Community Section -
Adaptive Capacity Model (Airplane)
Ron Baker - 09/21/2011
I’ve long been a fan of Michael Gerber’s E-Myth book. His concept of working “on” the business rather than “in” the business was a major theme of the Accountant’s Boot Camp, developed by my good friends Paul Dunn and Ric Payne.
So when I learned that Darren Root co-authored The E-Myth Accountant with Gerber, and especially since I was presenting with Darren at the Sage Summit, I was looking forward to reading their views on what Darren calls The Next Generation Accounting Firm™. The Firm of the Future is a topic near and dear to my, and VeraSage’s collective, heart, and I was looking forward to learning another perspective.
Areas of Agreement
There is a lot of good advice in this book with which I agree. Here is a bullet point summary of some of their better recommendations, most of which come from the chapters that Darren Root wrote:
- Darren asks a good question: “How did the accounting profession become a mass of technicians and very few business leaders?” David Maister’s book, True Professionalism, is necessary reading to overcome this.
- Firms engage in mass client acquisition, whether or not they are a good fit for the firm. We call this the market-share myth, a form of cancer (growth for the sake of growth). It leads to incredibly weak pricing power.
- Same as above with offering too many services, which Darren argues keep CPAs at the technician level as well. The debate between the specialist and generalist is over—the specialist won. This video from the late Paul O’Byrne illustrates this very effectively.
- Darren writes:
It’s time to trust your people, let go, and give yourself the opportunity to work on your practice...not in it.
Good point. Follow this path to its logical conclusion: it leads to scrapping timesheets and implementing a Results-Only Work Environment (ROWE).
- It’s hard to disagree with this:
The old business model has long been to sell billable hours. Instead of selling billable hours, your firm sells complete solutions. If your goal is to get off the proverbial hamster wheel and build a business, it is critical to abandon the billable-hour model and adopt value billing [sic—he means value pricing].
Darren believes that accountants are finally starting to hear the value pricing message, and I hope he’s right. He says that hourly billing doesn’t take into account efficiency or new technologies.
However, that’s not the major weakness of the billable hour. It’s Achilles heel is it doesn’t take into account customer value, and is based upon an incorrect theory of value.
- In a chapter written by Gerber ("On the Subject of Clients"), he discusses how to deal with client dissatisfaction with a 7-step process. What’s missing, though, is the recommendation that firms offer a guarantee to all customers.
- Darren suggests spending a good portion of your marketing budget geared toward strengthening existing client relationships. Indeed. As the AICPA pointed out years ago, it costs eleven times more to acquire a customer than to retain one.
The Gap
For as many topics as we agree on above, I’m afraid the chasm that exists between my vision of the Firm of the Future and the one laid out in this book is simply irreconcilable.
But as with most disagreements, this is more a conflict of visions rather than a disagreement about facts. I’m reminded of what Blaise Pascal wrote in Pensees:
When we wish to reprove with profit, and show another that he is mistaken, we must observe on what side he looks at the thing, for it is usually true on that side, and to admit to him that truth, but to discover to him the side whereon it is false. He is pleased with this, for he perceives that he was not mistaken, and that he only failed to look on all sides.
The side the authors are coming from is to build the McDonald’s of professional firms, by laying out a path for creating “a highly efficient money-making practice.”
Yet a glaring omission from this work is any mention of the knowledge economy, or knowledge workers. This is the dimension the book ignores completely.
A professional knowledge firm isn’t McDonald’s, nor should it be. This example of Gerber’s has always irritated me, but it is particularly egregious in a book for professionals.
This is where the author’s analogies to the importance of systems break down in a knowledge economy. Gerber posits “The People Law: without a systematic way of doing business, people are more often a liability than an asset.”
This is strange statement, given that 75% of the world’s wealth resides in human capital, according to the World Bank.
The prominence given to the “system” over people is redolent of Frederick Taylor, who wrote:
In the past the man has been first; in the future the system must be first.
