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Ron Baker - 01/10/2012
Nearly ten articles have been published on Holland & Knight’s Lobby Division saying bye-bye to the billable hour.
Actually, they are saying bye-bye to timesheets, as most of the revenue from H&K’s lobbying group was already on a fixed-price basis.
The first article was in Politico on December 13th. It quoted Rich Gold, head of H&K’s public policy and regulation group:
I think if you look out 10 years, this will be a very large trend...and we could either lead or follow.
Our favorite line from this article is from Ivan Adler, a headhunter with the McCormick Group:
This has the potential to be a real game breaker in law firm recruiting because it opens up a new vein of talented folks who have previously shunned law firms like a fruitcake at a Christmas buffet because of the billable hour.
Another telling fact from the article is:
Several former aides-turned-lobbyists said they opted for consulting firms and lobby shops over law firms for two reasons: Nonlawyers are treated like second-class citizens at firms, and they didn’t want to have to keep track of their time.
One of the issues that must be addressed when moving away from timesheets is how will the firm allocate revenue per person going forward if there are no timesheets.
Another article, dated December 14th, from The Washington Post explains how H&K will account for revenue:
Now, instead of billing hours to a matter, Holland & Knight will allocate upfront a portion of the monthly or yearly retainer to each individual working on the matter, based on estimates of how much they’ve charged in the past.
Ed Kless and I were privileged to be involved with H&K’s transition, working with Rich, Friedrich Blase, and several other partners from the PPRG group.
The group innovated the “Client Value Share” KPI. Since the price to the customer is already fixed, this KPI is a way to allocate, prospectively, that value amongst the team members who will work on the matter.
The beauty of this KPI is it forces the team to collaborate, upfront, on who will handle what, and decide what the value contribution will be from each person.
Someone may bring incredible value to the engagement but have relatively low billable hours. The CVS KPI will now account for that discrepancy.
And since the CVS is decided upfront, there will be less conflict regarding write-downs and allocations that are a normal part of the timesheet culture.
If someone on the team doesn’t pull her weight, the CVS can be adjusted, and reasonable people should be able to agree on that process.
This is a momentous change within the culture of H&K, and we applaud the vision, leadership, and courage of Rich, Friedrich, and the other partners, who understand what an enormous competitive advantage this will bring to the firm’s ability to attract top talent, while providing a better level of service to its customers.
It is one more data point that the naysayers, who believe it’s not possible for a law firm to eliminate timesheets, will have to contend with.
Ron Baker - 11/20/2011
Dan Morris and I will be conducting the Sole Proprietor’s Retreat this December 9-10 for the California CPA Education Foundation. This 1.5 day program was designed as a way to give sole props the opportunity to have a retreat with their peers, since they don’t have partners.
It was a predecessor program to the Firm of the Future Symposium, but designed specifically for sole props and all the issues they face.
Ric Payne has agreed to offer a 12-month membership to the Principa Alliance, which provides access to its Practice System (a $1,295 value).
If anyone is interested, don’t hesitate to contact me, or Dan. We always limit the participation to 7-12 to make the group more intimate.
Also, if you could help spread the word that would be much appreciated.
Ron Baker - 09/21/2011
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.
Peter Drucker refuted this logic in his 2002 book, Managing in the Next Society:
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).
Peak efficiency is a sign of no innovation.
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.
Ron Baker - 07/01/2011
VeraSage Senior Fellow John Chisholm gives us and update on happenings Down Under with respect to Value Pricing:
This recent article from 23 June Western Australian Business News highlights that some progressive and innovative firms have “seen the light” and are slowly but surely “coming out” publicly in their move away from hourly billing.
BBV_OZ_ARTICLE.pdf
Bowen Buchbinder Vilensky (BBV) is one of the Perth firms leading the change.
David Vilensky, BBV’s Managing Partner, who is now a good friend of Ron and I and a zealot for non-time pricing would be first to admit than when he first heard me speak on the topic at a Law Australasia Conference 2-3 years ago he was far from converted. Both at that conference, and subsequently, we engaged in many discussions and debates on the topic.
However, David is not the sort of lawyer who simply closed his mind when someone didn’t agree with him, but rather thinks deeply and rationally about any topic he is discussing (well maybe not his football team West Coast Eagles).
Over time, as he engaged further in discussion and became more and more widely read on the topic (including buying Ron’s books), he decided moving away from hourly billing would be good for his firm.
After hearing Ron speak further on the topic, and as a sign of his and his firm’s commitment to the transition, last year David went to the trouble and expense of closing his firm down for a day and taking every single member of his firm to hear Ron and I address them on Value Pricing and Firm of the Future concepts.
