Community Section -
Ron Baker - 10/26/2008
I received an incredibly thought-provoking email from Jonathan Iannacone, CPA, who blogs as well.
Ron,
I hope this email is not too presumptuous but I consider you one of the rare thought leaders of public accounting. I subscribe to VeraSage (RSS) and am always happy with the thought provoking discussions that you create.
First a disclaimer: I run a small CPA firm that specializes in outsource CFO services for growing businesses. I do not charge hourly (all FPAs) and I do not use timesheets. In short I am a raving Firm of The Future believer.
I would like your thoughts on a question that continues to bother me regarding the K[ey] P[erformance] I[ndicator] we use at the firm, Revenue per Employee.
Recently a list from Inside Public Accounting (IPA) came out listing the Best of the Best accounting firms for 2008 (top 25 and then next 25 honorable mentions). Using the data from that table, you can crunch the numbers to get partner/staff, rev/partner, and rev/employee results. For me, the Rev/Employee is most important since is let’s me fact check my own firm goals.
Looking at the numbers it made me questions a few things:
- Is there a terminal velocity for Revenue/Employee for CPA firms? Data seems to suggest that whether your $6M or $600M, California or Arkansas, that $200K per employee is pretty much what the best firms do.
- Timesheets or no timesheets? Does the admission of a terminal velocity render the argument meaningless because at the end of the day it is whatever the market will bear and this list pretty much tells us what that number is? In other words, are there “no timesheet” and “timesheet” firms side by side in this list that scale in the very same way and limit out at the same point?
- How can we rethink the PKF to escape these constraints. Is there a way to “productize” and package it in a way that makes it infinitely more scalable (Turbo-tax and QuickBooks seem to point to yes).
I would love to have your input as to what the numbers are telling you and how you would then go about moving and addressing the questions that inevitably arise.
Thanks in advance for any time and knowledge share.
Sincerely,
Jonathan
Jonathan attached an Excel spreadsheet that crunched the numbers from the IPA article, computing revenue per partner, revenue per team member, and revenue per all employees.
The highest revenue per all team members was from Gerson Preston Robinson & Co., of Miami Beach, FL, at $250,685.
The lowest was Novogradac & Company of San Francisco, CA, at $118,092.
Jonathan asks difficult questions, ones we around VeraSage have discussed for years.
The first issue you confront when looking at studies like this is to realize that these firms are pricing by the hour, which is a self-imposed ceiling on any organization’s income potential.
The Firm of the Past
As my colleague Tim Williams says—with a little exaggeration, but you get the point—if you sell time, and want to make a million more dollars, you have to charge a million more hours.
Not a very effective lever for creating wealth. This is what we call The Firm of the Past, and it’s theory is as follows:
Revenue = People Power x Efficiency x Hourly Rate
All of the firms in the IPA report have, in effect, the above theory as their talisman. I detail the problems with this theory in my recent Journal of Accountancy article.
This is why we believe a new model is needed among Professional Knowledge Firms (PKFs) that leverages the real source of wealth in our knowledge economy: Intellectual Capital (IC).
The Firm of the Future
Hence, our New Practice Equation, or what we call The Firm of the Future:
Profitability = Intellectual Capital x Effectiveness x Value Price
This enables a PKF to leverage its IC in a myriad of ways, rather than relying on the head count of billable hours.
Jonathan’s second question is an excellent one. All of the firms in the IPA report use timesheets, and price by the hour. So we don’t have a controlled experiment within those firms where we are able to study the differences in results.
The best we can do is look at the firms we know that have trashed timesheets and implemented Value Pricing. These firms are, of course, much smaller than those in the IPA report.
When you run those numbers, you find pretty much the same results—that is, not much over $200,000-$250,000 per employee.
Though we do have some firms that top over $300,000 per employee, mostly sole proprietors, which tend to be the most profitable firms on the planet.
Eventually, we will have Top 100 firms whose performance we’ll be able to compare to timesheet firms, but I don’t expect radically different results.
Keep in mind that we are not advocating eliminating timesheets so that firms will be wildly more profitable. We are advocating their elimination because we think they are demoralizing to knowledge workers, along with measuring exactly the wrong the things.
