Are You a Diamond Cutter?

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Do you cut diamonds in your role? No, I recognise that we’re not really jewellers – we’re dealing with far more valuable and precious things than they ever do.

When someone comes into your business, they can be seen as either an uncut diamond or an unset gem. How you manage their induction and culturisation within your business will determine the sparkle and presentation that they eventually offer to you and the customers they deal with.

Many firms have the archaic concept that they can just give someone a computer and a phone and “let them at it”. With respect, they will then wonder why they have staff turnover issues and the morale and culture in the firm is not great or even toxic.

Selecting the uncut diamonds to bring into your firm is both an art and a science. It requires a deep knowledge and understanding of not only where you are but also where you want to be – as a firm and as the whole team within the firm.

Recruiting someone merely because they have a pulse and a degree/experience ain’t a guarantee of success. Getting to know what motivates them, what matters to them and letting them see the same about you (both at firm level and as individuals who make up the firm) is going to enable a far more successful/less stressful introduction.

I know in my firm, we take at least 3 meetings with other team members before I even get a look at the candidate! If anyone has reservations, they are tabled and addressed. We need to remember that everyone needs to work together and the new hires will either add to or detract from the culture that you have worked hard to establish (or are working hard to improve!) – getting it wrong can be a disaster.

The process of taking an uncut diamond (or even a rough diamond) to a sparkling gem as per Wikipedia – take the following and apply it to how you deal with your people – from initial assessment through the process of refining and cutting to produce a valuable gem that people want:

Mined rough diamonds are converted into gems through a multi-step process called “cutting”. Diamonds are extremely hard, but also brittle and can be split up by a single blow. Therefore, diamond cutting is traditionally considered as a delicate procedure requiring skills, scientific knowledge, tools and experience. Its final goal is to produce a faceted jewel where the specific angles between the facets would optimize the diamond luster, that is dispersion of white light, whereas the number and area of facets would determine the weight of the final product. The weight reduction upon cutting is significant and can be of the order of 50%. Several possible shapes are considered, but the final decision is often determined not only by scientific, but also practical considerations. For example the diamond might be intended for display or for wear, in a ring or a necklace, singled or surrounded by other gems of certain color and shape.

The most time-consuming part of the cutting is the preliminary analysis of the rough stone. It needs to address a large number of issues, bears much responsibility, and therefore can last years in case of unique diamonds. The following issues are considered:

The hardness of diamond and its ability to cleave strongly depend on the crystal orientation. Therefore, the crystallographic structure of the diamond to be cut is analyzed using X-ray diffraction to choose the optimal cutting directions.
Most diamonds contain visible non-diamond inclusions and crystal flaws. The cutter has to decide which flaws are to be removed by the cutting and which could be kept.
The diamond can be split by a single, well calculated blow of a hammer to a pointed tool, which is quick, but risky. Alternatively, it can be cut with a diamond saw, which is a more reliable but tedious procedure.

After initial cutting, the diamond is shaped in numerous stages of polishing. Unlike cutting, which is a responsible but quick operation, polishing removes material by gradual erosion and is extremely time consuming. The associated technique is well developed; it is considered as a routine and can be performed by technicians. After polishing, the diamond is reexamined for possible flaws, either remaining or induced by the process. Those flaws are concealed through various diamond enhancement techniques, such as repolishing, crack filling, or clever arrangement of the stone in the jewelry.

When having a read through the process outlined above, it occurred to me that the way we treat our uncut diamonds is vitally important to the outcome of the final gem. We also need to recognise that the setting into which the gem is going to be placed needs to be carefully considered – this has a big bearing on the design of the cutting process.

But, do we really adopt this process in the firms we run? Do we really value our people as potential gems worthy of admiration and even as objects of (for us vainglorious types), envy?

Or do we treat them as rocks – a commodity which is generally processed roughly (if at all) and not valued?

I know how I view this process. The jewellery bench is a wonderfully creative and deeply satisfying place to work. Far better than a quarry.

File Under “You Can’t Make This Up”

This last week from the Business Insider: Minnesota Lawyer Billed Client For Having Sex With Her.

This is clearly an extreme, but it does support our contention that the ABH (Almighty Billable Hour) leads to immoral and unethical behavior.

Book Review: Models. Behaving. Badly

Emanuel Derman has written a terrific book for explaining the difference between models, theories, and intuition.

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The author grew up in Cape Town, South Africa, when apartheid was at its peak in the 1950s and 1960s, came to the US in the mid-60s, worked as a theoretical physicist, then as a “quant” at Goldman Sachs.

I can quibble with some of his political and economic views, such as the claim that the extreme left and right are equivalent, which is nonsense. I’d rather live under a Italian fascist than a communist. And his contention that capitalism is not capable of self-regulation, Wall Street overshoots in its greed, etc. Not once does he mention government failure when discussing the financial meltdown of 2008.

