Community Section -
Ron Baker - 04/30/2008
A lot has been written on whether or not hourly billing is unethical. My colleague and friend, Ric Payne, recently weighed in with his thoughts, mostly in response to something Rob Nixon out of Australia wrote in his newsletter. Obviously, Ric thinks hourly billing can be ethical.
Our friend and colleague Mark Bailey also weighed in on his Blog, arguing that hourly billing is unethical. (This post also prompted Mark to apologize to Ric, but I’m going to avoid that debate).
But I think all the posts missed the main reason why hourly billing is not ethical. To explain, we have to discuss what, exactly, is ethics, as well as a bit of philosophy.
Ethics—originating from the Greek word ethos, meaning habit—is the study of morality. Morality is concerned with social practices defining right and wrong. It exists prior to the acceptance by any one individual. In other words, morality is not a personal choice but a social construct. I’m sure Hitler thought he was ethical. So what?
Ethical theory is a reflection on right actions. Aristotle wrote that ethics was a branch of politics, and since morality and politics are inseparable the political question is, “How ought we to order our life together?” After all, you would not need to study morality or ethics if you were stranded on an island, since there would be no one to be “just” or “unjust” to.
The Josephson Institute of Ethics, one of our favorite resources for ethics education, defines ethics this way:
Ethics is about how we meet the challenge of doing the right thing when that will cost more than we want to pay. There are two aspects to ethics: The first involves the ability to discern right from wrong, good from evil, and propriety from impropriety. The second involves the commitment to do what is right, good and proper. Ethics entails action; it is not just a topic to mull or debate.
Rather than merely analyzing the consequences of actions, there exists a philosophical theory that holds that one should do what is right. This is known as deontology, a Greek term meaning duty.
Deontologists believe in universal principles (thou shall not steal, murder, etc.) and that consequences should not be the only criteria used to judge moral behavior. The leading deontologist is the German Philosopher Immanuel Kant (1724-1804). Kant proposed two questions, “What may we hope for?” and “What ought we to do?”
Kant’s theory places motives for actions as higher importance than the consequences of those actions. In other words, one should do what is right, for the right reasons. If one is honest only because they believe honesty pays, it’s not as moral as those who are honest because it is the right thing to do, according to Kant.
Kant proposed broad principles in order to provide a framework for making moral decisions, described as categorical imperatives:
- Act only on that maxim by which you can at the same time will that it should become a universal law (e.g., no stealing).
- Act so that you treat humanity whether, in your own person or in that of another, always as an end and never as a means only (people are to be respected because they have dignity. Moral agency is what gives humans dignity).
- Kingdom of Ends formulation: You should act as if you were a member of an ideal kingdom of ends in which you were both subject and sovereign at the same time.
If you apply this test to hourly billing, you find it fails miserably on all the questions, especially the first and third.
Would you want hourly billing to become universal? Would you want all businesses to utilize it?
If the Golden Rule is true—treat others as you yourself would want to be treated—how can one defend the morality of hourly billing?
Now Ric countered that he believes it’s ethical as long as the customer knows in advance what the price is, and agrees to it. That’s true.
But the reality is, most firms that bill by the hour do not quote fixed prices up-front, they quote hourly rates, or at best, a range of prices. Again, would you accept that from a hotel, an airline, a grocery store?
My earthquake insurance companies quotes me a fixed premium, even though it really doesn’t know the costs of a future earthquake. It’s called taking a risk, the source of all profits.
Hourly billing also misaligns the incentives between professionals and customers, and there exists much empirical evidence for this. Just look at any ABA survey, or advertising survey. For a detailed explanation of the ethics of hourly billing, the best book is The Honest Hour, by William G. Ross. This book documents all of the ethical challenges caused by the billable hour in the legal industry.
Ross actually concludes, like Ric, it can be ethical policy; again missing the point completely.
As Aristotle wrote, “It’s not easy to be a good citizen in a bad society.”
Hourly billing creates a bad culture, focused almost exclusively on the convenience of the seller, not the customer.
It’s not how you purchase anything else in your life. You wouldn’t tolerate it for one minute if any other business tried to price this way.
Hence, it’s unethical.
I think Kant would agree.
Ron Baker - 04/30/2008
The Complete Lawyer provides “Tools and insights on professional development, quality of life, and career issues that impact every lawyer’s success and satisfaction.”
Beginning in March, they will be running a 4-part series of articles, the first one is an interview with me on The Firm of the Future.
The second article is now published here.
The third article is now published here.
The fourth article is now published here.
Ed Kless - 04/30/2008
In presenting Service Level Agreements to Sage partners over the last few years, I always believed that I was doing a more than adequate job explaining the concepts required to make them successful (three levels and a hook). However, it was not until recently that I think I have stumbled across the words that drive the concept home.
Most Sage partners do not have a specific on-going service agreement with their customers. Rather, they have a list of customers who call in when they need them. A partner could have 250 or even 1,000 of these types of relationships. Here is the problem (and finally the right words) — You cannot plan capacity when your customers are on a pay-as-you-go basis.
