VeraSage

Timesheets on the defense Down Under

Ron Baker - 07/27/2010

Thanks to John Chisholm, some of Australia’s legal firms are taking Value Pricing seriously and establishing value councils, while a few are placing the timesheet on the dust-bin of history.

One of those firms is the Perth firm Lavan Legal, with 20 partners and 200 team members. It has appointed a 10-person pricing committee. As this recent article in The West Australian makes clear, Lavan is planning to trash its timesheets.

John and I have had the pleasure of working with Lavan, and the managing partner, Greg Gaunt, and the deputy managing partner Dean Hely, are both visionaries in the legal profession.

Lavan does major litigation, and although they are still making their way towards pricing this work based upon value, early results are encouraging.

There’s another firm in Perth going down the same road, as well as other firms throughout Australia.

Another firm with an innovative business model is Marque Lawyers, founded by Michael Bradley. I’ve had the pleasure meeting Michael and he truly has a Zen perspective on the practice of law—a refreshing and optimistic point of view about the future.

Michael was recently interviewed by Lawyers Weekly, where he linked timesheets to depression in the legal profession. 

Two other articles in Lawyers Weekly discussed the VeraSage Institute’s Quest to bury the billable hour and trash timesheets: Take timesheets to the gallows and The man on a timesheet-killing mission.

Earlier this year in May, The Honorable Wayne Martin, Chief Justice of Western Australia, delivered a speech on the perils of both the billable hour and the timesheet. You can read the Judge’s speech here.

Obviously, something is going on Down Under.

It’s not enough to advocate that firms move to Value Pricing. The timesheet must be attacked as well.

After all, it is the timesheet that is the ultimate cancer, because it is the wrong measuring device for intellectual capital.

Thinking that we are measuring the efficiency, let alone the value, of knowledge workers by denominating everything into hours is simply ludicrous.

It’s the equivalent of arguing that Jonas Salk’s polio vaccine is valuable to the extent of the time it took him to develop it. Or that we could make Einstein more efficient if he had only completed a timesheet. Otherwise, how would we know he was on budget?

With firms like Lavan and others in Australia, true business model innovation is taking place.

By ridding their firms from the hegemony of timesheets, these firms are showing real change is possible, not just lip service about “alternative fee arrangements.”

If you are still are tracking time to justify your firm’s pricing, or to measure the “efficiency of your team,” you are billing by the hour and not doing anything new since timesheets were introduced in 1919 to the legal profession.

You are simply “selling time” just as much as any union employee. The world has changed since 1919.

Real innovation will only come when timesheets are trashed. And Australia may just be ahead of the United States, at least in larger firms.

Congratulations to Lavan Legal, a Trailblazer Firm in the making.

Chef’s Table Offering

Ed Kless - 07/23/2010

John Shaver of Aries Technology in Knoxville and VeraSage Trailblazer wrote Ron Baker and I about an idea he is noodling:

Since Service Level Agreements (SLAs) were killed earlier this year, we now refer to customer agreements as Knowledge Transfer Agreements (KTAs) since that title is a much more accurate statement of what we really do for customers.

In the spirit of being creative, I’ve come up with a list of KTA levels based on a steakhouse/restaurant theme.

• A level:  The Palm (average dinner for 2 is $350)
• B level:  Ruth’s Chris ($200)
• C level:  Outback ($75)
• D level:  Golden Corral ($25)
  

We have a "black card" level as well.  It’s called Chef’s Table.  One of my high school classmates (Todd Gray) owns a restaurant in Washington, DC called Equinox (which is consistently ranked in the top 5 restaurants in the DC area).  Todd has a table that is literally in the kitchen.  The normal waiting list for that table is several months.  You pay $350 per person (plus wine pairing if so desired) and are served whatever Todd thinks is the freshest and best quality at that particular time.  You have no idea what you will be eating; you just know it will be the best.

For about $1,000 (if you get the wine pairing), all you know is that you will be eating something and drinking some type of wine.  What a concept!

