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Ron Baker - 01/29/2009
Hat tip to Henrik Martin at the IC Knowledge Center for posting on an interesting paper by Herman Miller (the manufacturer of office furniture) on ”Quantifying and Fostering Organizational Effectiveness.”
The paper has many interesting points, some of which I agree with, others I strongly disagree with. This just goes to show how much work needs be done in understanding knowledge workers, something Peter Drucker wrote about for decades. We just don’t know how to measure their productivity, and the statistics we are using—which were designed for an Industrial Era—are obsolete, and I would add, are probably doing more harm than good inside of Professional Knowledge Firms.
Knowledge work is hard to define, since it’s largely based on tacit knowledge. It’s harder to quantify, so I was skeptical right off the bat with the paper’s title. It confuses effectiveness with efficiency. Effectiveness requires a judgment (usually by another knowledge worker), whereas efficiency is a measurement.
Nevertheless, the paper is worth reading for those of you interested in this topic.
Definitions
The paper begins by defining organizational effectiveness:
While it isn’t limited to productivity, organizational effectiveness certainly encompasses it. Defined narrowly as the amount of physical output for each unit of productive input, productivity has been a human concern for centuries. The Chinese philosopher Mencius (372-279BC) wrote about conceptual models and systems that would qualify today as production-management techniques. Plato (427-347BC) spoke of the division of labor in The Republic: “A man whose work is confined to such limited task must necessarily excel at it.”
Early thinking about productivity remains relevant to production today. Measuring it, however, has become more complex. The U.S. Bureau of Labor Statistics (BLS) measures what it calls “multifactor productivity,” in which “output is related to combined inputs of labor, capital and intermediate purchases. Labor is measured by the number of hours of labor expended in the production of output. Capital includes equipment, structures, land, and inventories. Intermediate purchases are composed of materials, fuels, electricity, and purchased services.”
The problem with measurement comes in defining output for non-manufacturing, service activities commonly thought of as “white collar” or “knowledge work” that the BLS labels “hard-to-measure.”
There’s an understatement, “hard to measure.” Notice how the inputs are much easier to quantify than the outputs. Further, the outputs are usually measured based on price, not value, and therefore “productivity” as measured by the government—and firms themselves—is not only understated, it’s also meaningless.
Economists have a saying that if you’re driving with a broken speedometer you probably shouldn’t get it fixed because at least you’re used to it. I feel the same way about how the government measures productivity for knowledge workers. It’s sort of meaningless, but better than nothing for statistical, macroeconomic comparisons.
But at the microeconomic level of running a PKF, it doesn’t shed much light on knowledge worker effectiveness. Consider Einstein. Sure, we can tally up the amount of inputs he uses, along with their costs, but how do you measure the output? How do you price it? How do you value it? This is the age old problem: it’s easier to count the bottles than describe the wine. Efficiency is the count, the description is a judgment. I’ve posted on this topic before.
Individual vs. Team Productivity
The paper quotes Michael O’Neill who leads a program of research into organizational effectiveness for Herman Miller:
In traditional productivity measures the unit of analysis is the individual. In terms of knowledge work, that may be irrelevant because increases in individual productivity, no matter how they’re measured, do not automatically transfer to the productivity of the organization. Instead, the team, or functional group, becomes the unit of analysis. This requires managers to make a conceptual shift in their thinking, to understand that it’s more relevant to measure activities that contribute to overall business goals and strategies, such as the speed of organizing around new opportunities and the quality of business processes.
This is a good point, since one knowledge worker’s output greatly effects another in the chain. Here’s an example. I was recently hospitalized where my surgeon ordered a CT Scan so he could operate. The technician didn’t read the surgeon’s order properly and did the scan incorrectly.
However, if all you were doing was measuring inputs and outputs with some efficiency metric, the CT Scan would have rated 100%. After all, he got me in and out in record time, processed the image to the doctor on time, etc. However, it wasn’t until the surgeon looked at the results, requiring a judgment, when he discovered the scan had been done improperly and had to be done over. This cost me an extra day or two in the hospital, not at all adding to my satisfaction with the hospital’s service.
In other words, the scan was efficient, but not at all effective. And you can’t measure effectiveness. It has to be judged. Obviously if one knowledge worker screws up on a team, it’s going to have ripple effects throughout the entire project.
This is why the paper points out that “no single measure is likely to capture the outcomes,” which is why PKFs can’t rely on measures alone. As the paper points out:
If the organization’s goal is to guide, motivate, or even control knowledge workers’ behavior, it must supplement measurement with strong cultures and value systems. Measurements may be attractive for their apparent preciseness, but they must be tempered with the observations, experience, and common sense of managers.
