Will Uber Kill Time-Based Billing?

Why would Uber’s business model impact the standard billing method of established professional firms?

An interesting observation was made on a radio program I was listening to last night.  Apparently a number of taxi operators in larger cities in the US are now doing all their pricing up-front for the passenger before they start the trip.  This means that the old  method of turning on the meter and charging what the end result was is becoming redundant as the taxi operators have worked out that the customer wants pricing certainty.  If the cabdriver doesn’t provide it, the customer will go to Uber…

The disruption Uber has caused within the taxi industry globally has been well documented, however, it did get me thinking.

With increased penetration of up-front pricing for work that used to be based on an set (arbitrary?) rate by time, customers from all segments of the economy are going to start to question the logic of entering a transaction with no known end price.  Where very other industry is going down the path of providing pricing certainty on commencement of a piece of work, why do the professions still believe they are immune from the impacts of the change?

In many respects, the taxi industry is similar to the professions – time by rate and it doesn’t matter to the provider how many hours (or miles) are spent on a job as they will know they are getting paid “for what they do”.  The sad thing is this has been ripe for exploitation (who hasn’t been in a taxi which “took the long way” to get somewhere?)  Unfortunately, it doesn’t create a great experience for the user of the services as they just have to grimace and wear it.

Disruption in pricing and business models is going to increase and roll through many other industries and professions that used to work on the time by rate model.  Customers are experiencing more of it and are going to demand more of it.

Those firms that start on the path to pricing on purpose will see themselves gain a competitive advantage – those that don’t will wonder what the hell happened.

Have a look around the Verasage site – there’s lots of rich material in here (esp recommend a solid listen to Ron and Ed on their “The Soul of Enterprise” podcasts).

The professions are going to become “Ubered”.  I hope they are ready for it.

Really?

Do you understand what your customers are wanting?  Really?

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There is a lot of noise (especially in the accounting press) about the move from the classic compliance offerings from accountants into more advisory work.  All the industry pundits are saying that the accounting profession is going through a period of change and we, as professionals in the industry, need to adapt.  I fully agree with them.

The issue seems to be though that many of our colleagues are fearful of the change.  I believe this has a lot to do with the type of people who have been attracted to and trained in the profession.

The following is a short list of adjectives that can describe the approach adopted by a lot of people in the profession:

  • amiable (nice people to have a chat with)
  • good listener (wanting to get to the heart of the issue)
  • loyal (will “go in to bat” for their clients)
  • dependable
  • sincere

We can couple these with a few more for the real technocrats in our industry:

  • accurate
  • precise
  • fact finder
  • careful
  • cautious
  • conservative

All absolutely perfect for an accountant preparing your financial statements and assisting you with your taxation and compliance matters.

Contrast those traits with the approach required to help a customer in the advisory space.  Adjectives we might use to describe people in this arena include:

  • direct
  • inquisitive
  • daring
  • assertive
  • driving

Mixed with a few of the following:

  • persuasive
  • enthusiastic
  • confident
  • influential
  • positive

Now when I look at the lists above, I see polar opposites.  The “traditional” accountant approach and style can be somewhat disconnected with the “advisory” accountant style.

When you look at the changes that are imposing themselves (being imposed?) on the profession at the moment, consider whether your mindset and approach is what is truly required to deliver the service your clients want.  Having worked as an accountant for over 20 years, I know a hell of a lot of my colleagues are very precise, accurate and cautious.  And that is a great thing.  In the right area.

I find the same issue crops up with the firms who move proactively into issues like value pricing and changing the way they engage with their clients.  The more conservative, “classic” accountants do the whole fear and attack response when challenged.  They will generally evade the issues and resort to “the rules” rather than assess the opportunity on its merits.  They will, politely, pay lip service to the idea while telling you it cannot work.

The transition in the accounting profession is therefore going to be quite painful for many of our colleagues.  Their natural style will make it incredibly difficult for them to make the move.  In effect, they want to see a lot of other firms make the change before they do.  This will, in their eyes, reduce the risk of such a move.

The challenge with this approach is that they will be starting well behind the game and therefore struggle to catch up.

There are piles of surveys and reports indicating what it is that clients want from their accountants.  The problem is a lot of accountants are too busy being focused on the compliance aspects of their businesses, and they will miss the significant opportunities that lie directly under their feet.

We have had some success of late by talking with clients about what they are wanting.  They really want support to think and act for the future – not tell them what happened last year (which you cannot do anything about).

Many younger practitioners are “getting” the whole idea, but they are more focused on marketing than delivery.  With this situation, a melding of the old and the new – marketing with the “young guys” and delivery (with experience) from the “old guys”, can be a powerful combination.

When you next have a conversation with an accountant, ask them how they are going remaining relevant with and for their clients.  If they say that the industry transition doesn’t apply to them or their clients, ask them just one question.  Really?

