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!
Being forced to read this would be the intellectual equivalent of water boarding.
The copy reads:
TIME IS a lawyer’s commodity - or rather - it is how most lawyers quantify their expertise.
How successful you are as a lawyer depends fundamentally on how you use your time. There is direct correlation between how much value you can extract from your time and your profitability. Most lawyers must record how they spend their time on a daily basis and regularly justify their use of time to clients, the court or their employers.
BTW - The blog post title is Morse code.
Hear the sledges with the bells -
Silver bells!
What a world of merriment their melody foretells!
How they tinkle, tinkle, tinkle,
In the icy air of night!
While the stars that oversprinkle
All the heavens, seem to twinkle
With a crystalline delight;
Keeping time, time, time,
In a sort of Runic rhyme,
To the tintinnabulation that so musically wells
From the bells, bells, bells, bells,
Bells, bells, bells -
From the jingling and the tinkling of the bells.
- Edgar Allen Poe
There it was on page 64 of the January 23, 2010 issue of The Economist! Another death knell for the billable hour has sounded.
In a recent paper, ’The Death of Big Law,’ Larry Ribstein, a law professor at the University of Illinois, argued that after decades without changing, law firms are likely to have an outburst of experimentation with different business models: even the venerable and lucrative “billable hour” method of charging clients is in doubt.
It reads like an obituary doesn’t it. We hear at VeraSage anxiously await the wake!
On January 9, 2010, I received an email from Kim Foard, CPA from Billings, Montana that created an HSD for me—High Satisfaction Day—as we like to say here at VeraSage:
Your book, Professional’s Guide to Value Pricing, improved my client’s happiness and my success. While the financial rewards have been fun, the improved relationships are priceless!
Pricing on Purpose is next.
Kim Foard
Kim was kind enough to provide us with a case study for our Trailblazers section, reprinted below.
January 16, 2010
What We Want
As a door-to-door Cutco© knife salesman in my freshman year of college, I learned that people buy what they want; not what they need.
When asked for several knives to sharpen, one couple would present broken blades so dull soft butter was a challenge. While giving me hearty nods of approval that they were in need of knives and enjoying the presentation of tricks performed with the sharp knives from my sales kit, they would politely say, “No. No, thanks; we don’t want what you’re selling.”
The couple in the next house would struggle to find any dull knives in the sets of fine cutlery displayed in their kitchen. As they apologized for not being able to play along, I would make a little conversation, reluctantly begin the show, and then quickly navigate my way through the script. Without even asking for the order, my focus was on an exit strategy. They would reach over, touch my arm and exclaim, “Yes! We want to buy the biggest set!”
Only years later, when studying one of the greatest salesmen, Zig Ziglar, did I learn, “You can get everything you want in life, if you will just help enough other people get what they want.”
This is my story.
The days of my childhood were spent horseback in a sea of cowhides with a Dad who knew the way to confidence was by doing what others said was impossible. The evenings were spent in epic tales of adventure with a Mom who knew the portal to opportunity was by learning from the stories of others.
After high school, I turned down scholarships to pursue my dream of being a cowboy. Fifteen months later, I knew I didn’t have the same love of horses and cows as my dad! Yet, all of those years living the notion, “Where there’s a will, there’s a way” came in handy for a poor kid with a “new dream” of going to college. In the course of managing my fledgling business as a twenty-something entrepreneur, the counsel of an older client friend cut short my whining as he said, “Kim, your problem is not that you were born poor. Your problem is that you were born with ambition. Many are born poor and stay that way. You want something else.”
The “something else” was finally discovered twenty years later in a book written by Ronald J. Baker, Professional’s Guide to Value Pricing (with CD), Edition 3, published by Aspen Law & Business, 2001 [now out of print].
By starting with one client in a little Montana town of 2,500 population, appropriately named Roundup, the cowboy in me was enjoying the gathering of a small herd of loyal clients. They understood from the very beginning: I was in the business of selling dollars. I didn’t understand Value Pricing; I did understand the importance of finding 5 to 10 times my fee in benefit for them. In the early years, there was an Exit Conference with every single client to explain what had been done. That made quite an impression and they would say, “No one has ever cared enough to spend time with me, like this!” Spend time? Heck, no! I was investing time with them; I wanted a long-term relationship!