Peter Drucker refuted this logic in his 2002 book, Managing in the Next Society:
What made the traditional workforce productive was the system—whether it was Frederick Winslow Taylor’s “one best way,” Henry Ford’s assembly line, or Ed Deming’s Total Quality Management. The system embodies the knowledge. The system is productive because it enables individual workers to perform without much knowledge or skill....In a knowledge-based organization, however, it is the individual worker’s productivity that makes the system productive. In a traditional workforce, the worker serves the system; in a knowledge workforce the system must serve the worker.
Yes, knowledge workers will create their own systems. That’s the point. Two surgeons will not perform an operation the same way. Even two barbers won’t cut hair the same way (nor would we want them to).
This is why Steve Jobs says:
The system [at Apple] is that there is no system. That doesn’t mean we don’t have a process.
Sure, there are things that can be turned into a repeatable process, but the value in knowledge work lies in where there is applied judgment, creativity, and wisdom. And you simply can’t systemized those virtues. Indeed, if you try—with Six-Sigma, Lean, etc.—you kill them.
The better solution is to capture the knowledge that is tacit in those unique ways of doing things so the knowledge can be spread across the firm. Yet any discussion of knowledge management and capture is missing from this book.
The authors also seem to think that the systems should only be designed by the firm’s owners, rather than its workers—this is a large part of working “on” the business rather than “in” it.
But to borrow from Steve Jobs again, does it really make sense to hire smart people and then tell them what to do? Apple hires smart people so they can tell Apple what to do. Welcome to the knowledge era.
The idea that all the intelligence rests with management didn’t work in Frederick Taylor’s industrial era and it certainly doesn’t work in a knowledge economy. Worse, you cannot inspire creative knowledge workers by spouting Taylor’s efficiency mantra.
Today, knowledge workers are the system, which means they have to have a hand is designing it. Even auto manufacturers understand that those closest to the work are the ones who can improve it the most. See Toyota.
Yet the cult of efficiency is worshipped throughout the book, even though Darren quotes Steven Covey:
If the ladder is not leaning against the right wall, every step we take just gets us to the wrong place faster.
Nowhere is the recognition that there’s nothing more wasteful than being efficient at doing something that shouldn’t be done at all. Or that efficiency—and technology—are mere table stakes, not a competitive advantage, since your competition can easily replicate those gains.
Darren even suggests you identify those services you do best, which he defines as being able to perform with a high level of efficiency. But surely you should identify those services that you can perform most effectively—better yet, efficaciously—and that create the highest value.
If there’s that much efficiency to be gained, they are probably low-value services that should be outsourced (see the Stan Shih Smile Curve).
Peak efficiency is a sign of no innovation.
The same error is made when he claims the major factor driving realization is the existence of proper systems and processes. But this is incorrect. Price drives profit more than any other factor.
Further, he writes that his firm’s realization is over 100%, but that just means he’s still comparing price to hours x rate; it has nothing whatsoever to do with pricing commensurate with value, as he claims.
He also proclaims he’s not a proponent of throwing away timesheets, since they can catch scope creep, measure efficiency, benchmark against other firms, and allow him to manage what he can measure.
These are weak arguments for timesheets. If you’re catching scope creep from timesheets, it’s way too late to price it—you’re billing and ducking in arrears at that point, and by the hour. Project management is far more effective.
And the idea that timesheets measure the efficiency of a knowledge worker has been well destroyed in all of my books. This is illusion of control and one of the seven moral hazards of measurement.
This defense of timesheets is particularly amusing when compared to what he writes toward the end of the book:
Remember: Just because you’ve always done things in a certain way doesn’t mean you have to continue that tradition. If it’s not working, it’s not working. Abandon the old and make way for the new.
Except, of course, when it comes to the ancient tradition of maintaining timesheets.
Also, towards the end of the book, Gerber explains that Time is not money; time is life. If true, then why are we dividing a firm’s revenues and costs by life?
[And even if you still believe the old canard that time is money, all that means is we are dividing cost by cost if we use the hourly metric system].
There are other major areas of disagreement with the book. Their concept of a firm’s vision is too focused on what and how, not why. It’s far more effective to develop your firm’s why, letting that drive your what and how, consistent with Simon Sinek’s TED talk, and book Start With Why.
