Community Section -
Ed Kless - 02/27/2009
Of the three types of intellectual capital (human, structural, and social), the most misunderstood and even maligned is social capital.
Last week a news story hit the local papers in Dallas — A small meteor had impacted somewhere south of Dallas. (Full article here.)
Two scientists set off for their journey about 3 a.m., which was originally going to lead them to Fayetteville. The team decided to make a quick stop at the Czech Stop in West to grab a kolache.
“We had our NASA and UNT gear on and the employee behind the counter asked if we were there because of the thing that shook their walls,” DiLulio said with a smile. “A customer approached us and said ‘it was as loud as a train.”
DiLulio at that point knew they were traveling along the right path. The team decided to continue chasing the Fayetteville site at sunrise and search.
Starr said they spent about 2-3 hours searching, but decided to head back to West because they were certain it was closer to the explosion.
DiLulio said they stopped at a truck stop in West to buy some batteries from his metal detector. While they were inside they came across the McClennan County sheriff and some deputies.
“I wanted to interview everyone, so I asked him if he received a lot of reports,” DiLulio said. “One of the deputies said it happened right by his house. The sheriff told him to take us there.”
Starr and DiLulio decided to search the gravel road first before looking on the private property. Starr said the two were driving slowly when they noticed a black grayish rock.
No offense to the esteemed scientists, but Fayetteville and West are about 150 miles from each other.
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They should have paid more attention to the social capital they obtained in West at the Czech Stop. BTW - Their kolaches are the BEST!
Ron Baker - 02/25/2009
Science historian at Stanford, Robert Proctor, has made this profound observation, as reported in the February 2009 issue of Wired magazine:
Normally, we expect society to progress, amassing deeper scientific understanding and basic facts every year.
Knowledge only increases, right?
Proctor points out that when is comes to many contentious subjects, our usual relationship to information is reversed: Ignorance increases.
He has developed a word inspired by this trend: agnotology. Derived from the Greek root agnosis, it is “the study of culturally constructed ignorance.”
The reason I found this so interesting is I’ve been having an exchange with Jim Hassett, a legal consultant, who has written (so far) a seven-part series of blog posts on “alternative fees.” There is no more contentious issue than suggesting professional knowledge firms trash their timesheet.
In his seventh post, he quotes me on why timesheet are part of the problem in transitioning to Value Pricing. After I present my argument, Jim writes:
In this case, Ron and I will have to agree to disagree.
Both law firms and their clients have several decades of experience thinking about cost in terms of the hours each matter will take. And there are good reasons for this approach, since ultimately most of the cost of doing the work will depend directly on the number of hours it takes, and the salaries lawyers are paid. In my opinion, asking law firms to throw this experience out the window is counter-productive.
To get better at pricing, you need to measure which matters produce the largest financial returns, and which people within the organization do. Tracking the time and money spent on each matter is the simplest way to measure that financial return.
My response to this is, so what? Jim is entitled to his opinions, but not his facts. The fact is, there are firms out there doing what he says shouldn’t be done. At what point does one become persuaded by empirical evidence? As I wrote Jim in an email:
If we were debating Intelligent Design vs. Evolution, I can accept your comment—"Ron and I will have to agree to disagree"—though I still find it lacking in intellectual rigor
But we are talking about business practices, and hopefully optimal business practices. I have no doubt that cost-plus pricing is profitable. That’s not my point. My point is it’s not optimal. Timesheets are part of the reason.
The fact that there exists—right now, in the real world—hundreds of firms that have gotten rid of timesheet and have found it more optimal should spark your curiosity, not a dismissal that we’ll have to agree to disagree.
If my worldview is challenged in such a manner, I investigate very deeply, not wanting to dismiss facts and evidence simply because they conflict with my worldview or experience, or because I do not understand exactly how they are doing it.
This is what I find so discouraging about consultants. They are not innovators. They simply spread orthodoxies from one firm to the other. And in the case of Value Pricing, they are part of the problem, not the solution.
It’s almost impossible to debate people who believe that something that is being done cannot be done, or should not be done. I will let the empirical evidence speak for itself, leaving it up to leaders in the respective professions to investigate and draw their own conclusions. More and more do so everyday, and end up trashing their timesheet as a way to become better pricers.
People can disagree all they want, but that doesn’t change the facts.
We can certainly argue about what facts mean—that is a true debate. But if we are arguing about what the facts are, then it denigrates into Proctor’s agnotology Armageddon, where reality no longer matters.
