Friend of VeraSage Brenda Richter passed this along this morning. I am not always the biggest fan of Tom Peters, in this case he speaks the truth.
Brenda chips in, “Isn’t the time sheet the ultimate standardized form?”
Yes, Brenda, it sure is!
Yesterday, I received a solicitation regarding a “solution for transferring knowledge!” It included a link to the following video.
Problems with this:
Now, I did view their product page and the system itself seems like it would be helpful to collect and disseminate tactic knowledge throughout an organization. This is, in fact, something sorely needed in professional knowledge firms. However, I would suggest to them:
If any of you pursue looking at this further, please let us know what you think about it.
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.
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.
Pat Lamb commented on my recent post on Lean Client Service.
Since I don’t want to repeat the entire post along with his comments, I will just respond to his comments, as shown below in all capital letters.
On the distinction between “value billing” and “value pricing” Pat writes:
[I APPRECIATE THE DISTINCTION AND APOLOGIZE FOR THE ERROR. BUT TO ME, THE CRITICAL ELEMENT IS THE PRICING AND SUBSEQUENT BILLING SHIFT TO THE LAWYER OR OTHER KNOWLEDGE WORKER THE NEED TO PRODUCE THE OUTPUT AT THE LOWEST COST IN ORDER TO MAXIMIZE PROFIT MARGINS].
This comment explains most of the differences between Pat and me.
Pat, you seem to have a “penetration” pricing strategy, which means any costs you drive out of the system are passed along to your customers, like Wal-Mart.
I think this is a strategic error for Valorem, especially if you offer “alternative” pricing and great customer service.
At worst, you should have a “neutral” pricing strategy, or better yet, a “skim” strategy. Little wonder you are still arguing for cost savings everywhere. You should re-read the story from Ben & Jerry’s from my book Pricing on Purpose (which you reviewed on Amazon and gave 5 stars), where they discuss their pricing epiphany. [In fact, I’ve reproduced it at the end of this post].
Your penetration strategy dictates your views, while most of the firms we work with are implementing a skim price strategy.
On the issue of “professional service” vs. “professional knowledge” firm, Pat writes:
[TO ME, A DISTINCTION WITHOUT A DIFFERENCE].
Really? Then Peter Drucker was wrong about knowledge workers, and the enormous differences between them and industrial/service workers? You can apply the same metrics to a KW as an industrial or service worker?
The difference is enormous, and I’m not just talking about the name. Knowledge workers own the means of production, and they are the system when it comes to many functions. I side with Drucker on this one.
If we can’t agree on this, then nothing else I say will matter to you.
Pat writes:
[IS YOUR POINT THAT WE WANT TO DO THE RIGHT THINGS INEFFICIENTLY? IF SO, I BEG TO DISAGREE].
No, not my point at all. My point is that in many cases, as I cite in my post, at the margin trading less efficiency for more effectiveness is a wise strategy.
Doing the right things efficiently, or to the best of our abilities, is just plain common sense. I don’t mow my lawn with my BB gun. I’m saying that your ruthless attention to efficiency is not a competitive advantage, because despite your penetration price strategy, most law firm clients are not price sensitive.
Pat writes:
[I THINK THIS IS WHERE THE PARSING OF WORDS GETS EXTREME, RON. FRED AND I LIVE I A WORLD WHERE PEOPLE KEEP SCORE AND NEITHER OF US IS MAKING CEMENT LIFE JACKETS. WE ADVOCATE, AND LIKE IT OR NOT, IT IS AN EVERYDAY PART OF THE BUSINESS WORLD].
Keeping score is one thing, but keeping score doesn’t make you more efficient. That’s like arguing measuring yourself more accurately will change your weight.
I’m not against keeping score (hell, I’m a CPA), I’m against keeping score of the wrong things.
Pat writes:
[FRED AND I, AMONG OTHERS, HAVE USED THE BUGGY WHIP MAKER ANALOGY TO DISCUSS BIGLAW. BUT THE PRODUCT BEING SOLD BY LAWYERS IS RESULTS—SOLVING CLIENTS PROBLEMS. I DON’T KNOW OF A CLIENT WITH A PROBLEM WHO WOULD ARGUE THAT HER LAWYER’S ABILITY TO ACHIEVE A RESULT AND MAKE THE PROBLEM GO AWAY IS AN ANTIQUATED BUSINESS].
I’m not arguing that lawyers will go the way of buggy whip makers, though other thoughtful people are. I’m saying a focus on efficiency at the expense of innovation and creativity will make you irrelevant, or less able to create services that customers value.
Pat writes:
[EFFICIENCY DOES NOT ALWAYS NEED TO BE MEASURED, BUT ARE YOU REALLY ARGUING AGAINST DOING QUALITY WORK FASTER AND CHEAPER?]
Please give me an example of an efficiency metric that is not measured?
When you attempt to do this you will make my point about the difference between a measurement and a judgment.
Even your definition contained in your comment further below is a measurement, where you write:
[EFFICIENCY, AT LEAST IN THE LAW, IS GREATER OUTPUT—RESULTS—PER UNIT OF TIME].
Looks like a measurement to me. You can measure the output, but the results must be judged.
Further, it’s greatly flawed, especially from a value/pricing standpoint.
Are you saying the Jonas Salk’s polio vaccine is worth the amount of time it took him to develop? Are you saying that if it took him decades to develop it would be less valuable?
Sure, we would have loved it if he came up with it sooner, but we are dealing with human beings, not machines. You seem to think lawyers can run at 100% efficiency all the time, or at least your measurements argue for that logic. I reject this as industrial thinking.