If they made no difference in the profitability of firms, wedd still rally for their elimination.
To Jonathan’s third question about re-thinking the PKF model to escape these constraints, that is exactly what our New Practice Equation is designed to do.
I think you are right on about “productizing” PKFs intellectual capital so they can generate what we call “sleep revenue"—money you earn while in bed. You can’t do that if you’re selling hours.
We have seen some innovative advertising agencies doing exactly this. They are creating their own portfolios of IC, thereby escaping the constraints of selling time.
Among our CPA Trailblazers, what we are seeing is more investment into their “invisible balance sheet.” O’Byrne & Kennedy (OBK), in Great Britain, for instance, has created a knowledge bank wherein it captures its IC so it can leverage it across more customers.
In the long-run, this will make OBK more valuable, with a higher resale value, since it’s not dependent on the IC in the heads of its owners.
But this is a long-term strategy and it will not show up in the revenue per employee calculation anytime soon.
Looking at these revenue per employee numbers also teaches that there are no economies of scale in a PKF. So firms that are merging as a source of growth are not getting any great gains in that area.
PKFs are incredibly labor intensive, and until the business model changes from selling time to selling IC, I don’t think you will see great movement in these numbers—regardless of whether timesheets are kept or trashed.
One more point is worth mentioning. Value Pricing will, inevitably, help push up the revenue per employee numbers, while allowing the firms to do so with fewer customers.
This is a change from economies of scale to economies of scope. Fewer customers equates to more profitability.
But Value Pricing is limited to the value firms create. If all they want to do is play financial historians by offering attest and low-level compliance work, then unless they innovate new product and services to climb up the value curve, they are going to struggle to break the $300K barrier, let alone any higher.
Another number I would love to see calculated for these firms is revenue per customer, which would shed some light on these firms’ value propositions.
In any event, this is not meant to be the final chapter on this topic. It’s precisely this ceiling that inspired Paul Dunn and I to write The Firm of the Future.
How long it takes for the New Practice Equation to diffuse throughout the profession, let alone impact on these calculations, is anyone’s guess. Mine is past my lifetime.
[I will have a future post on this very topic of the time it takes for new theories to diffuse within professions, in the form of a book review. The book I just finished has literally blown my mind, and has made me far more pessimistic regarding the ability of firms to change from selling time to selling IC. Stay tuned].
As always, I welcome any and all comments from our Fellows, Trailblazers, and readers on this very thought-provoking analysis from Jonathan, and the questions he raises.
Ron Baker - 10/23/2008
I received an email yesterday challenging me on why I am so adamant about ridding the Professional Knowledge Firm (PKF) of timesheets. At the request of the author, I am not disclosing his name, but I thought his questions were worthy of a response.
This is an excellent example of why the timesheet mentality is such a cancer in the PKF world. It does, indeed, keep professionals mired in the mentality they sell time. I don’t think Bill Gates thinks in terms of $300 per hour.
I have indented my responses to the original email below.
Ron,
Reading your books and the site materials I share your confidence that value-based pricing is the right thing for service selling. I feel, though, that your obsession to wipe out timesheets is akin ”delenda est Carthago” motto.
Maybe the evil is not in time-based pricing itself but in its mighty acceptance which obscures the principle of value-based pricing making it the ultimate end instead of a means.
Indeed, you’re fighting cost-based approach but what if one uses time as a driver of value? Airlines or tailors don’t charge for time they spent because it’s irrelevant. The scope is clear and predefined so the customer doesn’t care how much time it would take or what internal cost would accrue. In the scope-defined engagements it makes sense but I have two examples where I’m struggling to justify a Fixed Price Agreement (FPA).
I don’t understand how you can reconcile the subjective theory of value while asking “but what if one uses time as a driver of value?” That’s the whole point. Time is not value. You have simply asked if the labor theory of value isn’t true. It’s not true, it was refuted in 1871.
Time spent in Professional Knowledge Firms is just as irrelevant as with airlines and tailors. It’s not because they have a more defined scope. It’s because the labor theory of value is false across all human behavior.