Gerber posits that there are six types of clients around which your entire marketing strategy must be based. But I find this unconvincing, and it could benefit from Occam’s Razor. Asking customers about their expectations would be more effective. Also, innovation is the firm’s job, as customers don’t innovate, they iterate.
Then Darren writes that clients are a firm’s greatest assets. But customers are not owned by firms, anymore than human capital is owned. Speaking of them as assets is inhumane and demoralizing.
The book does not contain any endnotes, a bibliography, or index. Outside of the few books and authors mentioned, it would be helpful if the authors shared the books that have shaped their thinking.
In conclusion, if you read this book, do so with this caveat: the book’s gap of not discussing the knowledge economy is simply too wide for me to overcome. It overshadows everything they write, and the logic traps them into the cult of efficiency rather than one of creating value.
We no longer live in an industrial economy where the talisman is Frederick Taylor’s enigma of efficiency and the “one best way.” A PKF is a human relationships-based entity, not a factory.
On the positive side, now that I’ve met Darren, there’s an opportunity for ongoing dialogue. If all goes well, we’ll get him to trash his timesheets someday.
Ron Baker - 12/27/2010
What is next for organizations that already provide unsurpassed customer service?
What do companies such as Disney, Ritz-Carlton, FedEx, Zappos, Nordstrom, among others, see as they peer into the future and strive to offer a value proposition to their customers that prevents them from falling into the so-called “commodity trap,” while still allowing them to maintain their leadership role as price makers, not takers?
One compelling hypothesis comes from Joseph B. Pine II and James H. Gilmore, in their book The Experience Economy, wherein they put forth a futuristic value curve for businesses, with the following echelon of customer value:
- If you charge for stuff, then you are in the commodity business.
- If you charge for tangible things, then you are in the goods business.
- If you charge for the activities you execute, then you are in the service business.
- If you charge for the time customers spend with you, then you are in the experience business.
- If you charge for the demonstrated outcome the customer achieves, then and only then are you in the transformation business (page 194).
PKFs are at top of the curve
We believe PKFs are already poised at the top of value curve, since they do offer their customers transformations, even though they may not think of themselves as doing so. To prove this, let us see how Pine and Gilmore define a transformation:
While commodities are fungible, goods tangible, services intangible, and experiences memorable, transformations are effectual.
All other economic offerings have no lasting consequence beyond their consumption. Even the memories of an experience fade over time. But buyers of transformations seek to be guided toward some specific aim or purpose, and transformations must elicit that intended effect.
That’s why we call such buyers aspirants—they aspire to be some one or some thing different. With transformations, the customer is the product!
The individual buyer of the transformation essentially says, “Change me.” (pages: 171-172, 177, 192).
Think of the difference between a fitness center, one that charges for membership, versus personal trainers. The latter earn more because they take personal responsibility for the outcome of their customer’s fitness regimen.
Professionals, such as accountants, financial planners, attorneys, and advertising agencies already enable many transformations for their customers.
For example, they can help their customers become millionaires, retire at a specific age, finance a child’s education, grow and enhance the value of a business and brand, and carry out a customer’s last wishes through estate and gift planning.
These are inherently personal transformations, guiding the individual into their preferred vision of the future—guiding them from where they are to where they want to be.
There is no similarity between this offering and a commodity or even a bundle of intangible services. You are literally touching your customer’s soul, forging a unique relationship with them virtually impervious to outside competition and commanding prices commensurate with the value of the results you are creating.
Our VeraSage colleague Brendon Harrex has taken this transformation strategy to heart, even adopting the language with his customers at the Harrex Group in New Zealand.
He recently wrote me an email detailing how the Harrex Group was deploying this strategy, along with other advanced value creating strategies—Daryl Golemb’s idea of ”emotional capacity,” offering pricing options, conducting an ”After Action Review” with customers, and utilizing the “Perpetual Fixed Price Agreement.”
It’s an excellent demonstration of how a firm can take Value Pricing to the next level by having the customer become the product, thereby creating—and capturing—a much larger proportion of value than merely offering services, or even experiences.