Could not say it better myself!

Only just received the 2015 copy of the “Good, Bad Ugly” report on the Australian Accounting profession prepared by Business Fitness.  Makes for interesting reading.

head in the sand

There are a couple of points that are worth repeating:

  • revenue per partner has decreased by 8.9%;
  • average client fees have reduced by over 18% in the past two years;
  • for firms using timesheets, productivity is falling;
  • lower marketing spend over the past three years; and
  • 6% increase in firms using outsourcing (reasonable number, but not very many firms are doing it).

There is one very telling comment made in the introduction to the statistics in the report (my highlights):

When analysing the 14 years’ worth
of data relating to high-performing
firms, we can conclusively say that
productivity based on chargeable
hours has no correlation to
profitability.

Having just returned from the Verasage get-together in Boston, it has become even more apparent that the old models of firm management are not only redundant, they are dangerous.  Much of the discussion at the symposium related to the way successful firms focus on relationships – both internal and external.  This has to do with building, maintaining and honoring decent relationships.  Not relationships where everything is about flogging the crap out of your people and billing the hell out of your clients.  Relationships which are based on trust, accountability and common goals.

Having seen the damage done by the Almighty Billable Hour and looking at the impact this approach has on the cultures of firms, it amazes me that so many firms still use this model.

There is change already here in our industry and, as the GBU report reveals, this change is having an all-pervasive impact on our profession.  Either adapt or die.

Pollen and the Professions

What’s in the Wind in the Accounting Profession?

A question posed recently by an accounting profession publication

I was recently asked to answer the question of What’s in the Wind in the Accounting Profession? I believe such questions are naively complex. I feel it leads to a drumming simplification of MeTu (aka me too) thinking. The collective of the various professional press and media along with national and state association leadership tends to rework an all too common concert of sound bites and feel good Kumbayah designed to placate the rank and file while providing a spin that there is something significant just around the corner if we could just stretch a little. This pandemic of Pabulum for the Professions eventually annoys even the most infrequent of listeners.

Now that I have that off my chest, I will share the following thoughts of What Should be in the Wind in the Accounting Profession? In my view, what is (and should be) in the wind is simply Pollen.

Profits over Production: The debate about effectiveness (doing the right things) over efficiency (doing things right) is over. The corollary is that firms need to focus. Focus on profits over production. Focus on Results over efforts. Firm leaders need to focus on profit improvements over gross billable hours. Customers do not care about the hours one works; they care about the results that are delivered. Effectiveness is far more superior then efficiency.

Efficiency is always a ratio and never, in and of itself, ever an output. FedEx is far more effective then the postal system. In order to be effective, they had to seek better outcomes and certainly FedEx improved its efficiency in the process of effectiveness but envision that FedEx designed a package system but still used the Pony Express instead of a fleet of planes? The result would have been highly efficient (they know where each and every package {and its horse/rider} but it would have failed as it is ineffective today to transport packages in such a manner. In essence, firms need to stop orgasming over top-line growth and instead need to focus on profit improvement.

Opportunities Abound: True professionals are naturally observant: Too many firm leaders look at their markets as closed pools of opportunities. They naively seek growth at the expense of competing firms. In fact I have heard partners of established firms specifically target another firm’s customers and operated as if all members of our Profession were competitors instead of colleagues. This is utter nonsense and such thinking destroys our Profession.

The first canon of our Profession as outlined in the AICPA’s Code of Professional Conduct (Principles) notes that we have an obligation, as members, to promote the well being of our Profession. This includes both improving the Art of Accountancy and, likely more importantly, to Cooperate with Each Other. We aren’t cooperating if we are poaching.

Learning and expanding by observation is simplistically easy yet requires infusing effort into the process. We grow our firms by investing in the opportunities we find and the ones we create. Waiting for the phone to ring is not a marketing and growth strategy. Firm leaders must learn to create their own futures.

Smart real estate developers have learned to look for leading indicators about where to build and what to build. For example, when it comes to mixed-use commercial style real estate what do you believe are the leading indicators as it relates to capturing early-stage value? It isn’t zoning or demographics. And, it isn’t merely location, location, and location. These indicators are either lagging (zoning changes occur after someone has figured there is a better use, acquires or options the property, and then seeks the changes they seek) or they are coincident, meaning they help us concurrent with the changes in the market. Neither of these is leading (predicting where the values are headed). It turns out that one of the best leading indicators is to watch where the artists go.

Artists are relatively poor (economically) and need to find inexpensive and creative spaces for their studios and residences. Artists seek out great value. Artists then tend to invite other artists to share their spaces. These new artist colonies begin a following. At some point these colonies of people draw the attention of supporting and cottage companies; (from creative coffee shops to stores to restaurants to dry cleaners) entire communities follow the artists to their new neighborhoods. And artists are creative and innovative as it comes to the quality of life of their buildings and neighborhoods driving up values by driving away dirt, dust, and decay. Artists, it turns out, are a great leading indicator for real estate developers who desire to be early adopters of profit opportunities by merely observing their own communities and where the artists are headed.