I’m a “trusted adviser” and sell my brain-time to the customer via meeting or calls attendance. Say, I have a retainer to spend 1 day a week with him and we sign an FPA for the advisory service for $2400/week (read, 8 hours/day). Now the customer wants to change the scope to 2 days/week. What should I charge him? Something like $4800, right?
It’s logical, clear, and simple. If the customer gives me some unusual “homework” and occasionally I need to spend between half to 2 days additionally on her projects how should we agree on that? Regardless whether we shape it as a change order or a new FPA (taking into account the average extended time) the time will be the driver for the calculation. I’m not saying the customer buys my time—she buys my value—my advisory service, measured via the time we spent. I’m capable of charging $300/hour not because I’m a commodity but certainly because I’m differentiated and the customer recognizes it. We use a Timesheet here just as a measure of the scope and due to the lack of any project-finite scope. I see no other way to measure my services but to multiply the time I spend servicing her on the value the customer perceives to get from the service.
Again, you are not selling your “brain-time” since that is an input. What if you spend a long time thinking but creating no results for your customer? What you are selling is knowledge that creates wealth for your customer.
In your example of $2400 to $4800, you state the customer is not buying your time, but rather your value. But how? You priced this based on time, and that’s not value. What if you come up with a million dollar idea in an hour in that marginal second day? Under your method, it’s worth the same $300 per hour as an hour in the first day. This is suboptimal pricing that has no relationship to your value. The fact that it’s “logical, clear, and simple” does not mean it comports to reality—the subjective theory of value.
You’re still locked into the $300 hourly rate mentality, which demonstrates you are still selling time. This is the exact problem with the timesheet. It’s keeping you mired in the mentality that you sell time.
You ask how you should price another half or 2 additional days, and I would say up-front, before you do the work. Value is subjective, and contextual. It all depends on what you are doing.
You then say that the timesheet is used “just as a measure of the scope and due to the lack of any project-finite scope.” This is why you are still selling time, and not Value Pricing. Timesheets are backward looking, whereas project management, which always defines a scope no matter how limited it may be, projects forward.
You say you see no other way to measure your services, but there are, indeed, other ways to value your services when there is no project-finite scope. We’ve discussed this at length elsewhere. You are letting a problem kill an opportunity to add value to your customers. As a result, you are sub-optimally pricing yourself by the hour. Some would argue—I being chief among them—that this is the result of your timesheet.
Another example is about a typical project in high-tech consulting, solution integration. Timesheets makes life easier when we do have a project scope but the customer has to develop (supply, prepare, deliver) additional tasks my execution is dependent on which. If the dependency is very tight then often times I won’t be able to progress without customer’s delivery. Another pitfall is just so many unexpected things that may happen (which, honestly, may happen with FPA too). So the whole project becomes a huge change order. In that case timesheet becomes a good protection for me since the customer knows that his inefficiency really costs him and I’m not its hostage. So should I drop such customers or just use timesheet as a shield against his inefficiency?
No, you should quote a price for a defined scope up-front, with a covenant that the customer is responsible for providing certain tasks by a deadline. If they fail to deliver, you have a Change Order. Keeping your customer worried about the time you spend is exactly the wrong thing to have them focus on. It’s not a shield to protect you, it’s a shotgun pointed at their head.
You then say that so many unexpected things can happen that the whole project becomes a huge change order. That’s usually the result of very poor planning and project management. It may also indicate incompetence. Face it, if things are that out of control, why are you doing the project in the first place?
But even allowing for your logic, so what? My insurance company provides me earthquake insurance, yet they don’t know every contingency, nor do they even know what their costs are going to be. They still give me a fixed price because I, like all customers, demand it. No one would buy insurance being priced on a time & materials basis.
Your timesheet is preventing you from being a better project manager.
The last reason for timesheet is it’s much more accepted (I guess you heard this one many times) in the industry, customers know how to measure and value my service, and I’m protected against inefficiency or unexpected things. On the other hand, when the scope is concrete and I can trust the customer I’m all for using FPAs (and surely the time then is not the primary driver but the value the customer gets is).
