At a recent Firm of the Future Symposium with the THRIVEal Network in Greenville, SC, Ron Baker and I were asked about some of our word preferences. On the spur of the moment we developed this quick list of words we believe should be avoided by professional knowledge firms.
Staff - This makes us think of a type of infection. We prefer team member, colleague, associate, or people as alternatives.
Client - In ancient Rome, the lawyers of the day functioned as public servants and were not paid for their work. Instead, they were appointed to their duties in working with their clients. The relationship was not one of equal status and implied a sense of duty and obligation to serve the great unwashed. The word still has this connotation in the context of social workers and their clients. We prefer the term customer which is an Anglo-Saxon word derived from the fact that it was the custom of certain people to frequent a particular place of business.
Value billing - Nothing will set a VeraSagi (our made up and officially adopted name for someone from VeraSage) off into a tirade faster than calling the pricing practices we espouse value billing. A bill is produced in arrears whereas a price is agreed to upfront. This term is linked with professionals when the do write-ups to a time calculated bill. We believe this practice to be more akin to mail fraud. The preferred terms are value pricing, pricing on purpose, or pricing with purpose. When discussing price with a customer we suggest the term fixed price or open (meaning transparent) price.
Fee - This word has a negative connotation as it is associated with governmental and penalty type incursions. We suggest the use of the more neutral word price.
Hours - We believe the only place time spent should matter is in prison. We would ban all use of the word hour and suggest a $5 fine whenever it is used. There is no acceptable substitute.
Training - Horses and dogs are trained, humans are educated. Training implies a bullwhip lashing sounds in the background. Also, do you want your 16-year-old daughter to get sex training or sex education.
Service - We believe most professional firms do not provide services. They provide access to and/or transfer of knowledge, results, objectives, and occasionally goals.
Did we miss any of you favorites? If so, please leave a comment with the term to be avoided and your suggested alternatives.
I am thrilled to announce that Ron Baker and I will be conducting four Sage Firm of the Future Symposia in 2012. The dates are:
March 20-21 in Toronto, ON
April 24-25 in Irvine, CA
May 23-24 in Vancouver, BC
July 17-18 in Boston, MA
The symposium will feature Ron and myself and is dedicated to the possibility that a professional organization can be run more effectively when it becomes a knowledge firm rather than a service firm. Creating such an organization is hard work and not for everyone as it requires partners to think differently than they have in the past about what it is that they do.
If you are interested visit sageu.com, and navigate to Academies and Bootcamps > Mid Market ERP. Not a Sage partner, but still want to attend? Email me and I can get you registered. The price is $2,500 per person and comes with a 100 percent money-back guarantee.
I’ve long been a fan of Michael Gerber’s E-Myth book. His concept of working “on” the business rather than “in” the business was a major theme of the Accountant’s Boot Camp, developed by my good friends Paul Dunn and Ric Payne.
So when I learned that Darren Root co-authored The E-Myth Accountant with Gerber, and especially since I was presenting with Darren at the Sage Summit, I was looking forward to reading their views on what Darren calls The Next Generation Accounting Firm™. The Firm of the Future is a topic near and dear to my, and VeraSage’s collective, heart, and I was looking forward to learning another perspective.
Areas of Agreement
There is a lot of good advice in this book with which I agree. Here is a bullet point summary of some of their better recommendations, most of which come from the chapters that Darren Root wrote:
Darren asks a good question: “How did the accounting profession become a mass of technicians and very few business leaders?” David Maister’s book, True Professionalism, is necessary reading to overcome this.
Firms engage in mass client acquisition, whether or not they are a good fit for the firm. We call this the market-share myth, a form of cancer (growth for the sake of growth). It leads to incredibly weak pricing power.
Same as above with offering too many services, which Darren argues keep CPAs at the technician level as well. The debate between the specialist and generalist is over—the specialist won. This video from the late Paul O’Byrne illustrates this very effectively.
Darren writes:
It’s time to trust your people, let go, and give yourself the opportunity to work on your practice...not in it.