Firm leaders need to approach their growth the same way. Look for the leading indicators. Look for your firm’s equivalent of artists. Look for the innovators, the inventors, the new immigrant businesses, the prospects that are expanding, and look for value when others are blind to its beauty. Firm leaders need to get of out their offices and look around. They need to be active members in their communities and seek positions of influence in fledgling industries.

Firms mature, as do their clients.   Anyone can recognize a change is afoot after the proverbial tipping point where the innovators and early adopters have paved the way for the following majorities. The best firms and best firm leaders are at the left-hand edge of the diffusion curve. These mavericks inherently understand there will be many investments that fizzle and only a few that sizzle. It is those profits from the sizzling hot successes that drive the firm’s future value and growth.

 

Legislation and Regulatory Issues: Together with my VeraSage Institute colleagues, I have the opportunity to speak to and meet with thousands of fellow CPAs and CAs each and every year. One of our favorite questions to ask our audiences is: Have you recommended our profession to a loved one during the past year? Across the board and regardless of country (most common are USA, Canada, UK, Australia, and New Zealand) we receive positive responses from 10-15% of the participants. Inversely, this means that 85%+ of our fellow professionals have not and in reality do not recommend our profession to loved one (defined as a person one knows and cares about – unlike say a high school or college student sitting through some mind numbing “Feed the Pig” commercial).

This decline in advocacy about ones chosen profession is a leading indicator that something of a cancer must be present that is stripping away our enjoyment about what we do and how we do. Failure of firm (and profession) leadership to adequately diagnose and then cure this disease suggests the end is closer than we think to losing ourselves and becoming a trade or job rather than a career and profession. Personally, I do not want to see our profession go the way of the Scribe’s and be relegated to pages in a history book and postage stamp.

When asked why participants avoid recommending our profession, the most common responses include: regulatory overload, work load compression, and the sins associated with hourly billing as it relates to technological improvements and efficiencies via technology (think about the reduced time it takes to complete a tax return using software today then say 30 years ago when we filled in bubble sheets on CompuTax forms, or even 50 years ago when we prepared returns by hand and typed the values onto the forms).

Lets look at regulatory overload. This includes government regulatory matters from the SEC, the PCAOB, the IRS, the FASB, the AICPA SSARs, the GAO, the DOL, the 50+ State Boards of Accounting, the IFRS, and all other bodies deemed capable of dolling out but never retracting rules and regulations that impact what we do and how we do it. There is no joy in contorting ourselves to please the whims of bureaucrats residing in such cities like Nashville (home of NASBA), Washington, D.C., home of the federal morass of death by regulatory action, NYC and RDU (home of the AICPA). Such regulators act like they can use rules and procedures to triumph over common sense and good judgment. They can’t; but they sure try.

Leaders of our profession should seek ways to reduce the complexities of rules and regulations in exchange for more principled driven decision making that promotes the right answer, with the right disclosures, with the right outcome, so that users of our reports and services may make informed judgments about the economic activities of the businesses and individuals we represent.   Far too often, the so-called leadership of our profession is to cozy with regulators and rule making bodies and, in fact, support additional complexities under the misguided notion that more is better when in reality simpler is better.

As it relates to workload compression, this too is a function of an overzealous regulatory and ill informed bureaucracy and/or legislative body (or bodies). Much of this compression came about during the TRA 86 when fiscal years for pass through entitles was essentially abolished. This shifted more audit and assurance work along with the tax work to the front half of the year rather than allowing for a smooth seasonality of services. This has increased our need for people in narrow time frames and then we face an excess capacity of human capital in others. Firms burn out their people increasing the chance that our actually “best and brightest” leave our profession as it lacks the enjoyment they hoped to achieve in life. Firm leaders should continue to pressure their local, regional, and national officials to return to a time when natural business cycles could be used for associated filings and reporting periods.

Finally, the toxic nature of timesheets and billable hours drive talent from our profession. Time-based billing is the antithesis of professionally based pricing. Hourly pricing where one is compensated based upon recorded time does not align with the goals and objectives of our customers. Our customers desire a result. When we are compensated based upon our inputs and not our results, we are apt to add useless procedures, steps, and complexities that drive the billable hours up and hence charge the customer more. Also, timesheets are full of lies as people are unable to really capture in (6 minute) increments what they really do all day and so they tend to make a lot of it up. Ric Payne (the smart founder of Principa) has suggested that over time the lies balance each other out (e.g. I work a little for free for client A today and bill my time to client B, and sometime in the future it is reversed). This may be realistically true, but does not cure the challenge of misalignment of interests. Another toxic challenge of the timesheet mentality is that billable hours are rewarded for promotions, partnership, and influence.