Again, so what? Everyone used to think the world was flat, that didn’t make it right. Customers accept the hourly rate, but they don’t like it. Who wants uncertainty in the price of what they buy? You are way too focused on the internal machinations of your business. This is hindering you from focusing on external value.
Actually I’m negotiating now an offer to join a practice and I was re-reading your books thinking, maybe, to influence my new partners to switch to FPAs. The above is a result of “critical thinking” where playing a devil advocate I wanted to reveal FPA weaknesses and exceptions.
We love critical thinking. We love the fact that you are wrestling with this issue. We love it when people ask “when won’t this theory work?,” since that is how you falsify a theory and come up with better ones.
Critical thinking also means looking at empirical evidence, and the fact is we have over 600 firms that have trashed timesheets. They have solved every one of the problems you point out. You have added nothing new here. That’s not to belittle you, that’s just to say we’ve overcome these hurdles. Read our Trailblazers section for examples of IT firms that have made the transition. Also, read this post that provides additional resources broken down by category of things you have to do to implement Value Pricing and trash timesheets.
I think that the advantage of FPAs is in the value-based approach but must I dig up timesheet completely to sell value? I think I can sell value and still use timesheet for certain cases.
Yes, I believe you must ditch timesheet in order to become better at pricing. Your email is even an illustration of why this is so.
I used to not believe this. I used to say, “Keep your timesheet, but use them as they were originally intended, as a cost accounting tool only, but price on value.” I no longer say this, because empirical evidence has changed my mind.
The best pricers across all PKF sectors—from accounting and law, to advertising and IT firms—all have one thing in common. None of them maintains timesheet.
I used to believe this is because they became so good at pricing, timesheets became superfluous. But I now believe that they became good at pricing precisely because they got rid of the timesheet, which forced them out of the “we sell hours” mentality and made them obsessed with value.
We are very reluctant at VeraSage to state a causal relationship. Too many confuse causation with correlation, as if to say wet streets cause rain.
But here is where I will state a causal relationship emphatically: If you want to become a better pricer, you have to trash timesheets. You have to do other things as well (project management, KPIs, AARs, leadership, etc.), but there’s no doubt in my mind, if you are serious about creating and capturing value, the timesheet must be buried.
To borrow a phrase: Ceterum censeo Carthaginem esse delendam.
Ed Kless - 10/22/2008
Brad Farris in his recent RainToday article The High Cost of Low Initial Fees: How to Price Your Services Once You’ve Established Your Firm stands with VeraSage on the abandoning of the billable hour.
I am in agreement with most of the article, but in my opinion, Brad does not spend enough space on understanding customer value. I will give him a pass as many of the articles on RainToday, mostly by Alan Weiss and Ron Baker deal effectively with this subject.
Welcome to the fold Brad, please sign the Declaration!
Ed Kless - 10/22/2008
I just read this brief story entitled Why the stock market does not reflect the economy. The story is not the important point here, the use of language is.
In the first five sentences, the writer uses three ”collective nouns:”
- “the market”
- “the economy”
- “Washington”
The use of collective nouns (and pronouns) is a KPI (key predictive indicator) of victimhood. Much of the news copy today is filled with them. In addition to those listed above, you will hear: the Administration, the White House, experts, researchers, scientists, et al. Sadly, these journalists like the one mentioned above are not the only ones to succumb to this disease. In our organizations, we say things like, ”Marketing just doesn’t get it,” ”Customer service is out to lunch,” and ”Sales really blew it this time.”
Do not fall prey to these grammatical Grendels. If you catch yourself using them, ask “Who in marketing doesn’t get it?” Get specific, don’t be a victim.
Ed Kless - 10/21/2008
Ron Baker’s recent post on Hard Times taking down the billable hour reminded me of a new objection excuse I am now hearing about why a firm cannot make the transition to pricing with purpose — the economy.
So let’s take a look at the new complete list of excuses. I can’t get off of the billable hour because:
- We are a big firm
- We are a small firm
- We are in a large market
- We are in a small market
- We support a wide variety of customers
- We support a small niche of customers
- We serve big customers
- We serve small customers
- We are an architecture/consulting/accounting/law/engineering/advertising/marketing/technology firm
- We could do this with new customers, but not with long-time customers
- We could do this with long-time customers, but not with new customers
- We are in a troubled economy
- We are in an expanding economy
Am I missing any?