Pat writes:
[BUT A DOCTOR DOESN’T WASTE TIME NEEDLESSLY. IT IS BAD FOR THE PATIENT’S HEALTH].
Again, Pat, this depends. I want my doctor to spend as long with me as necessary for a complete exam, diagnosis, etc. Ever been to a Dr. who stands by the door ready to rush out to the next patient, probably because some Lean consultant imposed a patient per hour quota on them? Not very effective. The Mayo Clinic does not do this, for this very reason.
Now if you’re saying that a doctor shouldn’t waste time in surgery, I have no argument. But even if he does, that’s his judgment, and if I trust him and it leads to a more effective result, why do I care? Maybe he needed a consult, or to think about a procedure more carefully. Are you really arguing that there’s no room for inefficiency? Then we really need to stop this debate.
Pat writes:
[THIS IS A GREAT EXAMPLE THOUGH. TOY STORY AND OTHER COMPUTER GENERATED CARTOONS ARE JUST AS GOOD BUT PRODUCED AT A FRACTION OF THE COST, ALLOWING THE PRODUCERS TO INVEST MORE AT THE IDEA DEVELOPMENT STAGE AND STILL MAKE MORE MONEY].
I doubt Pixar movies are cheaper to make than Disney’s, given the price of human capital. Pixar wasn’t about lowering the cost, it is all about making a more awesome (effective?) animated movie.
Even if I accept your argument that they did it at a lower cost, did they pass that cost savings onto the moviegoer?
Ha! They skimmed it for themselves. This difference in pricing strategy, again, explains most of the differences in our worldviews.
Pat writes:
[LEAN IS ABOUT LOOKING AT PROCESSES TO SEE WHAT VALUE THEY PRODUCE FOR CLIENTS. ARE YOU SAYING THAT WE SHOULD BE INDIFFERENT TO THE USE OF TECHNOLOGY IN DOCUMENT REVIEW FOR EXAMPLE, EVEN THOUGH STUDY AFTER STUDY HAS SHOWN IT PRODUCES EQUIVALENT RESULTS AS HUMAN REVIEW FOR A FRACTION OF THE COST?]
No, I’m not saying that. I’m saying that you using technology for document review does not convey a competitive advantage, since your competitors are using it too. It’s like having restrooms.
I rather have you focus on how to create more value for your clients than worrying about how you can increase efficiency by 1%.
Pat writes:
[SO WE’D RATHER HAVE LARGE NUMBERS OF EXTRA COMPUTERS FOR EXAMPLE, RATHER THAN TRYING TO PURCHASE ONLY THAT WHICH IS NEEDED? WE LIKE TO HAVE EXTRA BODIES AROUND FOR THE RARE TIME THEY ARE NEEDED RATHER THAN LOOKING FOR ALTERNATIVE APPROACHES?]
This is not really addressing the point of the hammer example. That was made to prove that the efficiency measurement did not convey the underlying realities of the situation.
But to address your point, I do believe your firm should have spare capacity. Too many firms run at full tilt, they burn out their team members, don’t have time to effectively market for better customers, and are always playing catch up on hiring at the last minute.
Spare capacity is a good thing for knowledge workers, giving them time to invest in marketing, social media, education, thinking, creating, innovating, and just recharging their batteries.
Pat writes:
[NO, BUT YOU WOULD LOOK AT THE COST OF TRANSPORTING THE MUSICIANS FROM ONE ENGAGEMENT TO THE NEXT, OR THE COST OF PROCURING THE NECESSARY INSTRUMENTS FOR THESE PEOPLE TO PLAY THEIR EXCEPTIONAL LEVEL. YOU ARE LOOKING AT THINGS FAR TOO NARROWLY.]
Oh come now, Pat. Are you really going to transport these folks on Southwest because it’s cheap? Again, this is a mechanical view of knowledge workers. Most airplanes’ business and first-class are filled with business passengers. I wonder why?
Pat writes:
[RON, YOU WRITE AS IF PROCESS AND JUDGMENT ARE MUTUALLY EXCLUSIVE. THAT MAY TRUE IN THEORY OR IN YOUR WORLD. I CAN ASSURE YOU, HOWEVER, THAT IN THE WORLD MY CLIENTS OPERATE IN, THEY ARE INTEGRATED. YOU HAVE TO PROVIDE GREAT JUDGMENT AT A LOW PRICE.]
I work in the real world, Pat. I’ve transformed thousands of practices around the world. I’m able to do that because the theories I use are sound and predictive. Accusing me of not being in the real world lends zero credence to your arguments.
You also seem to think that customers only care about lowest cost. Do you buy the cheapest toilet paper? Customers aren’t price sensitive, they are value sensitive. But given your penetration pricing strategy, maybe you are dealing with the most price sensitive segment of the market.
In any case, it does not alter the fact that a judgment is far different than a measurement. Enron was not theoretical, it was a perfect illustration of the difference between a measure and a judgment.
Pat writes:
[RON, I JUST THINK THE MAJORITY OF PEOPLE ARE GOING TO REJECT YOUR ARGUMENT THAT WE SHOULD BE INDIFFERENT TO COST. NO ONE CAN AFFORD THAT THESE DAYS].
I’m not arguing to be indifferent to cost. Your costs should be driven by your price (not the other way around!), and your price should be driven by the value you create.
Again, if we can’t get past this basic economic fact, this debate is futile.
In the price-led costing world, your costs are determined up-front. You can only recover the costs you incur if you can command a price that covers those costs, plus profit. The only way to do that is to create value above the price, so your customer makes a profit on the transaction as well.