John Maynard Keynes (an economist currently back in vogue) once wrote:
When somebody persuades me that I am wrong, I change my mind. What do you do?
Robert Proctor’s new word resonates with me given my experience with debating the timesheet issue.
Is this a good explanation, or is there a better one?
Ed Kless - 02/24/2009
Below are the slides that Ron Baker and I have used when delivering the Value Pricing Boot Camp. This program has been offered from time to time for business partners of Sage. If you are interested in attending a future event, please email me at ed.kless *at* choosegreat.com.
Enjoy!
Ron Baker - 02/24/2009
Thanks to Stephanie West Allen, who introduced me to Mike (known as Charon QC) over at Insite Law.
Mike’s 100th podcast interview was with Dan Hull, who had mentioned me regarding Value Pricing, so Stephanie thought it’d be a good idea if Mike interviewed me.
We spoke last week for Mike’s 104th podcast. You can listen directly to the podcast here, or access it at Mike’s blog here.
As an fervent Anglophile, I thoroughly enjoyed my discussion with Mike, and he’s invited me back to discuss another topic. If any one has any suggestions for a topic, let us know.
Ron Baker - 02/20/2009
I received the following questions regarding pricing litigation support services over the prior week.
Mr. Baker.
As a thought-leader in value pricing I was hoping that you could take a few minutes to share your thoughts and comments with me about value pricing in my practice area.
I am located in California and I offer litigation support services to family law attorneys. I am regularly hired by family law attorneys to perform valuations of closely-held and professional service businesses, analyze apportionment of community and separate property claims, perform forensic tracings and complex special accountings, and calculate child and spousal support. Ultimately, these assignments result in me providing expert witness testimony either by written declaration or by oral testimony.
I am writing to ask your opinion about somebody (me) providing the aforementioned litigation support services in a value pricing format.
This is something that I feel confident that I could successfully do from a project management standpoint on my side. However, I am wary of how it would be perceived by the family law attorneys that hire me and the Courts that consider my testimony.
I am curious what your opinion is on whether or not this non-traditional approach to pricing would be either a turn on/off to family law attorneys who only know the billable hour, if as an expert witness I can charge my clients in this manner and avoid be perceived/labeled as a “hired gun,” what potential pitfalls may lie ahead when I am on the stand being cross-examined about my billing practices, and finally how would I market a value pricing approach without offending the bill-by-the-hour attorneys that hire me.
Thank you in advance for your time and comments.
My reply:
Thank you for your email.
My take is you should be able to provide a Value Price for this type of work. If the attorneys ask for “number of hours” simply reply that you don’t do timesheets, but rather agree upon a fair price up-front for value delivered. As long as the price is not “unreasonable” I can’t see why the lawyers or the court would disallow it, especially as it was agreed to up-front. There is nothing more transparent than pricing up-front, despite how proponents of hourly billing twist themselves into pretzels denying.
I would also think the family law attorneys would appreciate the certainty in price; I know the clients would! As for “hired gun,” I think that risk exists just as much with hourly billing as it does for a fixed price.
Perhaps if you offered an “Unconditional Money Back Guarantee” on your service, you’d be in a much stronger position to command a premium price. Note that this is not a guarantee of a specific outcome in the case, only with your service level. For an example of such guarantees from law firms, visit here and here.
I also realize state law varies on this, but if a court has jurisdiction over your fees, it may require billable hours. But again, only if it’s questioned; and as long as your fee is reasonable, you’d be able to submit an estimate of the time you spent extemporaneously.
Another question, this one more specific:
I have a practical question.
Hypothetically let’s assume that a client and I agree on a value price of $20,000 for a particular case.
And let’s further assume that I had a very thorough meeting at the very beginning of the case and we identified four specific items that needed analysis.
Then as I am working through the analysis the case settles.
- Does the client still pay me the full amount even if I have not actually performed all of the analysis?
- Would I price each item separately and collect on a percentage of completion basis?
- Even if priced separately what if I did the work but never presented it?
- Do I renegotiate a final price for what was done and refund the difference?
- Isn’t there an intangible value that I provide just by being in the case? Maybe the work that I did complete was so convincing that opposing counsel chose to settle on the other issues? Should I not be compensated for this intangible value and collect the full amount?
Value pricing is something that I really want to put into practice but I am trying to think through as many of the future headaches and initial questions I will face.