As I think about this, my bet is this affects lawyers more than it does accountants. Accountants have the advantage of a government sponsored impending annual event. (Translation, a tax return.) In software technology, we have no such event. Upgrades are 18 to 24 months apart and are optional in most cases anyway.
Back to my main point — You cannot plan capacity when your customers are on a pay-as-you-go basis — this phrase really has seemed to spark interest in creating service level agreements more than anything else I have said, so I thought it was worth passing along.
Sorry for the ramble, but my point was to let you know that sometimes it takes years find the words that really work.
Ed Kless - 04/29/2008
About a month ago, I had the honor of presenting some of my material to a Sage business partner. In attendance (and speaking the next day), was one of my mentors, Howard Hansen of Healing Leaders. A few days later, I was given the opportunity to conduct and After Action Review with him. What follows is my best recollection of one portion of the conversation. (I knew I should have recorded it!)
Howard: Ed, I am going to give you some feedback that is specifically for you.
Ed: Great! (I was thinking that I was about to get the meaning of life!)
Howard: (after a pause of what seemed like a minute or more) Rethink your use of your evaluation form.
Ed: (Thinking, that’s it! Change my evaluation form! C’mon, really. Instead saying) Ok, super, thanks.
We then went on at length about it, and once again, I realized why I have selected such a fine mentor. Howard was dead-on right. My evaluation form was a problem. The evaluation was an exercise in ego. It was four questions that suggested the student to tell me who great the teacher was. Instead, the evaluation needed to be participant focused.
So without further bloviating (as Bill O’Reilly would say), here are the questions to ask on the best damn evaluation ever created.
- What did you hope to gain from your participation in this learning experience? What did you contribute to the dialogue?
- When were you the most anxious or fearful? Why?
- When were you the most inspired or ecstatic? Why?
- What did you learn about yourself?
That’s it. Don’t ask about the food, comfort of the chairs, or temperature of the room. If that is what is causing a person to not learn something they have a much larger problem. A successful learning experience is more about what the participants bring to the table than about what the instructor brings. Think about that the next time you attend training.
And, bring the above evaluation with you in case they are not using it.
Ed Kless - 04/27/2008
And an answer to a question I have been asking myself for a long time.
I have been a fan of Margaret Wheatley for almost ten years. However, it took me a few years to move A Simpler Way off of my reference tool list and to my read list.
Overall, I enjoyed reading the book; however, the experience was a bizarre one. It is my predilection to mark up and underline passages with which I both agree and disagree, so it is odd that there are chapters were I did not take a single note in the margin, nor was a word underlined. Other chapters are filled with notes to the point where I almost use up all of the copious margin space.
I almost did not get past the first chapter, and then on the first page of the second chapter, this gem appears. “Life often feels like a series of tests presented to us by hostile teachers. But this isn’t true. Life isn’t concealing solutions to problems; were not being tested to see if we get the right answer. Instead, life is exploring to see what works, to experience the pleasure of the unexpected and the unique.”
The book is a great testament to the belief that organizations are more like organisms than they are like machines. They are born, grow, mature, decline, and even die. Wheatley points out the absurdity of us asking about and caring what others have done. Again from chapter two, “Observing others’ success can show us new possibilities, expand our thinking, trigger our creativity. But their experiences can never provide models that will work the same for us. It is good to be inquisitive; it is hopeless to believe that they have discovered our answers.” Boldface mine.
She has something deep to tell us. It is better and far more successful to explore continuously than to try to become efficient at what we already do. Forget the efficiency experts, explore effectiveness! “Every act of observation loses more information than it gains.” Ouch, that’s gonna leave a mark on David Connell.
Toward the middle of the book, I began to think about how often I have forced organization on a project. I wondered what a project would look like if I just trusted the team to evolve on its own rather than make it fit my thinking. I realized that this is all about trust. The less trusting I am of a colleague, customer, or other collaborator, the less willing I am to let the process flow and the more I am certain I need to force a process. I am not sure what this means for me going forward, but it is something I will be thinking about for quite some time.
On page 40, the spotlights are turned on those who ask “How to” about pricing on purpose, or any learning worth doing. “We want to generate more capacity but approach it through prescriptions and designs. We try to engineer human contribution. In the self-organizing world, this type of engineering can be described only as lunacy. Stability is found in freedom — not in conformity and compliance.” WOW!
In the end, I am grateful to Margaret Wheatley because she has given me the answer to the question of why most professional service firms will never make the leap to become professional knowledge firms. In short, it is because they do not encourage freedom! They will never encourage freedom!
“In fear, we stop the energy available to us — the energy that wants to create affiliations, systems, efficacy. We restrict freedom to assert control. We choose control over effectiveness. But living systems cannot be effective if they cannot exercise autonomy. Freedom is essential to the movements of life. It is just as essential to us and our organizations.”
Ron Baker - 04/27/2008
There is no such thing as a commodity. All goods and services are differentiable.
—Theodore Levitt
G.K. Chesterton once wrote:
Competition is a furious plagiarism.
Yet the fact of the matter is there is no such thing as a commodity. Anything can be differentiated, which is precisely the marketer’s job. Believing that your firm—and the services it offers—are commodities is a self-fulfilling prophecy.