These concepts, obviously, are for firms that are well-along the path of Value Pricing. But for those who are, I think you will find Brendon’s observations below absolutely profound.
Hi Ron,
The purpose of this email is to provide you with some feedback on some of the more positive pricing conversations that have occurred since our telephone conversations with you.
- We have continued our use of pricing options. In general, every customer is provided with three service level options. Sometimes the service levels are differentiated by the amount of work required, and sometimes they are differentiated by the level of service, e.g., turnaround times, accessibility, etc.
- The Value Council is attempting to put a much greater emphasis on [Daryl Goldemb’s] “emotional investment” required to deliver to the customer’s expectations and we are using this language more in our pricing conversations.
- In several pricing conversations, I have talked to customers about the difficulty of pricing a product when the customer themselves is the product. Interestingly, customers identify very well with the sales hierarchy [proposed by Pine and Gilmore, see above].
Most customers definitely understand that they are seeking a transformation in themselves and I think the sales hierarchy helps them to understand where the value of this transformation sits in the scheme of things.
This conversation has also led on to interesting discussions on how we assess the success of the transformation. This is valuable as it greatly assists us in determining the customer’s “value points” which, of course, provide our priorities.
- We continue to battle with how to make our proposals less “transactional or service orientated” and more “relational or transformation orientated.”
As you are aware, customers make irrational purchasing decisions but look for rational measures to support these irrational decisions. We are continuing to work on this, however the best we have come up with is to try and shorten our proposals and present them in a sales meeting where much greater detail can be provided.
- We have fully embraced the concept of a value retainer. This has been very well accepted by our high value customers. Two examples are as follows:
- Last financial year we completed a large business restructure for Customer A and undertook their compliance accounting requirements. Their fee for the last 12 months was approximately $90,000.
They requested a meeting with us to discuss some concerns they had regarding our performance and pricing. Their key concerns were as follows:
- They did not clearly understand the value we had delivered.
- Because of the large nature of the project, they were not sure where it started and finished. This left them uncertain as to what fees they could expect to pay in the next 12 months.
- They did not clearly understand the difference between our accounting services and that of our competition.
I effectively ran an “after action review” with them. This enabled us to answer all their queries and clearly articulate the value we had provided.
In particular, I focused on the difference between strategically focused compliance services and retrospective score keeping.
In the example of Customer A, we agreed that their compliance services could be processed elsewhere for approximately $12,000. I advised that while we had not broken it down, our compliance services were priced at $18,000 (we were then only talking about $6,000). Once I explained the additional value we delivered for the extra $6,000, the customer got it.
We left the meeting having agreed a 3-year contract for $30,000 per year (inflation adjusted) payable in monthly installments (in advance!).
- Customer B started working with us in a strategic capacity approximately 12 months ago and at this stage, I became directly involved with their business. (Prior to this, they had used Harrex Group for compliance services only for an annual fee of $14,000).
Twelve months ago we agreed a fee of $30,000 and this involved us preparing a Business Life Plan for which we assigned an internal value of $8,000.
When we reviewed pricing with the customer this year, they increased the price from $30,000 to $36,000 (even though there is no Business Life Plan this year) and have committed to this for 3 years.
In addition to this, they want our assistance in clearly defining their vision, values, and purpose and creating a mechanism to align staff remuneration with the achievement of the business goals and vision. This additional project work will likely be between $10,000-$20,000 over and above the base line pricing agreed.
The concept of the perpetual service agreement has been very valuable to us—thank you!
I think agreeing 3 year contracts has enabled us to achieve greater margins, create more certainty for our customers, and has enabled us to more clearly define the boundaries of our work.
One of the great struggles in a value pricing environment is to ensure that our expectations are clearly aligned with those of our customers as without this, scope creep occurs more easily. We are finding that expectations are easier to align when you do not have to go back and renegotiate from the ground up every year, i.e., effectively our pricing discussions start on the third storey of the building, rather than at the ground level.
On reflection, I think that renegotiating a service agreement from a zero base every year is like demolishing the building we built last year and starting all over again. It seems to be a lot easier when we are able to build on the foundation that has already been established.
