VeraSage

Value Pricing Formula

Ron Baker - 03/31/2009

After fifteen years of extensive research, VeraSage has determined firms should use the following formula to derive a Value Price.

Start with: Estimated Hours x Hourly Rate (this will establish a cost accounting minimum floor beneath your pricing).

Add the following premiums if you are offering them to your customer:

• A fixed price: add 12.613% (this is similar to the premium charged for a fixed rate mortgage versus a variable rate mortgage).

• If you utilize change orders, add 3.14% (again, because you are offering fixed prices for all scope creep).

• If you offer a service guarantee, add 22.245% (a service that is guaranteed is worth more than a service that isn’t).

• If you offer a price guarantee, add 16.301% (this insures the customer they don’t have to pay for work they didn’t authorize).

• If you offer payment terms structured around the customer’s cyclical cash flow, add 14.729% (customers have budgets, they will value this highly).

• Since all value is subjective, add a “black box” component of 25.298% to reflect this fact.
  

If you follow the above the formula, you will accurately Value Price all of your work, and invert the now artificial ceiling of hourly billing to a floor.

Blog Talk Radio Interviews Ron Baker

Ron Baker - 03/26/2009

Thanks to Tia Car Williams of Legal Social Media and Relationship Capital Institute for interviewing me on Blog Talk Radio.

The interview “Kill Billable” lasts about 30 minutes and you can listen to it here.

2.5 Cheers for Gary Boomer

Ron Baker - 03/25/2009

Gary Boomer of Boomer Consulting is a consultant I’ve written about a few times in the past, some say unfairly so.

This is because you can see him dismiss the Rate x Hours mentality, but as of yet he has not written about the timesheet.

Well, his most recent article in the March 16-April 5, 2009 Accounting Today takes another step forward in trashing the timesheet.

The article’s main thesis is that the microchip is responsible for the current economic climate. Gary’s evidence and argument is totally unconvincing, but that’s not what I want to focus on here.

Here are two comments that caught my attention:

Many tasks and services that accountants used to offer have lost value. Time and effort is no longer a measure of value in the market (though many accountants are still caught in this paradigm).

Time entry and billing (capturing and reporting irrelevant information).

That second point is the most damning statement against timesheets I’ve ever read from Gary.

He goes on to write this:

Managing a firm by revenue per full-time equivalent (FTE = 2,080 hours) is more relevant than simple realization and utilization.

The problem with this is revenue per FTE is a lagging indicator, and simply measuring it tells us nothing about how to change it.

Further, if the partners in the firm are lousy pricers, than they are leaving money on the table, something this metric, or financial statements, or cost accounting, cannot measure.

There are better Key Predictive Indicators—that is, those that are leading indicators, which are predictive of customer behavior—to look at other than revenue per FTE, as discussed here.

It also demonstrates why effectiveness is so much more important than efficiency in a professional knowledge firm. Efficiency is a measurement but effectiveness requires a judgment.

So I reiterate my challenge: Come on, Gary, make our day. Write a column on the deleterious effects of timesheets.

Value Marketing Done Right

Ed Kless - 03/22/2009

A few weeks ago I received an email from Glen Mund, president of Plus Computer Solutions in Burnaby, BC. Attached was this radio ad they have been running.

This is a terrific example of what we call value marketing - a focus on attracting prospects who prefer to buy on relationships and value and not price shoppers.

Kudos to Glen, Wendy Gorrie and their team. We hope to unveil them as a VeraSage Trailblazer soon.

VeraSage on Social Networks

Ed Kless - 03/21/2009

We wanted to let our readers know that many of the VeraSage Fellows are Web 2.0 savvy with accounts at LinkedIn, Facebook, and Twitter.

Several of the Fellows also have blogs of their own.

In addition, there is a VeraSage LinkedIn Group you are welcome to join as well. Of course, we have a Fans of on Facebook.

Ask VeraSage: Who is responsible for the message?

Ed Kless - 03/20/2009

Eric Fetterolf wrote to VeraSage with an interesting question:

“Group fed up with baffling government jargon” is an article from Yahoo news.

I’ve heard you encourage people to extend our vocabulary.  Using broader vocabulary encourages readers and listeners to improve their own vocabulary to achieve understanding.  Having stated that, I agree that one should not use language to confuse or obfuscate the intended message. 

In your opinion, who is ultimately accountable for the message: the Speaker or the Listener?

Ron: The speaker is always responsible for the message. But that does not mean that the Listener has no responsibility. In fact, listening is probably the most least used skill of all. Most people are awful listeners. But that said, the onus is still on the speaker to get his point across in a way the listener can grasp. Peter Drucker has written about this very topic, I want to say in his The Effective Executive book, but don’t quote me on that, it might be in another one of his books.

Ed: The creation of the message is clearly the sender and it is the responsibility of the sender to develop to the best of one’s ability a message that one believes will be understood by the listener. The listen can choose to ignore the message regardless of what the sender does. It is mutual, but I would say the focus needs to be on the creation of the message by the sender.

What say the rest of you?

Trailblazer Update: Brains on Fire, Two Months Without Timesheets

Ron Baker - 03/15/2009

Our Trailblazer friends at Brains On Fire have provided another update on their progress of transitioning to a firm of the future.

This one is life without timesheets for two months. You can read Brandy Amidon’s blog post here.

I especially liked her “Triumphs,” section, which I challenge any firm that uses timesheets to think real hard about:

Triumphs

1. We are able to predict the currents month’s net income before the month begins. We can look at our projects estimated percentage complete for the month and say this is where we will land. Instead of waiting till the end of the month, after we’ve grossed everything up and then start writing things off. We were worried about losing control of profitability when we switched off time sheets. Now we have more control and power to see into the future (now I can throw away our eight ball).