If you think you are a commodity, so will your customers. How could they believe otherwise? This notion of selling a commodity is a pernicious belief. It leads to price wars, incessant copying of competitor’s offerings, lack of innovation, creativity, and dynamism, as well as suboptimal pricing strategies.
Consider this story from The Tom Peters Seminar:
Transformation. Breaking the mold. Anything—ANYTHING—can be made special. Author Harvey Mackay tells about a cab ride from Manhattan out to La Guardia Airport: First, this driver gave me a paper that said, “Hi, my name is Walter. I’m your driver. I’m going to get you there safely, on time, in a courteous fashion.” A mission statement from a cab driver! Then he holds up a New York Times and a USA Today and asks would I like them? So I took them. We haven’t even moved yet. He then offers a nice little fruit basket with snack foods. Next he asks, “Would you prefer hard rock or classical music?” He has four channels. (This cab driver makes an above-average amount per year in tips.)
If a taxicab driver can establish a rapport with a complete stranger in a 15-minute ride to the airport, what is possible with a customer relationship over the course of a lifetime? Note how the cab driver differentiated himself with low-cost items (newspaper, candy, and so on). It is not the cost that counts, but the value perceived by the customer; and, in this instance, the little touches make all the difference. If a taxicab driver can be this imaginative and creative, what is the excuse of today’s firm leaders not to do this?
Imagination Is the Only Limitation
The potential for competitive differentiation is only limited by your firm’s imagination. Many leaders lament that since their industries are mature, commoditization is inevitable, despite all the empirical evidence surrounding them that this is simply not so.
Consider candles, an industry literally in decline for the past 300 years. Yet Blyth Industries bucks the trend by custom tailoring its candles for the specific location, companion, and occasion, growing from $3 million in sales in 1982 to nearly $500 million in 1996, with a market capitalization of $1.2 billion dollars in 1997.
Even the declining lettuce business has been differentiated by prewashing, cutting and packaging the vegetable—along with some salad dressing on the side—for the customer in order to save time. As a result, from the late 1980s to 1999, a $1.4 billion industry was created. And Great Northern Wholea Lettuce has come up with the innovation of ripped lettuce (not cut), offering restaurants a way to handle waste and save time. Wholea Lettuce commands a premium price.
Would you ever pay more for a share of stock—whose price is publicly listed and traded on the New York Stock Exchange—to one broker over another? After all, how can a share of stock be differentiated? It may be one of the few examples of a pure commodity. Before you answer, visit oneshare.com, where you can only purchase one share of stock at a time, which are valued primarily as gifts for babies and teenagers. You pay the market price for the stock and a $39 one-share fee. You also may choose a special frame (costing from $34 to $64 depending on your style choice), and this may be further customized by your choice of matte and an engraved message for additional fees.
How fast is Starbucks growing? “I don’t know for sure,” quipped one comedian, “but I do know they just opened one in my living room.” Opened in Seattle, Washington in 1971, Starbucks—named after the coffee-loving first mate in Herman Melville’s Moby Dick—has grown to over $9.4 billion a year in revenue. Howard Schultz, the founder, earned a business degree in 1975, and worked for Xerox until he joined Starbucks in 1982 as an employee. In 1987 he bought the Starbucks chain for $3.8 million and took it public in 1992.
The success of Starbucks has been so meteoric, Harvard Business Review has labeled it the Starbucks Effect:
Ten years ago, only 3 percent of all coffee sold in the United States was priced at a premium—at least 25 percent higher than value brands. Today, 40 percent of coffee is sold at premium prices. We’ve found plenty of evidence of the Starbucks Effect. When individual companies increase the perceived “premiumness” of a product through innovations in the product itself or the way it’s delivered, the entire category can reap higher prices and profits.
Basic economics teaches that it is very difficult to sell something someone else is giving away for free. Yet notice bottled water. Water covers nearly three-fourths of the Earth’s surface. Could there be a larger commodity than water? Yet it’s a $35 billion worldwide industry, with a plethora of premium priced brands. Perhaps this is why Evian is “naïve” spelled backwards.
Purging the Commodity Word
Unless your firm decides its strategy is to compete based on price—such as Wal-Mart, Costco, H&R Block, and Southwest Airlines—you cannot create a loyal customer based solely on being the low-cost provider. If customers are attracted by your low price, they will easily leave for another firm that offers an even lower one. Cutting your price in order to attract a customer encourages buyers to ask constantly for future price concessions, thereby subsidizing your worst customers at the expense of your best ones.
The notion that consumers get excited over a low price anyway is not grounded in reality, as Roy H. Williams points out in his book, The Wizard of Ads:
“I WAS CHARGED A FAIR PRICE” is not the statement of an excited customer; yet many business owners mistakenly believe they need only convince the public that they will be treated “fairly” to win their business. Phrases like “Honest Value for Your Dollar” and “Fair and Honest Prices” tempt me to say (with no small amount of sarcasm), “Yippee Skippy, call the press.”