Because of this success, we can see 3-year contracts becoming a lot more common in our business and some of the scenarios we are currently in the process of applying this thinking to are as follows:
- Situations where there may be a large volume of work in one of the 3 years where this can be spread over a 3 year relationship, making the decision a lot easier and more palatable for the customer. (Obviously, if Year 1 is the spike year, you want to have a trusted relationship and/or an early exit payment agreed if the customer terminates the contract early).
- New relationships where the customer wants to walk with us a while and are happy to agree a base level of services before allowing us access to “the upper levels.”
We are also asking ourselves how we can be more transparent with regards to our services that are highly competitive, i.e., our compliance services priced at $18,000, when market prices these at $12,000. I have found it is a lot easier to have a discussion over the difference than it is over the whole amount.
Once again Ron, thanks for your assistance and we look forward to the continuing conversation with you.
Regards,
Brendon
Thanks for sharing your experiences here, Brendon. You have taken Value Pricing to an entirely new level.
No one can accuse the Harrex Group of offering a “commodity”!
Ron Baker - 08/21/2010
I’ll be hosting a Webinar for CPA Leadership Institute on Wednesday, August 25 from 1 pm to 2:40 pm (Eastern Time).
The topic is: Cross-Selling: What is Your Firm’s Lifetime Value to its Clients?
You can learn more at the CPA Leadership Institute’s Web site here, and even get a detailed outline of the Webinar, in pdf, here.
This topic takes me back to the late 1980s, when I began to seriously study Total Quality Service, as it was then called by Karl Albrecht in his book, The Only Thing That Matters.
This book had an enormous influence on my thinking (it’s one of my Top Ten Best Business Books), because it was TQS that led me to the study of Value Pricing.
It was an epiphany when I realized that billing by the hour not only generates lousy customer service, it’s also a lousy customer experience. No one likes to be surprised by price.
Studying TQS leads you into customer loyalty economics, and one of the metrics is always “What’s the lifetime value of a customer to your firm?”
The logic being that you need to sometimes ignore the math of the moment and make an investment in the relationship. This is also where the billable hour fails miserably, as pointed out brilliantly by VeraSage senior fellow Paul Kennedy in his essay on why timesheets are damaging to customer relationships and lifetime value.
But I believe there is a more important metric: What is the value of your firm to your customer?
This forces us to think about constant innovation, and offering services that can help customers through the various stages of their lives and business—from womb to tomb, so to speak.
I hope you’ll be able to join us for the Webinar, but if not read the Kennedy essay and any book by Karl Albrecht.
Ron Baker - 04/21/2009
Ed Kless - 02/24/2009
Below are the slides that Ron Baker and I have used when delivering the Value Pricing Boot Camp. This program has been offered from time to time for business partners of Sage. If you are interested in attending a future event, please email me at ed.kless *at* choosegreat.com.
Enjoy!
Ron Baker - 07/22/2008
I will be conducting three Webinars for Business Expert Webinars (BEW) in the coming months.
BEW was founded by Lee B. Salz to bring together a community of business experts comprised of best-selling authors, award-winning speakers, and business gurus, designed to share their secrets of success.
I was honored when Lee invited me to participate. The Webinars are designed for a generic business audience, not just professional firms; the type of program professionals could recommend their business customers attend.
My three programs will be:
Pricing on Purpose: Creating and Capturing Value. Friday, August 8, 2008, 3-4pm Eastern Time.
When Debits Don’t Equal Credits. Wednesday, September 24, 2008, 12-1 pm Eastern Time.
The Experience Economy: Succeeding in Today’s Dynamic Economy. Wednesday, October 8, 2008, 4:30-5:30 pm Eastern Time.
I hope you can join us, and check out the other programs BEW conducts.
Ed Kless - 04/30/2008
In presenting Service Level Agreements to Sage partners over the last few years, I always believed that I was doing a more than adequate job explaining the concepts required to make them successful (three levels and a hook). However, it was not until recently that I think I have stumbled across the words that drive the concept home.