Disagreements
The old canard that what you can measure you can manage is nonsense on stilts, since we can’t change our weight simply by weighing ourselves more accurately or frequently. Here’s how the paper addresses this topic:
An old business adage says that whatever cannot be measured cannot be managed. Yet, as Susan Cantrell, research fellow at the Accenture Institute for Strategic Change, points out, knowledge workers resist being measured, “both because they have no history of being measured and because they believe it might take the ‘magic’ out of their work. Most high-end knowledge workers...tend to work on unique, one-off, highly specialized problems, making it impossible to have one measure for all such knowledge workers. Moreover, many knowledge worker...work interdependently, making it difficult to isolate one knowledge worker’s contribution from another’s. And, because the work performed is generally unobservable, a knowledge worker could be working for months, or sometimes even years, before an output is tangibly realized.”
I have an alternative explanation for why knowledge workers resist being measured. It has nothing to do with taking the “magic” out their work. It’s because the measures are wrong. In no way can they capture the value created. Why continue to measure things that don’t matter?
The paper also claims that improving knowledge worker productivity is the only true way to improve a company’s competitive position. Surely this is an overstatement. What about innovation? What about a differentiated value proposition for customers? The most innovative companies, like Google or Apple, are certainly not the most productive as traditionally measured. So what? They are incredibly effective in creating value for their customers.
It just goes to show how theories that are so hardwired in us are so difficult to change. We are going to have to get over our obsession with measuring everything and begin to realize that in PKFs a judgment is far more valuable, effective, and right, than a mere measurement.
Any measurement can be manipulated, so we ultimately rely on judgments in the end. It’s time to face the cold reality: knowledge work cannot be quantified with the metrics we are now using. Our speedometer is broken. And while that might be alright for government cars—statistics—I would suggest we get ours fixed.
This is why we advocate Key Predictive Indicators, most of which are judgments rather than mere measurements.
Ron Baker - 01/29/2009
It was a pleasure to finally spend some time chatting with Bill Jawitz at SuccessTrack Esq, a consultant and executive coach to lawyers.
Bill and I have been exchanging emails for quite some time, and yesterday we did a one hour interview on Value Pricing for attorneys.
You can listen to the entire exchange here.
Ron Baker - 01/28/2009
Michael Stewart, Director of Integrity Chartered Accountants & Business Advisors—one of our Trailblazer firms—sent me an update on his firm’s progress since trashing timesheet.
What’s great about this update, which Michael is so graciously allowing me to publish, is that it is a compilation of the firm’s team members’ attitudes to operating in an environment without timesheet. Regular readers of this site know we believe that one of the major impetuses for driving the change to Value Pricing and no timesheet is the competition for talent. Increasingly, knowledge workers understand the value they create for their firms is not predicated on the time they spend, let alone accounting for every six minutes of it on a daily basis.
This update from Michael is good timing, as I just responded to a letter to the editor from my November 2008 Journal of Accountancy article, The Firm of the Future. Here’s an excerpt from that letter:
My college production management professor back in 1983 stated, “Happy employees are not necessarily productive employees. Many employees are perfectly happy doing next to nothing.”
Most current management experts, outside CPA practice management experts, teach that you get what you track. If you want productivity, you have to track productivity.
Here’s part of my reply:
I was in college in 1983 as well, where I learned the same “happy employees are not necessarily productive employees” axiom. But the article wasn’t about happy employees, it was about effective knowledge workers, who are less effective when they are micromanaged, and demoralized when they must engage in a low-value activity such as tracking every six minutes of their day.
The letter further asserts “you get what you track. If you want productivity, you have to track productivity.” But this is nonsense. We don’t change our weight by weighing ourselves more frequently, or accurately. We must look at the root causes, and processes, which timesheet emphatically do not do.
We at VeraSage do not advocate trashing timesheet in order to make employees “happy,” but rather to remove an incredibly low-value activity from their routine. It’s all about increasing their effectiveness, though we will admit happiness seems to rise as well.
Which leads us to Michael’s update. To read it in its entirety, go here.
Ron Baker - 01/25/2009
From what I can tell, most firms are responding to the economic downturn with the following tactics:
- reducing costs
- increasing productivity, utilization and realization rates
- reducing or eliminating capital investments
- some are aggressively hiring talent, others have frozen hiring
- exiting unprofitable markets
- increasing hourly rates
- unbundling pricing (tactics like adding photocopy and administrative fees to each bill)
Struggle is good for us humans. Name something worth having, or doing, that is easy. I wish everyone would stop carping and whining about the economy, especially the illiterate comparisons to the Great Depression. We are nowhere near that level of deprivation, or slowdown in economic activity.