Then, one day, time had taken its toll on a ranch family and they were in the process of transitioning the next generation into the accounting function. I remember the excitement of working with the new twenty-something CFO, as we set up QuickBooks© and enjoyed a day’s worth of coaching and visiting.
In the course of adding families, processes, and infrastructure to the ranch operation, right in the middle of a seven year drought, there was a Net Operating Loss to be carried-back: Many thousands of dollars of benefit for a thousand dollar fee. To my surprise, I received a call from the new CFO, who had questions about the bill.
Remember, this was before Value Pricing, Fixed Price Agreements, Retainers and crystal clear Communication at the beginning of every project.
Sure enough, he was right. There was a line on his bill, and every other client’s bill, that read: Photocopies and Assembly—$75.00.
Made perfect sense to a bean-counter; we have overhead. After a few years in business, we have a history of expense; we can project that cost into the next year and we can reasonably estimate number of clients and projects for a given year. So, we do the math. $75.00 was a good number, all clients paid the same on any project and it, definitely, was a Fixed Cost to me. Not to the client. He wanted to negotiate that amount, downward.
In fact, he had counted the number of pages, and fasteners, applied the going Office Supply Store rate for those commodities and arrived at his number of $7.50. In his mind, he had been overcharged by a factor of 10. Ah, that “Perfect 10”; yet, this time it was viewed as being in my favor, not the client’s, and it was causing harm to our relationship!
He thought I was cheating him; I thought he was behaving stupidly. We were, both, on to “something”!
The value provided to the family for the last twenty years didn’t matter at that moment. In essence, he was a “new client” and deserved my respect. So, we began at the beginning.
Having read enough of Professionals Guide to Value Pricing to think differently and having found the CD in the back of the book with templates, I approached this “new beginning” with fervor. I had nothing to lose and everything to gain; a relationship hung in the balance!
There must be a better way to build relationships than: work hard; send bill. For twenty years, I had done what I had been trained to do by my accounting mentors. It worked, most of the time: 95% of the clients understood the value and were willing to be surprised by the bill. For a competitive perfectionist, that other 5% was the challenge, and at that moment I had one very irate customer on my hands, and my mind!
Change nothing; Nothing changes.
Insanity is doing the same thing over and over, expecting a different result.
Easy is hard; Hard is easy.
We get what we allow.It was time for a change.
The insanity was tiring.
A new path was needed.
I had created this mess.A single line on a bill was the proverbial straw that broke the camel’s back.
One more witticism became the mantra of the day, “Fake it until you make it!” At the time, all I had was a page of script titled, “Questions You Should Ask The Customer During The Fixed Price Agreement Meeting” and a burning desire to find a better way.
Today, those questions have been customized and internalized until they are at the center of every new beginning, and potential client relationship.
They look like this:
- What do you expect from me?
- What are your biggest worries?
- How do you see me helping with these challenges?
- What growth plans do you have?
- What role do you want your CPA to play in your business?
- How would you define quality service?
- Is a 100% Money Back Service Guarantee important to you?
- What would you consider as timely response to your accounting and tax questions?
- Why are you changing professionals?
- Are you concerned about any, one, issue that I should give special attention?
- Were you referred to me by someone?
- Are you Able To Pay for guaranteed exceptional value?
- Are you Willing To Pay a retainer in advance and the balance upon completion of services?
Forget about Perfect 10s; these are the Lucky 13!
As accountants, we will eventually need, and want, to answer this question:
- Are we Relationship Builders, or Paper Shufflers?
Paper, as a commodity, is cheaper by the case.
Relationships are priceless.
For those who want to debate whether the glass is half-full, or half-empty, handling commodities might be an excellent career choice. For those of us who wonder why so much attention is given to “half” of anything, “Creating and Capturing Value” is quite a noble profession!
Wholeness comes from tapping into the Universal Principle of abundance; our real potential is unlimited. Yet, this isn’t about us.
Communication is what the listener does. Are we listening to our clients? Do we really hear, and understand, what our customers want?
Oh, sure, they will grudgingly accept bills for the compliance work they “need” to have done. When they understand how much we care about them, demonstrated by how we actively listen to their dreams, they are open to new ideas. As they consider all of the many menu choices available to them, with a clear pricing structure designed to express the value of each one, and ultimately commit to partnering with us, the “want” is palpable!