Most Sage partners do not have a specific on-going service agreement with their customers. Rather, they have a list of customers who call in when they need them. A partner could have 250 or even 1,000 of these types of relationships. Here is the problem (and finally the right words) — You cannot plan capacity when your customers are on a pay-as-you-go basis.
As I think about this, my bet is this affects lawyers more than it does accountants. Accountants have the advantage of a government sponsored impending annual event. (Translation, a tax return.) In software technology, we have no such event. Upgrades are 18 to 24 months apart and are optional in most cases anyway.
Back to my main point — You cannot plan capacity when your customers are on a pay-as-you-go basis — this phrase really has seemed to spark interest in creating service level agreements more than anything else I have said, so I thought it was worth passing along.
Sorry for the ramble, but my point was to let you know that sometimes it takes years find the words that really work.
Ron Baker - 02/24/2008
I’ve been having an e-mail discussion with Bob Harper, of More Software in the UK, during this past week over an article he wrote about the airplane analogy we use here at VeraSage.
Officially, it’s known as the Adaptive Capacity Model, which I used originally in The Firm of the Future to illustrate Baker’s Law: Bad customers drive out good customers.
A copy of the airplane diagram is one of the most frequent requests we get (see diagram below). It’s an enormously powerful analogy. We actually recommend that firms slide it across the desk to each customer, at least once a year, and ask “Where would you like to sit in our airplane.”
The model has implications for strategy, customer selection, de-selection, allocating capacity to different customers, offering, communicating and capturing various levels of value depending on where the customer wants to sit, and even more. It’s a powerful metaphor.
We’ve even had discussions about the model’s implications for project management (each project is a different plane, according to Ed Kless), team member leadership (each team member is an airplane, ala Dan Morris). You can see the endless ways you can expand this analogy.
But I’m a firm believer in Occam’s Razor--don’t unnecessarily complicate the theory. The reason the airline diagram is powerful is because almost everyone has flown. They know they have a choice of how much to pay and where to sit. They understand different customers get different levels of service and pay radically different prices, even for the same flight. But it’s not the same flight!
As a 1K flier on United, I recently flew to Spain on business. For me, that flight was vital, for if I didn’t arrive on time, the loss of goodwill would be incalculable. But for the leisure traveler, they’re not as time sensitive. Huge difference in value, even though it doesn’t cost United any more to fly me than him.
Also, people understand they may get bumped—actually, bribed with a free flight—from a flight to accommodate a 1K flier, or even sometimes a 1K flier gets bumped to accommodate an even more valuable flier, say a One Million Mile flier.
There are many implications, but I want people to read into the model what is important to them. For one firm leader, they may have too many people in the back of the plane, so it may inspire them to shed customers and free up some capacity. For others, the message may be they have to do a better job differentiating customers based on various levels of value.
Here is what I wrote to Bob after a few emails that I thought were getting too complex:
Bob,
You can see how easy it is to take this metaphor of a plane to extreme levels. Some of our VS Fellows think that each team member in the firm represents a different plane, with it’s own capacity, competency level. We can take this analogy too far.
Bottom line is this: Any firm can only handle so many customers, given its existing size. What we refer to as the firm’s Theoretical Capacity.
- How many customers do they want in each class? This is the firm’s Optimal Capacity, which is probably 60-70% of its Theoretical Capacity.
- How much capacity should they reserve for their best customers and team member down time?
- When should they stop adding capacity for back-of-the plane customers?
- What is the value proposition for each section of the plane?
And here’s the biggest question of all: Where does the customer want to sit?
The firm DOES NOT decide this, the customer does. How? Ask them. We have firms who slide the picture of the plane over to the customer and ask, “Where would you like to sit in our plane.” This forces the firm to communicate the value proposition for each section of the plane, just like the airlines have (quite effectively I might add).
Keep it simple with this. I know from experience how we can add many layers of complexity that don’t mean a whole lot. People will draw their own conclusions from the metaphor, that’s the beauty of thinking for one’s self.
Ron
I’d love to know what the Airplane diagram meant to you when you first saw it, and how it has changed how your firm views it value proposition, pricing, customer selection, etc.