You might be thinking:  how could I ever get a customer to pay for Chef’s Table?  For us it means becoming WAY more than just a software consultant/vendor.  It means that we must create an incredibly valuable experience for our customers.  Just like Todd does at Equinox.

All of our customers are in the small- to mid-sized (SMB) space so some examples of what I consider to be part of a Chef’s Table KTA are:

• Assist them with implementing a Results-Only Work Environment (ROWE)
• Teach them how to use project management
• Reduce their Information Technology costs by moving to Google Apps
• Assist them with implementing a strategy to leverage social media
• The list is almost endless!

Does anyone else offer their own version of Chef’s Table?  And what does your KTA look like?

Great stuff John!

Price Options for a Newspaper

Ed Kless - 07/20/2010

A Sage Partner and friend of mine, Steve Bond from TAG, sent me an example of pricing options he received from a newspaper. The options were as follows and presented in this exact order:

• 1 Year Online & Print Subscription $149.00
• 2 Year Online & Print Subscription $385.39
• 6 Months Online & Print Subscription $148.34
• 3 Months Online & Print Subscription $83.74

Two questions: 1) Do you think this was intentional or just haphazard? Why or why not? and 2) Which option would you have chosen?

Note: This post has been altered from its original per a request.

Great Moderates In History?

Ron Baker - 07/14/2010

Evolutionary biologists have proven that the more adapted (i.e., comfortable) you are in your existing environment, the less able you are to adapt to environmental changes.

Struggle is good for us. Rigidity is what organizations manifest when they are faced with either superior competition or outdated business models.

This is the history of business. New ideas, inventions, and business models from the tinkerer in the garage change the world, while rendering obsolete the existing modes of production, infrastructure, and business models.

The automobile replaced the horse and buggy, the calculator replaced the slide rule, and the personal computer replaced the typewriter, iTunes replaced CDs, and so on in a never-ending “perennial gale of creative destruction,” as described by economist Joseph Schumpeter.

Harvard professor Clayton Christensen writes:

Generally, the leading practitioners of the old order become the victims of disruption, not the initiators of it.

Change and creativity always take us by surprise. If it didn’t, we wouldn’t need it, because we could simply plan on it and incorporate it into our existing strategies and processes. Nassim Nicholas Taleb makes this very point in his book, The Black Swan:

We do not know what we will know. Invention and creativity is always a surprise. If we could prophesy the invention of the wheel, we’d already know what a wheel looks like, and thus we could invent it.

The professions, however, have been slow to adapt to the realities of an intellectual capital economy. Never before has this mentality been such a hindrance to success in today’s rapidly changing, globalized marketplace.

Business Model Innovation

In a meeting with professor Clayton Christensen, former Intel CEO Andy Grove made the point “that disruptive threats came inherently not from new technology but from new business models.” Perhaps this is why Grove titled his own book, Only the Paranoid Survive.

I am defining a business model as follows:

How your firm creates value for customers, and how you monetize that value.

Clayton Christensen’s partner in his consulting firm Innosight is Mark W. Johnson, author of the compelling book Seizing the White Space. He points out that most successful innovative business models are forged by start-ups.

Johnson studied approximately 350 business model innovations in the past ten years, with more than 30 percent being enabled by Internet technology. Fourteen companies founded since 1984 have entered the Fortune 500 between 1997 and 2007 through business model innovation, including:

• Amazon.com
• AutoNation
• eBay
• Google
• Qualcomm
• Starbucks
• Yahoo!
  

Thinking about the history of innovation, creative destruction, and business models in the context of professional knowledge firms, in combination with the radical business model proposed by VeraSage—from “We sell time” to “We sell intellectual capital"—the diagram provides an interesting look at where any firm can be at a given point in time. Since competitive advantages are built based on effectiveness, not efficiencies, I have chosen to highlight each as the axes of the diagram.

Luddites: Firms that resist technological advances and other innovations that are merely table stakes risk being Luddites. They have both low efficiency in doing things right, and low effectiveness at doing the right things—not a bright future.