Ed Kless - 10/21/2008
I commented in an early post that I was for “None of the above” in the Presidential Pageant (errr, sorry, Election) and have a “None of the above” yard sign. A few people did not believe me so here is the picture of my front yard. Mr. Baker can vouch for me that it is, in fact, my front yard.
Ron Baker - 10/21/2008
Another hat tip to Stephanie West Allen for pointing out a CLE course for lawyers offered by West Legal Edcenter,” entitled ”Mourning the Death of the Billable Hour: Successfully Transitioning to Alternative Billing Methods.”
It is a $170 ($110 for members), two hour online audio panel discussion of how law firms have successfully implemented alternative pricing methods other than the billable hour.
If any lawyers take this course, we’d love to hear what you think. I’ve sat through countless numbers of these panel sessions and they all sound the same—mostly gripe sessions about what’s wrong with the billable hour with little to no new ideas as to alternatives.
This program may be different. If it is, please let us know.
Ed Kless - 10/21/2008
Two weeks ago, I attended at Sage Leadership Academy Alumni Association retreat where the speaker was Doug McVadon of Dorrier Underwood. Doug’s topic was fascinating - new discoveries in brain function and their impact on what we know about leadership and communication - but, it was something he did before the class that inspired me; he gave the participants a Preval, a pre-course, self-evaluation.
This got me to thinking that as good as the Best Damn Evaluation is, it only gets feed back at the end. To rectify this, Ron Baker has begun some of his sessions by showing the questions from the evaluation at the beginning of the class. He said that this alone has created a noticeable change in the dialogue. The Preval marries these two great ideas together.
So with out further ado, I hereby present to you - The Preval! --> Personal_pre-valuation.pdf
Please feel free to download and begin to use it. If you have any feedback on it please either comment below or shoot me an .
I am grateful already for the feedback I have received on the beta version from Ron and Dan Morris of VeraSage, Apryl Hanson, a colleague at Sage, and Howard Hansen, mentor extraordinaire from Healing Leaders.
Ron Baker - 10/20/2008
Hat tip to Stephanie West Allen for sending me this article from the Washington Post, ”Rethinking Legal Fees for Lean Times.”
Here’s the interesting point in this article:
“I think the financial crisis will exacerbate everybody’s pain point,” said Pam Rothenberg, managing member of Womble Carlyle Sandridge & Rice’s D.C. office. Rothenberg said the firm, which has 550 lawyers in 11 offices, works within a budget that the client and firm set ahead of time.
That’s an interesting hypothesis, and it indeed might force some firms to transition to Value Pricing. But I have my doubts. The billable hour has survived prior recessions, usually emerging even more entrenched in the legal profession.
Of course, the article spouts the conventional wisdom that this change is being driven by legal counsel:
New efforts to jettison hourly billing are being driven by in-house corporate lawyers, who say they have grown frustrated seeing fees to outside firms soar even as they slash their own costs. They said they want more certainty in their legal budgets and worry that outside firms are spending unnecessary amounts of time on their matters.
This, too, has been said for decades, and it’s nonsense. In-house counsel will not drive this change, only law firms can, as we’ve pointed out time after time.
Just read the lawyer quoted in the article that doesn’t plan to abandon the billable hour, except in very rare cases.
Firms like Jay Shepherd’s, who is cited in the article (and is one of our Trailblazers), is further proof that the innovation on pricing strategies originates from sellers, not buyers.
Since we are quite interested in what the “burning platform” will be that will, ultimately, force firms to give up the Almighty Hour, we’d love to hear if you think tough economic times will create the tipping point?
My personal bet is the competition for talent will drive the change more than anything else. Knowledge workers don’t want to account for every six minutes of their lives.
Ron Baker - 10/17/2008
I’m thrilled to announce the publication of my article “The Firm of the Future,” which is now available on the Journal of Accountancy Web site.
You can access the actual November issue print version of the article here.
The article profiles four firms of the future, including the first ever Top 100 accounting firm, Kennedy and Coe, LLC.