These quibbles aside, his dissection of the differences between a model and theory is fascinating, one that I wish I had read a lot sooner. This will be a very abbreviated review, just to summarize the major differences between theories and models, which I believe will be incredibly useful in our work.

The author’s major purpose in the book is to explain the three ways of understanding the world: theories, models, and intuition.

Humans worry about what’s ahead, and models and theories are a way of foretelling the future, and controlling it. We need theories and models because of time (the world is not stationary, and we must plan for the future).

Theories attempt to discover the principles that drive the world; they need confirmation, but no justification for their existence. They must stand on their own two feet. A theory can become a fact; it is deep; whereas a model is shallower. A theory doesn’t simplify, it becomes indistinguishable from the object itself.

We advance by mounting new theories atop previous facts. If those theories prove correct, they become facts too.

This is why the author loves what Goethe wrote in Maxims and Reflections:

The ultimate goal would be: to grasp that everything in the realm of fact is already theory.

And:

There is nothing so terrible as activity without insight.

Models stand on someone else’s feet. They are metaphors. They simplify, and can only capture partial truths, not entireties (the model is not the object; think of a model airplane vs. a real one; a model is a toy!).

Models always describe one thing relative to something else (think of the VeraSage Adaptive Capacity Model of the Boeing 777 airplane as a firm).

While theories tell you what something is, models tell you merely what something is like. Models fail and theories are never perfect (always subject to falsification). Models save mental labor—they are a little language.

A model grounded in a theory can have more power than either alone.

Intuition is more comprehensive; it unifies the subject, and plays a major role in the discovery of nature’s truths. It also requires common sense and ethical principles.

Einstein called intuition “a sympathetic understanding of experience.”

The author spent 17 years extending the Black-Scholes model, the most celebrated model in economics:

Our knowledge about the behavior of stock markets is much sparser than our knowledge about how egg whites turn fluffy. Fluids and egg protein don’t care what people think about them. Markets and stock prices do. This makes models usable but simultaneously limits their usefulness.

He states that financial modeling is not the physics of markets, which is absolutely true. This is why Austrians wanted to study human behavior first (Ludwig von Mises called it Praxeology), then work up to macroeconomic principles.

What’s interesting is his contention that

Economists for the most part have never seen a genuine theory…for people have proved difficult to theorize about. Economists falsely believe that rigor can replace fact and intuition.

Economists are said to have “physics envy,” a joke I believe this author would agree with.

He calls the Efficient Market Hypothesis a model, not a hypothesis. Austrian economists don’t subscribe to the EMH, but rather, as Rory Sutherland says, the Cool Market Hypothesis—markets just do things that are cool.

I’m not sure what the author’s opinion would be on the subjective theory of value? Is that a theory, or intuition, or both? He does write:

Value is determined by people, and people change their minds.

The movements of stock prices are more like the movements of humans than of molecules. It is irresponsible to pretend otherwise. There are no genuine theories in finance. Financial models are always metaphors.

I also love this advice:

Whenever we make a model of something involving human beings, we are trying to force the ugly stepsister’s foot into Cinderella’s pretty glass slipper. It doesn’t fit without cutting off some essential parts. You must start with models but then overlay them with common sense and experience.

And:

To confuse a model with a theory is to believe that humans obey mathematical rules, and so to invite future disaster.

Here’s a list that distinguishes the characteristics of models with theories

Models
Are made
Require a modeler
Fail
Simplify
Shallow—a little language
Partial truths
Stands on other’s feet
Metaphor—what something is like
Save mental labor
Static

Theories
Are discovered
No theorizer needed
Need confirmation
Indistinguishable from object
Deep
Entireties
Stands on its own
What something is
Subject to falsification—never perfect
Cumulative—new theories atop facts

I’m trying to figure out if The Firm of the Future is a theory or a model? Probably a model, but maybe both?

Rethinking Unlimited Access Level Agreement

While watching Rory Sutherland’s Zeitgeist presentation for the 20th time, I was struck (finally or again) by his story about Spotify and how they have not gotten much traction with their offer of unlimited downloads per month. He suggests that they change it to some absurdly high number like 180 songs a month.

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Sutherland reasons that unlimited provides no context to the offering. As he put it, “Nobody knows what unlimited music is worth. It is a bit like asking, ‘Would you like to buy my unicorn?'”

The 180 song per month limit would give the price context in that it could be compared to iTunes at $0.99 per song. So for $9.99 a month you could enjoy $180 worth of music.

This got me to thinking.

Perhaps access level agreements should have a similar notion. Instead of saying unlimited access, perhaps it should be changed to 30 contacts (phone calls or emails) per month. Now, this would be more than anyone could possible need, and would therefore it would not be a barrier to any customer in terms of being worried about wasting a call on their particular issue. It would, however, allow them to compare it to other plans where there is a per call fee, thereby increase the perceived value of your offering.