I do believe the current recession is more of a “mental recession” than anything else. It’s a lack of faith in the future, coupled with great uncertainty about how the government is going to respond. I simply can’t understand why one bridge built to nowhere is a disgrace, but thousands of them to be built is economic stimulus. But that’s a topic for another post.
For now, the current crisis is an enormous opportunity for firms to help their customers grow their businesses. Professionals are needed more in a downturn than in good times.
As for what firms should do themselves, I suggest the following:
- Fire “D” and “F” customers—low value customers take up too much capacity that is better spent with “A” customers who value what your firm offers, and want more from you.
- Diligent customer selection—do not take all comers. Not all customers are created equal, and more business should not be a firm’s goal. Better business should be the goal.
- Innovate new services for your “A” and “B” level customers. Innovation is not efficient, but so what? The goal of your firm is not to be efficient, but rather to create value.
- As Peter Drucker points out, there are only two functions that matter in a business: innovation and marketing. These are the only two that create value; the rest are costs. The default purpose of marketing is not to increase revenue, it’s to increase profitability.
- Don’t take a hatchet to costs. No business has ever cut its way to prosperity. Some costs should probably be increased now, especially innovation in new services, talent, and retention marketing.
- Put more investment into keeping existing customers rather than attracting new ones, since the AICPA says it costs 11 times more to gain a customer than keep one.
- Consider outsourcing some of your back office and low-value functions. Not so much to save costs, but rather to free up capacity for performing higher value work.
- Segmentation of your value offerings is essential. Think about American Express’ Green, Gold, Platinum, and Black card offerings. In hard times, you need a Green card—that is, a low price offering—that also strips out value so you force customers to sacrifice value for a lower price. When times get better, they can then upgrade to a higher value—and priced—offering.
- Change your pricing. Establish a pricing panel with competent pricers, and take away authority for pricing from partners and managers who aren’t good at it. Stop billing by the hour and start pricing based on value. Your customers buy your intellectual capital, not your time.
- Agree on price and payment terms up front for all work, which will eliminate aging accounts receivables, collection hassles, financing, and administration costs. You’re not a bank.
- Have your pricing panel institute a policy of Change Orders for work that goes beyond original scope, and offer a 100% money-back service guarantee to all your customers in order to command a price premium over your competition.
- Do not, repeat, do not, unbundle your pricing. Charging for things like photocopies and administration is insane. Customers don’t value it—it’s part of your overhead, not their value proposition—thus you shouldn’t focus them on things they don’t value. I heard one consultant say the airlines were doing this by charging per bag, drink, etc. So what? At least they aren’t charging their top-tier fliers those things, nor are they charging for auto land and computerized navigation. Price unbundling is not a wise strategy for a PKF. Remember, the airlines are also giving customers a fixed price, communicated up-front (even the annoying charges), which most firms don’t do that hourly bill. Transitioning to fixed prices solves these problems once and for all. (Trailblazer Jay Shepherd has a great post on this on his blog).
- Stop obsessing about efficiency, utilization, and realization—they were formulated for manual workers in an Industrial Era and are not proper measurements for the success of a knowledge worker. Knowledge work must be judged on results, not measured by quantity of inputs. Emphasize effectiveness, innovation, creativity, enhancing intellectual capital, and customer service—all of which are not very efficient as measured by the antiquated billable hour and timesheet, but are essential if your firm is going to thrive in tough times, or good times for that matter.
One more point. We ask this question in nearly all of our programs. If you think of the three factors of production, what type of income do they generate?:
- Land/Buildings = Rent
- Labor = Salaries and Wages
- Capital = Interest, Dividends and Capital Gains
So where do profits come from?
The answer is: Risk. You cannot afford to not take risks if you expect to prosper and profit in any economic environment.
We’d love to know how your firm is responding to this current environment.
Dan Morris - 01/19/2009
Ten days ago (+ or -) Mary (our Director of the Individual Tax Experience) recommended a book that she thought I would enjoy. The book was The Shack, by William P. Young.
The Shack is the story of a family that loses a daughter to a serial killer and the subsequent cloud of despair, anger, frustration, and depression that falls upon the family and especially the father. The story is phenomenally written and is so captivating that I essentially couldn’t put it down. Along with an engaging read about the trials and challenges of dealing with a child’s murder and subsequent carnage that follows, the author’s capabilities as a story teller are so strong that my emotions roared down my face like a class 6 rapid. There I was flying from JFK to SFO, in my comfortable upgraded seat, reading and crying and crying and reading as the father’s journey is unfolded and how an invitation from God to face the brutality and ultimate guilt for such a heinous act unfolds in my mind’s eye.
The Shack has touched a fire storm of conversations within my office, my friends, and my communities. The consequential discussions about faith, forgiveness, human failings, and human opportunities have been beyond scale. Acts of human companionship rarely felt in today’s politically correct and sterile environments.