Too many firm leaders list their billable hours like a badge of honor when in fact they should be ashamed. It is far better to produce results with effectiveness rather than efforts and price according to the value delivered rather then the time invested. I am reminded about the conundrum of hours invested versus the effectiveness of the team member via the following example shared by one of my former firm partners. His wife is a construction project manager. Her supervisor one time confronted her about the fact that the “men” on the job site were spending part of every Saturday working while she did not. The supervisor suggested this looked like she wasn’t pulling her “weight” as a team member and that come bonus time she might not receive an equitable share. Her response was superb. She responded with “if I were as wasteful and inefficient with my work during Monday through Friday, I would have to work Saturdays too.” – How right she was. And how wrong are firm leaders that value the inefficient worker over the effective one because the tool for measurement only records efforts and never results.

A final aspect to the tainting of the value of our professional lives is living within the childish nature of our elected officials. Their creation of complex rules and financing regulations designed to reward their patron saints (their donors) end up punishing their people by forcing unwarranted behaviors by citizens in order to minimize their individual tax footprint rather than supporting a culture where people seek to maximize their individual opportunities to expand their financial horizons. Too much of our national GDP is spent reporting and navigating the complex tax code. We need a simpler and fairer method to collect the necessary funds to operate our government.

Loyalty and Customer Economics: Firm leaders and members of our profession need to understand and operate within a customer loyalty framework. Too many firms reward the hunt, the capture, and the kill of a new customer while failing to understand why their best customers leave. It is far superior to enhance the value proposition of current customers then it is to invest heavily into new relationships.

Customers love to be loyal. Just ask any director of an airline loyalty program. Even if passengers dislike flying, they love ‘’their airline”. Ask a Nordstrom customer about loyalty and they will frequently advertise that they rarely shop elsewhere even if they believe Nordstrom is slightly higher priced (they generally are priced very competitively). Just look at American Express that captures great loyalty from all of their various card levels – from the inexpensive Green Card to the exclusive Black Card, American Express delivers value across the board or its continuing customers would use alternatives.

What is frequently missing in CPA firms is a reason for customers to remain loyal. This is partly because our profession focuses on efforts. CPAs extol how hard “we” work rather than focusing on helping the customer achieve her objectives, goals, and desires. When asked to rank those attributes that customers use to select CPA firms, firm leaders respond in the inverse to the customers. CPA firm leaders discuss their technical skills and acumen over their softer skills like communication, awareness, and creativeness. Customers on the other hand respond by relying greatly on communication, creativity, and engagement. Customers struggle to comprehend our technical skills yet too many CPA firm leaders only speak about their knowledge while ignoring their more important competencies.

CPA firm leaders need to understand why CPA firms are hired and why we are fired. We are rarely, if ever, hired or fired due to our technical quality.   We are almost never hired or fired because of our price (about 4% of all engagements are decided upon price). We are almost always hired and fired because of our communication skills, our ability be creative, our eagerness to help our customers, and our availability to help them when they want our help and not “after tax season”. Sometimes we are hired because we have nicer furniture or a better location. Sometimes it is because we will meet them at odd hours of the day. Sometimes it is because we offer a solution that others can’t. What I can guarantee you is that you aren’t hired and fired because of price or quality. It is all service related opportunities and challenges that drives customer decisions. Investing in customer loyalty metrics goes a long way to a more profitable firm. Simply remember that a current customer can be 11x more profitable then a new customer.

Experiment with Service Offerings: I believe that the best firms are the ones that experiment and expand their offerings. Many experiments will fail to deliver their desired results. That is a price of admission. There are two primary reasons for a firm to explore new opportunities and experiment with creative options: The first is that our complex customer base is not standing still and their wants and needs continue to evolve and if we aren’t at least with them or even better, ahead of them, they will naturally look elsewhere for solutions to their unfilled needs and desires. The second reason is that many members of our profession have signs of ADD. In essence, our best and brightest get bored and bored people become inattentive and inattentive people make mistakes.  Worse, bored team members daydream of better jobs and brighter futures and these daydreams become realities far too often.

I have concluded that our professional attention span is about 3 years. This is enough time to learn a skillset, master that skillset, and then teach that skillset to a new person and then be allowed to move on. I see too many firms with team members living the same routine for years and decades to the extent of missing the true needs and wants of their customers. Hence, they become my customers. Times are changing, generational shifts, web 2.0 to 3.0 – go head and add some R&D; experiment with new offerings, and take aware the boredom of our lives. Remember, each new mountain pass travelled generates a new world view and an ever-expanding world view is more necessary today then it ever has been.

Networking – Networking is not social media. Although social media is a part of networking it is not networking. Networking encompasses so much more than mere social media. Networking is the act of becoming an integral part of the multi-variant solutions to unknown problems. Thus positioning the professional in the middle of the necessary web of needed information and solutions to an infinite array of challenges.