That, by the way, is how the real world works. It doesn’t work on a cost-plus basis, otherwise GM wouldn’t be in bankruptcy.
Pat writes:
["TOTALLY FOCUSED” MY POINT EXACTLY, IF YOU FOCUS ON ONE OR THE OTHER TO THE EXCLUSION OF THE OTHER, YOU LOSE. BOTH NEED TO BE PURSUED].
It depends on your pricing strategy. BMW of course cares about costs, but not to the point that it reduces the value of its cars. If customers value your product enough, they will pay for high costs, and even inefficiency (again, see the Ben & Jerry’s pricing epiphany below).
Pat writes:
[BUT EVEN THE BEST AIRLINES PAY ATTENTION TO COST, BUYING OIL WHEN IT IS CHEAPER, FOR EXAMPLE, OR HEDGING INCREASED OIL PRICES].
Sure, so what? Look at how they price. They change their airfares 11 million times in one day in the USA. They don’t do this because costs are changing that often, but because the value of the flight is changing the closer you move to take off.
Pat writes:
["IN AND OF ITSELF.” AGAIN, YOUR OWN WORDS SHOW YOU ARE CASTING THIS AS EITHER/OR WHEN I CERTAINLY DID NOT AND NO BUSINESS PERSON I KNOW OR HAVE HEARD OF DOES EITHER].
I stand by the statement, and you haven’t successfully refuted it. Efficiency, in and of itself, will not convey a competitive advantage.
Pat writes:
[BUT THEY DO HAVE PIANISTS ONLY DURING PEAK HOURS, NOT EVERY HOUR THE STORE IS OPENED].
It’s not that the dog dances poorly, it’s that he dances at all. No Lean/Sig-Sigma consultant would dream of putting pianos in a Nordstrom, even during peak hours. It’s not efficient.
Pat writes:
On doing the Right Thing, not Doing Things Right [IT SEEMS WISER TO ME TO DO THE RIGHT THINGS THE BEST WAY, OR AT LEAST A BETTER WAY].
Forget about efficiency. Worry about effectiveness. [IN MY WORLD, RON, I HAVE TO WORRY ABOUT BOTH. IF I DIDN’T, I WOULDN’T HAVE CLIENTS].
But which drives success? Effectiveness does. You have to worry about both to a point, but when your efficiency interferes with your effectiveness, which has to go?
Pat writes:
[BUT SOUTHWEST MORE THAN MOST ANY OTHER BUSINESS I KNOW LOOKS TO STRIP OUT “STUFF” THAT DOES NOT IMPROVE THE CUSTOMER EXPERIENCE, WHICH IS THE VERY DEFINITION OF LEAN].
Yes it does, but they don’t use Lean, or any other management fad. They’ve rejected those since they were founded. My point is that Lean isn’t the only way to eliminate waste.
Pat writes, in response to our replacements for Lean/Six-Sigma:
[I AGREE WITH ALL THESE CONCEPTS, NONE OF WHICH ARE FUNDAMENTALLY AT ODDS WITH THE CORE CONCEPTS OF LEAN. AGAIN, THEY ARE NOT MUTUALLY EXCLUSIVE].
Well, in the real world, I can tell you that companies I’ve seen use Lean/Six-Sigma have focused on the one while driving out the other.
Leadership attention is a fixed resource, and you can only have so many iniatitives. Lean and Six-Sigma is a low-value undertaking, compared to focusing on creating and capturing value.
Every study undertaken proves that a 1% increase in price adds far more to the bottom line that a 1% improvement in reducing costs, or even rainmaking.
Pricers have an axiom: Innovate for growth, price for profit. This is why Google gives 20% Google Time, which I notice you didn’t comment on? That’s not very efficient, so why do they do it?
To give a real world example: I know a PKF that uses Lean/Six-Sigma, it even has Black Belts in Six-Sigma on their team (yes, it’s a real designation). After one year of implementing Lean/Six-Sigma here are the results:
Now, I’ve been working with a similar sized firm on implementing Value Pricing, and over the same past year they report a 25% increase in revenue, and an even greater increase in profit.
Which result would you rather have? You may answer both. Ok, but I think you will find that low-value ideas crowd out high-value ideas, since they are easier to implement.
Your own comments tell me that you find value pricing very hard. It is, damn hard. It’s also a high-leverage activity, so is creating more value.
It’s much easier to sit around and gaze at our navels and discuss how to increase output per hour by 1%. It’s just nowhere near as profitable.
Pat writes:
[RON, WHEN WE FIRST MET, I ASKED YOU HOW YOU WOULD APPLY YOUR VALUE PRICING MODEL IN THE CONTEXT OF A CLIENT WHO HAD JUST RECEIVED A COMPLAINT AND WAS LOOKING AT 3 LAW FIRMS WHO WOULD HANDLE IT, TWO OF WHICH WERE PROPOSING SPECIFIC BUDGETS. IN MY WORLD, THAT PROPOSED PRICE WOULD BE WHAT THE CLIENT LOOKED TO AS THE BOGEY YOU WOULD HAVE TO MEET OR BEAT. INSTEAD OF RECOGNIZING THAT REALITY, YOU SHIFTED THE DISCUSSION TO THE THEORETICAL BENEFITS OF VALUE PRICING, MUCH AS YOU HAVE DONE IN THIS DISCUSSION BY FOCUSING ON ONLY CERTAIN ASPECTS OF WHAT LAWYERS DO. REALITY IS TOUGH THING TO DEAL WITH, BUT IN POSTING ABOUT THE POSSIBLE VALUE OF LEAN TO CLIENT SERVICE, I WAS SUGGESTING THAT LAWYERS WOULD BENEFIT FROM A CRITICAL ANALYSIS OF THE MANNER AND PROCESS BY WHICH THEY HANDLE ALL ASPECTS OF MATTERS FOR CLIENTS. THIS DISCUSSION HAS ONLY REINFORCED MY VIEW OF THE VALUE TO THAT CRITICAL ANALYSIS].