Good point. Follow this path to its logical conclusion: it leads to scrapping timesheets and implementing a Results-Only Work Environment (ROWE).
It’s hard to disagree with this:
The old business model has long been to sell billable hours. Instead of selling billable hours, your firm sells complete solutions. If your goal is to get off the proverbial hamster wheel and build a business, it is critical to abandon the billable-hour model and adopt value billing [sic—he means value pricing].
Darren believes that accountants are finally starting to hear the value pricing message, and I hope he’s right. He says that hourly billing doesn’t take into account efficiency or new technologies.
However, that’s not the major weakness of the billable hour. It’s Achilles heel is it doesn’t take into account customer value, and is based upon an incorrect theory of value.
In a chapter written by Gerber ("On the Subject of Clients"), he discusses how to deal with client dissatisfaction with a 7-step process. What’s missing, though, is the recommendation that firms offer a guarantee to all customers.
Darren suggests spending a good portion of your marketing budget geared toward strengthening existing client relationships. Indeed. As the AICPA pointed out years ago, it costs eleven times more to acquire a customer than to retain one.
The Gap
For as many topics as we agree on above, I’m afraid the chasm that exists between my vision of the Firm of the Future and the one laid out in this book is simply irreconcilable.
But as with most disagreements, this is more a conflict of visions rather than a disagreement about facts. I’m reminded of what Blaise Pascal wrote in Pensees:
When we wish to reprove with profit, and show another that he is mistaken, we must observe on what side he looks at the thing, for it is usually true on that side, and to admit to him that truth, but to discover to him the side whereon it is false. He is pleased with this, for he perceives that he was not mistaken, and that he only failed to look on all sides.
The side the authors are coming from is to build the McDonald’s of professional firms, by laying out a path for creating “a highly efficient money-making practice.”
Yet a glaring omission from this work is any mention of the knowledge economy, or knowledge workers. This is the dimension the book ignores completely.
A professional knowledge firm isn’t McDonald’s, nor should it be. This example of Gerber’s has always irritated me, but it is particularly egregious in a book for professionals.
This is where the author’s analogies to the importance of systems break down in a knowledge economy. Gerber posits “The People Law: without a systematic way of doing business, people are more often a liability than an asset.”
This is strange statement, given that 75% of the world’s wealth resides in human capital, according to the World Bank.
The prominence given to the “system” over people is redolent of Frederick Taylor, who wrote:
In the past the man has been first; in the future the system must be first.
What made the traditional workforce productive was the system—whether it was Frederick Winslow Taylor’s “one best way,” Henry Ford’s assembly line, or Ed Deming’s Total Quality Management. The system embodies the knowledge. The system is productive because it enables individual workers to perform without much knowledge or skill....In a knowledge-based organization, however, it is the individual worker’s productivity that makes the system productive. In a traditional workforce, the worker serves the system; in a knowledge workforce the system must serve the worker.
Yes, knowledge workers will create their own systems. That’s the point. Two surgeons will not perform an operation the same way. Even two barbers won’t cut hair the same way (nor would we want them to).
This is why Steve Jobs says:
The system [at Apple] is that there is no system. That doesn’t mean we don’t have a process.
Sure, there are things that can be turned into a repeatable process, but the value in knowledge work lies in where there is applied judgment, creativity, and wisdom. And you simply can’t systemized those virtues. Indeed, if you try—with Six-Sigma, Lean, etc.—you kill them.
The better solution is to capture the knowledge that is tacit in those unique ways of doing things so the knowledge can be spread across the firm. Yet any discussion of knowledge management and capture is missing from this book.
The authors also seem to think that the systems should only be designed by the firm’s owners, rather than its workers—this is a large part of working “on” the business rather than “in” it.
But to borrow from Steve Jobs again, does it really make sense to hire smart people and then tell them what to do? Apple hires smart people so they can tell Apple what to do. Welcome to the knowledge era.
The idea that all the intelligence rests with management didn’t work in Frederick Taylor’s industrial era and it certainly doesn’t work in a knowledge economy. Worse, you cannot inspire creative knowledge workers by spouting Taylor’s efficiency mantra.