If the most your customer can say when he walks out your door is: “I was treated fairly,” your business is pitifully stale, and you have virtually nothing to advertise. Why? Because the expectation of “fair treatment” is such a basic assumption in business dealings that most people take it for granted. What we really hope to find is the “delight factor.”
This is true whether you sell to businesses or consumers, since ultimately all commerce is conducted by us human beings. As Sean Finn, Senior Vice President of Public Affairs, Chief Legal Officer and Corporate Secretary of the Canadian National Railway Company in Montreal, said about its law firm:
Any time a law firm realizes that we don’t view their services as a commodity, we get a better product. It’s not just a question of money...we look at the value provided.
Why do so many firms ignore this message? Many firms are prisoners of their past, assuming that the way they have always done it is the only way. Yet it takes creativity and innovation to separate yourself from the competition. Offering only a cheap price is the last refuge of a marketing department out of ideas for creating value for customers.
In any event, there is absolutely no excuse—none—for firms to think of themselves as commodities. Any company can compete on price; it is truly a fool’s game. On the other hand, competing based on Total Quality Service, positive customer experiences, and transformations requires more thought, creativity, and investment. The commodity trap is a self-fulfilling prophecy, which breeds cynicism and stifles creativity, dynamism, and innovation.
The stale and overused canard—usually expounded by noncreative types—that good ideas are everywhere and it is really execution that matters, would be relatively easy to overcome if only it were true (see my post for why this is not true).
For if it were true, we would have better movies (not remakes of Bewitched and I Dream of Jeannie), books and products; more memorable experiences and longer-lasting transformations from the companies we patronize. Both ideas and execution are important. There is no effective way to implement a bad idea. History provides many lessons, from Napoleon invading Russia to countries attempting to implement socialism. Were these bad ideas, or simply a case of poor execution?
As the examples here illustrate, each firm should seek to differentiate itself from the competition and develop a value proposition that customers are willing to pay a premium for to obtain. If your firm finds itself continually competing on price, it is taking the easy way out—since price is always the easiest way to make marginal sales.
It is also the obvious factor to blame for an organization’s failure to offer an awesome service and a memorable experience. Constant price discounts signal that you are targeting the wrong customer segments, lacking a viable value proposition separating you from the competition, not getting your share of sales success, or offering too much service in your basic package.
Do not let your firm acquire a core competency in cutting prices by falling into the commodity trap. Especially since there’s no such thing as a commodity!
Ron Baker - 04/25/2008
The Emerson Experience in Entrepreneurship, Exemplar Law Partners, and (R)evolve Inc. Invite You to The Call of the Entrepreneur movie, produced by the Acton Institute.
Wednesday April 30, 2008
6PM - 10PM
Courtyard Boston Tremont Hotel, Wilbur Room
275 Tremont St.
Boston, MA 02116
Refreshments will be served
RSVP
The movie recounts the stories of three entreprenuers and the paths they took to get to where they are today. These stories exemplify the courage, perseverance, and spirituality of an entrepreneur.
Distinguished Panelists include:
Moderator: Kevin Krauss, Director (R)evolve Inc.
David Hartstein, CEO, Kabloom
Jenny Floren, Founder/ CEO, Experience, Inc.
Christopher Marston, CEO, Exemplar Law Partners
Dianne Sutter, CEO My TV
Ron Baker, Founder, VeraSage Institute
I had the great good fortune to see this movie last year in New York with Chris Marston and Dan Morris. After the movie, Father Robert Sirico, George Gilder, and Dr. Jay Richards (the producer of the movie) held a panel discussion and Q&A session.
The movie is incredibly powerful. If you’re going to be near the Boston area on April 30th, I highly recommend coming to this event.
Ron Baker - 04/23/2008
Matt Homann over at the [non]billable hour has a post citing a study on the psychology of odd-numbered pricing. Matt then suggests you might want to set your hourly rate at $297 per hour rather than $300.
As you can imagine, there are several flaws with this. Here’s the comment I left on Matt’s post:
Matt,
I’m surprised you’d advise to still have an hourly rate?
In any event, this study is specious. Odd-numbered pricing was not originally designed because people think $19.99 is cheaper than $20.
It was put in place when cash registers were installed, so employees would have to open the drawer to make change, usually with a loud bell attached so the owner could mentally count how many times sales were rung up.
Odd-number pricing was designed to prevent employee theft. This happened around the 1880s. There is little economic evidence odd-numbered pricing influences people’s buying decisions.
Why odd-numbered pricing still exists is a more complex question, given our technology advances (and sales tax). Inertia? People think other people think it’s cheaper, etc.
Disney stopped odd-number pricing in its retail stores in the theme parks after their pricer heard me explain the origins at a pricing conference. Even numbered pricing (including $4.50, etc.) actually sends a quality signal to the customer.
But the most important question: Why would you want customers to think your price is close to your cost? You should be nudging them to think of your price compared to value, which has nothing to do with your costs.
It is surprising how much staying power this myth has, but once you trace it back to its origins you see how specious it is.
My colleague Ed Kless loves to tell the story of one of his partners who will quote a price such as $100,000.17. Every one asks right away, “How’d you get the .17¢?” completely ignoring the $100,000.