Again, Pat, if you don’t understand the value that you create then how will your customers? Taking a budget as a price is a serious mistake, unless of course you really do have a penetration pricing strategy.
You seem to think that all customers care about is low price. This is nonsense on stilts. I’ve talked to hundreds of General Counsel who confirm this view, and elasticity studies by economists back it up.
They want to understand value, and if firms can’t do this, then the only thing left to discuss is price and/or hours.
Even Fred Bartlit doesn’t have a “penetration” pricing strategy, as I’ve read he’s turned away a case at $5,000 per hour. What customer in their right mind would be willing to pay that?
A customer looking for value. That’s not theoretical, that’s the real world.
Focus on your value and your customer service, and stop thinking you can price for 100% efficiency in a knowledge firm (and don’t make them fly on Southwest for crying out loud).
Your people aren’t machines, and I’ll let Ben & Jerry make my point:
The history of business is the history of epiphanies. Sometimes the fog clears up, and the right path is seen. This certainly happened—with respect to pricing—for Ben Cohen and Jerry Greenfield, founders of Ben & Jerry’s ice cream. Before they sold the business in 2000, to Unilever, the British-Dutch food company, they wrote an essay in 1997, titled “Bagels, Ice Cream, or...Pizza?” in which they explain their “famous pricing epiphany”:
Each year we would break even and say we needed only to do a little more business to make a profit. Then the next year we’d do a lot more business and still only break even. One day we were talking to Ben’s dad, who was an accountant. He said, “Since you’re gonna make such a high-quality product instead of pumping it full of air, why don’t you raise your prices?”
At the time we were charging 52 cents a cone. Coming out of the ‘60s, our reason for going into business was that ours was going to be “ice cream for the people.”
Ben said, “But Dad, the reason we’re not making money is because we’re not doing the job right. We’re overscooping. We’re wasting ice cream. Our labor costs are too high—we’re not doing a good job of scheduling our employees. We’re not running our business efficiently. Why should the customer have to pay for our mistakes? That’s why everything costs twice as much as it should.”
And Mr. Cohen said, “You guys have to understand—that’s human. That’s as good as people do. You can’t price for doing everything exactly right. Raise your prices.”
Eventually we said, either we’re going to raise our prices or we’re going to go out of business. And then where will the people’s ice cream be? They’ll have to get their ice cream from somebody else. So we raised the prices.
(Quoted in The Book of Entrepreneurs’ Wisdom, edited by Peter Krass, John Wiley & Sons Inc., 1999, pp. 462-463.)
I don’t expect to alter your view on any of this Pat, and that’s not why I’m debating you.
I’m actually using this debate to illustrate how obsolete the industrial/service model thinking is in a knowledge economy.
Our metrics come from Frederick Winslow Taylor in the late 19th century, and they are obsolete with respect to knowledge workers.
That said, I truly appreciate your debating skills. I, of course, believe the empirical evidence supports my view.
The market, ultimately, will decide, and I have faith it will make the right decision.
Pat Lamb posted on Lean Client Service, which inspired me to post a comment.
Then Pat replied in another post.
This led to another post, incorporating several comments from Legal On Ramp’s discussion board.
The debate is critical, and regular readers of VeraSage already know how much ink and mind power we’ve devoted to this topic.
Attacking efficiency is the equivalent of criticizing motherhood and apple pie, so my position is highly contentious. I believe this is good, since we only learn from people we disagree with. And, it illustrates how we have not yet come to grips with the consequences of no longer being an industrial/service economy, but rather a knowledge economy.
In that spirit, I thought it necessary to comment on Pat’s latest post, while expanding the discussion.
Here is my letter to Pat.
Hi Pat,
Fantastic discussion, thanks so much for provoking this much thought on what I consider a critical issue for professional knowledge firms.
We have two problems with this debate. The first is a linguistic issue. We all seem to be using a somewhat different definition of efficiency and effectiveness.
We believe all change is linguistic, so we should agree on terms. For example, you say in your post that I am one of the “leading thinkers on the issue of value billing,” but we at VeraSage don’t use the term “value billing,” since billing is done in arrears, whereas pricing is done up-front, before the work is started. There’s an enormous difference in these two approaches.
We also don’t believe law firms are “professional service firms” but rather “professional knowledge firms (PKFs),” terminology more in line with Peter Drucker’s famous definition of knowledge worker and knowledge economy.
So let me begin by defining how I am using the terms efficiency and effectiveness, which I take from Peter Drucker:
Now many people argue that both of these are important, and up to a point I agree. However, past some point—which we argue occurs sooner on the graph in a knowledge firm than, say, in a factory—the two become mutually exclusive. I can cite hundreds of examples where a decrease in measured efficiency still leads to an increase in effectiveness.
However, I can’t find many examples of where an increase in efficiency has increased effectiveness (as defined here). I know Fred Bartlit says that “increased efficiency almost always results in increased quality,” but quality is not necessarily effectiveness as I’m using the term here. One could make an incredibly high quality cement life jacket, but it wouldn’t be very effective (this crack was made by Tom Peters with respect to ISO 9000 standards).