Today, knowledge workers are the system, which means they have to have a hand is designing it. Even auto manufacturers understand that those closest to the work are the ones who can improve it the most. See Toyota.
Yet the cult of efficiency is worshipped throughout the book, even though Darren quotes Steven Covey:
If the ladder is not leaning against the right wall, every step we take just gets us to the wrong place faster.
Nowhere is the recognition that there’s nothing more wasteful than being efficient at doing something that shouldn’t be done at all. Or that efficiency—and technology—are mere table stakes, not a competitive advantage, since your competition can easily replicate those gains.
Darren even suggests you identify those services you do best, which he defines as being able to perform with a high level of efficiency. But surely you should identify those services that you can perform most effectively—better yet, efficaciously—and that create the highest value.
If there’s that much efficiency to be gained, they are probably low-value services that should be outsourced (see the Stan Shih Smile Curve).
The same error is made when he claims the major factor driving realization is the existence of proper systems and processes. But this is incorrect. Price drives profit more than any other factor.
Further, he writes that his firm’s realization is over 100%, but that just means he’s still comparing price to hours x rate; it has nothing whatsoever to do with pricing commensurate with value, as he claims.
He also proclaims he’s not a proponent of throwing away timesheets, since they can catch scope creep, measure efficiency, benchmark against other firms, and allow him to manage what he can measure.
These are weak arguments for timesheets. If you’re catching scope creep from timesheets, it’s way too late to price it—you’re billing and ducking in arrears at that point, and by the hour. Project management is far more effective.
And the idea that timesheets measure the efficiency of a knowledge worker has been well destroyed in all of my books. This is illusion of control and one of the seven moral hazards of measurement.
This defense of timesheets is particularly amusing when compared to what he writes toward the end of the book:
Remember: Just because you’ve always done things in a certain way doesn’t mean you have to continue that tradition. If it’s not working, it’s not working. Abandon the old and make way for the new.
Except, of course, when it comes to the ancient tradition of maintaining timesheets.
Also, towards the end of the book, Gerber explains that Time is not money; time is life. If true, then why are we dividing a firm’s revenues and costs by life?
[And even if you still believe the old canard that time is money, all that means is we are dividing cost by cost if we use the hourly metric system].
There are other major areas of disagreement with the book. Their concept of a firm’s vision is too focused on what and how, not why. It’s far more effective to develop your firm’s why, letting that drive your what and how, consistent with Simon Sinek’s TED talk, and book Start With Why.
Gerber posits that there are six types of clients around which your entire marketing strategy must be based. But I find this unconvincing, and it could benefit from Occam’s Razor. Asking customers about their expectations would be more effective. Also, innovation is the firm’s job, as customers don’t innovate, they iterate.
Then Darren writes that clients are a firm’s greatest assets. But customers are not owned by firms, anymore than human capital is owned. Speaking of them as assets is inhumane and demoralizing.
The book does not contain any endnotes, a bibliography, or index. Outside of the few books and authors mentioned, it would be helpful if the authors shared the books that have shaped their thinking.
In conclusion, if you read this book, do so with this caveat: the book’s gap of not discussing the knowledge economy is simply too wide for me to overcome. It overshadows everything they write, and the logic traps them into the cult of efficiency rather than one of creating value.
We no longer live in an industrial economy where the talisman is Frederick Taylor’s enigma of efficiency and the “one best way.” A PKF is a human relationships-based entity, not a factory.
On the positive side, now that I’ve met Darren, there’s an opportunity for ongoing dialogue. If all goes well, we’ll get him to trash his timesheets someday.
On August 9-10 in San Francisco, Ron Baker and I will once again be presenting our Firm of the Future Symposium sponsored by Sage North America.
This symposium will be dedicated to the possibility that a professional organization can be run more effectively when it becomes a knowledge firm rather than a service firm. Creating such an organization is hard work and not for everyone as it requires professionals to think differently than they have in the past about what it is that they do.
