I am sesquipedalian. So when a new word that I had not ever heard comes my way, I am very excited. This one comes courtesy an exchange between Ron Baker and Jim Caruso, Partner in charge of Financial Management Outsourcing for Fesnak and Associates LLP.
Jim send the following email to Ron a few days ago and Ron passed in along to me.
“Only in recent history has "working hard" signaled pride rather than shame for lack of talent, finesse and, mostly, sprezzatura.”
sprezzatura (pluralsprezzaturas) From the Italian, Sprezzatura meaning nonchalance; (art) The art of doing a difficult task so gracefully, that it looks effortless
[It] gives new perspective to the concept of the billable hour as the basis for revenue generation, doesn’t it.
I plan on using this one quite often. It is a characteristic that to which all professionals should aspire. Of course, if you bill by the hour, it is not possible.
First, I received word that an online comment I made on a Harvard Business Review blog post would be printed in the magazine.
For those of you that can’t make it out, my 15 seconds of fame reads, “Business ain’t science.” I told the copy editor that I had more to offer than that and that I usually am grammatically correct, but they did not seem interested. “No, your thought really says quite a lot.” Uh-huh.
Next, my article on using project management to replace the timesheet finally made it into the Journal of Accountancy. Please comment there as I would love to get a big long string going.
Could it be that the Mets getting out of the gate strongly? I can only hope!
Quick note this morning - I find it ironic that Apple, one of the best price setting organizations of which I am aware, gets all crazy about developers messing with price on the App store.
While I have heard the objection of revenue recognition to fixed price and service level agreements before, there has been a recent spate of them and my default value reply is to say, “Really, that’s all you got!”
The more detailed answer is to ask, “Are you a publically traded company? If not, there is really no problem.”
This is usually met with silence followed by some mumbling about a possible future creditor using WIP or receivables to secure a loan. The response is then to say, “What about using the signed agreement from your customers? Isn’t that better than time either billed and not collected or time not billed at all? Besides, I recommend you get paid upfront.”
Again, more silence followed by, “Yeah, but if they prepay me, I can’t recognize the income.” My reply, “So, you are complaining that you will have too much cash is the bank? Maybe you won’t need a loan in the first place.”
That usually ends the argument, as if there was one in the first place.
While some objections to pricing on purpose and service level agreements are better than others, this one takes the cake. It is just a non-starter.
I am often accused of being obsessed with uncovering value when in the discovery and dialogue step (sometimes known as the sales process) of a consulting engagement.
One of the key statistics I cite is from the Standish Group and their research on small and medium business information technology projects - 47 percent of SMB IT projects cost 190 percent of the original estimate. I often round it and say, “half cost double.”
This of course leads me to suggest using the McKinsey and Company mantra, that unless the consultant can help uncover three times the value of any price they would propose for a solution, then the consultant will not even propose a solution. In addition to being sound business advice, it is also quite a disarming comment for a consultant to make.
Well, there is more distressful news on this front this week. In an article in PCWorld by Chris Kanaracus entitled Widespread Discontent Persists with ERP Projects, the author opens with following citation of a recent study conducted by Panorama Consulting Group, “More than half of companies that implement ERP systems end up garnering no more than 30 percent of the business benefits they expected.” To round this one I would say, “half get a third.”
Now, I will not vouch for the veracity of these numbers. I believe that business is art, not science, and any attempts at making it science are of the pseudo variety.
That said, combine these two thoughts together and you have a pretty good explanation of why “no decisions” and other forms of stuck sales are so prevalent in this industry.
Think about it, we are in a position where prospective customers have (at least some form of) documented “evidence” that:
half cost double
half get a third
If you do not assist a customer in developing a perceived value in dollars, the following will (perhaps has) happen:
A company budgets $30,000 (software and “services") for a new ERP solution. It ends up costing double, $60,000. Since the provider never got a solid understanding of value from the customer, the customer assigns the original price to be the value number, again, $30,000. A year goes by and the customer only feels like they gain one third of the value they thought they would get, $10,000.
To sum it up, spent 60K, got 10K. Oh yeah, let’s upgrade!
Greg Kyte is the self-proclaimed “Champion of the Dissenters.”
Here is Greg’s second contribution in defense of the billable hour and timesheet.
Ron Baker, you were wrong once again. The night before last was one of the biggest nights of the year for my firm. You and the rest of the VeraSage flunkies could have had a piece of it too, but I guess you ditched the timesheet an hour too soon.
You see, we have an annual tradition during the heart of busy season. Everyone in our firm is expected to work the night before daylight savings time. We all work until 3:30 a.m. at which point we have a party. The party consists of waffles and a cheese tray. How we can afford to treat our people that good, you ask? Well, it’s all thanks to Ben Franklin and a little thing that we like to call the TIMESHEET because at precisely 2 a.m. we set our clocks ahead to 3 a.m. With a staff of 52 and an average billable rate of $120, our firm pockets an extra $6,240 just for staying up late and “springing ahead”.