Peter Drucker believed that a business wasn’t paid to be efficient; it’s paid to create wealth for customers. A business could be highly efficient at doing the wrong things. Examples abound: buggy whip, dot-matrix printer, slide rule, and typewriter manufacturers, etc, all models of efficiency before they were decimated in a gale of creative destruction by more effective technology.
In fact, a company at the apogee of their measured efficiency is probably in a perilous position, which is why Google allows its professionals to spend one day per week working on projects that excite them. This is not very efficient per your timesheet or billable hours; however it has led to many of Google’s innovations—Gmail, Google Earth, Google Books, etc. Other companies such as 3M and Gore have similar strategies.
This is why Peter Drucker wrote The Effective Executive, and not The Efficient Executive.
But let’s get back to efficiency.
What, Exactly, Is Efficiency?
Efficiency is always a ratio, expressed as the amount of output per unit of input. Mathematically, it seems straightforward, as if there was one widely agreed upon definition of the components of the numerator and denominator. In an intellectual capital economy, however, it is a conundrum.
Take the denominator in the ratio. Which inputs should be included? If we are dealing with wine, we could count the costs of the grapes, the bottles, corks, etc., none of which would help us define—let alone value—the final product. As they say, it is much easier to count the bottles than describe the wine.
If we were dealing with Rembrandt’s efficiency, we could sum up the cost of paint, canvas, brushes, and even the amount of labor hours spent plying his craft. Would there be any relationship to the final value of the output?
We can calculate how many surgeries the cardiologist performs in a given number of hours, but it doesn’t tell us anything about the quality of life for the patient.
Was Einstein efficient? How would you know? Who cares?
Firms have learned costs are easier to compute than value, so they cut the costs in the denominator to improve the efficiency. This is the equivalent of Walt Disney cutting out three of the dwarfs in Snow White and the Seven Dwarfs in order to reduce the inputs, thereby making the resulting ratio look better. Since Snow White contained over 2 million painstakingly crafted drawings, this reduction would have been quite efficient—but hardly effective. The Two Little Pigs probably would have been more efficient, but nowhere near as effective.
The fact of the matter is, we do not know how to measure the efficiency of a knowledge worker. And this is true for a very fundamental reason, which leads to the second problem with this debate: The Grand Fallacy—that is, the idea that there is such a thing as “generic” law firm efficiency.
There’s No Such Thing As Generic “Efficiency”
Efficiency cannot be meaningfully defined without regards to your purpose, desires, and preferences. It cannot simply be reduced to output per man-hour. It is inextricably linked to what people want—and at what cost people are willing to pay.
Consider the example of a hammer in a poor country. It’s likely to drive more nails per year, since it’s most likely shared among more people and sits idle less of the time. But that does not make the poor country more efficient; it just proves that capital tends to be scarcer and more expensive in those countries.
During the Cold War, the old Soviet Union used to boast that the average Soviet box car moved more freight per year than the average American box car. Yet this didn’t prove they were more efficient. On the contrary, it proved that Soviet railroads lacked the abundant capital of the American industry and that Soviet labor had less valuable alternatives to engage in than their American counterparts.
Your automobile is not very efficient, since it’s idle a majority of the time. So what? When you want to go somewhere, it is incredibly effective, since it meets your purposes at a price you’re willing to pay. (I am indebted to Thomas Sowell, and his masterful book, Basic Economics, for these examples).
Princeton economist William J. Baumol asks this thought-provoking question: How would you go about increasing the efficiency of a string quartet playing Beethoven? Would you drop the second violin or ask the musicians to play the piece twice as fast?
Adam Smith explained how the specialization and division of labor were the major causes of productivity increases and the creation of wealth. However, even some of Smith’s insights are not effective in a knowledge environment. Shakespeare could not specialize in writing the verbs while a colleague wrote the nouns of his many works, even though this would, no doubt, increase “efficiency,” at least given the way firms currently measure that statistic.
Judgment vs. Measurement
Efficiency is always a measurement. Effectiveness, on the other hand, is always a judgment, which is far more important in a knowledge environment. Some of the comments on your blog post support this position, especially Fred Bartlit’s.
There is no generic way to “measure” the quality of legal output; it requires a judgment, based on the results it creates. This is one of Drucker’s major insights about the difference between a factory worker and a knowledge worker. If I’m placing tires on an assembly line it is much easier to measure my quality (and defects) than if I’m a lawyer writing a crappy brief, which will only be discovered by a judgment, usually from another lawyer.
I was hospitalized last year. My surgeon ordered a CAT Scan. The procedure was done very efficiently, as measured by outputs and inputs. I was in and out very quickly, comfortable, etc.
However, when my surgeon saw the scan results he “judged” the radiologist screwed up, didn’t scan far enough down my thigh. The measured efficiency could not inform him of this defect—it had to be judged. This defect led to a much longer hospital stay and other serious complications.
The scan was highly efficient, but it was nowhere near being effective.
I’m all for process, and you mention audits. However, judgment is still superior. Take Enron. The auditors followed the “processes” and the “checklists.” What they didn’t do is apply professional judgment by asking “Do these financial statements reflect the underlying economics of this entity?” The result was an efficient audit that was entirely ineffective.
Anthony Kearns makes an excellent point when he says: “In law...it will be difficult if not impossible to determine in advance where efficiency in process can be achieved without unsatisfactory compromises in quality.”
This is another way of stating what economists have known for centuries: there is no generic efficiency without respect to purpose, and what you are willing to pay.