I’m not advocating this, but it may partly explain the staying power of odd-numbered pricing.
Ron Baker - 04/23/2008
Our government does a lot of real dumb things, wasting enormous amounts of resources for bridges to nowhere, museums, and monuments built to satisfy the egos of those in Congress—especially those from West Virginia.
I was recently reading the new book Nudge (highly thought-provoking, but more on that later) on a flight from Venice, Italy to Frankfurt, Germany. When I learned what I’m about to share with you I was LMAO, to the point where the guy next to me asked what was so funny. When I explained to him, he looked dumbstruck, but then it dawned on me—he’s European, so he’s used to government lunacy.
In it’s infinite wisdom, the Social Security Administration’s Web site has “Hours of Operation”:
(All times ET)
Weekdays 5 AM - 1 AM
Saturday 5 AM - 11 PM
Sunday 8 AM - 11:30 PM
5 AM - 11 PM on these holidays:
New Years Day
Independence Day
Thanksgiving Day
Christmas Day
Hours for all other holidays are: 5 AM - 1 AM
So if you’re an insomniac, wake up between 1AM and 5AM concerned over whether or not you should take early Social Security or wait until full retirement age, the calculator on the Web site will not operate during those nocturnal hours, causing great discomfiture for millions of worry warts.
Imagine if the private sector’s Web sites had “hours of operation.”
And we want to turn over our health care to this crowd? I wonder what it would be like to be driven in an ambulance operated by Amtrak to a hospital run by the Postal Service, or the SSA?
As Milton Friedman used to say, “It’s a good thing we don’t get all the government we pay for.”
Unless, of course, you’re surfing the Web at the wrong times.
Ron Baker - 04/23/2008
In a previous post I discussed that ideas, always and everywhere, are far more valuable than their mere execution.
You may want to re-read that post as this one builds upon its foundation, especially the comments from Thomas Sowell and Paul Romer.
Before you proceed, please take a look at this short Super Bowl ad for Bud Light.
The distinction between ideas and knowledge may be subtle, but perhaps management consultant Sid Caesar clarified it best when he quipped:
The guy who invented the first wheel was an idiot. The guy who invented the other three, he was a genius.
Charles Murray, in Human Accomplishment, explores fourteen of the world’s most important meta-inventions that occurred after 800 B.C. until 1950, essentially cognitive (not physical) tools for improving the world around us:
- Artistic realism
- Linear perspective
- Artistic abstraction
- Polyphony
- Drama
- The novel
- Meditation
- Logic
- Ethics
- Arabic numerals
- The mathematical proof
- The calibration of uncertainty
- The secular observation of nature
- The scientific method
All of the above are nonrival goods, meaning we can all utilize them at the same time without their being diminished—your use of the alphabet does not inhibit mine. These ideas changed the world, creating untold wealth. They were also the contributions of an incredibly small number of individuals—4,002 to be precise, according to Murray.
In the arena of business management, ideas have an enormous capacity to apply knowledge to knowledge, thereby increasing innovation and wealth.
Management consultant and author Gary Hamel has identified 175 significant management ideas between 1900 and 2000. He applied three questions to each idea to create the most important advances:
- Was it a marked departure from previous management practices?
- Did it confer a competitive advantage on the pioneering company or companies?
- And could it be found in some form in organizations today?
Think of the global impact the following dozen management innovations have had, which all met Hamel’s criteria:
- Scientific management (time and motion studies)
- Cost accounting and variance analysis
- The commercial research laboratory (the industrialization of science)
- ROI analysis and capital budgeting
- Brand management
- Large-scale project management
- Divisionalization
- Leadership development
- Industry consortia (multicompany collaborative structures)
- Radical decentralization (self-organization)
- Formalized strategic analysis
- Employee-driven problem solving
Economist Paul Romer is right, innovation rests on individuals’ ability to create and test ideas, thereby creating new knowledge and wealth. Even something as prosaic as a pill bottle can become the genesis of a new idea that creates value, and even saves lives.
Deborah Adler’s grandmother mistakenly took her grandfather’s prescription medication Amoxicillin by accident. While Adler was working on her MFA thesis, she came up with an idea for an easier-to-read, user-friendly pill bottle with color-coded rings and other safety features. Target was so impressed with her redesigned bottle it bought the design from her. In the autumn of 2005, the bottle was displayed in the New York Museum of Modern Art.
Business is about people, ideas, and things, not land, labor, and capital. Yet ideas are not easily measured or quantifiable, so they are not given the resources they deserve by many organizations. Creativity and dreaming take time, which does not enhance conventional productivity statistics.
But in an intellectual economy, creativity is what propels economic growth. Tim Delaney, Vice President, Executive Designer, Creative Development with Disney says:
The success of the Walt Disney Company has centered on two basic fundamental concepts: our ability to be great storytellers, and the constant and the vigilant search for exciting new ideas.
This is how you can say with complete confidence that ideas are always and everywhere more valuable than their mere execution.
It’s worth asking again. What percentage of your firm’s human capital is devoted to creating and testing new ideas versus merely executing old ones?