Thank you in advance for your help.
Again, my reply:
You’re going to get used to hearing this answer from pricers: “It depends.”
You’ve actually answered your own question through the thought process in your bullet points.
As long as you have an agreement with the client, up-front and BEFORE you begin the work, you can have a clause read any way you want in the event of settlement before the work is done. Depending on the value of that settlement, that will help you set the price.
This is where you have to think like an actuary. What are the odds of a settlement? What are the odds you’ll have to complete all the work scoped? You bet there is substantial value just having you involved, which could lead to a quicker settlement. That value should be reflect in a settlement clause price.
Make sense?
The important lesson is to always comprehend your client’s value drivers, and plan for the contingencies you estimate to have a reasonable chance of happening. Price them in advance, giving your client certainty. You’ll be amazed at the results.
As always, we’d appreciate any feedback and experience of others who have priced these types of services.
Ron Baker - 02/19/2009
I’m thrilled to announce my first Second Life Webinar that will be held this Monday, February 23rd, 9:00 am PST.
You’ll have to be registered for Second Life, as well as the Maryland Association’s CPA Island on Second Life.
For more information on the Webinar’s content, visit Maryland’s Web site here.
New to Second Life?
Follow these easy steps:
Use the new Direct SLURL feature by clicking on our link Conference Meeting Room to go to the Second Life URL. On that page, click “sign up” and quickly register, download and login to the viewer, and arrive at their originally intended destination. A quick tutorial will open upon their initial arrival.
Hope to see you there—literally and virtually!
Ron Baker - 02/19/2009
I had the great pleasure of speaking with Bill Sheridan from the Maryland Association of CPAs a few weeks ago.
Inspired by the November 2008 Journal of Accountancy article, Bill and I discussed the ideas behind the Firm of the Future’s new equation, as well as the limitations of the old model of billable hours and realization rates.
The interview lasts approximately 25 minutes. Visit here to listen directly.
Bill also wrote a blog post on the interview at the Maryland Association’s Blog, CPA Success.
I’d like to thank Bill and everyone at the Maryland Association of CPAs for supporting the spread of these ideas. Surely Maryland is one of the most progressive CPA state societies in the country, under the visionary leadership of Tom Hood.
Ed Kless - 02/19/2009
In the news today is the announcement that the consulting firm that was an outgrowth of KPMG, BearingPoint, has filed Chapter 11. I have a few questions for the community.
- Did they bill by the hour? If so, how do you lose money? The only way I can think of is by keeping on people that you have no work for.
- If they did not bill by the hour, they were clearly terrible pricers. Who would hired a consulting company that was clear managed by inept business people?
- What happens to intellectual property in these cases? The real value of the company is the knowledge of the people (with the exception of those on pricing engagements), what do the creditors do, extract brain cells?
Ron Baker - 02/13/2009
Bill Gates doesn’t believe he sells time, thus there’s no need for him to maintain a timesheet. The two go hand and hand.
This is why I was so amazed by Evan Chesler’s opening statement in his Forbes article on the billable hour:
I’m a trial lawyer. I bill by the hour. So do the associates who work for me.
If you were to ask any other CEO to define themselves, or their company, I doubt you’d hear that sentiment.
Jay Shepherd, one of our Trailblazers and a great thinker, has a fantastic post on this today over at Client Revolution, “What if Google billed by the hour?”
Note that Google allows its employees 20% “Google time” to innovate new ideas, services, etc., for its customers. How many professional firms would do that in a billable hour environment?
Is it any wonder that PKFs are not hot beds of innovation?
Ed Kless - 02/06/2009
If this were not so funny it would be pathetic. Actually, as Willie Wonka says, “Strike that, reverse it.”
Recently, we at VeraSage became aware of an accounting firm’s Web page that had a series of questions and answers regarding fees. Among the litany is this gem:
How do accountants charge?
All Accountants charge by time. The longer it takes to prepare your Return the dearer it’s going to be. Some businesses sell hamburgers. Real Estate Agents get paid commissions, and ACCOUNTANTS SELL TIME. The more presentably you submit your accounts, the quicker we get it done, and the more cost effective it is. We only have 8.0 hours per day to sell and we would not be in business if we gave our product away.
Not only is it wrong (all accountants do not charge by time, see our ever growing list of accounting Trailblazers), it seems this page has been cut, pasted, and ever so slightly altered by many firms in Australia and New Zealand. A Google search found seven instances of the same eff-ing page!