Anthony also makes another excellent point about expertise driving efficiency (I would say it drives effectiveness), and this supports my argument even more.
When we are undergoing education, we aren’t very efficient as measured by a ratio of outputs divided by inputs. New skills take time to learn, and beginners make tons of mistakes. If all we cared about was efficiency we’d never educate our team members. But the only way a knowledge worker can become more effective is through education, so the cost of less efficiency is a price worth paying.
Scott Irwin’s formula is interesting: Effectiveness + Cost Control = Efficiency.
But I reject this, for the many reasons cited above. Too many companies focus on cost control and efficiency at the expense of effectiveness, which I believe is dangerous.
Gordon Bethune, former CEO of Continental Airlines, made this very point in his book, From Worst to First. He said Continental’s management culture was totally focused on driving down cost per passenger mile, by piling more people into the planes like sardines, cutting down beverage sizes, taking out pillows, blankets, and magazines, etc.
He wrote “you can make a pizza so cheap no one wants to eat it, and you can make an airline so crappy nobody wants to fly it.” This cost mentality was precisely why Continental filed bankruptcy twice in one decade before Bethune took over and began to focus on effectiveness.
Efficiency in a law firm, in and of itself, is not a competitive advantage. It’s the equivalent of having restrooms. If your firm isn’t using the latest technological tools that is incredibly inefficient; but if it is using those things, so what? All of your competitors are too.
The differences in firm revenue and profit cannot be explained by efficiency, only effectiveness in customer service, as well as the ability to create, communicate and capture value. Efficiency is a table stake—the minimum you need to be in the game.
Competitive advantage is built on effectiveness, not efficiency.
It’s not very efficient for Nordstrom to have pianos in its stores, as it lowers sales and profit margin per square foot (the efficiency metric for retailers). It is, however, incredibly effective to serenade your employees and customers everyday, creating an ambiance they want to come back for.
The ultimate manifestation of the efficiency mentality was Robert McNamara, president Kennedy’s secretary of defense from 1961 to 1968, thereafter becoming president of The World Bank. McNamara was an accounting instructor at Harvard Business School before World War II, then he served as a specialist in operations research projects with the U.S. government during the war. After the War, he was hired by Henry Ford II—along with the so-called Whiz Kids—to revitalize the sagging profits of the Ford Motor Company.
He brought a mechanistic mind-set to the War in Vietnam, trying to micromanage it by the numbers. He apologized for this ill-conceived strategy in his 1995 autobiography In Retrospect: The Tragedy and Lessons of Vietnam.
Blindly relying on measurements can obscure important realities. The ultimate problem with numbers and measurements is what they don’t tell us, and how they provide a false sense of security—and control—that we know everything that is going on. I think the mentality among many leaders in professional firms is “If we can’t manage it, let’s measure it.”
What is the Purpose of a Law Firm?
What are firms trying to accomplish? What is the goal? Is it simply to crank out more work per labor hour?
If that’s the case, then under the hourly billing model their revenue actually decreases. That seems ludicrous.
Is it to crank out more work per labor hour to increase firm capacity? For what purpose? To add more “F” customers? That, too, doesn’t make much sense.
As Kurt Siemers, CEO of Kennedy and Coe, LLC (a Top 100 accounting firm) says:
And since becoming more efficient is a zero sum game over time, we have been left with working more hours to earn more. The historical business paradigm of our profession found itself on a collision course with our commitment to the well being of our people.
Simply stating that a firm wants to be more efficient is meaningless. They need to define what they are trying to accomplish long before they can begin to consider the best way to achieve their objectives. This is, I believe, precisely what Fred Bartlit is saying, which I agree with wholeheartedly.
The ruthless quest for increased efficiency contains within it a grave moral hazard. It’s encouraging behavior from firm leaders that is driving out creativity, innovation, dynamism, customer service, as well as talent from the professions.
I know you are a big fan of Total Quality Service, Pat. So are we. In fact, I came to Value Pricing through TQS, as the hourly billing method is a lousy customer experience.
The giants in TQS, thinkers such as Karl Albrecht, Stanley Marcus, Walt Disney, J.W. Marriott, among many others, didn’t have much use for efficiency, knowing that dealing with people requires effectiveness. Karl Albrecht criticized TQM, Six Sigma, etc., for this very reason, and thought the mechanistic mentality it fostered killed customer service.
Doing the Right Thing, not Doing Things Right
Forget about efficiency. Worry about effectiveness.
Better still, focus on efficaciousness; meaning having the power to produce a desired effect. This term is used to describe the miraculous power of many drugs since it suggests possession of a special quality or virtue that makes it possible to achieve a result—exactly what we are trying to accomplish in law firms for customers.
In an intellectual capital economy, and within firms, where wealth is created using the power of the mind—as opposed to the brawn of the body—these characteristics better explain the value created by knowledge workers.
Yet all of the so-called “efficiency” metrics and protocols such as Lean and Six Sigma have their origins in the late 19th century time-and-motion studies for manual laborers in factories, not knowledge workers who don’t work to the rhythms and cadences of an assembly line.
Firm leaders need to stop looking at input-output tables based on labor hours. Rather, they should define what their purpose and strategy is so to be different than the competition in order to command premium prices.
I believe lawyers are more artists than technicians. By all means, put processes in place for the low value work that can be streamlined and is repetitive. But when it comes to the thinking, strategy, synthesizing information, and creating results, use your minds, creativity, expertise, wisdom, and judgment.
I can increase an artist’s “efficiency” by providing them with paint-by-the- numbers kits, but it will produce crappy art.
Do I have a higher opinion of lawyers than do those who have commented on this board?