The Shack isn’t without its critics however I feel that these critics may simply may have overlooked the genius of the conversations and narration. This book is about hope and understanding. About choices that are made. About love and freedom. About forgiveness and salvation.
Regardless of your personal feelings about faith, I feel this book is a must read. I haven’t stopped thinking about the messages and I will reread my copy as soon as it is returned to me by my friends and family that are awaiting their turn.
Although this isn’t core VeraSage material - the ethics lessons, the life lessons, and the conversations about the past, future, and present are ground zero for much of what we believe in.
Give it read if you haven’t read it, and then please let me know your thoughts.
If you have read, please engage in what I hope is an illuminating and thought provoking conversation.
All my best,
Dan
Ron Baker - 01/16/2009
I’m finding it incredibly difficult to keep up with all the chatter in blog on value pricing in the accounting, legal, advertising and IT worlds.
Ed and I were discussing this incredible wave of interest in value pricing yesterday. It seems to be a confluence of events: a teetering economy, continuous challenge from customers looking to cut costs, firms trying to maintain margins, challenges in attracting and holding on to talented knowledge workers who don’t want to define themselves by how many hours they bill, etc.
Whatever it is, we love it, but continue to be amazed that people are still complaining that there’s not enough “how to” instructions on implementation.
Over at 3 Geeks and a Law Blog, Toby Brown—whom I’ve had the pleasure of speaking with—wrote this on his post, How to—Alternative Bill:
It appears that firms and clients are ready; they just need to figure How To. From my recent post on the Paradigm of Profitability, Jackie Hutter’s comment included a great statement: “In truth, many lawyers are unable to function in a fixed price environment.”
In my opinion, this is the challenge. Sitting down and talking with clients about value and price may be a new thing for lawyers, but it is not a particularly daunting task. In contrast, changing the entire way a firm functions will be a monumental challenge. Law firms’ entire structure is built on the billable hour. The way we intake business, the way we manage our knowledge, the way we hire and ‘train’ our people and most importantly the way we compensate our lawyers. The last point is especially important because “you get what you pay for.”
So my role as the KM Guy is becoming the How To Guy. And where this all comes to a head for me is deciding where to start. I have good idea of the various processes and systems involved, but I am struggling with the question of where to best attack this problem. It may well involve multiple points of attack, but I think choosing wisely will be very telling for success.
VeraSage readers know there’s no better way to get flamed on this site than to ask “how to” questions before completely understanding the theory behind Value Pricing. Read the very last section of this post to understand why.
As Ronald Reagan used to say:
They say the world has become too complex for simple answers. They are wrong. There are no easy answers, but there are simple answers.
I remain unclear on why sitting down with a customer to discuss value, define the success of your engagement, scope the work to be done, and put a price and payment terms on it is causing so much confusion.
This is how every other business on the planet prices. When I began Value Pricing in my firm in 1989 I had no clue what I was doing. There were no books, no blogs, no nothing on “how to” do this.
I simply dived into the pool and started swimming. I went under fast. I struggled, it was daunting, not at all easy. So what? Can you think of anything worth having that is easy? There is no such thing as a free competitive advantage—it takes work, risk, and investment.
I remain unclear on why the size of the firm matters at all, though I will admit we have seen more smaller, and up-start, firms adopt this model than larger legacy firms. But smaller firms constantly tell us, “This would be easier in a larger firm, since they have more resources and have the ability to assume more risk.” Oh well, everyone has an excuse about why they can’t do it, as Ed Kless has so brilliantly chronicled.
A few years ago, I had the great good fortune to have a drink with Bob Cross. Bob is a giant in the pricing world (and a former lawyer), having authored the best-selling book, Revenue Management, and implementing Yield Management pricing at Delta Airlines in the 1980s.
After the airlines were de-regulated in the late 1970s—by those free market advocates Jimmy Carter and Ted Kennedy, incidentally—the airlines no longer could look to the Civil Aeronautics Board to set its airfares. They had to actually pay attention to supply and demand.
Bob Cross tells the story in his book, but suffice to say, his investigations led him to conclude that Delta Airlines was leaving a substantial amount of money on the table with its use of a hybrid cost-plus and break-even pricing model.
When I asked him how he did all this in such a short period of time, he basically said they just did it. I’m paraphrasing, but this is the essence of what he told me:
Our business model was broken, and we knew we had to change. We made every mistake in the book, sometimes not even knowing exactly what we were doing. It was trial and error. But all of our competitors were doing it, and we didn’t want to fall behind.
It certainly didn’t take the airlines decades to rid themselves of cost-plus pricing and adopt more optimal pricing strategies.*
It’s an interesting question why professions are so slow to change, which I’ve written about before, most recently here. Partly because they are hermetically sealed from ferocious competition; they are not innovators; and are shielded, by and large, from creative destruction.