2. We’ve became closer as a team. AE’s aren’t afraid to ask more people to join in on a project if need be. No more fear of going “over” on a job. We are coming together as a team to provide the greatest benefit and exceeding our client’s expectations. I doubt it gets any better than that!
   

When we argue that firms need to ditch timesheets to truly appreciate all of the salutary effects that emerge (some of which we never anticipated), we are met with nothing but arguments. But how would you measure this, that, how would you know this or that, etc., etc.

But the dirty little secret is timesheets don’t provide any of this information now! It’s as if people who object to the idea are comparing life without timesheets to some Utopia of perfect measurement and balance.

But you have to compare not having timesheets to what you are doing now, not some Utopia that will never exist here on earth. This disadvantages of timesheets simply outweigh any advantages, and we’ve proven it over and over again.

There are essentially four defenses of timesheets:

1. We need them to price.
2. We need them for cost accounting.
3. We need them to measure team productivity.
4. We need them for resource and project management.
   

We’ve demolished every one of these arguments.

First, we need to better understand value to price correctly, not the time it takes to perform work.

Second, there are other ways to perform cost accounting than timesheets. This is what amazes me, especially with respect to CPAs. Do you really think timesheets are the ONLY METHOD of performing cost accounting? If you locked yourself in a dark room for an hour, could you come up with any other way? There are no other ways, really?

Third, timesheets don’t measure team productivity. They measure inputs, but productivity requires an output as well. Timesheets are silent as to output, both quantity and quality. Hence, Key Predictive Indicators are far superior at tracking team effectiveness.

Lastly, there is no doubt that in planning into the future, a firm may want to think about man hours, or man days, etc. But this is only in looking forward, it does no good looking backwards at this data. By then, the damage has already been done. Nor does it shed any light on how to do it better next time.

This is why we advocate performing After Action Reviews.

In any even, I bet if Brandy were to answer the four defenses of timesheets she could come up with arguments of her own why they don’t perform as conventionally believed.

But to truly understand it, you have to a take a leap of faith and trash them. It’s the only way to liberate your mind and body from the tyranny of time.

Really? Value Pricing doesn’t make the case for profitability?

Ron Baker - 03/15/2009

The first letter to the editor, in response to the November 2008 article—The Firm of the Future—has now been published in the March 2009 issue of the Journal of Accountancy, along with my reply.

The letter is from Lawrence W. Schwartz, CPA, MBA, CVA, of Fairfax, Virginia. Here’s part of what he writes:

For several years our firm (preceding our combination with another firm) carefully set “fixed” prices based on several factors, among them client hand-holding expectations, transaction volume and complexity, and intellectual capital requirements. Clients continually expected more for less, making scope creep (despite “change orders") a consistent obstacle to the development of client-firm value congruence. This led to the continuation of unprofitable, sometimes unnecessarily risky, client relationships, and often for the wrong reasons. We were, thankfully, profitable but not nearly at levels we could have achieved using more traditional (and, admittedly, more carefully tracked) value and productivity measurements.

Change is good, and looking at things differently is a useful exercise...Unfortunately, the article failed to make the case for profitability.

You can read my reply, but I feel I left off a very important point (isn’t that always the case; you come up with the perfect retort long after your initial response).

Schwartz seems to be arguing that the profitability of Value Pricing has not been proven, based on his firm’s poor track record in implementation (does anyone really, really, believe they were doing Change Orders for all scope creep?).

But his argument belies logic. Hourly billing automatically puts a ceiling on a firm’s profitability, period.

And most firms don’t even reach this artificial ceiling, hence the realization rates of between 65 and 95 percent, depending on the size of firm.

Value Pricing inverts this ceiling into a floor. If done right, it will certainly lead to more profitability.

To argue otherwise displays a misunderstanding of the economics of value and pricing, and of logic itself.

Pay Toilets on Ryanair

Ron Baker - 03/04/2009

Low-cost airline in the UK Ryanair is considering having customers pay to pee, as reported on The Economist’s travel blog, Gulliver.

I’ve flown Ryanair, it’s a miserable experience (much worse than Southwest), but it is cheap, with frequent flights all over Europe.

But I think this is a bad idea. Movie theaters don’t have pay toilets because they would probably lose at the box office what they charged for the bathrooms. It’s even worse 30,000 feet in the sky with no options.

It makes sense to charge for a beverage, checked luggage, and other items to keep down price. But I think this crosses the line of decency.

What do you think?

AICPA Economic Crisis Resource Center

Ron Baker - 03/04/2009

I’m excited to announce that Mark Koziel, Senior Technical Manager of PCPS/Firm Practice Management at the AICPA, has started blogging at the AICPA’s Economic Crisis Resource Center.

We’ve known Mark for many years and he is truly one of the thought leaders in the CPA profession. He was responsible for launching the Young CPA movement in New York, which has since spread to many other states.

As Mark wrote in his inaugural post:

Whether you are job hunting, seeking articles on job skills in a recession or looking for financial reporting or strategic planning guidance for your business, the Economic Crisis Resource Center is designed to help all CPAs to get through this together.

In addition to reading this blog, I would encourage any CPA firms that aren’t already to become members of the AICPA PCPS. Mark and his team have done an outstanding job putting together many excellent resources to help firms operate more effectively.

Welcome to the blogosphere Mark, we look forward to your wisdom!