After that, there was no turning back, as evidenced by his statements to the press, his passion when you speak to hi and when you look at BBV’s website explaining its pricing philosophy, the transition has been nothing short of amazing.
Whilst primarily because they are a bigger firm, and the pace of change is often slower, Lavan Legal, too, is committed to moving away from hourly billing ever since the late, great Paul O’Byrne and I met with them some years ago.
They too have had Ron and I involved in speaking to their partners and in my case their whole team over the last year or so and are well on the journey.
The other largest independent law firm in Perth, Jackson McDonald (who also had Paul and I address them on this topic 5-6 years ago) whilst I sense lagging somewhat behind BBV and Lavan Legal, have nevertheless set up a Pricing Council and are still grappling with the challenges of moving away from the time costing and time recording addiction.
There are other smaller firms in Perth that have or are making the transition and of course whilst still in the absolute minority they add to the growing number of professional firms in Australia that have publicly come out and are informing their clients and the public of their moves to non-time based pricing.
Their names are added to other Australian firms that proudly display their non- time based pricing options on their websites, including good friend and VeraSage Trailblazer Matthew Tol’s mta optima; Michael Bradley’s Sydney commercial firm Marque Lawyers; Melbourne and Geelong law firm Harwood Andrews; Canberra law firm Snedden Hall & Gallop; and accounting firm LBW, just to name a few.
Then of course there are those myriad of firms that whilst not so public about it (they see it as a competitive advantage and/or have not quite reached the tipping point in their firms yet) are nevertheless genuinely offering non-time based options to their clients in increasing frequency as they increase their competency and confidence in value-based pricing.
There are also an increasing number of customers of professional firms in Australia who now insist on fixed prices from their providers and thank goodness this shows no signs of abating as more and more clients and their firms experience the enormous mutual advantages. Some of these clients are more than ably assisted by Verasage friend and colleague Liz Harris of Allocatur Consulting.
A long way to go and it is literally one small step at a time and whilst we would all love to see these steps go from a walk to at least a jog given that most firms were either crawling or worse still heading in the opposite direction for the last 30 years, all indicators are that the steps are at least heading in the same direction.
Thanks John. I’m honored to have played a (very) small part in spreading the word Down Under, along with Paul O’Byrne, and Jay Shepherd.
But I think all of them would agree the credit goes to your indefatigable work and enthusiasm in spreading the message, and converting one mind at a time.
Ron Baker - 06/07/2011
The Institute of Chartered Accountants in Australia publishes a monthly audio program called “Business in Focus.”
I was honored to be interviewed for the March and April program.
”The Firm of the Future” was the March program, and is 7 minutes.
”Value Pricing and the Demise of the Billable Hour” was the April program, and is about 6.5 minutes.
Ron Baker - 05/15/2011
I’m pleased to announce the Maryland Association of CPAs is offering my third Second Life Webinar, which will be held Wednesday, May 25th at 12:30 - 2:30 pm Eastern Time. Registration begins at 11:30 pm.
You’ll have to be registered for Second Life, as well as the Maryland Association’s “CPA Island” on Second Life.
The Webinar’s content and registration information is here.
For how to register on Second Life, visit Maryland’s CPA Island Web site here, and click on “Where to Begin?” (Second Life Resources) in the upper right corner.
Ed Kless - 04/20/2011
On Saturday, July 9, 2011 the Sage Accountants Network (SAN) is presenting Sensational Saturday at Sage Summit 2011 at the Gaylord National Hotel just outside Washington, DC.
The main draw is entitled, Tomorrow Is Today: The Accounting Firm of 2011 to be delivered by Darren Root of RootWorks and Ron Baker of the VeraSage Institute. (Oh yeah, a guy by the name of Ed Kless is going to be there to moderate the fireworks.)
Darren is the co-author (with Michael Gerber) of The E-Myth Accountant. Ron’s just released book is Implementing Value Pricing. While the two agree on many topics, including the need for professionals to set fixed prices for engagements, there are other areas where they are not in alignment. This, to me, is where the fun will begin.
The presentation runs from 9am to 5pm and is dedicated to the possibility that accounting firms as we traditionally think of them are dying quickly. In order to ensure their survival, firms need to radically transform themselves. Creating such an organization is hard work and not for everyone and many firms will not be able to make the transition at all because this transition requires us to think differently than we have in the past about what it is that we do. You are invited to open a dialogue on a different model for creating success in a professional firm.
Click here for more information about the Sage Accountants Network.