What is Superior to Lean/Six-Sigma?
It’s one thing to light a candle in the darkness and point out flaws in the status quo, a function incredibly valuable if we are to improve our theories.
However, it’s also important to offer an alternative to the present darkness.
A Professional Knowledge Firm is not a factory, which is why I believe Lean and Six Sigma are the wrong talisman. Companies such as Google and Apple don’t use these tools; Southwest Airlines doesn’t even use them.
As a knowledge worker, I have seen far too many firms implement this type of thinking, turning their artists into a caricature of Charlie Chaplain in Modern Times, getting sucked into efficiency metrics, quotas, etc. I believe the price we pay for this is a lack of focus on effectiveness and customer service.
I, for one, don’t want to work in an organization that has a ruthless focus on efficiency. It’s not very inspiring or meaningful.
We offer the following cognitive tools as superior to Lean/Six-Sigma in a Professional Knowledge Firm:
I have one final question: Is this debate efficient? What are people putting on their timesheets when they participate in these types of Social Media discussions, which are quite time consuming?
I don’t think this is efficient at all.
I do, however, find it very effective.
Thank you, Pat.
While going through some old notes I found this list I developed of the top ten myths in or about business. Without further ado, they are:
1. Business is a zero-sum game
2. Price is based on cost
3. Excessive profits must be because the company is doing something evil
4. Increasing market share leads to increased profitability
5. Any focus on efficiency
6. Leadership is about changing others
7. Strategy is about analyzing, planning and doing
8. Business is science, and requires data to back up decisions
9. The customer is always right
10. Differentiation can be achieved by saying you are customer focused
Do you agree or disagree with any or all of these? If so, please comment.
I often state a truism that I stole from someone I can’t remember - In consulting, as in medicine, prescription before diagnosis is malpractice. (If you are this person, I apologize, I owe you a beer.)
In a recent conversation while on a walk with my wife, Christine, we concluded that there is a corollary to this rule - You can’t prescribe if the patient/customer will not let you diagnose.
I hear about this problem more than a couple of times a week from Sage partners with whom I am speaking. It usually manifests itself like this, “Ed, I was trying to get an understanding of why the customer thought a request they had made was important, and they told me that they don’t reveal that information to outsider consultants. What can I do?”
My initial response is a half-kidding, “Run away!”
After explaining that I am kidding, sort of, I state, “Perhaps you should suggest to them that they reconsider and explain that while you understand their concern, it is not in their best interest to withhold this information. Consider this - if you go to a cardiac surgeon and just ask for a triple bypass operation, any ethical doctor will first insist on a few tests before performing the surgery. Certainly, they would want to take your blood pressure and heart rate. Would it make any sense to say, ‘Hmm, I don’t know, I don’t think I want to reveal that information to you.’? Clearly, it would not. I am in the same situation as the doctor, without a full understanding of the problem, it would be unethical for me to proceed. So, I ask you to reconsider and answer my questions. If not, I really don’t think I can help you.”
Is this hardball? Maybe, but your only alternative is to violate your ethics and prescribe before diagnosing.
The recent book review of Reinvent Your Enterprise has sparked a fantastic discussion on the difference between efficiency and effectiveness, especially in a Professional Knowledge Firm (PKF).
Senior Fellow Paul Kennedy, of OBK fame in Great Britain, joined the discussion in an email to me explaining the obk simple management system™.
As OBK is a true Firm of the Future, I was excited to share Paul’s methodology. I only wish more PKF leaders understood the difference between knowledge and manual/service workers, efficiency and effectiveness, and a measure vs. a judgment.
Obviously Paul Kennedy does. Study the following. If you’re smart, implement it, or something similar to it.
Thanks for [the book review] Ron.
I have been giving this some thought about efficiency vs. effectiveness and I will send you some notes. However, the underlying issue if I have read the article correctly is how to manage a knowledge worker (KW) or can KW’s be managed?
I had thought that this debate had ended. That is—KWs are more led than managed. At obk we have developed the obk simple management system™ which is laughingly simple but seems to work. It is about aligning the skills of a KW to business objectives and then coaching them. It goes like this:
Step 1. Everybody has a job and every job has a body. This involves designing a functional organisation chart with a “position contract” in each box ([Michael] Gerber style). This is business object orientated.
Step 2. Each position contract describes desirable outcomes, qualitative performance expectations and cross refers to an assessment form (see step 3 below).
Step 3. We design an assessment form for each KW. This is a short list of judgement criteria that assesses how well the function is being discharged. Against each criteria (usually between 5 and 10 headings) is 2 columns. One for self assessment and one for manager assessment. The KW and their manager score how well the criteria point is being done / performed / achieved, using 1 = low and 5 = high. The criteria headings can be anything you like but in our case includes:
- Development of relevant Human Capital
- Contribution to firm’s structural Intellectual Capital (IC)
- Consistency with firm’s core values
...Among others
Step 4. The KW and their manager have a 15 to 20 minute chat about their scores on a regular basis (sometimes weekly, sometimes monthly)
We have been experimenting with this system in the obk lab for some time and we have a number of clients using this system. What we have learned is:
- When you present a position contract describing desirable outcomes and with qualitative performance expectations some KW don’t want the position! (This may explain why management has been so frustrated with this KW for so long)
- Others say “to get to that standard I need help” (also good because its management’s job to provide help in terms of inspiration, tools and training).
- When assessment forms are completed we have observed a number of things:
- When a KW scores themselves low but their manager scores them high—the KW is pleased and their work is recognised (A good thing according to Blanchard’s One Minute Manager and Baker see Page 64 of The Firm of the Future—the 4 reasons why people go to work).