Answering the how to
We’ve actually answered this question, but I’m going to do it again in response to Tony and other who are still afraid, and/or over-analyzing, this change.
Here are the things a firm must do to begin Value Pricing. Experiment with one customer, a new or old one, it doesn’t matter.
Offer them a fixed price for a specific scope of work. Communicate to them that you are making this change to offer them certainty in price, so they never will receive an invoice from your firm without first knowing the price, payment terms, and scope of work to be performed. Use the analogy of the auto mechanic and/or contractor.
Since you’ll still be maintaining timesheets, figure out how well or poorly you did with the fixed price after the work is performed. Perform a post-mortem, or what is known as an After Action Review. How could you do better next time? What lessons did you learn about the price compared to the value created for the customer?
Stop worrying about not making your hourly rate on every single minute. This is a learning process.
Pricing is an art, but it’s also a skill. You will get better at it the more you do it, like tennis or golf. This is why we only want people in your firm to price who are good at it. Stop letting partners who suck at pricing do this critical function.
If the scope changes, issue a Change Order. Go through the same process: communicate to the customer up-front before you perform the work. Set a price, payment terms, and scope of work.
Don’t let anyone in the firm perform work that the client hasn’t agreed to, including price, terms and scope. If auto mechanics can do this, so can intelligent knowledge workers.
Have the CVO and pricing cartel read every single link on this post and discuss among themselves.
Have them read every book they can on pricing. You will find a list on my Shelfari bookshelf, click on the tag “value pricing” below the shelf.
In other words, just do it. Stop analyzing, stop looking for a checklist, a formula, or detailed instructions like this was a piece of IKEA furniture—there aren’t any.
Value is subjective, it’s like beauty, in the eye of the beholder. You must discuss this with the customer. If you don’t, you’ll end up discussing hours, efforts and activities, all things they really don’t care about but will look at if you don’t give them something else.
I can assure you of this: One way not to implement Value Pricing is to continue to think about and discuss hours, utilization and realization. This is to remain mired in the mentality of Karl Marx’s labor theory of value.
Will your pricing be perfect? No. It never will be. Live with it. Pricing intellectual capital is one of the hardest things you’ll ever do. So what?
Even if you are able to capture 1% more of the value you create, it will have an enormous impact on your profitability. Eventually, you’ll capture 5% incremental value, then 10%, etc.
And consider this: how much are you leaving on the table right now with sub-optimal hourly rate billing? The problem is, this lost revenue doesn’t show up anywhere on your financial statements, so it’s off your radar screen completely. No one is even asking the question.
Resources on “how to”
Read blog, articles, and books written by firms that have made the transition. Learn from their successes, not just their failures. Here’s a few places to start.
VeraSage fellow Chris Marston’s recent article in The Complete Lawyer. Chris is CEO of Exemplar Law Partners, which doesn’t bill by the hour, nor does it have timesheets. He also has an excellent blog.
Mark Chinn—a family law attorney in Mississippi who not only has stopped billing by the hour, he trashed timesheets—has written a great primer, Dumping the Billable Hour: One Lawyer’s Experience, an e-book which you can buy for $15.
Jay Shepherd, of Shepherd Law Group, has an excellent blog where he frequently writes about the insanity of the billable hour.
Read RainToday’s report, The One Piece of Advice You Need to Get the Price You Deserve.
Read about four firms that have made the transition from my Journal of Accountancy November 2008 article.
Read some case studies from our Trailblazer section at VeraSage. Don’t just read about law firms, read about accounting, advertising and IT firms. They are mired in the billable hour too, and the issues are essentially the same.
All of these resources are more than I ever had when I embarked on this journey in my firm twenty years ago. These are the “how to” answers.
You may not like them, they may not be easy, but that doesn’t mean they haven’t been addressed.
Seriously, just do it.
* Please spare us the comments about how the airlines are not profitable. Yield Management is not the reason. In fact, airlines couldn’t exist if they didn’t engage in price discrimination, not to mention many other industries—from rental cars, cruise lines, sports teams, retailers, and hotels—engage in Yield Management and are quite profitable.
Ed Kless - 01/15/2009
Ron Baker - 01/14/2009
Thanks to Rita Keller’s blog for pointing me to an article in the January/February 2009 issue of the Ohio Society of CPA’s magazine, Catalyst.
The title is provocative, ”2018: A world of global accounting and virtual business.” Written by Kimberly Scher, vice president communications for The Ohio Society, with insights and suggestions from Jeff Tucker, shareholder of Top 100 firm Rea & Associates Inc., with which we have been discussing various issues surrounding effectiveness vs. efficiency, Lean Six Sigma, Value Pricing, getting rid of timesheets, etc. It just might be the second Top 100 firm that trashes timesheets.