It also profiles three other firms, which will be familiar to our VeraSage readers: The Harrex Group in New Zealand, founded by VeraSage Senior Fellow Brendon Harrex.
Mark Bailey & Co., Ltd., our Trailblazer firm from Reno, Nevada.
Snyder & Co., from Ohio, one of our most recent Trailblazers.
Congratulations to all of these firms for their pioneering spirit.
We will be posting a more detailed case study from each firm in the future.
Until then, we hope you enjoy their inspiring stories.
Ideas, indeed, have consequences.
Ron Baker - 10/17/2008
As a frequent flyer, nothing is more annoying than having to stand in long security lines, watching the TSA [Thousands Standing Around] pat down little old ladies in wheelchairs.
Fortunately, Dan Morris turned me on to Clear, a Silicon Valley company that enables you to move to the front of the security line in airports where they are present. San Jose airport got Clear long before San Francisco, but once it came to SFO, I signed up.
The customer service from Clear is exceptional. The people are always polite, helpful, and escort you to the front of the line. All for $99 per year.
Dan and I joked that we thought the price was too low, trying to figure out how they could be making money since they have enormous investments in equipment (retina and fingerprint scanning machines), as well as paying rent in high price airports.
Well, indeed, they are now raising their price to $199 per year. But notice how they did it.
We often hear that loyalty is dead in the business world, especially among customers. But I never believed this. I think humans find it easier to be loyal, it reduces many costs and risks in our lives.
What’s dead is a reason to be loyal. This is exacerbated when we receive notices in the mail offering low prices to new customers from our cable, cellular, and credit card companies.
In other words, let’s charge lower prices to low-value customers, and higher prices to loyal customers. It never made any sense to me, since it doesn’t reward loyalty.
This is how Clear notified its members of its price increase, in an email from CEO Steve Brill:
As of October 15, new annual memberships in Clear will cost $199. It’s a price that reflects the rapidly expanding value (and cost to us) of the Clear network.
Our market tests indicate that because of this expanding network and the reputation we have won for delivering on our promises, our new price—which is necessary to solidify our business as we move beyond the start-up phase—will be well received. However, we do not want the customers who supported us from the beginning in building that network and reputation to have to bear the brunt of these costs.
Therefore, I am writing to you with the following special offer: Because you are a current Clear member, if you renew now, you can save $40 and renew for $159. Plus, you have the option now to renew for up to ten years at annual prices that are even less than $159 a year, while protecting you from future price increases. And, of course, you can always get a pro-rated refund on any unused portion of your membership, should you no longer need Clear.
I don’t particularly care about Clear’s rising costs, but his statement about the value is emphatically true. And this statement is even better, especially for us loyal customers:
Most subscription businesses offer deep discounts to lure new customers, while charging old customers a higher price. I’ve always thought that “penalizing” your best customers that way didn’t make sense. Instead, this continuing discount for renewing members seems a smart, fair way to recognize our earliest supporters, while helping us to finance the future expansion of Clear, both in terms of airports covered and the services and equipment we invest in.
Then, as a value-added inducement to renew early, he offers a special Clear ID card that can replace your driver’s license for airport security purposes.
This is strategic pricing. Knowing your value, communicating it clearly, all the while rewarding loyalty.
Are you doing the same thing in your firm?
Ron Baker - 10/14/2008
I’ve commented in the past about Gary Boomer’s columns in Accounting Today, sometimes being accused of unfairly singling out Gary as opposed to the other consultants to the CPA profession.
We at VeraSage enjoy watching people wrestle with significant issues, especially when they challenge long-held views of the way the world works. Gary continues to do so with his recent article in the October 6-19, 2008 issue of Accounting Today entitled “The future of IT in professional service firms.”
The opening sentence is shot across the bow for those who think efficiency is the talisman of running a successful professional knowledge firm:
Exploiting technology to create new business value now trumps efficiency as the chief focus of information technology. Leadership and governance of IT in your firm must change in order to exploit new opportunities.
Excellent point! It’s way beyond the time to stop focusing PKFs on efficiency. It’s time to focus on effectiveness, as we’ve written extensively elsewhere.