Ed Kless - 04/23/2008
Last night I began reading George Lakoff and Mark Johnson’s Metaphors We Live By. By page 7, it became clear that this was a valuable addition to my “I have read it” list.
In the book, they develop the idea that all humans live entrenched in metaphors. We use these metaphors as an anchor for our thoughts and beliefs. For example, when we are learning something new our brain searches for a pre-existing metaphor to which we can tie the new concept. If we find something readily accessible, we are golden. If not, we struggle to either search or try to add the new concept to the overall databank. The latter is made even more difficult when the new idea is incompatible with our current metaphors. This is where VeraSage comes in.
The first example of a powerful cultural metaphor Lakoff and Johnson use is Argument is war. They cite many example of how we use the metaphor of war to describe our arguments. For example, “He attacked every weak point in my argument; her criticisms were right on target and; you disagree? Ok, shoot!”
The second example blew me away — Time is Money. Here are all their examples:
- You’re wasting my time.
- This gadget will save you hours.
- I don’t have the time to give you.
- How do you spend your time?
- The flat tire cost me a hour.
- I’ve invested a lot of time in her.
- You’re running out of time.
- You need to budget your time.
- Put aside some time…
- Is that worth your while?
- He’s living on borrowed time.
- I lost a lot of time when I got sick.
- Thank you for your time.
Notice that these are all metaphorical concepts. They are not the only way to conceptualize time, but they are common to our culture. The authors point out that there are cultures where time is none of these things. O to live in such a culture!
I sure hope Lakoff and Johnson tell me how to change other people’s metaphors.
N.B. — I went back and
italicized all metaphorical language I used in this blog post. I counted nine!
Ron Baker - 04/11/2008
Hat tip to Simon Tupman for sending me the new regulations from the New Zealand Law Society, part of which deals with fees.
As is typical with regulations, the wording is turgid, dry, and not at all comprehensible. But it’s Chapter 9 (page 18) that caught my eye, since it’s very similar to the ABA’s Model Rules of Professional Conduct, Rule 1.5 on factors that make a fee “reasonable.”
While the ABA’s Rule lists eight factors to consider in determining if a fee [I sure wish they’d use the word “price” instead] is reasonable, the New Zealand rules lists thirteen.
Either way, they both go way beyond “the time and labor expended.” I especially love this factor to consider from the New Zealand rule:
The degree of risk assumed by the lawyer in undertaking the services including the amount or value of any property involved.
Risk is incredibly important in determining price, probably more so than scope, according to Ed Kless in this post.
What’s amazing, though, about all these pages of rules on fees is that they could be replaced with one sentence:
You should price all of your work up-front, agreed upon by the customer in advance, and utilize change orders for when unexpected items arise—again, approved in advance by the customer.
Or, more simply put: capitalist acts between consenting adults.
Some answers are simple; it’s the fallacies that get complicated.
Billing by the hour is an enormous fallacy, requiring page after page of rules, regulations and interpretations not needed in any other business on the planet.
Amazing. I wonder if lawyers will ever learn?
Ron Baker - 04/11/2008
I had a great conversation this week with Michael Stewart of Integrity Wealth Pty Ltd, outside of Brisbane, Australia.
I’ve known Michael since his days with Results Accountants’ System under Paul Dunn and Ric Payne. Then he was with Principa, and now is with Integrity as General Manager.
As of October 1, 2007, the firm eliminated timesheets. More empirical evidence that this is the wave of the future if firms are serious about operating effectively in an intellectual capital economy.
During our conversation, I asked Michael to provide me with a case study on his firm’s transition to becoming a Firm of the Future.
Here is his first installment, as he wants to add to the story in the future to inspire others:
Hello Ron.
Thank you again for speaking with me during the week. As is always the case when interacting with you, or your material, I left feeling further inspired; and also somewhat humbled—there is still much for us to learn and implement as students of pricing and value.
As agreed I’m sending this email now and if there is sufficient interest from the VeraSage community I’ll follow up with a more detailed case study. While getting rid of timesheets was just one step in an overall strategy to change our firm, it has proven to be a critical one. Not being an accountant myself I’ve never had to record my life in 6 or 10 minute units (and if I had I probably wouldn’t have lasted very long). So in some respects I don’t think I can really convey some of the differences it’s made to individuals within the firm. But I do know what it’s done for our mindset, how we promote the firm, and how both clients and team members react to a no timesheet model—and it’s all positive. Perhaps in a future email I’ll get one of the team to write their thoughts. As an example, Denise Gibbons (Partner) said to me recently “I used to make myself sick preparing bills for clients”. We don’t have to worry about that anymore, which in itself has to be a major win.