Which of you wants to take credit for originally writing this drivel? Perhaps it was a consultant to the professions that continues to circulate this crap. I beg each of you to spend an hour on this Web site and learn something new.
Ron, do you still think Australia and New Zealand are ahead of the US and UK?
Ron Baker - 02/05/2009
We often discuss the fact that profits originate from risk, which is a supply-side viewpoint.
But what about the demand side—that is, what about the customer’s risk? If a firm lowers a customer’s risk, or uncertainty, it should be able to command a price premium over the competition.
In tough economic times, everyone likes to bemoan how their offering is becoming more and more commoditize. We hear this across all sectors, and it’s truly disheartening, since there’s no such thing as a commodity.
I’ve recently finished a presentation with that very title for an actuarial conference, arguing that no insurance product need be a commodity. But how do you de-commoditize your offering? The answer is with marketing and your value proposition.
One method to achieve this is by analyzing customer risk and uncertainty and devising ways to shift that risk to your firm. Your firm is in a far better position to absorb risk than your customer, since you can spread the risk across many customers at once.
You may have saw the Hyundai ad during the Superbowl, where it is offering customers up to one year to give back their cars in case they are laid off at no cost, and with no hit to their credit rating. As the New York Times article points out:
Last fall Hyundai began testing the idea of a return policy rather than simply piling more discounts onto its already low-price vehicles. The program covers every buyer of a leased or financed vehicle who involuntarily loses a job; becomes physically disabled; loses a driver’s license for medical reasons; is transferred to another country; is self-employed and files for bankruptcy; or dies in an accident.
The guarantee covers the difference between the value of the car and the amount the buyer owes, or negative equity, up to a maximum of $7,500.
“It doesn’t matter how many zillion dollars you put in rebates, or what A.P.R. you give them,” Mr. Zuchowski [Hyundai’s vice president for sales] said. “If people are worried about their job, they don’t really care and they’re just not going to get off the fence. But we had to walk a really fine line. We wanted to make sure we didn’t come off as panicked or distressed.”
The result of this strategy so far? According to the article:
The company’s market share nearly doubled last month as sales rose 14 percent, the largest year-over-year increase that any big automaker has posted in the United States since last May.
I hope Hyundai was smart enough to change it’s pricing strategy along with this offering. In any event, there is a great lesson here for PKFs. How can you reduce, or mitigate, your customer’s risk and uncertainty?
Understanding Customer Risk
Any purchase entails risk. Professional services are relatively more risky than products, since they cannot be evaluated until after experiencing them, sometimes long after. This is one reason why there is greater loyalty to service providers than products manufacturers.
There are seven types of customer risk:
- Performance risk is the chance the service provided will not perform or provide the benefit for which it was purchased.
- Financial risk is the amount of monetary loss incurred by the customer if the service fails. Purchasing services involves a higher degree of financial risk than the purchasing of goods because fewer service firms have money-back-guarantees.
- Time loss risk refers to the amount of time lost by the customer due to the failure of the service.
- Opportunity risk refers to the risk involved when customers must choose one service over another.
- Psychological and social risk is the chance that the purchase of a service will not fit the individual’s self-concept. Closely related to psychological risk is social risk, which refers to the probability a service will not meet with approval from others who are significant to the customer making the purchase. Services with high visibility will tend to be high in social risk. Restaurants and hair stylists are examples of service industries that are perceived to have a high level of social risk. Even for business-to-business marketing, social risk is a factor. Corporate buyers are concerned that a service they purchase will meet with approval of their superiors. Thus, IBM’s famous slogan: “No one ever got fired for choosing IBM.”
- Physical risk is the chance a service will actually cause physical harm to the consumer.
Of course, there are many ways of reducing customer risk. The more common ones are offering fixed prices. Just as with fixed-rate mortgages that command a premium over Adjustable Rate Mortgages, this will command a price premium; the 100% Money-Back Service Guarantee; a Price Guarantee, whereby the customer never has to pay an invoice that they did not pre-authorize; unlimited access so the customer can call or meet with you anytime to discuss any matter, similar to having an attorney on retainer, offering peace of mind.
But what about the factors listed above? How else could you reduce your customer’s risk? Think about it from the customer’s perspective like Hyundai did, creating a new competitive innovation that is likely to be imitated in short order. But don’t let that stop you. PKFs are far slower to duplicate competitive advantages than industry in general.