Fortunately, not many firms are in this category. If you are here, you are dead already and the funeral is a mere detail.

Buggy Whips: Usually when an industry is at the apogee of its efficiency, it is at risk of being made obsolete by new technologies or business models. As Peter Drucker said, no amount of efficiency gains would have saved the buggy whip manufacturers from the automobile.

Innovators: As George Gilder wrote in Forbes, “Knowledge is about the past; entrepreneurship is about the future. If creativity was not unexpected, governments could plan it and socialism would work. But creativity is intrinsically surprising and the source of all real profit and growth.”

Innovators are firms that are willing to invest some of today’s profits into tomorrow, while at the same time sacrificing efficiency for effectiveness.

Innovation, creativity, and Total Quality Service are the antithesis of efficiency—ideas such as Google Time (where Google employees can spend 20% on innovation), experimenting with new ideas, investing in education, all reduce efficiency metrics.

But if firms do not make these essential investments they are simply coasting on their existing intellectual capital, and in today’s economy, knowledge becomes obsolete more rapidly.

Humpty Dumpty: This is a precarious future. This represents firms that are highly efficient and effective.

I am arguing if you are here, you better be sliding back to the Innovators position and start sacrificing some of that efficiency for innovation and making the firm more valuable to its customers.

Humpty Dumpty eventually falls and ends up like the industries mentioned under Buggy whips. Efficiency is not the answer. Effectiveness is.

Firm of the Future or Firm of the Past?

Embracing a new business model requires leadership and vision. It requires knowing you are doing the right things, not just doing things right.

It requires focusing the firm on the external value it creates for the customer and simultaneously building the type of firm people are proud to be a part of and contribute to—the sort of organization you would want your son or daughter to work for.

It requires a sense of dignity and self-respect that you are worth every penny you charge, and you will only work with customers who have integrity, whom you enjoy, and respect.

It requires an attitude of experimentation, not simply doing things because that is the way it has always been done.

It requires less measurement, less fear, and more trust. It requires boldness and risk-taking—there has yet to be a book written titled Great Moderates in History.

As science fiction writer William Gibson quipped, “The future is here. It’s just not widely distributed yet.”

Skeptics will call for an incremental approach, which is how they maintain the status quo.

But how will these optically challenged skeptics make incremental changes to an existing business model that is already dying? By making it incrementally less dead?

The late economist John Kenneth Galbraith wrote, “All successful revolutions are the kicking in of a rotten door,” not—I would add—merely oiling the hinges to make it swing more efficiently.

There is no limit to what we can achieve, as long as we do not lose faith in ourselves. It is the difference between remaining a firm of the past, or, like a chrysalis, emerging as a firm of the future.

The choice is yours.

Ask VeraSage: Accounting for Intellectual Capital?

Ron Baker - 07/13/2010

I’ve been having a dialogue with a consultant for the last two years, and we recently had a very interesting discussion on intellectual capital (IC).

I thought you might find it of interest, since IC is what the professional knowledge firm is all about.

Our exchange focused on whether or not it is possible—or even desirable—to attempt to value IC, and perhaps placing that value on the financial statements, or a set of parallel statements.

Doug was not advocating this approach, just questioning the validity of doing it, and what the impact would be. I’ve had many other discussions with consultants and CPAs about, for instance, placing the value of a company’s brand on its balance sheet.

Should we account for IC, like GAAP accounts for transactions? Should IC be on the financial statements?

We both conclude no. Here’s why.

Hi Doug,

We do use IC as an integral part of a professional firm’s business model, which is why we refer to them as Professional Knowledge, not Service, Firms. PKFs sell IC, not time.

As for measuring IC, I find the work of others in that area interesting, and have met my share of firms that offer formulas and frameworks to value IC. All fascinating, but I’m still trying to answer, “What’s the point?”

Some insist they want IC to be put on the firm’s financial statements, which will and can never happen, since accounting is designed to capture value after a transaction, not value it before hand.