What are your thoughts?

ET HORA LIBELLUM DELENDA EST

On Paid Search vs Social Media Spending

Fellow Sage team member Greg Tirico posted an interesting link to an article which suggests that small and medium businesses are beginning to favor social media spending over paid search.

I have always thought of paid search (and even SEO) as a mistake in the consulting profession because it tends to lead to poor customer acquistion. In other words, it produces more D and F customers than A or B customers.

By their very nature web search prospects are in the gather information step in the buying process. They tend to be tire kickers who are generally looking at buying more on (pun intended) low price rather than a long-term relationship.

I think social media has the potential to change this because it turns search on it head. Instead of looking for people who already have their hand in the air (an intercept lead), social media allows the providers to look for people who have unrecognized need.

In my opinion, it is a much better place to spending marketing dollars.

ET HORA LIBELLUM DELENDA EST

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Guest Blog: Richard Muscio, CPA, on CPA Horizons 2025 Report

Richard Muscio is long-time friend of VeraSage.

He recently read the AICPA’s “CPA Horizons 2025” report, and was inspired to write this post.

Since we here at VeraSage love a great debate, we’d love to hear your opinions with respect to this report, and Richard’s comments on it.

From Richard:

I just finished reading the recent report titled “CPA Horizons 2025,” which was put forth by the American Institute of Certified Public Accountants to describe both the current state as well as the future of the CPA profession.

Please allow me a couple of minutes to stretch my 6’2″ frame, because to be able to read this report, I had to cram myself into a very small box.

The CPA Horizons 2025 report concluded that “the services that CPAs provide have become so varied and diverse that the concept of core services is no longer representative of the profession.”

This conclusion was reached based on interviews with approximately 5,600 CPAs.

To test the veracity of this conclusion, I emailed 17 customers, and asked them: Excluding me, since I am special (well, at least according to my mother…), what services to you think of when you think about what CPAs do? I received 14 responses.

13 customers said, in effect, that CPAs prepare income tax returns and financial statements. One customer said CPAs help their business customers to sleep better at night.

I like this last answer, but this particular customer never follows instructions, so I will disregard it in context of my specific question. I am glad, however, that this customer sleeps better since we started working together.

So the next question: if the AICPA-interviewed CPAs say that core services (preparing tax returns and financial statements) is no longer representative of the profession, then why do customers of CPAs not seem to know that? Let’s look for answers by reviewing the conclusions in CPA Horizons2025.

The first conclusion: the world is now driven by technology, and CPAs need to change how they do business to accommodate this fact. Really, the AICPA needed to interview 5,600 CPAs to conclude that?

The second conclusion: the CPA profession must find solutions to offer investors and stakeholders up-to-date, real-time financial information, because of how fast the business world now moves due to technology.

Okay, I’ll give the AICPA credit for pointing out that having financial statements that are current as of yesterday is an improvement over having financial statements that are only current as of last month of last quarter.

However, in both cases, both of these results are the recitation of history. Whether you are looking at last month’s bank reconciliation or yesterday’s bank reconciliation, in both cases you are looking at the past.

How about CPAs helping their business customers to predict how much cash the business will have in the bank at the end of next week, next month, or at September 30, 2012?

All of the technology in the world does not matter if CPAs cannot start to help their customers by looking through the front windshield of their car while they are driving, as opposed to trying to drive the car by looking through the rear-view mirror.

Objects in the mirror are closer than they appear: could that object be the irrelevance of the CPA profession in the economy of the future?

If CPAs cannot help customers to peer intelligently into the future, then irrelevance of the CPA profession will certainly be the result.

An additional benefit should result, that is to say, fewer accidents will happen. And for those of you who have forgotten Enron and Qwest, I offer you the recent explosion called MF Global.

The third conclusion: CPAs must embrace mobile technologies and social media to modernize and enhance interaction and collaboration with clients (AICPA’s word, not mine) and colleagues.

I flat out disagree, because my customers want consistent and repetitive face-to-face interaction, which includes ideas for value creation. The technology is merely how we transmit certain information.

I will in fact argue that the most valuable resource a CPA can create is a vast and talented and multi-disciplinary network of complementary professional (and other) services providers, that can assist customers with virtually any need that the customer may have, CPA service-centric or not.

This is not accomplished through spending one’s days typing emails and playing with the latest and greatest technology, it is accomplished through constant contact and face-to-face interaction.

I will further assert that tremendous improvement in technology has caused “reverse delegation” in the CPA industry, that is to say, multitudes of CPAs are now performing data-input based tasks because of the ease of use of technology, and given how much compliance work exists in the profession, many CPAs I know are so “busy” (man I hate that word…) that they have no time or energy to actually think about the future, whether their own future or their customers’ futures.