We, as professionals, have the distinct opportunity to provide what I term as “bridges to structural holes”. The “structural holes” as I term them, are the distances between what a customer has and what the customer needs. Of course, one could substitute almost any synonym for customer. The key is that a well-networked professional is the key that opens many doors.

Most firm leaders undervalue networking; unless the participant is already a member of leadership. That is unfortunate. Networking should begin from the beginnings of student life, through early careers, into leadership, and into retirement. As Australians are fond of saying, “we all need Mates”. And Mates watch out for each other.

Networking is not about just providing referrals or leads. Networking is seeking solutions to problems that possibly don’t’ already exist and, concurrently, listening to wants and needs from those who will benefit from connections that we are only to provide.

Networking requires dedication and commitment. Networking is not about “you”, it is always about “them”. Networking requires in investment in time and resources. It requires your ears to be always open, your mind to be engaged, and your heart to centered on your clients, friends, and colleagues. Networking isn’t just slapping palms or sharing LinkedIn profiles. Networking is active engagement across all disciplines, across all strata, across all industries, and encompassing all opportunities.

Networking should begin even before the beginning of a career. Networking must begin most definitely concurrent with your professional work. Twenty years into a career, the connections made in one’s youth frequently pay dividends. The customers you meet, the contacts that are made, the alumni of your university, the town where you live, and the hobbies that you share are all part of a valuable interconnected web of opportunities and solutions.

The most important time for investing into your network is at the beginning of your career. Networking’s ROI is akin to the time value of money. The earlier your investment, the larger your return. Networks expand exponentially. They are not a zero-sum game. Young people must develop a network and they need time and opportunity to learn this craft.

Partners and other firm leaders must allow younger professionals time to attend meetings, events, lunches, professional society events, and community activities. Each and everyone one of these avenues provide an opportunity to meet someone whose individual return on investment is multiples greater than the average. And, when this occurs, the net present value of those future transactions is exponential.

Yet, such networking activities as described above run counter to the firm’s current objective of maximizing revenues. If, on the other hand, the firm had a long-term profit view, leadership would both understand the value of these early career investments and support return multiples of any “opportunity costs incurred today”.

A professional’s value is predicated on their ability to solve expressed and unexpressed customer wishes and problems. If you can’t do this, then the professional is really just a technician; nothing more than a hired gun to perform the work orchestrated by others. There is nothing extraordinary in merely following the recipe crafted by others. The value of a professional is primarily connected with one’s ability to craft excellent resolutions to an ever expanding list of unfulfilled opportunities.

My advice is to constantly expand your network, each and every day for your benefit and the benefit of others. In this way, you maximize your opportunities to really make a difference in the lives of others. There is nothing truer than a professional that makes a difference.

There you have it. Now you know what I believe should be in the wind of the accounting profession.

Now, enjoy your day.

 

Regrets? They’ll have a few

OK, so we’ve all got them.  You know, those things that we look back on and think “what the hell – why did I do that?” or, (even worse) “why didn’t I do that?”

I’ve had plenty – more of the former type than latter, but it all forms part of the rich tapestry of life that we humans form part of.  And, much as we may regret things, it helps us develop into the people we are and forms the foundations of who we will be.  Great.

apple

BUT, what would happen if you knew that something was going to happen and, despite every nerve in your body screaming at you to do something, you didn’t “do it” (whatever “it” might be) – is that really a regret?  If you adopted a stance of denial, does that turn into a form of regret?

How is it that, even when confronted with massive amounts of evidence supporting a reality that is going to occur (and I’m not talking “consensus” here) – I am talking incontrovertible facts – you still don’t make the moves that are required?

I’m not going to launch into semantics here (I will leave that to my far more learned colleagues in Verasage), I am just trying to posit the argument that often times, people do not do what they should and don’t take action when they should or find a million reasons not to do something they know they need to because, well, they have lost something.

What is the loss they have made?

Consider if you will the current state of the accounting profession.  We are seeing massive changes set upon us – mainly from technology/cloud solutions, but also from offshoring operations.  Did you know, for example, that most of the Big Four have established offices throughout Asia to which they “in-source” their compliance work at (about) AUD10 per hour?  I know of an Australian example where a large corporate has moved a significant volume of their processing/admin work to a Pacific nation as the effective wage rate there is AUD1.20 per hour – a bit better than the award rate over here!

This is all happening now.  Today.  To our beloved accounting profession.  And what are the vast majority of our colleagues around the world doing about?  Nothing.

I posted some time ago about the changes that were occurring to our profession.  The changes that were coming then are rolling out even more quickly than I anticipated.