As the old actuary axiom says: There is no such thing as bad risks, just bad premiums.
Ed Kless - 02/05/2009
As a fan of the Pittsburgh Steelers I was thrilled by the great game played by both teams on Sunday. The final score 27-23, Steelers. But let’s look at the game a little closer from the perspective of a old equation firm. Their analysis would look something like this:
For the Cardinals
- Total Net Yards - 407
- Total Rushing/Passing Plays (includes Sacks) - 57
- Average Gain per Offensive Play - 7.1
- Net Yards Rushing - 33
- Total Rushing Plays - 12
- Average Gain per Rushing Play - 2.8
- Net Yard Passing - 374
- Gross Yards Passing - 377
- Pass Completions/Attempts - 31/43 = 72%
- Average Gain per Passing Play (includes Sacks) - 8.3
For the Steelers
- Total Net Yard - 292
- Total Rushing/Passing Plays (includes Sacks) - 58
- Average Gain per Offensive Play - 5.0
- Net Yard Rushing - 58
- Total Rushing Plays - 26
- Average Gain per Rushing Play - 2.2
- Net Yards Passing - 234
- Gross Yards Passing - 256
- Pass Completions/Attempts - 21/30 = 70%
- Average Gain per Passing Play (includes Sacks) - 7.3
In virtually every offensive category (in italics above) the Cardinals come out ahead. Do you notice something about these stats? They are all effort based, even those that measure efficiency — average gain per offensive play, average gain per rushing play, pass completion percentage, and average gain per passing pay. Measuring and using these statistics to determine the outcome of a game is nonsensical.
The same thing is true about professional firms that measure billable hours, utilization, and realization. They are all effort based, not result based. A billable hour is not a result, it is not a touchdown. It is an effort, it is a pass attempt.
As with any analysis of data, while you can measure based on efforts, you cannot judge or determine the outcomes based on them. What is true for sports teams is true for professional service firms. Stop measuring the efforts, start judging (better yet have your customers judge) the results!
Ron Baker - 02/04/2009
In our experience, there are two reasons why Value Pricing fails in firms. First, the price quoted was simply too low because the value created was misunderstood, or—and this is more common—the firm just wimped out on the price.
The reasons why this happen are many—no Chief Value Officer, no pricing cartel formed, no responsibility or expertise in pricing, not willing to take risks, not learning from successes and failures, no intellectual curiosity, among others too exhaustive to list.
Second, firms are horrific at scoping projects, project management, and communicating with customers up-front about what is covered in the price and what is not. This leads to the insidious scope creep, the largest killer of Value Pricing initiatives across all firms.
There’s a saying that if you do something stupid once, it’s a mistake. Do it twice, it’s an ideology. Why professionals can’t learn to back off from work that isn’t pre-authorized by the customer has always amazed me. I couldn’t do when I practiced because of what I was taught by my leaders. It wasn’t until I became convinced it was the right thing to do for the customer that I began to change my behavior.
None of us would give our auto mechanics a blank check for repairs just because they found another problem. If auto mechanics and contractors can adequately define scope and issue change orders, why can’t we?
Ed Kless and Chris Marston have both written wonderful posts on scoping projects, another of which is on Chris’ blog. There is a framework to follow, but as with the rest of Value Pricing, you have to find your own way.
In that spirit, Trailblazer Matthew Tol sent me this thought-provoking email on his firm’s approach to scoping projects as well as managing the customer’s expectations.
Ron,
I have just come from a meeting with a business which was looking at us to do some work for them. From that meeting, I learned an interesting new concept with regard to scoping and explaining it fully to the potential client.
The business they are in is an absolute mess—they have no idea of where they are financially and have spent the last eight years building an operation which has grown at in excess of 65% (compound) annually. In short, they have done a spectacular job of getting to where they are now but they’re not sure where that is!
The first problem is that their systems are way way way below the level they need to be. They want help in getting their information up to date and then assisting them with developing new systems to cope with their planned growth from here on in.
The second problem they have is they have an ex Consultant (ex Big 4 Accounting Firm) who was wanting a fixed price (which is a good start) for the agreed scope. In our discussions however, it unfolded that many of the issues they had assumed were within their scope were in fact potentially outside of it.