As a summary:
Practice Profile:
- 2 partners + 11.5 FTE (includes our financial planning division)
- 2006 revenue $645,000
- 2007 revenue $735,000
- 2008 revenue $1,180,000 (growth approx 50/50 acquisition/natural growth)
- Approx 400 clients in Accounting division
We are located in Clayfield, Brisbane, QLD, about 10 minutes from the heart of the city. Over the past 18 months we have been working to redesign the business on many levels in order to create a place that will attract team members. The partners, Denise & Mark, were very keen to implement many things but like most firms were struggling to balance client work with internal goals. I joined full time in October 2006 with my focus being on establishing the strategy and infrastructure that would attract team members and allow us to grow. For a firm of this size to hire someone who does little or no client work was a significant decision, both financially and in terms of mindset—the partners were agreeing to hand over the day to day running of the overall business so they could focus on client work and development of the team.
We made the decision to abolish timesheets as of 1 October 2007. We had been talking about it for at least 9 months prior to that and had committed in writing to the team we would do it. There were many discussions on whether we should keep timesheets at the same time to make sure, well, to make sure the sky didn’t fall in I guess; or whether we should still record total time on the job to identify scope creep. Finally common sense prevailed, we chose to back ourselves, we took the leap, and haven’t looked back.
How it works:
- All clients now receive an engagement letter with a fixed fee and a date for when their work will be completed. Typically the fee is based on last year + 10%. We review each job and the scope of the work before determining the price. Mark, the partner of the accounting division does the initial review. We then sit together and as Chief Value Office I challenge anything that has not seen a minimum 10% increase. (This is in addition to a 10% increase last year for most clients). Mark is right on the page with value pricing so he identifies any special work or areas in which we could add significant value. Though for most work it’s very similar year in year out.
- We must receive the signed letter back from the client before work begins. Naturally there are some long-standing clients where we respect the relationship and we haven’t bothered trying to force an agreement upon them. So long as they agree to the price we’re happy.
- We now ask for payment of invoice immediately upon completion of work, instead of 14 day payment terms. New clients often have to pay $1,000 upfront for us to review their work, then we quote on the scope and price of the work that needs to be completed. Again, the client must agree to all terms in writing before the work begins. We haven’t worried about moving to bill existing clients upfront. Instead we have focused on workflow—if we can get the job out the door quickly then we can invoice sooner. Then of course you need a system to chase debtors (receivables for our international colleagues).
- We initially set a minimum fee of $1,000 for new clients. We have since moved that to $2,000 and will soon be increasing to $3,000.
- We currently have just one KPI that has replaced timesheets—a monthly invoicing target. The entire accounting team are responsible for ensuring we make this target. I have set the budgets for the firm, Mark then looks at all upcoming work and selects the jobs to be completed each month. Then we just get on with it. If we make target, we know those jobs have been completed. Nice and simple.
- Monthly targets are based on a combination of what we have invoiced for the same period in previous years; what the firm would have achieved on a hours x rate x productivity model; plus any price increases, allowances for special work or value priced engagements etc. In a firm of our size it’s pretty obvious if people are working hard or not. If productivity or workflow is lower than we believe it should be, it’s usually more to do with planning, getting the right people doing the right work, and resourcing, than it is a lack of effort by the team. In other words we believe people come to work with the intention of working hard; we just needed to get the planning and infrastructure correct so their efforts turned into outputs.
To ensure I was happy with the monthly targets I conducted a financial analysis using Principa’s FirmPlan—I think it’s the best tool I’ve come across in relation to looking at the financial performance of a firms that record time. Within it I compared our numbers to some benchmarks, ran some what if analysis on impact of price increases etc. From there we picked an annual revenue figure, divided it by 12, made some adjustments to each month based on seasonal fluctuations, and targets were set. We have 15 years of history on what price our clients will pay for most of our work and how much work we can do in a given period—so even if that is based on a timesheet model it is a well established precedent and provides an easy starting point for getting rid of timesheets and quoting a fixed price before the work begins.
- It’s important I point out how helpful our team, in particular our admin team, have been in adopting this change. For the professionals it has made life easier. Though for Barbara (admin, reception) it has created work. Who gets engagement letters; who doesn’t; changes to the system every other week as we learn new things; extra work in preparing engagement letters; updating the workflow system etc. We continually communicate why we are doing these things and we are very grateful that all of this has been handled with a minimum of fuss and we are a better firm as a result.
Ron, there will be many other things to discuss and share: strategy, vision, client selection, pricing, marketing, recruitment, post job reviews, successes, failures, things we have no idea how to approach, examples of value pricing successes, and comments about “accounting utopia” (more on that story in another email). This email is to get the process started. On behalf of Integrity I’d like to say a massive thank you to everyone who has shared their ideas with us and myself over the years. We hope our contribution is helpful to others who are heading down this path.
Ron, please feel free to publish my contact details in case anyone would like to contact me.
Michael
Michael Stewart
General Manager
Integrity Wealth Pty Ltd
Integrity Chartered Accountants & Business Advisors
http://www.integrityaccountants.com.au
http://www.integrityfp.com.au
Tel: +61 (7) 3262-3533
Thank you, Michael, and we look forward to more details on your firm’s transition.
Congratulations to the entire team at Integrity for blazing the trail for your colleagues—and all of those reluctant consultants—to follow.
This is truly Firm of the Future 2.0.
Ron Baker - 04/10/2008
Congratulations to our newest Trailblazer firm, Base52 Ltd in Hertfordshire, outside of London (the same city as O’Byrne & Kennedy).