You certainly could devise parallel financials for IC, but again, what’s the point? The argument is to force managers to think about it, value it, etc.

But it seems to me that this is the “What you can measure you can manage mentality,” and with IC, effectiveness is always and everywhere more important than efficiency (the latter of which is always a measurement, where the former is always a judgment).

Since value is subjective, any formula or model for IC will be flawed from the get go. Not that it’s not a worthwhile exercise, such as how Interbrand values the world’s leading brands, but it’s the illusion of accuracy and precision. I’ve seen companies pay well over IC value calculations because value is subjective.

So, I come back to what’s the point of this? What’s the service being offering by valuing IC? What’s the value of doing so? I don’t think it’s as obvious as IC folks make it out to be. As you know, I wrote an entire book, Mind Over Matter, on this topic, but didn’t try to value IC—it can’t be done with any reliability.

Thanks Doug, look forward to your thoughts.
Ron

Thanks very much, Ron. 

This is exactly the kind of response I was hoping for—informed and critical. I’m slowly committing Mind Over Matter to memory, so I have deep respect for your opinions. 

I have a lot of skepticism myself. I take your point about accounting being the trail of the past. I have heard the argument that by putting NPVs on assets, is bringing the future into the present, and isn’t it true that IC is exactly about the future, and that is why [we need] a breakthrough in accounting? It is supported by IASB standards on intangible assets and impairment, which also track with FASB standards 38 & 38.

But the IC side intrigues me, because so many people believe there is such a need to recognize (and quantify and monetize) your subtitle (intellectual capital is the chief source of wealth). I think this belief is even more strongly held in the wake of the debacle over people pumping up risky underpinnings (lousy mortgages, among others) into highly leveraged clouds of crap. A wealth creation engine based on human knowledge, experience, relationships, performance, and results seems like a more positive economic foundation. But how to capture, how to harness? 

Thanks again for your quick and thoughtful response. One of these days I’ll buy you a beer, or a glass of your favorite wine

Cheers, and great thanks,

Doug

Hi Doug,
I understand the argument, my problem is knowledge is also a social construct—it simply cannot be quantified, tracked, and put into a formula.

There is certainly value in valuing IC for a business sale, and indeed that is what happens. This is why accountants call the sales price over the book value “goodwill"—just a word that describes their ignorance, i.e., their inability to value an enterprise, only capture it after a transaction takes place.

But even formulas for IC won’t capture the subjective value of an enterprise. How many times have you seen a company pay way above a company’s value, as assessed and computed by business valuators? It happens a lot, and that’s because value is subjective.

And no, I do not think putting NPVs on assets is bringing the future into the present. Accounting can’t do that, and even if there existed formulas, they would be full of errors and inaccuracies.

Here’s another reason: knowledge is actually about the past, whereas entrepreneurism is about the future, and you can’t capture the Black Swans of entrepreneurialism by formulas. No amount of sophisticated IC formula could have predicted, captured, or harnessed eBay or Google. It takes the
risk-taking of entrepreneurs to create new wealth. Anything we can capture, measure and harness is almost by definition about the past that is already dying.

I’ve come to the conclusion that we’ll never be able to measure IC. So what?

We know it’s there—like dark matter in the universe—but there are too many variables. It’s spiritual, not material—meaning you can’t measure it.

To believe otherwise is the materialist fallacy—that everything needs to be measured to be understood. It doesn’t work—see the USSR, Cuba, North Korea and any other communist country.

This doesn’t mean we should ignore IC, only that trying to measure and value it is futile—like plunging a ruler into an oven to determine its temperature. It’s the wrong device.

There’s lots more to say on this topic, but it does make my brain hurt.
Ron

Doug made the final salient point about IC, what Joseph Schumpeter called the Creative Destruction of capitalism:

The key point is that the value does not arise from the accounting of it, however elaborate the accounting scheme might be, but rather in the context of a marketplace that is focused on performance and results, enhanced by a skunkworks generator, etc. 

Would love to hear your opinions on this topic.