Issues such as incomplete records, erroneous assumptions on the part of prior staff and God knows whatever else. We proceeded to have a rather detailed discussion on the scope whereby we likened the issue to peeling back the layers of an onion—the initial scope was to peel back one or two layers. If we then found that we needed to keep peeling back layers due to what we’d found, then we would be downing tools and seeking a discussion with them as to their preferred method of progress from there on—they fix it or we have a Change Order and we’d attend to it.
It is the assumption gap that creates the issue here—unless the scope is very precise and detailed, you’re bound to have problems. To ensure your scope is correct and valuable to the client, you need to spend a fair bit of time questioning not only what they want but why they want it and what they will do with the outcomes from the engagement. The understanding leads to precision.
The base learning in scoping discussions is that initially we assume that everything is OK (natural when you’re speaking with a potential new client). Once you’ve done it a few times, you find the scope is a bit like an onion—we need to understand that the scope may expand down through a number of different layers.
Having your initial scoping deal with the known and unknown layers ab initio can save a pile of time (and pain, angst, badwill and fees) down the track. It will ensure the relationship gets off to the best start and gives it a great chance of developing and growing over the duration of the engagement.
Maybe our lawyer friends could take something from the above that will help them get on the bus (ref ”Talkers are no good doers” post).
Kind regards,
M
Thanks for sharing your intellectual capital Matthew, your progress continues to inspire all of us here.
Some of our fellows believe one way to incrementally implement Value Pricing is to begin with a clear scope document in the Fixed Price Agreement and start issuing change orders.
You don’t have to be very skilled at pricing to achieve this. And since it’s the hardest part of Value Pricing, as well as the largest reason for failure, it’s probably a good place to start.
Perhaps another Key Predictive Indicator for the pricing cartel could be how many times someone identified scope creep, and what percentage of the time does that lead to change orders.
We’d love to hear from other firms on how they approach scope creep.
Ron Baker - 02/02/2009
New Zealanders and Aussies are just fantastic. Their cultures seem to be much more receptive to experimenting with new ideas, as evidenced by the number of Trailblazers we have from Down Under. Our senior fellows, Peter Byers and Yan Zhu, continue to help accounting and law firms transform into Firms of the Future at a dazzling pace.
So I’m always thrilled to hear progress reports from firms who get it. One such firm is Trailblazer Matthew Tol + Associates.
So I begin this post with the Wisdom of Matthew Tol, from a recent email he sent me:
Ron,
Just came across an interesting couple of quotes which could summarise the issues we’re dealing with when we try and change the profession from the “bad old ways”:
In the confrontation between the stream and the rock, the stream always wins...not through strength but through perseverance. H Jackson Brown
Predominant opinions are generally the opinions of the generation that is vanishing. Benjamin Disraeli
I find the second quote very true—we are talking about a generational change in the way we should approach our professional dealings with our customers. Moving people from entrenched positions is incredibly difficult and causes great angst amongst those trying to change and those trying to effect the change. It is the fear of what could go wrong rather than the focus on what can go right that makes many people scared of the process.
By getting the right focus and mindset, the change can be done but it will take a little time. We’ll just keep working away at the early adopters and progressive thinkers until the snowball gets bigger. It will grow—has to. Given the current environment, I find that we are seeing more customers needing clarity and comfort. We can provide them with certainty in their dealings with us through the value pricing and no timesheet model. The time is terrific to be in this space and it encourages our customers to really use us to assist them through these supposedly tumultuous times.
As I mentioned to you in a post recently, we’ve had a greater level of enquiry over the past couple of months than we’ve had in years—all by referral, all great businesses and all loving the fact that we won’t bill them for a phone call or for photocopying. These small things make a critical difference (ref Paddi Lund’s “Critical non-Essentials")—they make us different and higher on the value tree than our competitors. All contributes to our success and allows the team to flourish whilst the customers are getting terrific outcomes. These things are surely what it’s all about.
Now, what code do I post this to?
Cheers,
M
Now for the Wit. This comes from John Chisholm, a consultant to professional knowledge firms. He was a dear friend of our mutual friend, Paul O’Byrne, traveling with him extensively throughout New Zealand and Australia preaching Firm of the Future principles.
We at VeraSage have felt for a long time that mockery is more effective than logic when it comes to changing paradigms. Consider the movie Airplane. That one single movie killed off an entire genre of disaster films from the 1970s. We need to do the same to the billable hour and timesheets. This letter from John is a great start:
January 2009
Dear Client
Re: Our Engagement
I am writing to you quite frankly because I am being made to and for no other reason.