Objectives
From a focus on revenue to a focus on profit
From a focus on capacity to a focus on capital management
From a focus on efficiency to a focus on effectiveness
From a focus on cost-plus pricing to a focus on pricing on purpose
Sage (Ed’s employer) has agreed to open a limited number of spots for firms that are not partners of Sage. If you are interested in joining us, please send me an email and I can get you registered. The price is $2,500 per person and comes with a 100 percent money back guarantee!
One of the more interesting stories to emerge from our previous FotFS, was that of Peter Coburn of Commercial Logic. They are publishers of, you guessed it, time and billing software. Peter underwent a conversion of sorts and posted a terrific article on it.
In general, there are four defenses for maintaining timesheets:
We need them to price.
We need them for project management.
We need them for team member performance evaluations.
We need them for cost accounting.
We here at VeraSage have proven, without a doubt, that every one of these defenses is incorrect, and that there are superior methods and tools for each of these objectives.
First, prices are set by value, not hours, even within the context of competition. After all, none of us buy the cheapest of everything, which proves there is room in all markets for price searching by sellers to take place.
Second, anyone who spends a day listening to Ed Kless teach project management cannot possibly come away thinking that “time spent” is more important than “duration"—that is, turnaround time—from a project manager’s perspective. Duration is where the bottlenecks occur, not time spent.
Third, anyone who has studied nearly every single private business, or a Results-Only Work Environment (ROWE), knows timesheets are not needed to conduct performance evaluations for team members.
Yet, it’s the last defense I really want to bury, once and for all, in this post, which was inspired by an excellent article by legal consultant Allison Shields in the May 2011 issue of Law Practice Today.
“Thaaaar She Blows”
When it comes to customers and profitability, another adaptation of the Pareto Principle applies. Run a Pareto analysis on your customers, ranked by revenue and you will most likely find approximately 20 percent of your customers generate 80 percent of your revenue. But what about profitability?
Professors Robin Cooper and Robert S. Kaplan of Harvard Business School have shown the result of their analysis of an insurance company’s customers, resulting in what author Matthew Stewart in The Management Myth calls “The Whale”:
The shape of the curve occurs in virtually every customer profitability study ever done, in which 15 to 20 percent of the customers generate 100 percent (or more) of the profits. In this case, the most profitable 40 percent of customers generate 130 percent of annual profits; the middle 55 percent of customers break even, and the least profitable 5 percent of customers incur losses equal to 30 percent of annual profits.
There’s an old joke about the perils of hourly billing: You work 12 hours, bill for 8, and get paid for 6. My good friend and colleague Ric Payne (Chairman of the Principa Group of Companies) has added this to make the joke even less funny: “and you actually make a profit on 4.”
Ric has confirmed Kaplan’s finding with empirical evidence from accounting firms. Using historical timesheet data, Ric constructed a macro in Excel that allocated actual costs—not the inflated “hourly rate” of the firm because that rate includes a desired profit, and hence is not cost accounting—to each customer based on hours.
At least Ric has used the timesheet as it was originally intended—as a cost accounting tool. Since most firms have this data, why aren’t they utilizing it in this manner to determine which customers to fire, or at least increase price?
Most firms simply use the time and billing system to invoice customers, not as a profitability tool. I have yet to see a firm fire a customer, or increase their price, because of timesheets, for if they did, realization rates would not consistently be below 100 percent.
When confronted with an analysis such as this, most partners will dismiss it by saying something to the effect of, “Oh, we know we lose money on some of our customers. But they are acorns who will grow into great opportunities one day.”
This is not bad logic, per se, as a firm should look at the total profit from a customer over its lifetime. The problem is, if this is so, then why the pretense of timesheets being used to measure profitability? What decisions do you make as a result of timesheets? Do the benefits exceed the costs? Once again, this is the illusion of control.
I argue that firms already know where their customers are on the Whale, without even looking at the analysis. However, if the analysis provides impetus to leaders of the firm to shed their unprofitable customers, then by all means it is worth undertaking (Ric has kindly offered to make his Excel Macro available on his Blog).
Timesheets are a Cost Allocation Tool
When we show the Whale, people claim the only way to calculate profitability per customer is with timesheets. Really?