Gary goes on to lay out a five-point plan, which includes this gem in number 4 that will be familiar to readers of VeraSage:
Assign a chief value officer and a pricing task force. Centralize pricing and take it out of the hands of those who are not good at it. Implement strong engagement letters, including change-order clauses. Don’t be afraid to collect in advance.
But the reason for only two cheers for Gary is he still insists on being silent on the timesheet issue, even though he states emphatically in the article that “...the economic model (hours x dollars) is broken, and has been for many years.”
Does anyone but us see the connection between this and timesheets? If you want to fix that model, you have to stop tracking the one thing that perpetuates it—time.
Maybe this is simply too hard for consultants to preach to their customers? But if you want to implement Gary’s fourth point—which is not at all easy, by the way—how can we not replace timesheets with KPIs, After Action Reviews, and sound project management?
The same issue of Accounting Today also has an article by August Aquila, wherein he outlines the changes accounting firms have to embrace today. The third on his list is knowledge workers.
Well, knowledge workers don’t want to fill out timesheets in six minute increments, be micromanaged, account for every potty break and personal phone call. Knowledge workers aren’t union employees who merely “put in the time.” They create wealth through ideas, creativity, and innovation.
Timesheets are a form of negative intellectual capital.
Come on, Gary, make our day. Write a column on the deleterious effects of timesheets.
Ed Kless - 10/13/2008
We often talk at VeraSage about our HSD (High Satisfaction Days), however, I thought it would be fair to post an example of the reverse.
Last week I received this email from someone who attended my workshop on consulting theory. (The firm name has been redacted to protect the guilty.)
What I realize is that project management is really simple but it requires a whole new way of doing things.
Everything here at ZYX firm is so very complex and it makes it really difficult to do a good job for the customer. Most of the problems can be pointed to the billable hour and staff moral is so low that hardly anyone gives fig about the outcome.
Of course the fundamental issue is with the management team revolving around control and the misuse of power. It will take a miracle to see some changes around here.
Clearly, this person will be leaving this firm soon, and that is a good thing. What is sad is that there are some many people out their who continue to labor in firms mired in the muck of the billable hour. If you are one of them do something today by planning your escape. You are not a slave! Sign the Declaration today! Or, post an anonymous comment in this space declaring your own emancipation.
Ron Baker - 10/09/2008
I have written previously why ideas are always and everywhere more valuable then their mere execution.
This is a provocative statement, usually drawing heated debate. When I first read it in Thomas Sowell’s writings, I was skeptical.
But facts are stubborn things, and the evidence is overwhelming that this statement is true. Economies that generate more ideas have overwhelmingly higher standards of living than economies that merely execute ideas.
Google has launched its Project 10 to the 100th, whereby they are investing $10 million in ideas submitted from anyone.
Here’s how they explain it:
Project 10100 (pronounced “Project 10 to the 100th") is a call for ideas to change the world by helping as many people as possible.
We’ll post a selection of one hundred ideas and ask you, the public, to choose twenty semi-finalists. Then an advisory board will select up to five final ideas.
...we ask that you put your idea into one of the following categories and consider the evaluation criteria below.
Categories:
- Community: How can we help connect people, build communities and protect unique cultures?
- Opportunity: How can we help people better provide for themselves and their families?
- Energy: How can we help move the world toward safe, clean, inexpensive energy?
- Environment: How can we help promote a cleaner and more sustainable global ecosystem?
- Health: How can we help individuals lead longer, healthier lives?
- Education: How can we help more people get more access to better education?
- Shelter: How can we help ensure that everyone has a safe place to live?
- Everything else: Sometimes the best ideas don’t fit into any category at all.
We’re committing $10 million to implement these projects, and our goal is to help as many people as possible. So remember, money may provide a jumpstart, but the idea is the thing.
What do you get if your idea is chosen? According to Google:
You get good karma and the satisfaction of knowing that your idea might truly help a lot of people.
It’s common to read “good ideas are everywhere, it’s execution that matters.”
Nonsense. If good ideas were everywhere, we wouldn’t have remakes of Bewitched, Get Smart, and the Dukes of Hazzard.