I know you have not asked me—or if you have I have conveniently ignored you—to confirm our terms of engagement but regrettably some regulations demand that I send you this letter.
Firstly I want to thank you for your instructions. I am ever so grateful because it means that I and my team can now reach our monthly fee budget. This means that I will not be subject to judgement by others in the firm but will clearly be in a position to judge others.
I am required by law to give you an estimate or range of the fees you are likely to spend with us, set out our method of charging and a few other extraneous and irrelevant matters.
You will be pleased to know that I will personally look after your matter—unless something more profitable or interesting pops up—but you can be assured of service commensurate with the quantum of the fees you will be paying us. At various times I will have a team of lawyers, paralegals, graduates and whoever else maybe struggling to reach their budget assisting me. Please be assured that regardless of whether I will be actually working on your file or not, I will make sure that some of my time is added to your file to reflect my level of importance in the firm.
If you have any queries at any time please do not hesitate to contact my p.a who will screen your call and determine whether it is important enough for me to speak to you direct. If you wish, you could always send me an email however given the level of technical skills I possess, it is unlikely I would be able to open it let alone respond.
In respect of our charges as you would appreciate (or you would if you were partner in our firm) it is very difficult for us to be precise on what your total legal fees in this matter might be.
This is because we charge solely according to the time we spend on your matter (which is in the firm’s best interest and if it is in our best interest it must be in yours) and I have no way of knowing how much time we will need to spend on your matter in advance. It is not that I have not had experience in this type of matter before its just that, well every case is different. I may be a good lawyer but I have absolutely no skills nor training in pricing so any precise fee I would give to you wouldn’t be much use to either of us. Indeed, it may be disadvantageous to me as it may mean I have to achieve an outcome for you regardless of my ability to make my monthly budget—not a pressure I would like to have. I hope you will understand.
It is also not in my interest to give you a precise figure anyway primarily because you might hold me to it. Even if I were to give you a precise figure you might not like that figure and choose to shop around, or ask me how I arrived at that figure. Worse still you might seek to negotiate a different fee with me.
I am prepared however to give you a range which may—or may not—be of some assistance. Based on what you have told me to date, which I know was not much because I have not asked you many questions, I can with some confidence state that your fees are unlikely to be any less than $20,000 (in fact I can positively guarantee they will not be any less than $20,000 looking at my budget month to date) and are unlikely—but not impossible—to exceed $200,000.
Everyone at our firm is proudly assigned an hourly rate at the commencement of each financial year (although we do reserve the right to change the rates at anytime without telling you in advance). You are lucky to be dealing with me who as a senior partner can command extraordinarily high charge out rates. As the senior partner I can guarantee my rates will always be higher than anyone else in the firm as you will note from Appendix 1 attached which lists all members of the firm and their current hourly charge out rate.
Whilst we all have an hourly rate for your convenience we break down our rates into 6 minute units of time and charge you for each 6 minutes or part thereof we spend on your file. Please be assured however that we will NEVER spend less than 2 hours doing anything on your file.
You will be pleased to know that at our firm we rarely sleep and you can be assured that often 24 hours per day we will be thinking about your case and how to achieve the best results for you. With advances in technology it is even possible for us to think about your matter for more than 24 hours per day.
Again for your convenience we will bill you monthly. Actually we will raise an internal tax invoice for you on the last day of each month (notwithstanding when we actually do work on your file) but sometimes we may not get around to actually sending you the tax invoice until a few days/weeks later and as such I apologise in advance for the nasty letters/phone calls you may receive from those awful people in our credit department who will be unaware that the invoice may have not been sent to you (although they should be used to that by now). Just ignore them—I do.
You will also note on our tax invoice that it states you are required to pay our account in full within 14 days. No client has ever done that yet and I would hate you to set a precedent so please also disregard that and pay us whenever you feel like it.
We urge you to read the attached 24 page Complaints Procedure (which we are quite proud of). In short you have one day in each month (on the full moon between the hours of midnight and 2 am) in which to lodge your complaint personally by hand.
Finally I sincerely wish you the best of luck being a client of this firm—you are going to need it!
Regards
Senior Partner
P.S. I neglected to inform you about our firm’s most profitable practice area—Disbursements. In addition to our professional fees we will also charge you non-professional fees such as photocopying, binding, telephone calls, taxi fares, tea and coffee (espresso), lunch, dinner, red wine, chocolate biscuits, use of our meeting rooms, the cost of our Christmas gift to you, the cost of sending you our bills and follow up letters and any other expenses we can get away with passing on to you. Of course we do not just pass on the total cost of these items—there is always a healthy mark up applied.