First off, you don’t need timesheets to know your firm’s costs. Look at your income statement. Don’t confuse total costs with cost allocation.
Give me half a day, maybe less, with your income statement, revenue per customer, and allow me to interview your team, and I will allocate your costs over any time period you want, and the result will be the Whale.
Let’s get over the idea that any cost accounting—be it timesheets, Activity Based Costing, or any other method—requires 100 percent accuracy. The simple truth is, cost accounting is full of arbitrary allocations and errors, and if you don’t understand that, you’ve never been a cost accountant.
Cost accounting just has to be close enough, and the important point is that your costs need to be known before you do the job, not afterwards.
This is why Japanese manufacturing (especially automobile) companies utilize Target Costing, not standard cost accounting. They are about 40 years ahead of American companies with this practice.
This is an enormous difference, since value drives price, and price drives the costs you can incur to earn a profit you can live with. It does no good to know your cost allocation to the penny if the customer doesn’t agree with your value and/or price.
Further, costs are largely fixed in professional firms. This is why airlines, cruise ships, hotels, etc., do not engage in low-value cost accounting, but rather concentrate on yield management—that is, pricing for value, not to cover arbitrarily allocated costs.
Why Your Hourly Rate is Not Cost Accounting
However, I want to dive deeper on this issue, because the above logic doesn’t seem to convince many CPAs.
Your hourly rate is not even an accurate cost allocation method. Here’s why:
It includes profit. There’s no such thing as allocating profit in cost accounting. That’s profit forecasting, not cost accounting. Opportunity cost has no place in cost accounting either, as that is an economic concept, not a cost accounting concept.
Even if you remove the profit component from your hourly rate, it still bears no relationship to your firm’s actual costs. Since most firms establish their hourly rates based upon reverse competition—that is, what your competitors chare—the cost component is completely arbitrary. I have yet to encounter more than a handful of firms that tie out their cost per hour to the General Ledger.
With the timesheet, you are attempting to run a Profit & Loss statement on every hour of work logged. This is absurd, since your firm is an interdependent system, and cannot be atomized into a series of recorded hours.
The hourly cost allocation gives no weight to the lifetime value of the customer—and the lifetime value of the firm to the customer. Our colleague Paul Kennedy has illustrated why this is so more brilliantly than anyone I have ever read.
These are egregious errors for CPAs to commit, given our supposed fastidiousness when it comes to numbers.
And when you compare this costing method to target costing—or price-led costing—you realize timesheet allocation is suffering from what philosophers call a deteriorating paradigm—the theory gets more and more complex to account for its lack of explanatory power.
This is why many firms will allocate the same dollar of revenue three or four times, based upon different criteria—from origination to realization to cash collections—which is overly complicated and not a great use of limited executive attention.
But Wait, There’s More
Here’s a Gedanken (thought experiment).
Assume you’re a sole proprietorship, and have $100,000 of fixed overhead this year (rent, wages, pencil lead, etc.).
Further, let’s assume you plan to work 3,000 hours, and expect one-half of this to be “billable,” and the other half “nonbillable.”
The first question is do you divide the $100,000 of costs by 1,500 or 3,000 hours? Forget adding your desired profit, as that’s not cost accounting but profit forecasting.
The theory of hourly rates says you’d divide by the number of hours you expect to bill, not work, so that’s $100,000/1,500, or $66.67 per hour of allocated costs per hour worked.
Let’s also assume that you’ve billed 1,500 hours between January and November 30th of the current year, and you’ve completed all of your work, looking forward to your month off (you were able to get all your work done early because you took Ed Kless’s excellent project management boot camp).
Now, on December 1st, a new customer engages you to perform 100 hours of additional work that month.
Your cost allocation now becomes $100,000/1,600, or $62.50. Therefore, you’ve been over-allocating your costs by $5 per hour for eleven months of the year.
[It’s even more absurd if you originally divided the $100,000 by 3,000 hours worked (not billed), even though you no longer have the $5 per hour over-allocation issue. Why? Because, then, to which customers do you allocate the 1,400 “nonbillable” hours? And how do you determine that allocation? This is why cost accounting is full of arbitrary assumptions].