Yes, that new CFO in charge of the family ranching heritage understood the Value in the Price (when I covered up the detail of the bill) and wanted me to understand that he wanted more of that simplicity. Why did it take me so long to get the horse in front of the carriage? Answer: Good judgment comes from experience; Experience comes from bad judgment!
Disciples of Value Pricing never hear “The check’s in the mail.” In fact, because “the checks are in the drawer”, we manage risk, schedule our days, attract quality clients, stumble into opportunities, enjoy open communication, reap financial rewards, and tie “Ribbons and Bows” around each and every project on our way to building relationships.
I have learned a deep respect for one of Goethe’s couplets:
Whatever you can do, or dream you can, begin it.
Boldness has genius, power, and magic in it.In our world of technological advances, “www” has become the gateway to infinite possibilities. If we will decide “What We Want” and, then, offer that with passion to others, the result is guaranteed to be a “Win Win Win”: for Customers; for Us; and, for the Whole Wide World!
Best regards,
Mr. Kim Foard, CPA
It’s rare to get cowboy poetry from a CPA, so thanks again Kim for making our day.
More importantly, congratulations to you for having an open mind, looking for a better way, and contributing to the dignity of our profession by doing the right thing for your customers.
Reading Kim’s story was another HSD!
This is the fourth 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.
This was a panel session, hosted by Lisa Kianoff of L. Kianoff and Associates. Three partners (all Sage) participated. More significantly, I was not a participant (except as an attendee). This is a huge victory for the pricing with purpose movement.
Here is what each one had to offer.
In reply to a conversation with a member of VeraSage I wrote a really good paragraph and I thought I would share since it is TLFT (too long for Twitter).
One of the issues (with tracking time) is vagueness which is the enemy of accountability. Getting people to define the results is hard work; time sheets allow managers to be precise about the effort expected while leaving the results entirely vague. Thus someone who bills many hours can be considered a hero or an idiot depending on what the manager thinks of them.
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.
I’m not a river or a giant bird
That soars to the sea,
And if I’m never tied to anything,
I’ll never be free
-From the Finale of the musical Pippin by Stephen Schwartz
Twenty years ago, I had the good fortune to perform in this play as the eponymous character with a community theatre troupe. The run was four performances over two weekends. So, if you throw in rehearsals, I must have sang these lyrics dozens, perhaps hundreds of times.
It was not until at least ten years later, when I first began reading the works of Peter Block, that I even began to understand them. What Schwartz has so elegantly defined for us is the idea of accountability.
Over the past few years I have read countless books, articles and blog posts that call for more accountability in the workplace. With the exception of Block, they all suppose that it is a management function to develop processes to “hold people accountable.” Think back on your past conversations about accountability and, no doubt, they will be transitive in nature. Herein lies the problem.
Accountability is not something can be imposed, but rather chosen. Peter Block begins to develop this idea as far back as Flawless Consulting and it comes to full maturity in Freedom and Accountability at Work. It is absurd to think we can even try to “get those people to be accountable.”
In Viktor Frankl’s Man’s Search for Meaning, the author writes of his experiences surviving a Nazi concentration camp and comes to the understanding that the only human freedom that cannot ever be taken away is the ability to choose how one feels about any given situation. Even if we are a victim of unspeakable crimes, we have the choice as to whether or not we feel like a victim. We are accountable for our own feelings, not anyone else.
Indeed, it is not only totalitarianism that is the enemy of freedom, but vagueness. In my view this is the problem with accountability in business. It is not that people do not want to be accountable, but rather that leaders are unclear about the expectations. Ron Baker tells a story of proposing this gedanken to a group to which he was speaking - What if timesheets became illegal? One participant blurted out, “Oh, my God, we would actually have to lead.”
The startling conclusion at which I have arrived through reflect on Block and Schwartz is this: Freedom and accountability are not just linked but are actually one and the same. If you want people to “be accountable” give them their freedom, but be clear about the expected results.
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!
Those who know me know I listen religiously to Rabbi Daniel Lapin on KSFO 560AM every Sunday from 1-4 pm.