Ron Baker - 02/02/2009
My inbox has been inundated with the New York Times article from January 30, 2009, ”Billable Hours Giving Ground at Law Firms.”
Some of these messages contain high praise for my work and VeraSage’s in killing off the billable hour, stating how proud we should be of this moment.
But I’m not celebrating. This war is far from over. All this article is achieving is a wider exposure of more groaning and moaning over the billable hour’s inherent fallacies.
Once again, Evan R. Chesler, presiding partner at Cravath, Swaine & Moore in New York is quoted:
This is the time to get rid of the billable hour…
“Clients are concerned about the budgets, more so than perhaps a year or two ago,” he added, with a lawyer’s gift for understatement.
The article goes on to state how the billable hour has been firmly in place since the 1960s, which is not quite true. It actually reached a tipping point by the 1950s, whereas timesheets began as early as 1920 by some accounts, and certainly by the 1940s.
The article then quotes Frederick J. Krebs, president of the Association of Corporate Counsel:
I like to paraphrase Churchill, “In all these conversations, never has so little been accomplished by so many for so long. It just hasn’t happened.”
But the crashing economy may achieve what client complaints could not, Mr. Krebs added. “We may well be at a tipping point here.”
On one level, Mr. Krebs is correct. The ABA and firms have been talking, publishing, speaking, touring, and bemoaning the billable hour since at least 1992, with the publication of the seminal books of Richard C. Reed. All to no avail, at least at the large firm level.
But on another level, I believe Mr. Krebs is incorrect to think that a crashing economy, or the ACC Value Challenge for that matter, will bring about a change. How many recessions has the billable hour survived since the 1950s, including the much more severe recession of the early 1980s? If anything, it became more entrenched.
For reasons I’ve discussed many times before, sellers change pricing strategies, not buyers. That means the ACC has no power here to force law firms away from the billable hour. Oh, sure, some customers will force “alternative fee” arrangements on some firms, but that is a long way from each firm applying a new pricing model across all of its customers.
Besides, a lot of the “alternative fee” methods are nothing more than the billable hour in drag—blended rates, caps, discounted rates, etc.
Mr. Krebs goes on to say this, which I find simply ludicrous:
The difficulty is, we don’t really know what it costs us to do something.
This is not the difficulty. A monkey with rudimentary cost accounting skills can figure out the cost, especially when most of the costs are fixed!
The difficulty is firms don’t understand the value they create for their customers. They don’t seem to comprehend it, they don’t communicate it, they don’t innovate ways to enhance it, or to convince their customers of it. They whine that this is too hard, value is to fuzzy, and a host of other complaints.
Of course value is difficult, which is what makes pricing fare more complicated (and intellectually interesting) than multiplying hours by some fictitious hourly rate. But I can say one thing with total confidence: One way not to comprehend value is keep talking about billable hours.
It was John F. Kennedy who said that ambitious goals are worth pursuing “not because they are easy, but because they are hard.”
So I have a proposal for Mr. Chesler. You have eloquently laid out the case against the billable hour, in high profiles such as Forbes and now the New York Times.
It’s time for you and your partners to show some leadership, and draw a line in the sand. From here on out, Cravath will no longer bill by the hour. Furthermore, we are no longer keeping timesheets (this will shut down any conversation about hours).
Do it, Mr. Cravath. In your own words, “This is the time to get rid of the billable hour.”
What are you waiting for? Other firms to go first? Where’s the leadership? Set the example and you will start off a diffusion among large firms that will be unstoppable.
We have the knowledge of how to do this, you don’t have to reinvent the wheel, just your cultural mindset. The one that says the value you create is determined by the hours you expend.
I know how deeply rooted this mindset is, and how difficult it is to overcome. Trailblazer Jay Shepherd has a great post on an article in the California Bar Journal by a former partner defending the billable hour as “the best way to measure value because it is a mechanism of measuring the amount of work that a lawyer did for a client on a particular matter.” Karl Marx thought the same thing with his thoroughly discredited labor theory of value.
Ignore the naysayers Mr. Chesler. William Shakespeare, in Richard III, wrote that “Talkers are no good doers.”
Prove him wrong.
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