Jackie is the article’s fictitious protagonist, a CPA who works in her parent’s furniture company. A recounting of her day gives you a glimpse of how accounting will be different by 2018, including XBRL, international accounting standards, doing business in China, technological innovations, an international CPA certification credential, among other topics.
From our standpoint at VeraSage, here’s the most fascinating prediction in the article. During a lunch with a colleague, Michael, who works in public accounting, Jackie asks, “How’s business at the firm?” Here’s Michael’s response:
“Business has been great since we eliminated timesheets and hourly rate billing. We now price every piece of work up front based on the value of the services we provide. Our clients love it. They get a client service plan tailored specifically for them. We negotiate a fixed price agreement, called an FPA, for implementation of the entire plan. The FPA comes with unlimited access to us.”
“No more bills for a six-minute phone call!” Jackie says with a laugh. “As a client, I can see why that would be popular. What if a client’s needs change?” Jackie asked.
“Then we revise the plan, document the modifications and renegotiate the FPA with the client,” Michael said.
“Why the change to FPA?” Jackie asked.
“When we billed by the hour, we had to work more hours to earn more. Focusing on billable hours impacted our staff’s work/life balance. We realized that with hourly billing there was little or no relationship between the payment we received and the value of the services we provided. With the FPA approach, we determine what services our clients want from us and develop a compensation structure based on the value of those services.”
Here’s my question: Do we really think this will happen in a majority of CPA firms by 2018?
Critical mass takes approximately 20% of a population adopting an idea before it diffuses among the majority of the remainder. VeraSage’s best conjecture is 7-10% of firms have implemented Value Pricing and Change Orders as we teach these concepts. Less than 1% have trashed timesheets.
My bet is we won’t be at a “tipping point” by 2018. I hope I’m wrong, and articles like this are encouraging since we now believe that Value Pricing and trashing timesheets are finally on the offense, not defense.
What is your bet?
Ron Baker - 01/13/2009
Wow, another day, another HSD (High Satisfaction Day).
For the second day in a row, we learn of another Trailblazer firm that has trashed timesheets.
David Littlefield, president and CEO of Littlefield advertising agency in Tulsa, Oklahoma sent me this progress report today:
Ron,
With encouragement from you and Ignition Group’s Tim Williams, our agency has been moving more and more in the direction of value pricing the past two years. In an effort to “burn the ships” and move more aggressively in that direction, we symbolically torched a paper time sheet in December at a staff meeting and announced we are no longer keeping detailed time sheets for billing purposes going forward. (High fives all around!)
There are several reasons we have embarked upon this course.
First and foremost, we want to send a strong message to our people that we value their thinking and talent, not the physical hours they take to accomplish a task.
Second, the old, time-based way of billing clients flies in the face of how people normally buy things. Do you really care how much time it took to build the car you want to buy or the perceived value to you of the purchase price? We now scope the work, quote a price, and unless the scope of work changes, we live with our quote.
We bill 1/2 of the quote upon initiation of the job and the balance when the job is completed. Ongoing services, such as brand strategy, PR, media or research, are scoped and quoted as an annual fee. We then bill 1/12 of that number monthly. This approach will greatly simplify billing and make it easier for our clients to reconcile their budgets to our invoicing.
And finally, we believe this approach will force clients to sit down with us to better establish the metrics we will use to define success, which will really help them see the value of the services we are going to provide.
It is too early to measure the success of this effort, but we are committed to this brave new world of value pricing and don’t plan to go back.
Next up? Performance-based compensation—but first things first!
Best regards,
David
David’s “burn the ships” reference is to Hernán Cortés, the Spanish conquistador who ostensibly burned his ships in dock so his men would have to fight to the death with no chance of retreat. That is the total commitment that is required when you embark on pricing on purpose and getting rid of your timesheets.
Congratulations to the entire group at Littlefield for having a better vision of the future. We look forward to hearing your progress down the road.
Ron Baker - 01/12/2009
Another HSD at VeraSage as a result of this email Dan and I received from Brandy Amidon, CPA, from Brains on Fire, Inc., which has trashed timesheets as of January 1, 2009:
Good morning Ron & Dan,
Just wanted to let you both know that we have abolished time sheets starting this month! We are a Word of Mouth and Identity company in Greenville, South Carolina.
Our CFO read the article in the Journal of Accountancy and our eyes were opened!
We are still in shock that we didn’t think of this sooner! Just finished reading The Firm of the Future as well. REMARKABLE!
We wanted to thank you both for all your hard work in spreading the word about time sheets and mind blowing innovations in our profession. Of course, I’ll email you with progress reports as we go along.