The thought occurs at this point whether perhaps the AICPA should have interviewed 5,600 customers (or in the AICPA’s words clients) of CPA firms instead, because it doesn’t sound like very many of the 5,600 CPAs who were interviewed asked their customers what they want (not “need”) from the CPA profession.

But perhaps that would have been difficult, I suspect some of the answers may have been hard to listen to, let alone to meaningfully respond to.

All of these conclusions beg the same question for any individual CPA: what business am I really in?

If for example 90 % of your revenue comes from preparing income tax returns and financial statements, then you are not a CPA you are a historian.

The larger question becomes: how do I differentiate myself from my CPA competition? What is exactly at stake if I am unable to differentiate?

The fact is, most CPAs could not even sell cheeseburgers to the Donner party. I looked at 8 CPA firm brochures (yes on paper, not on the computer) and they all basically say the same thing: “we provide full-service income tax and financial statement preparation services that are of very high quality.”

They also all have a lot of pictures of men 55 and older wearing dark suits. No differentiation there.

How can consumers of CPA services know what CPAs are actually capable of when most CPAs cannot differentiate among themselves or away from traditional services? You are what you do (not say) every day, and consumers respond accordingly.

Next time, may I suggest to the AICPA that you interview 5,600 customers of CPAs? I’ll bet your conclusions would be different.

As the to relevancy of my profession in the economy of the future, if this report is the best that the AICPA can do, then I think I will call my stockbroker to buy short against my profession’s stock.

The Diamond Planet

A recent cosmological discovery got me thinking once again about the what George Gilder and others term the materialist fallacy. From a Reuters report from last Thursday:

An exotic planet that seems to be made of diamond racing around a tiny star in our galactic backyard in an undated image courtesy of Swinburne University of Technology in Melbourne. REUTERS/HandoutAstronomers have spotted an exotic planet that seems to be made of diamond racing around a tiny star in our galactic backyard.

The new planet is far denser than any other known so far and consists largely of carbon. Because it is so dense, scientists calculate the carbon must be crystalline, so a large part of this strange world will effectively be diamond.

Materialists, including many of my Libertarian friends who favor a return to the gold standard, will have to conclude:

  • This planet is more wealthy than we are. After all it is a diamond with the mass Jupiter.
  • We would be better off if this heavenly body were to break free of its orbit and be sent on a path to impact (or maybe just orbit) the Earth. Perhaps T. Boone Pickens and DeBeers can concoct a plan to (as they say in the Beltway) “effort” this.
  • The really good news is that there are likely more of these throughout the galaxy and universe for it is only recently that we as a species have been able to detect these orbs.

This is materialist wealth creation at its finest!

Side note and bonus material:

I am not sure why, but my brain was reminded of this classic Bugs and Daffy cartoon. Enjoy!

Blinded by Labels

In the past week I have been in meetings where a) the differences between the “generations” at work, b) Myers-Briggs tests, and c) PDP tests, have all been cited as the basis for decision making. In my opinion, they might as well have just added zodiac signs.

Over the years I have found these “tools” to be, at best, slightly amusing parlor tricks and, at worst, weapons used to psychologically maim people.

An example – one person retorted when I expressed my views on this hokum – “My profile says I need clear direction when given an assignment. I need to know why. When my boss gives me a “why,” I always do better on the assignment.” Really? Is there anyone who prefers to kept in the dark and doesn’t benefit from understanding why?

Do you see my point? This stuff is most universal assertions packaged in professional gobbledygook (thanks Michelle Golden for reintroducing me to that word). They are the business equivalent of, “I am a Scorpio, as a desert sign, I like long walks on the beach.”

The problem here is that these labels (Gen X, Gen Y, ENTJ, ISFP, High D, Low C, Aries, Scorpio) blind people to the truth. The best example I can give you is politics.

Last night I post this story and graph with the following comment – “Attention Republican/Conservatives, your party is not in favor of smaller government.”

My friend, John, replied, “Why would a well-paid, well-pensioned, government employee favor smaller government? And even if it’s their ‘platform’, why would anyone actually believe them?” Great point!

My reply, “For the same reasons that Democrats/Liberals believe that their president was going to end the wars – They are blinded by labels.”

Labeling people does not promote good decision making, it promotes blindness to the truth.

Five Hours of Free Business Advice for Veterans

In the following video, our G. Robert Newhart Non-Value Added Fellow, Greg Kyte, explores (among other things) the Veterans Fast Launch program. His deep and insightful analysis of “donating hours” to charity exposes the inadvertent injury inflicted upon the very people that are intended to be helped by this program.

Billing Your Time Is Like Pissing In Your Pants

As the G. Robert Newhart Non-Value Added Fellow, I hope you enjoy the following Accounting Update complete with a jab at the billable hour.

Post your billable hour comparison to this thread so we can laugh the son-of-a-bitch out of existence.