Multiply that by more and more employees, account for all the lies in timesheets, the eating of time, non-recorded time, and all the other games played, and you have an egregiously incorrect cost allocation scheme that is incredibly elastic, not accurate.
And, to add insult to injury, timesheets are not helping you price better, conduct project management more effectively (or even efficiently, for you Taylorite disciples), qualify your customers better, predict the performance of your team members, or measure what matters to your customers—and, they are lagging indicators.
All this said, what’s the point of timesheets?
As Ed Kless says, “If you suck at what you do, bill by the hour...”
And I would add, given the logic of the above, “...and keep timesheets.”
If you think the above is flawed, please let us know where.
This debate is getting stale, and we should have moved on a long time ago, since there are many more important issues for the professions to deal with rather than wasting time on a deteriorating paradigm.
”Would you want to buy from you?” I asked this somewhat rhetorical question at a recent Sage ECE (Extraordinary Customer Experience) Workshop I delivered to Sage business partners.
I continued, “Would you want Sage to bill you by the hour for support regardless of the outcome of the call?” The reaction was clear. ”HELL NO!” one participant shouted.
Yet, the majority of Sage partners (and all professionals for that matter) that I encounter still bill their customers by the hour. Some have even twisted the idea into thinking it isthe right thing for a customer. “You will only pay for what you need,” they claim.
I am here to tell you using the ABH (almighty billable hour) is not an ECE (extraordinary customer experience). Sage partner, Sonia Gray, once told me that after she switch to fixed price agreements, one customer told her, “I am so glad you price this way now. I always thought the billable hour was a license to steal.” Wow!
Here is a list of just the customer experience reasons to abandon the ABH, based on Chapter 7 of Ron Baker’s treatise Professional’s Guide to Value Pricing.
It creates a conflict of interest between the consultant and the customer (the very person you are trying to help). It is the customer’s best interest to reduce the number of hours; it is the consultant’s best interest to increase the number of hours. Hmmm.
It focuses on the efforts, not the results. Your hours are the inputs, not the output. The output is the solution to the customer’s problem. Focusing on hours would be like counting the number of swings a batter takes in baseball and ignoring the hits or lack thereof.
It puts the risk of the engagement back onto the customer. This is lunacy because the customer is paying you to reduce the risk, billing by the hour transfers this risk back to the customer, no wonder they don’t want to pay your bill. When you reduce your risk, you also reduce you potential reward, meaning your potential profitability. Being in business is a risk, embrace it.
It creates a corporate welfare system. Often times it is the C and D customers who complain most and are granted relief of, at least part of their payment. In order to make up for this in the aggregate your company must do something in order to remain profitable. The something is, ultimately, charging more to the A and B customers who complain least and rarely do not pay. You are, in effect, subsidizing your C and D customers, by taking more from your A and B customers. You are giving to the have nots at the expense of the haves.
It makes you a lazy project manager. Because the customer is “paying for what they need,” scoping and change requests become a non issue. Why bother? They are not paying for a scope of work, they are paying for your hours. This allows you to a) not scope the work properly in the first place and b) assume every change requested by the customer to be in the “new” scope. Partners then complain about scope creep. This is nonsense because, in my opinion, you never really had scope in the first place.
Lastly, it does not set your price upfront. An hourly rate is not a price unless you are only selling one hour. A range-of-hours proposal (always couched with “this is an estimate") is a guess. Worse still the customer will only look at the low number, whereas, you will only look the high (plus 10 percent). Customers, like you when you buy stuff, want a price. It is a rational request, honor it.
Below is a list of videos I found on youtube that are related to the timesheet with a link to a playlist I created if you want to view them consecutively. Please view them and let us know which is your favorite.
Do your timesheet by joebeegnish – This would be funny if it were not serious.
Time Sheet Song by liltam21 – There is even a song about this…
June Timesheet Reminder by tracywald – …and a Matrix parody. This is a whole series from one person. I wonder what she puts on her timesheet when producing these.