So, what is the profession doing to adapt to this change?  Not much.  Some of us a screaming to all who can be bothered to listen that there needs to be a change in business model.  Hardly anyone seems to be listening.  Or caring.  And we are not, by the way, being “chooky looky” – the sky is falling in!

What are most accounting firms doing to try and combat the inevitable?  They are trying to be more efficient.  Making better time recording platforms and putting greater emphasis on staff productivity.  Anyone recall Danny DeVito in “Other People’s Money”?  Buggy whips.

To make the process more precise isn’t what’s required in the accounting profession today (or tomorrow).  As Ron Baker is fond of saying – “I’d rather be approximately right than precisely wrong”.  Bravo Ron!  But tell that to the Luddites who persist with a 1950’s business model 65 years after it was made common place and 64 years after it became redundant.

The time-sheet is an anachronistic tool that does not fit with today’s requirements.  Staff hate them, admin hates them, managers hate them and Partners/Directors hate them.  The people who hate them most however, are the second most important people in your business – your customers.

In some respects, I am advocating a “back to the future” scenario – get rid of time-sheets – but with some important changes.  Changes like agreeing the scope of work and price up front with your customer.  The change which includes and involves your people in determining scope – and price!  The one where you truly empower your people to shine rather than record their misery in 6 minute increments.

Ed Chan of Chan & Naylor last week posted on Linked In.  Chan’s argument is that accountants sell time.  No.  We don’t.  We sell solutions to our customers’ problems.  His argument is that the “solutions” (I am expanding his argument a little here, but I believe it is in the same vein as what he has written) are all compliance-based whereby all we are doing is the “same thing” for each client.  As I have illustrated above, the basis of a lot of the compliance work is going to be automated or off-shored.  So scalability only applies if you’re doing basic, processing and bookkeeping work.  Not exactly what we’re trained for is it?

Similarly, setting an arbitrary hourly rate to charge them for your time isn’t reflective of their need or the value that they place on the work to be done.  Using the same rate for everything you do makes you pretty “average”.  And remember – average is where the best of the worst meets the worst of the best.

My belief is that every customer is unique and have their own set of fears, needs and the like.  To try and put them all in one basket is to demean both them and the people who work on their files.

Chan’s argument is also based on the premise that all you have to do is to hire more people and more customers will come to you.  Oh, to live in such a wonderful world!

From my experience (such as it is), the only way you can achieve this is to discount your offering to a level that drives people to you.  And then, what happens to “the margin” that Ed believes is the Holy Grail?  That and the fact that you’ll generally get the bottom-feeding clients who don’t value what you do anyway and will bring a whole heap of their “friends” along with them – High School Chemistry – like attracts like.  You will also not exactly engage your people as they merely become cogs in a never-ending grind out of tax returns.  Inspiring isn’t it!

So, in Ed’s world, where “you build a business to prepare a tax return”, I believe there will be regrets.  Lots of them.

Customers don’t want tax returns.  They want advice.  Support,  Counsel.  Encouragement.  SOLUTIONS.  The tax return work is only there because the government stipulates it.  Nobody really “values” it in the true sense of the word.  And the ultimate disruption?  I know of at least one of the Big Four that will be offering their clients compliance work for $0 in the coming years.  How’s “the margin” on that?

Getting the business model right for accounting firms is critical given the disruptive times we are in.  Making a bigger or cheaper version of what exists won’t answer the challenge – it merely cements in a race to the bottom for those firms that don’t adapt.

Regrets?  Yep, I have them.  A number of them.  One I do not have however is getting rid of time-sheets and moving to a business model that will sustain our business, our people and our customers for a long time.

Oh – the loss they have made that I referred to above?  It’s a loss of self esteem and belief in why they do what they do.  And that, my friends, can be scaled!

July 18th Show Notes: The Second Law of Marketing: All Prices are Contextual

In our July 11th show we discussed The First Law of Marketing: The Value of Value.

The Second Law of Marketing is just as critical to help your organization communicate value, and help convince your customers to pay for that value.

One of the most customer-centric strategies your company can deploy is to offer an array options to your customers. It is very “outer-directed,” rather than just offering a one-size-fits-all, take-it or leave-it option.

Customers prefer options, especially in today’s world where they face a plethora of choices regarding who, when, what, and how to patronize a business. Contemplate these examples:

  • Universal Studios Theme Parks standard admission price is $80, but for $139 you can get a “Front of the Line Pass” and for $299 a “VIP Experience,” giving guests behind-the-scenes access.
  • When the final book in the Harry Potter series was released, the publisher offered the regular version for $34.99 and the deluxe version for $65. They were ranked number one and two, respectively, on Amazon and Barnes and Noble websites.
  • Tourists in New York can avoid the long lines to get to the observation deck of the Empire State Building for double the regular admission price, guaranteed to take no longer than 20 minutes.