As Aristotle said: “But the greatest thing by far is to be a master of metaphor. It is one thing that cannot be learnt from others; and it is also a sign of genius, since a good metaphor implies an intuitive perception of the similarity between dissimilars.”
Ed Kless - 11/18/2007
It is not often that we at VeraSage comment on medical practitioners. This is not because we do not view them as knowledge workers, rather, it is because the system of third party payers — insurance companies (ugh) and governmental programs (double ugh) — is no where near a free market and therefore such examples are many times hopelessly flawed.
That being said, I recently came across a blog post from TechDirt which demonstrates that at least one physician out there is willing to be innovative. Here is a little of the text:
Dr. Jay Parkinson, a Brooklyn doctor, brought the house call back — but it’s been updated for the times. Parkinson has started a new medical practice that centers around instant messenger, email and house calls. During regular business hours, he is available to his patients for online medical consultations. Dr. Parkinson then pays the patient a house call only if it is really necessary (you get two included house calls in the fee), but most issues can be addressed virtually.
Kudos to Dr. Jay Parkinson! As a native Brooklynite myself, he makes me proud.
Ron Baker - 08/25/2007
* Don’t confuse PKF in Texas with PKF the way Ed Kless has defined it—that is, Professional Knowledge Firm. Here’s why.
We see so much dysfunction in so many firms, it’s always great to see one do something right. In the Aug 20-Sept 9, 2007 issue of Accounting Today, there’s a Special Report insert titled Tax Season 2007: Gauging Results. On page 18 is an article by Anjana Jackson, a manager in the Tax Department of Pannell Kerr Forster of Texas, P.C. (hereinafter PKF) titled “Reclaiming Tax Season.” It’s encouraging, an discouraging at the same time.
She states one of the firm’s core values is “People are the Key to our Future.” So far so good. But this is what particularly caught my eye:
In 2007, we wanted to strengthen our commitment to provide our employees meaningful challenges in their career growth (a core value) and to progress toward a more consultative mindset. We felt our largest barrier to achieving the success we desired was our client base. In order to groom consultants and provide challenges for our employees, we examined the types of projects our clients asked us to perform, the time commitments, and the level of learning and career satisfaction associated with a client.
The result was an aggressive decision to “disengage” a number of clients that scored low in these areas. This was a huge leap of faith. The reduction of our existing client base represented almost 25 percent of our 2006 charge hours. The impact of upgrading our client base was a reduced busy season workload of seven percent, while improving employee morale and increasing our net fees by 10 percent.
Hallelujah! I wonder what took them so long to perform this analysis? We have been preaching for over a decade that when it comes to customers, less is more. Not only have I coined Baker’s Law—Bad customers drive out good customers—we at VeraSage also use the Adaptive Capacity Model, utilizing the metaphor of a Boeing 777 airplane for your firm. This forces firms to strategically think about their capacity allocations among different value segments of customers, while always reserving capacity for its most valued customers (see article).
We see far too many firms that will actually add capacity for back-of-plane customers—that is, D and F customers (F, of course, standing for “friends and family"). No airline would think of doing this. Once they sell a certain number of Priceline.com (i.e., cheap) seats, that’s it, they no longer will stuff the back of the plane. This is why we call it the “adaptive capacity model” because firms can change—dynamically and strategically, in response to market demand—where they move the bulkheads in their airplanes. Our colleague Paul O’Byrne loves making the point that if CPAs ran airlines, the second story on the Boeing 747 would be on the back of the plane.
So why do nearly all firms have too many customers? We hear two major justifications, both of which are specious upon serious reflection. First, we need this low level work to provide on-the-job training to our youngest team members. Second, we make money on this work, it contributes to our overhead.
The first reason is absurd. Today’s knowledge workers go through at least five years of college, are incredibly intelligent and motivated to learn. Why give them uninspiring work? Would CPAs make surgeons pierce ears? The second reason is just as absurd. Sure, we make money on this low-level work because we are knowledge firms, we make money on practically everything we do (unless we are horrendous pricers). Surgeons could also open a kiosk in the mall and provide body piercing, and most likely they’d make money too. It’s just not the best use of their talent and intellectual capital.