Thanks so much for all the resources on your website. It made making the switch so much more comforting!
Check out our blog. The creatives gave me reins for a day to post our good news.
Thanks again!
Brandy Amidon, CPA
You can read Brandy’s blog post on trashing timesheets here. Be sure to read all the comments as well.
Congratulations to the entire Team at Brains on Fire. You are blazing the trail that others will eventually have to follow.
We look forward to your progress reports.
Ron Baker - 01/11/2009
Thanks to Stephanie West Allen (again!) for sending along this interesting article from Law.com International News, “Kill the Billable Hour? A British Response.”
This is in response to presiding partner at Cravath, Swaine & Moore LLP Evan Chesler’s article in Forbes.com about killing the billable hour, which I posted on earlier.
Here’s an interesting statement:
In the United Kingdom, lawyers and clients have never had the same all-consuming obsession with hourly billing as their American peers. Still, over the last 20 years hourly rates have become the dominant currency here as well, and the tide slowly is turning—some British companies and firms are much further along in making the change.
This has certainly not been my experience talking with CFOs from the Magic Circle firms. I did a program in Ireland with a room full of these CFOs, trying to convince them the billable hour was sub-optimal pricing. They defended it to the hilt, said their partners were making to much money under it to change, etc., etc.
So I remain skeptical of this author’s claim the British firms are not obsessed with billable hours. How many of them have trashed their timesheets? My guess is America (along with New Zealand and Australia) has more firms that have done so than Britain.
The article does mention one firm that doesn’t bill by the hour at all, Slaughter and May, stating:
Slaughter and May has never billed clients by the hour, nor do partners and associates have any targets for hours worked. ‘At the end of a deal we sit down with a client and ask, ‘How good a job do you think we’ve done?’’ explains senior corporate partner Nigel Boardman, the relationship partner for ITV.
Alright, that’s impressive. But so what? One firm does not a diffusion make. America has Wachtell, Lipton, Rosen & Katz, which also doesn’t bill by the hour.
Citing how individual firms are transitioning to alternative pricing arrangements with some customers is also not a major diffusion. Again, so what? They are still billing by the hour for a majority of their other work. Worse, they are still maintaining timesheets to compute hourly rates.
The article mentions another law firm partner predicting that “over the next five years we’ll see firms and in-house counsel looking at arrangements other than hourly rates although I don’t think clients will completely abandon hours.”
Therein lies the problem. It’s not up to the “clients” to abandon the billable hour. It’s up to the law firms.
The Brits are no further along than America when it comes to burying the billable hour.
But I’ll gladly admit to being wrong if someone can show us some empirical evidence to the contrary.
Ron Baker - 01/08/2009
Accounting Today’s January 5, 2009 issue has an article on the Best Firms to Work For.
Mark Bailey & Co., one of our Trailblazers and great friend of VeraSage, was named first place in the small firm category.
What do they attribute this honorific to?
Trashing timesheets.
What’s that worth?
Congratulations to the entire team at Mark Bailey & Co. You are the future.
Ron Baker - 01/08/2009
Thanks to everyone who has been sending me the January 12, 2009 Forbes article written by Evan R. Chesler, presiding partner at Cravath, Swaine & Moore LLP, entitled “Kill the Billable Hour.”
It doesn’t real say anything that friends of VeraSage don’t already know. It lays the out how the billable hour misaligns the interests of attorney and customer, especially in litigation.
Chesler uses the example of a contractor he hired to remodel his kitchen. He received a fixed price, causing him to wonder why attorneys can’t do the same, even in complex litigation that can be broken down into various phases.
You can read this article and other comments on it at Law.com, and the Wall Street Journal’s Law Blog.
Once you step out of the professional realm, you realize that every other business on the planet offers a fixed price, before you buy. This is basic economics, which PKFs have been violating at their peril.
We have used examples of how absurd it would be if airlines charged by the hour, or insurance companies used cost-plus pricing. Jay Shepherd, one of our Trailblazer law firms, has a great post about what would happen if Starbucks charged liked attorneys.
I’m constantly amazed by the amount of chatter that has been spent on defending and debunking the billable hour. What’s so hard about offering customers a fixed price up-front? It eliminates all of the problems and ethical dilemmas of the billable hour.
There’s an interesting interview on the Legal Talk Network with attorney Stewart Weltman from the Weltman Law Firm, discussing how his firm uses value pricing, even when representing the defendant in a lawsuit. (Hat tip to Stephanie West Allen for passing this along).
I’m encouraged by all the talk in the legal blogosphere on this issue. But as my friend Ric Payne begins a lot of sentences, at the end of the day, talk is cheap. I’m afraid at the end of the day, Chesler will still be completing his timesheet.