Fred McBeen is the Director and Practice Manager of Base52. I was privileged to meet him at a talk I gave for CIMA last June outside of London.
Here is Fred’s email reporting on his firm’s progress since our meeting:
Dear Ron,
I hope that you are well.
You may recall we met at a UK conference a year or so ago and exchanged e-mails after this.
I was enthused by your presentation and by your book, The Firm of the Future and implemented some changes to our practice after reading this. You asked if I could send you an update after 6 months or so and let you know how things are going, so here goes:
Broadly, things have gone quite well. We are a relatively small practice having only started a few years ago. In the last financial year we grew revenues and profits by about 35% and a good proportion of this growth was due to “Value Pricing” measures we implemented.
We scrapped timesheets about 6 months ago now and I don’t think we have missed them. We set work completion targets every month and track these every week so as practice manager I have a good feel for how work is progressing. Being less hung up about hours has meant that we focus on quality even more and ensuring that we do a first rate job.
I mentioned in my previous e-mail that we had secured a contract with one customer and I had followed value pricing principles and priced this 2 or 3 times higher than if I had used my normal “hourly rate” method. I am so pleased that we did this as the work has been problematic. Nevertheless we have made a good profit on the contract and have done what we said we would do. On our old pricing methodology it would have been very hard slog for very little (if any) return which would have been demoralising for the whole team.
My conversion rate for signing up new customers has dropped from around 70% to nearer 25%. The prospective customers we have not signed up have not been prepared to pay the higher prices I have quoted. By and large I am satisfied that they would not have been the right customers for us. In a tough market, we are finding it more difficult to pick up new customers but for now I am holding my nerve and looking to compete on value and not price.
I have been a bit less tolerant with customers who do not fit our ideal profile. Again it is a tough call but I expect to give notice to a couple of customers shortly who have repeatedly ignored our advice and do not seem to appreciate the work we do for them. This will mean a short term hit on revenues but will hopefully will be for the longer term good
I have taken on board the views in your book about building capacity before taking on new business. We have invested in training, systems and a bit more space so feel ready to expand with the right customers. We are only a small team and I am hoping that I can retain my key team members for the immediate future. If I can do this, I think the prospects for growth are very good.
One of the biggest changes in my own attitude has been self belief and confidence that what we offer is good value and we don’t need to be apologetic about this.
So to summarise the progress report. It’s so far, so good. Our target is to grow profits by another 30% or so this year. I will let you know how it goes..
Thank you again for your advice and support.
Best regards,
Fred McBreen
Director
Base52 Ltd
Fred makes many excellent points here, probably the most important being that you’ll never be paid more than you think you’re worth.
Also, it’s nearly impossible to implement Value Pricing with the wrong customers. I’m a bit concerned, Fred, about your acquisition rate dropping from 70% to 25%. This may be just a temporary drop given your new pricing strategy.
If it persists, however, it may be a indicator that you are not effectively communicating value to prospective customers, since customers aren’t as price sensitive as they are value conscious. If this continues, you may want to develop a “stripped down” version of your services at a competitive price (pricers call this a “flanking product"), which will allow you to acquire some of these customers and then as time goes on they will purchase more from your firm.
But I don’t want to take away from your incredible accomplishments in the past ten months.
Congratulations again, and please keep us posted on your progress.
Ron Baker - 04/07/2008
One of the joys of writing books is receiving feedback from readers.
You never know what is going to resonate with someone, whether from a book or attending a seminar. This is why we at VeraSage use a variety of techniques to educate: from video clips, stories, and metaphors to case studies, examples, theories, etc.
You just never know what is going to be an epiphany for someone.
I remember a program Paul O’Byrne and I did in Orlando, Florida where at the end we showed a clip of Walt Disney’s final days before he passed away. It’s an incredibly moving scene, and one gentleman came up to us at the end of the program to say “You guys changed my life today. I’ve resolved to quit smoking.”
Walt had died from lung cancer—he was a chain smoker nearly his entire life. I would have never expected that reaction, since that’s not why we showed the clip. But as they say, when the student is ready, the teacher will appear.
That said, Joel Ungar, CPA, recently wrote to me (and on his blog) about how he is re-reading The Firm of the Future.
He said the following sentence from page 5 “...is going to have a deep impact on me”:
No one enters the profession in order to bill the most hours.
The professions are a noble calling, providing the opportunity to serve and contribute to others, and make a difference in the world beyond one life.
Despite this, the passion and morale in the profession—a leading indicator of the health and vitality of any calling—has been in decline for decades. We believe this is in part caused by the component in the old theory that says the road to success is paved with ever-higher billable hours.
Indeed, no one enters the profession in order to bill the most hours. This theory—which is at the very core of the thinking of most professionals—is slowly eating away at the very sustenance of our calling.
It is time to supplant it; and we suggest this not so you can make more money, but more of a difference in the lives of those important to you.
VeraSage sounds a tocsin to our colleagues around the world in the hope you will join with us to restore the quality of life in the professions.
Thanks for the feedback Joel, I’m glad that one sentence so resonated with you.
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