We simply must get over the false idea that there is one optimal price for a customer. There is a range of optimal prices, commensurate with the value being created. Dutch psychologist Peter van Westendorp developed the van Westendorp Price Sensitivity Meter (PSM) by posing these five questions:

  1. At what price would this service be so expensive the customer would not consider buying it?
  2. At what price would the service be expensive, but the customer would still buy it?
  3. At what price would the service be perceived as inexpensive?
  4. At what price does the service become so inexpensive the customer would question its value?
  5. What price would be the most acceptable price to pay?

The Magic of Three––Goldilocks Pricing

There is strong empirical evidence—from both the rational and behavioral schools of economics—that offering customers at least three options can often times result in them purchasing more, at a higher price, than merely offering one take-it or leave-it option.

In his book, Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions, behavioral economist Dan Ariely illustrates the utility of offering options by illustrating The Economist magazine’s offerings. First, he presented the following two options to 100 students at MIT’s Sloan School of Management:

  1. Economist.com subscription $59: One-year subscription to Economist.com, including access to all articles from The Economist since 1997—68 students chose this option.
  2. Print & web subscriptions $125: One-year subscription to the print edition of The Economist and online access to all articles from The Economist since 1997—32 students.

Now compare those results to the actual ad that The Economist offered, which contained three options, not two:

  1. Economist.com subscription $59: One-year subscription to Economist.com, including access to all articles from The Economist since 1997—16 students chose this option.
  2. Print subscription $125: One-year subscription to the print edition of The Economist—0 students.
  3. Print & web subscriptions $125: One-year subscription to the print edition of The Economist and online access to all articles from The Economist since 1997—84 students.

Ariely concludes that there is nothing rational about this change in choices. The mere presence of an option that was not desired—known as the decoy or dominated option—affected behavior, leading to a potential 42.8% increase in incremental revenue for The Economist.

When two options are presented, the decision is mostly made on price, yet when three options are offered it becomes a decision based on value.

The Anchor and Framing Effects

Offering options creates the anchoring effect, whereby the customer is now comparing prices to your highest offering. This is why Victoria’s Secret offers a diamond ornamented bra for $6.5 million that no one probably ever bought; and Prada stores always display one incredibly high-priced article that acts as an anchor for all the other products.

All of these high priced items act as an anchor, even if the customer never buys them—throwing a halo effect over the other offerings, allowing for prices to be higher, while increasing average per customer sales.

The first lesson from the above is if you do not offer a high-end premium package, how could you customers ever select one? Second, list your most expensive option first. The third lesson is that by offering three options, you almost always sell more of the middle option, and less of the cheapest offering.

This confirms what most pricing experts know: people are not price sensitive; they are value conscious.

Another behavioral phenomenon is the framing effect. What you compare something to will determine an acceptable price to pay. If I offered to sell you my Unicorn, you’d have no idea what to pay since no one has ever purchased one. But you’re happy to pay for coffee in little pods—which are more expensive than coffee purchased in bulk—because you are comparing it to Starbucks.

This is why brands pay so much attention to what you’re comparing their offerings to: Red Bull is packaged in a skinny can so it will not be compared to a Coke or Pepsi, and Woolite is in a bottle so it’s not compared with Tide, but rather dry cleaning.

When you present three options to the customer, you are also subtly changing their psychology. Rather than thinking about whether or not they will do business with your company, the options nudge them in the direction of thinking about how they are going to do business with your company.

Pay close attention to the context in which your prices are anchored and framed. It will have an enormous impact on your profitability.

Additional Resources and Books Mentioned

For more on why are we in business, Peter Drucker’s Marketing Concept, and the role of profit, see Pricing on Purpose: Creating and Capturing Value, by Ronald J. Baker.

Minding the Store: A Memoir, by Stanley Marcus. Ron believes this is the best book ever written on customer service.

Positioning for Professionals: How Professional Knowledge Firms Can Differentiate Their Way to Success, by our VeraSage Institute colleague Tim Williams, who will be a guest on a future show.

Ed mentioned Harry Gordon Selfridge and Amazon’s Kindle Unlimited.

We referred to Rory Sutherland TED.com talk, and his example the breakfast cereal Shreddies. Here is the video. Rory will be a guest on our August 29th show.

The infamous Wendy’s commercial from the Cold War era, about offering choices.

Email us at: tsoe@verasage.com

Twitter: @edkless @ronaldbaker #tsoe

What PKFs Can Learn from Country Music

Modern country music blends the best of traditional American values of hopes and dreams with classical rock rhythms and melodies.  It is difficult for even the most ardent anti-cowboy listener to avoid toe-tap while listening to some of the classics and modern hits alike.  Country stars crossover to rock and pop a even some country singers are involving aspects of rap (with a better vocabulary and message, of course).

Yet, even if you aren’t a fan of modern country music, there are lessons to be learned.   Studying (and implementing) their success benefits all aspects of our firms and professions.