Talk about leveraging people power! The lever is the timesheet and the hands pulling it are the hands of our clock. Hey, relax; we know this doesn’t work for our affiliates in Arizona or Hawaii. And we are very careful in that we forbid our people from working late when we “fall back”. (Imagine that: we’ve thought it through even though we don’t have the luxury of a think tank.)
Boom! Did you hear that? That was the sound of another hole blown in the hull of the Good Ship VeraSage. Sorry, Cap’n Ron.
Fred Wright from Aries Technology Group recently reminded me of one of the favorite quotes we use at VeraSage regarding price and value. The exchange is from the Oscar Wilde play Lady Windermere’s Fan:
Cecil Graham
What is a cynic?
Lord Darlington
A man who knows the price of everything and the value of nothing.
Cecil Graham
And a sentimentalist, my dear Darlington, is a man who sees an absurd value in everything, and doesn’t know the market price of any single thing.
It is obvious, to me anyway, that as pricers we are striving for the midpoint between the two. However, I am curious as to your thoughts on this.
VeraSage prides itself on dissenting ideas, which is why we have a “Skeptic/Dissenter” category under membership.
Greg Kyte is the self-proclaimed “Champion of the Dissenters.”
I’m proud to post his first contribution and let our readers decide for themselves the merits of his arguments. I’m sure this won’t be the last we hear from Greg.
Enjoy!
Ron Baker is Wrong
Ron Baker and his stooges at VeraSage have long tried to discredit the well established modus operandi of professional firms: Time Accounting. To do so, they use the following simplistic equation:
Revenue = People Power x Efficiency x Hourly Rate
Unfortunately for the VeraSage minions, they have been attacking a straw man. The manifestation of the formula as conjured by Mr. Baker does not accurately represent the robust nature of the hourly billing convention. Professional firms naturally augment the formula with the processes by which they calculate Hourly Rates for their personnel. Best practices for calculating the Hourly Rate element include the use of the following formula:
Hourly Rate = RABR x Experience Factor x Stupidity Factor x Biorhythm Factor x Opportunity Cost Adjustment.
Allow me to enlighten the brainwashed value pricing hoard on the components of the augmented hourly rate element.
Reputation Adjusted Base Rate (RABR). Every firm has a reputation within the context of the business community that it serves, and this reputation determines the base rate to be used as the starting point for calculating billing rates for personnel within the firm. Also, it is universally accepted that the reputation of a firm equals the quality of its service. Arthur Anderson was unquestionably the most reputable accounting firm in the world in 2000, and to this day nobody questions the quality of their work.
Experience Factor. To begin to hone the firm-wide RABR to the individual practitioner’s hourly rate, it is obvious to everyone but Ron Baker and his goons that experience is the most important factor. Without a doubt, a college graduate with a piercing analytical mind and a penchant for big picture value creation cannot deliver the same quality of service that a middle-age alcoholic in the middle of a years-long divorce and a crippling debt burden with 20 years of experience can.
Stupidity Factor. Stupid individuals should have a lower billable rate than smart people. A Stupidity Factor of 1.00 means that the individual has committed the average number of errors during the prior period. A Stupidity factor above 1.00 indicates more errors, more stupidity, and a lower billing rate. No, no wait. A lower stupidity factor means lower intelligence and more errors. No, that doesn’t seem right. A higher stupidity factor means stupider people with higher rates. Yeah, there we go.
Biorhythm Factor. I am a morning person. I work best in the morning, and I am virtually useless in the mid-afternoon. Therefore, since my efficiency and the quality of my work are higher in the morning, I bill clients 15 percent higher before lunch. I also charge a fifteen percent premium for the 20 minutes right after drinking a Diet Coke. To be fair, I also give my clients a 15 percent discount for the 20 minutes immediately following calls from my ex-wife or for any time that I happen to be hung over. For price sensitive clients, we have a partner with clinical depression and irritable bowel syndrome.
Opportunity Cost Adjustment. One of Ron Baker’s harebrained arguments against time accounting is that it does not reflect the realities of economic laws. Is there a more irrefutable economic concept than opportunity cost? Opportunity cost comes into play constantly during busy season when personnel are working odd hours. I charge an opportunity cost premium on Tuesday and Wednesday evenings because I hate missing Idol, and I give a discount on Sunday mornings just so I can have a good excuse for skipping church.
So, sorry, Ron, your simplistic revenue formula has been turned on its head. It looks like I’ve single-handedly brought VeraSage to its knees, and I sincerely hope that you can get out of the lease on the office space for your (virtual) headquarters.
You know who you are. You LEAN, six sigma, black belt, ninja turtles.
Explain to me (and the world) how any of you and your methodologies would have come up with the idea of putting a piano in the atrium of the Mayo Clinic where this could happen?
RSS Feed
Comments | 0 Trackbacks | Permalink | Knowledge Workers Pricing on Purpose (aka Value Pricing)