He’s one of the most astute observers of human behavior, and even though I’m not Jewish, as he says, no matter what your faith “Everyone needs a rabbi, and for those who have no faith, you definitely need a rabbi.”
He’s written a fantastic book, Thou Shall Prosper, which I reviewed here.
Every Thursday, Rabbi Lapin sends out his Thought Tools, a short story that deals with various issues we face in our life, to which I highly recommend you subscribe.
I just finished reading his September 23rd Thought Tool, ”Retreat to Advance.”
As you’ve probably read, I’m involved in an intensive debate with Pat Lamb on the issue of efficiency vs. effectiveness.
I argue that knowledge workers work with their minds, which is an iterative process not subject to the rhythms and cadences of an assembly line.
For this reason, the “efficiency” metrics that are used in most PKFs—such as output per hour, realization, utilization, etc.—are a complete joke.
Knowledge workers aren’t machines.
Rabbi Lapin, I believe, would agree, given what he wrote in this thought-provoking Thought Tool:
Like all of us, I spend my day tackling challenges. Sometimes there’s a problem baffling me. Then I put it out of mind and retire for the night. Often in the early pre-dawn hours I will awaken and am instantly aware that I have had a creative thought breakthrough. Grabbing the pen and pad I always keep alongside my bed, and which I recommend as a vital business tool, I can hurriedly scrawl down the answer to the daunting problem from the day before.
Every time this happens I am amazed, yet it shouldn’t astound me. After all, this is one of those timeless truths of ancient Jewish wisdom. Human creativity thrives in an environment of thrust, retreat, and then thrust again. Work the problem, back off, and then return to the problem. It will yield more rapidly than it would in one long protracted push.
This is a physical parallel to a spiritual reality. Just as our bodies require sleep, so do our minds and souls. Creativity and productivity are enhanced by regular periods of withdrawal.
But where do I log this withdrawal on my timesheet? If I’m measured by output per hour I’ll feel like crap if I do this (and used to when I billed by the hour).
Isn’t it obvious that knowledge workers are different? They simply can’t run at 100% efficiency, day in and day out.
I’m completely baffled why this is so hard for some innovative leaders to understand.
I’d be grateful for your thoughts and input.
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.
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!
I was thrilled for the opportunity to discuss Value Pricing with major buyers of legal services at a workshop sponsored by the Australian Corporate Lawyers Association (ACLA) during my August Tour Down Under.
As someone who teaches pricing, we at VeraSage spend the majority of our time with sellers, not buyers, since sellers have to develop and implement pricing strategies.
But every now and then, I have the opportunity to present the same ideas we show to firms to their customers. I did this in the advertising sector when I spoke to the Association of National Advertisers, which let to very interesting discussions with Coca-Cola, P&G, and other large customers of advertising agencies.
I tell both buyers and sellers the same thing—both sides need to focus on creating value. Economics is not zero-sum, if your agency or law firm is making a profit, so by definition is the customer.
In fact, our new mantra at VeraSage is to maximize the customer’s profit. The only way to do that is by creating more value; then the seller can capture a fair share with Value Pricing.
This message resonated with the in-house corporate counsel at ACLA. They want certainty in price, as they have budgets. They don’t want to be nickeled and dimed to death by hourly billing statements presented in arrears. These are not unreasonable expectations—it’s how they purchase everything else.
The laws of economics apply equally to car companies and law firms. There’s no special law of supply and demand for the legal profession. Customers want prices up-front, certainty and value.
For more information on the ACLA Workshop from Australia, and to get an audio recording, here’s the email from the Australian Corporate Lawyers Association:
Dear Member
Announcing: the ACLA Online MasterClass Series
ACLA is delighted to announce, in conjunction with Australian’s largest corporate webcaster, Boardroom Radio, a brand new online webinar service to members: The ACLA Online MasterClass Series. During the next few months ACLA will trial a series of three full-length online seminars on hot-topics of interest to members, brought to you by leading presenters from home and abroad.
In our first offering on Value Pricing, world renowned pricing expert Ron Baker challenges the infamous billable hour and the current relationship business model adopted by many in the legal profession.
This three hour seminar, which you can now view and listen to at your leisure—when it suits you—was held in Melbourne on 25 August 2009. The registration fee to attend the seminar was then $385.00 (incl. GST).