Once again, the self-proclaimed Defender of the Timesheet and Champion of the Dissenters, Greg Kyte, is at it again. This time he takes me on rather than Ron.
Dear Ron,
Quite awhile ago, I sent the following letter to the Journal of Accountancy, but apparently they were too scared to print the truth. Enjoy as I expose the falsehood of your co-conspirator, Ed Kless.
In April 2010 the Journal of Accountancy published the article, Project Management for Accountants by Ed Kless. Although the article contained a significant number of words, many of those words created lines, and if one reads between those fabricated lines, one may find the same offensive subtext that I found. The author is waging a guerilla war - not against gorillas, but against the accounting profession. Project management is for ignoble professions such as contractors, engineers, and doctorate-level pharmacology researchers. Project management may be good enough for those and other financial Cro-Magnons. We accountants, however, are the progeny of a dignified tradition, and our collective pecuniary prowess has led us as a community to a near-universal acceptance and usage of the financially sophisticated and elegantly simple concepts of the billable hour and the timesheet.
Mr. Kless’ approach to project management is his attempt to rob our profession of the fringe benefits that accompany the billable hour and the timesheet. In his article, Fast Eddie lists eleven essential components of a scope statement. He advocates the use of a scope statement because it is designed to limit “scope creep”; however, he ignores that fact that under the billable hour paradigm, scope creep creates revenue. Ergo, Fast Eddie is trying to decrease your firm’s revenue, and if you consult your accountant, she’ll verify that revenue is a good thing.
In his opinion, all assumptions between a firm and a client are to be clearly enumerated. Mr. Kless exhorts us to “answer the question, ‘What should we not leave unsaid?’” But since I bill by the hour, there is only one assumption that I can’t leave unsaid-the assumption that if I work on an engagement for an hour, the client is going to pay me for an hour.
I actually liked his idea of maintaining a “future project list.” It’s a list of possible projects and major tasks that will be deferred until the future . like when I need more billable hours.
He argues that constraints need to be brainstormed and specified. Constraints are limitations and restrictions that could hinder the efficiency of an engagement. The article states that constraints are “risks in waiting.” Don’t look at constraints as risks in waiting; look at them as semi-avoidable wellsprings of cash flow.
Possibly the most offensive part of this article was the following assertion made while discussing how to calculate percentage of completion: “Measuring the completeness of your projects by hours billed is akin to listening for the smoke detector to determine when your cookies are done. The alarm only goes off when it’s too late.” This is blatantly invalid. The beauty of using billable hours is that we don’t need to measure completeness. Billable hours and timesheets are actually like cooking with the Ronco Rotisserie and BBQ Oven: “Just set it and forget it!”
Once again, Greg demonstrates that he is quite deserving of his self-developed moniker.
This session will be dedicated to the possibility that a professional organization can be run more effectively when it becomes a knowledge firm rather than a service firm. Creating such an organization is hard work and not for everyone. It requires us to think differently than we have in the past about what it is that we do.
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!
Yesterday, I was forwarded a post from Dwayne Wright who could not be more wrong about project management and value pricing. Please read his post before continuing.
I posted wrote a comment, he rejected it saying, “Well, just rejected the first comment for a blog that wasn’t clearly SPAM. It came from a value billing advocate and was equally harsh, combative and lacking of substance.”
“Harsh, combative," HELL yes. “Lacking in substance,” I’ll let you be the judge.
My comment:
I am probably the original source of the comment about billing by the hour as being unethical. (It is clearly suboptimal and I believe immoral as well, but that is a whole other story.)
First, let me be clear, I do not accuse anyone personally of being unethical; it is the practice that is unethical because it promotes some very bad habits.
It puts the consultant and the customer is an adversarial role. It is in the consultant’s financial interest to maximize hours; in the customer’ interest to minimize hours.
You state, "It also says this (hourly billing) is often used when a precise statement of work cannot be quickly prescribed. Does that sound familiar to you and your consulting business?" Yes, it sure does and that is just plain wrong. Prescription before diagnosis is malpractice in any profession.