Google understands the value of ideas, which is why it allows its people to spend “Google time"—up to 20% of their time—dreaming up new products and services.
If good ideas are everywhere—like rocks lying all around us—why is Google asking for them?
If you’re interested, you have until October 20, 2008 to submit your idea. May you have good karma!
Ron Baker - 10/09/2008
Senior fellow Tim Williams specializes in strategy and branding in the advertising world at his firm, Ignition Consulting Group. His book, Take A Stand For Your Brand is a brilliant work.
It’s very hard for a Professional Knowledge Firm to implement Value Pricing without first establishing a core purpose and strategy. Most of strategy consists of deciding what your firm is NOT going to do.
A lot of firms fail at this, as they try to be everything to everyone.
We at VeraSage adamantly believe there is no such thing as a commodity—anything can be differentiated. There are examples of throughout our blog of this, from a $1,000 pizza to a $100 hamburger.
In the September 2008 edition of Ignition’s Propulsion newsletter, Tim has written an excellent article on what to do about those services your firm offers that are viewed as “commodities” by your customers.
Here is Tim’s article in full:
One of the greatest challenges to agency profitability is the perception on the part of customers that some agency services are commodities. Because customers feel they can get these services down the street—or across the ocean—for less, there is intense pricing pressure on agencies in areas such as print production, website programming, and media buying.
Unless you do something to add value and turn these perceived “commodities” into something customers can’t get down the street, you’ll be in a downward spiral of competition for work that doesn’t have much of a margin. Not a very attractive business to be in.
Deciding What Is Core
If you step back and look at your services and capabilities, there are certain core competencies that are central to the positioning and focus of your agency. For most agencies, these services will be in the area of strategy and ideation (vs. tactics and execution). For the services that define your value proposition you should be charging a premium for two reasons:
- Because they’re worth more, and
- To help offset the smaller margins you make on execution.
Another, more radical approach is to decide that you won’t offer “commodity” services at all. This is the philosophy adopted by many (if not most) of the successful new agency start ups in recent years. Strawberry Frog, Toy, Brew, Brooklyn Brothers, Fort Franklin, Wexley School for Girls, and others have all adopted the philosophy of what Ignition calls “big brains, small machine.” Their business model is to assemble a group of talented people who provide primarily strategy and ideation and outsource virtually everything else.
When asked how Strawberry Frog handles global brands with a relatively small staff, one of the partners explained, “We outsource everything the customer views as a commodity.” In other words, they follow the precept “Either add value and charge accordingly or don’t do it at all.”
The Hollywood Model
Some agencies refer to this as the Hollywood model; staff the agency with a core group of very smart people, then assemble teams around them for each project as needed. Boston’s Partners+Simons has been following this model for years.
How do you decide what services to handle in-house and which to outsource? Spend a morning with your leadership team and take them through an exercise of listing all the services and capabilities needed by your customers, then rating these services on a scale of 1 to 10 based on the following:*
- Value: How valuable is this to our customers?
- Differentiation: To what degree does this service help us truly differentiate our firm?
- Performance: How would we rate our performance in this area?
- Investment: If we’re not already excellent in this area, how much of an investment (time, money, resources) would be required to achieve excellence?
- Repeatability: Are the outcomes of this activity or capability inherently repeatable and predictable (in terms of time, cost, quality, etc.)?
Based on your analysis of the above, each of these services and capabilities can be assigned to one of four groups:
- Core: Done in-house as a core competency of the firm
- Partnered: Performed in partnership with another firm
- Outsourced: Assigned to an outside resource with little supervision from you
- Automated: Turned into an automated service using technology
If you choose to simply do “everything” for your customers yourself, you will continue to dig yourself deeper into a “high-volume, low-margin” business. And that violates the first rule of holes, which is “When you’re in one, stop digging.”
Tim Williams is founder of Ignition, a consultancy devoted to helping marketing communications firms create and capture more value. He welcomes your comments at .
*This model adapted from the work of Ric Merrifield, Jack Calhoun, and Dennis Stevens as published in the Harvard Business Review, June 2008 under the title “The Next Revolution in Productivity.”
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