I’ll be more impressed when Chesler gets Cravath to eliminate the billable hour entirely. Imagine what an enormous competitive advantage that would be for the firm.
Here’s the line I find most interesting from his article, and it’s at the very beginning:
I’m a trial lawyer. I bill by the hour. So do the associates who work for me.
Talk about defining yourself by an hourly rate. This is exactly the point that David Wootton, author of Bad Medicine, made about doctors reluctance to adopt a variety of new theories and techniques that would have made medicine more efficacious (see my review of this wonderful book here).
Wootton believes the primary obstacle to progress was not practical, nor theoretical, but psychological and cultural—"it lay in doctor’s sense of themselves.” This certainly explains Chesler’s opening sentences—he’s defined by his hourly rate.
I remain a paranoid optimist regarding all this chatter about getting rid of the billable hour. On one hand, I’m thrilled to see it getting so much attention, while on the other hand, I’m distressed that so far it seems to be a lot of talk with no action.
I’m beginning to believe in the wisdom of the physicist Max Planck’s statement, “Science progresses funeral by funeral.” Do we really have wait for the older generation to die out before changing to a more economically rational business model?
What do you think?
Dan Morris - 01/07/2009
For those of you who care to see what my office doesn’t look like (I used an additional office because the fire marshal hadn’t approved of mine) or if you would like to see my Wednesday Sweater, or finally, just how much hair I have lost, please watch the clip referenced here.
http://cbs5.com/video/?id=44153@kpix.dayport.com
One of the benefits of working in a Firm of the Future where my day isn’t always fully scheduled (even though I am always busy) is that I was able to shift my afternoon around after receiving a call at 12:45 for a 2:00 PM interview request. I was interviewed because when I met the reporter, I volunteered to be of any assistance I could and he remember that. He used many of my words as his sound bites and I had less than an hour to prepare. Team work, media training, and the luck of answering the phone at the right time provided valuable credibility to me and my firm.
Have a great day.
Ron Baker - 01/07/2009
Senior fellow Tim Williams is a thought-leader in the advertising world on strategy, branding, and compensation. He is the author of Take a Stand for Your Brand, a book I highly recommend (well, except for the Appendix, which Tim has repented adequately for).
His consulting firm, Ignition Consulting Group, publishes Creating Value, a quarterly newsletter, full of incredibly valuable insights based upon Tim’s extensive intellectual capital in dealing with agencies of all sizes.
Even though it’s written primarily for advertising agencies, most of the content is just as applicable to accounting, law and IT firms.
It never ceases to amaze me how similar many issues are across the various professional knowledge sectors, especially when it comes to customer selection, pricing, and dealing with procurement.
He recently asked me to look at his 4th Quarter 2008, Issue 8. Here are a few nuggets that I found compelling.
The first article deals with treating your compensation agreements as a stock portfolio.
Just as no investor would put all of their money in gold, a PKF should diversify its compensation agreements from relatively safe to high risk/high reward deals. This is impossible if you bill by the hour.
The next article deals with how to deal with procurement, a topic that confounds ad agencies, but is increasingly being felt in law firms as well. If customers employ professional buyers—procurement—shouldn’t sellers have professional pricers?
The central insight here is that procurement deals with process and compliance, something lawyers and CPAs are well versed in.
But economists don’t give much thought to compliance and process, however. Economists deal with incentives. If you structure the incentives correctly, the process and compliance take care of themselves.
Consider this example. When Great Britain sent prisoner ships to Australia, they initially paid the shipping companies based on how many prisoners boarded for the journey. The problem was many of the prisoners died making the trip.
They could have proposed a process and documented compliance—such as with the ludicrously expensive Sarbanes-Oxley law—insuring that adequate food, medical supplies, etc., were on board.
A competent economist would laugh at this, as much as they laugh at SOX. Rather, an economist would suggest they pay the shipping company for how many prisoners they deliver to Australia alive.
Once the incentives are aligned, who cares about process and compliance? This is a much more efficient and effective compensation agreement that ensures the objectives—another word for value?—are delivered.
Ad agencies are beginning to understand the necessity of aligning incentives with their customers. One such agency is the Brownstein Group in Philadelphia.
In its December 2008 newsletter, The Monthly Magnet, they wrote about this very topic.
This is the only way a PKF can change the conversation with procurement from inputs, efforts, costs, activities, processes and compliance to one of value, output and results.
Once again, if we don’t discuss value—another word for incentives?—we’ll end up talking about costs and hours.
Aligning incentives changes everything. It all starts with changing the conversation.
To download a complimentary past issue of Ignition Consulting Group’s Creating Value, which is all about setting a value-based price, visit here.
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