- When a KW scores themselves high but their manager low—also good because it means we are now at stage 1 on the progress ladder. Most managers never get to this stage with their KWs and can therefore never make progress.
- Whenever a score is less than 5 the conversation is about how can we get you to a 5? In other words this becomes a coaching process.
- The coaching chat plans and monitors the KW’s personal development.
At obk we have badges (Boy Scout style). We use these badges to define and test competence in skills required to create value for our customers. These badges may be technical or may relate to personal skills such as listening or speaking. Our KWs target and acquire these badges as part of their development. Their personal development is therefore aligned to our business needs.
This system works for us and for others where it has been introduced. In getting clients to use this system we have to educate them to make judgements. To get them to tell their KW’s how they feel without the need for justifying why they feel the way they do. We do not use measurements unless they can be directly related to KW performance, e.g., a salesman picking up new customers.
I think the key to making this system work is the environment in which this management system sits. This environment of course is the function of leadership and this is the key to getting more from KWs.
In my opinion, this is a far easier framework than the one laid out in the Reinvent Your Enterprise book. I can always count on Paul to shave with Occam’s Razor.
We’d love to hear what others think of the obk simple management system™.
What if you would refuse to accept any new customers unless they were referred to you but another customer? Would your leads dry up? If so, your new business problem is not marketing related, it is your service. FIX IT!
The lesson here is that if you are not getting active referrals from customers, your service ain’t great. The only thing more customers is going to do is put you out of business faster.
Imagine if your new customers, like my dentists, come from 100 percent referral sources. Do you think you could charge a premium? Do you at least think that discounting would go away?
It is time to take some stock and ask - Are we really as good as we think we are? If not, it is time to fix your service.
Yes, you read that headline right, someone at the VeraSage Institute is going to praise the accounting profession, specifically, the Big Four, or is it Three. Ooops, sorry, I forgot this is a post praising the accounting profession.
One thing I have always been impressed with from accounting firms, again, specifically the larger ones I have had contact with, has been their ability to create alumni networks that drive real value for them. Now, it certainly is true that this practice has caused some challenges by creating some possible personal conflicts of interest. However, I think for the most part, this is a great idea.
Too many businesses I have encountered tend to blame the person who has last left the organization for everything that has gone wrong at the firm from the creation of the world (a literary flourish, I believe in the Big Bang) to date. This is especially true if the person is fired, but it occurs with all too much frequency when the employee is leaving of the own volition.
“Oh, that Fred (I always use Fred), I am glad he left. In retrospect, he caused more problems than he solved.” Blah, blah, blah. To me this kind of trash talk is indicative of leadership. If this person sucked fowl ova so badly, why didn’t you get rid of them long ago. I think that what the person is really saying is, “Damn that, Fred, how dare he leave us. We are a great place to work.” Really? Do some soul searching.
Anyway, back to the praise.
Accountant do an outstanding job of placing people with their customers and even to some degree encouraging these types of moves. After all, if the person is unhappy, for whatever reason with your company, isn’t better to have them as a ally in the future.
If you are someone who has been critical of former employees, why not turn over a new leaf and plan an alumni BBQ at your house over the summer.
My wife, Christine, recently asked me a great question, “Have you thought about developing interview questions to see what candidates thoughts are on hiring people with the core belief (or open to the possibility) for these crazy new ideas? For example, value pricing, service level agreements, firm of the future?”
Honestly, I was stumped. I really had not.
She even provided me with a great potential question - Tell me about a time when you purchased something and wanted to know the details of the costs behind it.
This really got me thinking that we need a set of potential interview questions for firm who have made the leap to being a firm of the future. So, in addition to Christine’s first question above, I present a first cut list of potential interview questions for knowledge workers.
Note: TMAATW stands for “Tell me about a time when.”
OK, team VeraSage, now it is your turn. What additional questions would you add to the list?
PS - Now you know why I married her!
What would you think of a company that had the following characteristics and beliefs?
After a speech the owner of this company gave, he was asked, “...Can you please tell us what planet you’re from?”
These beliefs defiantly challenge the conventional wisdom of management practices. I’d love for the recent author of a letter to the editor of the Journal of Accountancy to read this. If he thinks timesheets are necessary for control, he’s deluding himself.
The above forces us to challenge nearly everything we think we know about how to properly run an organization. This 50-year old company, by the way, employs 3,000 people in three countries (some of them union members); engages in manufacturing, professional services, and high-tech software; and had revenues of $160 million in 2001—up from $35 million in 1994. If you had invested $100,000 in this company 20 years ago, it would now be worth almost $6 million.
When I discuss this company in presentations, I am met with a staring ovation of disbelief. This visionary leader knew what type of future he wanted for his company, and he was willing to pay the price to achieve it.
Is this the type of firm—and leadership—you would want one of your children to work for?
In the spirit of adventure and curiousity, I implore you to read the two books by Ricardo Semler and discover for yourself the possibilities of creating a better future: Maverick: The Success Story Behind the World’s Most Unusual Workplace; and The Seven-Day Weekend: A Better Way to Work in the 21st Century.
If you’d like to see Ricardo Semler for yourself, watch this presentation at MIT World (about 48 minutes).
Meet a real revolutionary who doesn’t just talk about the pace of change; he creates it everyday. There’s many lessons here for professional knowledge firms.
George Gilder responds to a question regarding the idea of banning profits and utters one of the most profound statements I have ever heard - “Profit is an index of altruism.”
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