If a firm truly wants to develop its younger team members into a consultative mindset, rather than compliance drones, that should start from day one, not after they’ve performed some hazing ritual of doing crap works because the partners paid their dues and they’re going to make sure the youngsters pay theirs.
And this is where I find the PKF article discouraging. She still speaks of charge hours. How can we create entrepreneurial CPAs if they are still being taught they sell time and have to account for every six minutes of their day? There is such a disconnect here. Team members need to be taught that what they are really selling is intellectual capital, so they will be incentivized to develop and contribute IC to the firm. This focus on hours is holding these firms back from developing the kind of team member mentality they all say they want. Why can’t they see this? Is the elephant in the room invisible?
She also writes the old standby: “We truly believe that our most valuable asset is the people who work for us...” People as assets (or resources), how demeaning and dehumanizing. The beginning of wisdom is using the correct language. When are firms going to start referring to their knowledge workers as human capital investors, or better yet, volunteers?
We live in a knowledge economy, but one would never know it studying the practices, procedures, language and leadership of nearly all firms. They treat their people more like factory workers, providing them uninspiring work along with mediocre leadership. Is it any wonder we have a talent crisis in the professions? Today’s younger generations know they are knowledge workers, even if the firms that employ them do not.
PKF provides lunches and dinners and 20 minute chair massages during busy seasons. All very well and good. But until it realizes its people are knowledge workers I’m afraid all these efforts, while necessary, are hardly sufficient. Until it escapes the shackles of The Old Practice Equation (leveraging hours and hourly rates) and embraces The New Practice Equation as defined on the top of this Web site, its destined to remain a Firm of the Past.
I applaud PKF’s efforts on customer deselection and recognition that it needs to provide challenging work to its knowledge workers. I only wish it would follow that very reasoning to its logical conclusion and embrace The Firm of the Future. Until then, we’ll have to look elsewhere for leadership and real, meaningful change in the profession.
Ed Kless - 01/03/2007
It is my pleasure to present the first VeraSage Trailblazer from the technology arena - Koenig Software Systems, LLC of Houston, TX.
Ken Koenig and Linda Kay attended Sage Software’s Project Management and Value Pricing Boot Camps in 2006 and we inspired to create consulting agreements based on the Adaptive Capacity Model we teach at VeraSage. Despite being warned that they should start by developing the normal model first, they opted to develop their high-end Black Card offering first. We are sure glad they didn’t listen to us.
For their whole story, visit the post on the Trailblazer tab.
Ron Baker - 01/02/2007
Matthew Tol from Australia began E-mailing me in November, 2006, after coming across the VeraSage Web site. We had a fantastic exchange on the importance of customer selection, grading, pricing and the total ineffectiveness of timesheets. Matthew had written a couple of articles before and during our exchanges, and while we may not agree on everything, I’m happy to report that his firm will be trashing timesheets June 30, 2007.
You can read our entire exchange, including Matthew’s articles, in our Trailblazers section (it’s a long post!).
Congratulations again Matthew on becoming a Pioneer in our profession.
Ed Kless - 11/24/2006
Recently, Doug Deane, a long-time and outstanding Sage Software partner and I had an excellent dialogue via email on the subject of value pricing. Doug was kind enough to agree to allow me to create the following document of the exchange in the hopes it will assist anyone struggling with value pricing in the software implementation industry.
Instead of just publishing the emails, I arranged it to read like a Socratic dialogue.
Doug expresses many of the perceived challenges of moving to value pricing in the technology industry.
Enjoy!
Download the file
Ron Baker - 04/04/2006
We hold these truths to be self-evident, that all men are created equal,…
—Thomas Jefferson, The Declaration of Independence, July 4, 1776
Whenever anyone quoted those immortal words from the Declaration of Independence—all men are created equal—Federalist Fisher Ames, an ardent opponent of Thomas Jefferson and a superb congressional orator, would retort: “And differ greatly in the sequel.”
While Fisher’s admonishment might not be the best way to administer a country’s laws—where all should be treated equally—it is profound when it comes to understanding no two customers are equal. A German Proverb teaches, “He who seeks equality should go to a cemetery.”
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