ACLA is pleased to offer this seminar online to you for just $195.00 (incl. GST). If you would like to purchase the webcast link, please download the attached order form and return it to ACLA.
Value Pricing is currently the subject of much discussion in Australia. This session is about making it a reality, learning how firms and clients have moved to a value pricing model and gaining insights into the challenges and successes using real examples.
Ron Baker conducts the session together with Liz Harris (Allocator Consulting) and John Chisholm, well known Australian experts in the in-house sector. An audience of senior in-house counsel provides a lively discussion.
If you would like to read more about Ron Baker and his recent lecture tour of Australia click here.
For more details about the Webcast offer, please contact ACLA at .
Kind regards
Phil Wallis
National President
Once again, I’d like to John Chisholm, Liz Harris, and the team at ACLA for all the work they did in making this event happen.
It was an incredible experience to challenge the customers of legal services—I learned a lot.
From August 13th to the 29th, I had the great good fortune of touring Australia with my colleague, VeraSage supporter, lawyer, and legal consultant John Chisholm.
It was an amazing journey. I met several incredibly interesting and gracious people, went to an Aussie Rules football game, drank way too much OZ wine (all excellent!); got my butt kicked on the golf course by John; flew several non-United airlines (a reminder how valuable 1K status truly is); did sixteen speaking engagements over 11 days and 5 cities—Gold Coast, Sydney, Brisbane, Melbourne, and Geelong—including the ALPMA Summit, 11 law firms, a Young Lawyers group, ACLA members (General Counsel association), and a meeting with government officials.
As you can imagine, it’s hard to summarize such a tour, but here are some of the interesting insights I came away with:
Liz Harris, a consultant and friend of VeraSage whom I had the pleasure of meeting for the first time and spending time discussing our Quest, taught me that the GCs in Australia are far more concentrated than in the States, and thus could definitely exert more influence in getting law firms to change pricing strategies.
This runs counter to my strong opinion that sellers change pricing strategies and business models, not buyers. However, I concede she makes a compelling point, and I would be all for buyers helping force law firms to change. I remain totally unconvinced, however, that buyers have the economic power—or incentive—to accomplish this.
To support my contention, I issued the GCs the following challenge: Stop issuing tenders (RFPs) asking for hourly rates. Simply insist on your law firms quoting fixed prices for a fixed scope of work. Period. If they continue to give firms the option, out of pure inertia firms will default to hourly rates.
Of course, some GCs are as mired in the billable hour mentality as are law firms, so this is not as easy as it sounds. I hope proponents such as Liz and John can get in front of more GCs to explain the benefits of Value Pricing for both sides.
I asked this one question every time I encountered one of these proponents of The Firm of the Past: Do you really believe that the value of Jonas Salk’s polio vaccine is determined based on how long it took him to develop? To ask the question is to answer it—unless you lack intellectual curiosity, not to mention honesty.
All in all, this was a great trip and an incredible learning experience. John plans to visit the United States, and if you are interested in meeting him, please contact him or me directly.
The billable hour is on the defensive around the world. I’m still waiting for someone to defend it with an argument that VeraSage hasn’t nuked. Some are still trying, but I’ve yet to read or hear anything new in its favor in the 15 years I’ve been on this Quest.
It’s simply the wrong theory of value. And just like your high school algebra class, if you begin a long problem with the wrong first answer, it doesn’t matter how efficient you are in the rest of your work, it’s will still going to turn out wrong.
Let us hope law firm leaders in both the USA and Australia have the vision, fortitude and guts to put the billable hour where it belongs—its grave. R.I.P.
Yesterday, on the front page of the Wall Street Journal opposition to the billable hour went mainstream - ‘Billable Hour’ Under Attack. The article begins, “With the recession crimping legal budgets, some big companies are fighting back against law firms’ longstanding practice of billing them by the hour.”
In addition, the Journal also posted this accompanying video, in which the client (Pfizer) lays down the law (of economics that is) to her firms. While there is much here to agree with, she misses an important point. No billing by the hour can be financially beneficial to the firm as well. The question that I have for these firms is will you now eliminate the time sheet? Your customer has just told you that you have no reason to keep them. If anyone out there works for one of these firms, please let us know what the buzz is.
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