Ron Baker - 02/10/2011
On January 27, 2011 I taught an 8-hour CPE course for the California CPA Education Foundation, inaguarating their new facility in San Mateo for in-house education events.
The course was: Pricing on Purpose: Creating and Capturing Value.
It was originally intended for CPAs who work in industry, but as it turned out, the overwhelming majority of attendees were practicing CPAs.
So we provided a copy of my latest book, Implementing Value Pricing, to all attendees. However, you don’t need the book to get value out of the program.
The course was Webcasted, and the Education Foundation has graciously made it available for free.
An excellent complement to this topic is another 8-hour Webcast we did last year, Measure What Matters to Customers, which discusses Key Predictive Indicators.
As always, we appreciate any and all feedback.
Ron Baker - 02/09/2011
Last November I conducted a Webinar sponsored by Principa, our good friend Ric Payne’s organization.
“Implementing Value Pricing” runs for two hours, including a Powerpoint slideshow. You can access it here (email required).
Since we received over three dozen questions from the November program, we decided to do a 2 hour Q and A Webinar on February 3rd.
I was joined by VeraSage Senior Fellows Michelle Golden and Ed Kless. There’s an enormous amount of “tacit knowledge” transferred in this program, since most of the questions revolved around how to implement.
You can access it here (again, email required).
We hope you find these useful, and as always, appreciate your feedback.
Thanks to Ric Payne and the Team at Principa for hosting these programs, and generously making them available to all.
Ron Baker - 12/13/2010
Ron Baker - 08/20/2010
Ron Baker - 05/18/2010
The Hon Wayne Martin, Chief Justice of Western Australia, gave a speech on Monday, 17 May 2010 to officially launch Law Week 2010.
The address, titled ”Billable hours—past their use-by date?, reviewed the criticisms of time costing and suggested new approaches to charging for legal services.
It was presented by the Perth Press Club at Frasers Restaurant in Kings Park. You can watch a 50-second clip from a news report here.
I had the good fortune of having a private meeting with the Chief Justice on my last trip to Australia. The meeting was arranged by David Garnsworthy, a cost consultant in Perth, and my colleague John Chisholm.
We had an incredibly candid discussion with the Justice, and he asked many penetrating questions regarding alternatives to the billable hour. You can tell he has given this issue much thought.
After our meeting, I send him two chapters from my forthcoming book, Implementing Value Pricing: A Radical Business Model for Professional Firms.
I was humbled to see he cited me in his speech, and used some of the material I had sent him on the deleterious effects of hourly billing.
He also makes many valid points regarding the perverse effects of the billable hour. If you are a lawyer in Australia, this speech is a must read. If you are a lawyer in the USA, or anywhere else, the speech is worth reading to gain a perspective of the billable hour from a Justice’s point of view.
Is there any doubt that the pressure points on the billable hour are far greater than merely from law firm customers?
There is a Perfect Storm brewing against this antiquated model from all sides.
Ed Kless - 12/09/2009
Congratulations to Mark Bailey and the whole team at Mark Bailey & Co. for being named the Best Accounting Firms to Work For by Accounting Today for a second straight year. The article specifically identifies the trashing of the timesheet as the reason for their tremendous success.
"We threw out timesheets," explained Mark Bailey, the firm’s managing partner. "But the motivation to throw them out is that they didn’t really reflect the value of the service that was being given. What we came to realize very quickly was that a timesheet is a control tool."
The 16-person firm decided that controlling professionals didn’t drive productivity; instead, it hampered innovation and creativity.
The entire article is available on-line and will be printed in December 14, 2009 issue of Accounting Today.
Ron Baker - 11/22/2009
Congratulations to Chris Marston and the entire Team at Exemplar for being appointed a Legal Rebel.
You can read Chris’ Legal Rebel profile here.
I don’t know most of the other Legal Rebels, but I would bet that Chris Marston is the only practicing lawyer among them who doesn’t do timesheets. I don’t know how you can be a Legal Rebel if you still complete a timesheet—the buggy whip of the intellectual capital economy.
Also, check out Exemplar’s new Website and our Australian colleague John Chisholm’s blog post on meeting Chris on his recent tour of the USA.
Congratulations Chris and Exemplar—you are truly a Firm of the Future!
Ron Baker - 09/12/2009
I had the opportunity to discuss hourly billing vs. Value Pricing with Brad Hatch of the Australian Financial Review.
His article “Billing Time” was published on September 11, 2009.
The article also discusses Advent Lawyers, an innovative firm that offers fixed prices.
Thanks Brad!
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