While the PMBOK (and PMI, in general) have some good things to say about project management, they are overly obsessed with costs. After all most of this stuff comes from government (think defense contractors and NASA). In business, customers do not care about your costs, nor should they. They care about the results. They pay for results not efforts. This again is a misalignment.
You are arguing that the risks should be borne by both the customer and the consultant. That is just wrong. You are the one with the knowledge not the customer. It is your job to spread diversify your risks across all your customers not put it back on each of them. Your customers hire you because of risk. If what you did was easy, you would not be hired in the first place. To put it back on them is ludicrous.
Lastly, it is not "vale billing" is it "value pricing" or better yet "pricing on purpose." A price is set ahead of time a bill comes after the fact. You bill now, we at the VeraSage Institute, encourage you to set a price beforehand.
By the way, Dwayne Wright, you are free to post any comments here they will not be rejected. You can thank me later for giving you are larger audience then you ever thought possible.
This is the second in a series of postings about my thoughts from sessions that I attended at the Information Technology Alliance’s Fall Collaborative (<-I love that word) held in Palm Springs. Since they are all not appropriate for this site, those of you who are interested can see the others as they appear at www.edkless.com.
Presented by Jeanne Urich of SPI Research. The highlight of my ITA experience occurred during this session when Jeanne acknowledged that a conversation that the two of us had at the spring ITA meeting has influenced her thinking and that she now believes that fixed price agreements are better for customers and consultants. Now to convince her to give up on these dozens of benchmarks! I think this will be a much harder task.
The study consists of 175 metrics, 20 of them deemed key performance indicators. The problem in my mind is that all, save one of the 20 are inwardly focused on the firm, even those in the “Service execution” and “Client relationship” areas are firm-based.
The problem as I see it with most benchmarking is that it focuses us on all the wrong things: the past rather than the future; internal rather than the customer; efficiency rather than effectiveness.
For example, one “customer” metric was about project completion success. The question was asked of the providers, “What percentage of your projects are completed on time and on budget?” The average answer was 74 percent. This more than doubles the number (35 percent) according to a study done by The Standish Group who asked the same question of customers. Needless to say, I side with customers on this one. Again, to her credit Jeanne acknowledged this flaw.
Many of the other metrics are based on the false premise that value delivered is equal to rate times hours, aka, the labor theory of value. This theory is demonstrably false and belief in it has been proven to cause harm.
I have sat in on countless benchmarking session and the reactions of the attendees is always the same: a) if they are doing better than the benchmark, they think they are OK and do nothing, and b) if they are worse than the benchmark, they dispute the data and still do nothing. Path (b) actually happened twice during the session!
My beef with all benchmarking in business is that while it attempts to appear scientific, it is not even close. To her great credit Jeanne is very careful about saying that these metrics are correlative not causal. Unfortunately, most people do not understand this distinction and are lulled into the illusion of control via data.
The findings are always similar and in many cases are nothing more than a bunch of truisms:
Firms who market well have higher revenue. (Yet, marketing spend, even among top firms, is less than average across all industries.)
Firms who close more business (win to bid ratio) are more successful. (The question is, what do they do differently that allows them to have a higher win to bid ratio? Win more or bid less?)
Few firms grew revenue in 2009.
Clear vision and strategy and taking care of your people are important in professional firms. Firms that focus on culture are rated as better places to work. (What kind of culture?)
Conclusions are almost always the same - “Increase revenue, lower discretionary spending.” Always a good idea.
I was honored to speak at the ITA Fall 2009 Collaborative in Rancho Mirage on the topic of monitoring an controlling project in software implementation engagements.
During the presentation I did a brief workshop on dealing with resistance. The video clip is part of the introduction to that topic. My thanks to Wendy Gorrie of Plus Computer Solutions for agreeing to serve as my videographer for the session, she captured way more that I had hoped. (I hope the blood returned to your arm, Wendy.)
I am deeply indebted to Peter Block who developed this idea extensively in his book Flawless Consulting.
If you are interested to view the entire segment, please send me an email at ed.kless *at* choosegreat.com.
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