First, the historical legends are never far from center stage.  Those trailblazers that helped established a fledgling musical style are honored and revered.  The history is rebuilt into the future.  The young stars and hopefuls know their history, know how their music was developed, and proudly expand their offerings to a new generation without abandoning what came before.  Innovation and collaboration are two hallmarks that separate country music and most professionals.

Country, more so than rock and pop,  certainly appears to collaborate frequently.  They produce duos and join forces for songs and tributes that expand their individual capacities.  I rarely witness true collaboration in CPA, Law, or other Knowledge firms.  PKF’s are fearful of collaboration believing there is no benefit and only risks of losing an edge over the (perceived) competition.  In fact, this stubbornness by leaders of these professions creates excessive waste in human capital, fixed capital, and redundancy.  What we all need to do is constuct more duos and collaborative services where we align to serve new  and mature markets, alike.

Country music stars of today coach the stars of tomorrow, as they were coached by former stars. Even though they have separate bands, labels, and musical styles, the leaders of today invest in relationships by assisting the newcomers.  And when the newbie wins a prestigious award that the stars of today were nominated for, these leaders hoot and holler, clap and cheer, and genuinely support the winner without whining about their current popularity or success.

PKFs rarely, if ever, help develop the talent of their future competition.  PKFs see the world as a zero sum game instead of one of abundance.  They don’t value sharing their love of their work and guard their ideas like they wholly own them.  PFKs struggle to even share within their organizations and frequently treat each of their own in ways akin to how a Piranha treats a fledgling fish.

Envision how PKFs could change the world by working together rather than apart?  How firms could coordinate talent across party lines to serve the public good?  How firms could end duplication and specialize where they are strong and collaborate where they are weak?  How leaders could spot the young talent and help nurture even if it is a long-term strategy?

You can’t fake true admiration and awe.  I was privileged to attend Entertainer of the Year, George Straits’ final large venue concert.  He is clearly loved and beloved by fans and fellow performers alike.  He shared his stage with nine (9) other superstars of today and yesterday.  Each of whom he had collaborated with, toured with, coached, and supported.  The tears of joy shared by, between, and among these stars was genuine and moving. Even when one of the stars slipped on a lyric, there was laughter and happiness.  The value of being a family; and not just a competitor.

Leaders of PKFs should learn from the success of country music.  Learn to share with others the love of your profession.  Find talent wherever it is and coach, teach, and admire their future growth.  Find other firms and professionals to collaborate with and share your joint talents for the benefit of all.

Silo thinking is rotgut of the professions.  It is time to expand our horizons and partner up for a stronger and more collaborative future.

Time to rid the professions of Mini-Me?

 “Imitation is the highest form of flattery”  

19th century English cleric and writer, Charles Caleb Colton.

minime

 

We know this holds true for Gucci,Prada,Rolex,and other high end producers, but one could be forgiven for believing many in the professions adopt a similar mindset.

No professional firm likes to think, let alone say,they imitate their competitors, and in fact most professional firms go to great lengths in their capability statements (yawn) and on their website explaining just how really different they are from their competitors.

But guess what? In most cases the claimed points of differentiation themselves are practically identical.

Sorry if you recognise any of these from your website but here are some of the more common claimed points of differentiation I have picked up. Preface each one with “Unlike our competitors”:

  • ….founded in 1066 our firm has a long tradition of…. (take your pick from;personal service/integrity/meeting our customers needs/aged partners,etc),
  • ….our firm is built on the following core values(here is an off the shelf list of up to 400 core values but don’t look too greedy just choose 4 or 5 say;integrity,honesty,reliability, innovation,sexiness)
  • ….we understand your business and the industry you operate in (yeah right like you have 2000 customers, you know them all intimately and you are their industry “go to” firm?)
  • ….we value all our clients and give them all the same exemplary personal service (in reality when it comes to prioritising work you probably deal with whoever yells the loudest)
  • ….we provide you with cost effective solutions,(This usually means one of 2 things: either it will be cost effective for the firm,or the firm will discount heavily just to get the business),
  • ….we have competitive rates(for a start you do what most of your competitors do and bill by time and you probably base your rates on reverse competition anyway),
  • ….we exceed our customers expectations(have you actually asked each individual customer what their expectations are,or just assumed you know what they are?)
  • ….we are recognised as one of Australia’s/USA’s/World’s/Timboon’s top firms (at least the partners of the firm recognise the firm as thus)
  • ….we are a full service law/accounting/consulting/IT/services firm (Different? If you google “full service firm” you get 323,000,000 results in 39 seconds)

Ok so maybe the above is all just a little tongue-in-cheek but you get my drift.

Even if these statements are true for any firm they a hardly a point of differentiation- they are at best just table stakes and they might,if you action them,allow you to play in the professional services game.Not one of them is any guarantee of ongoing success nor will they make any firm stand out from the crowd.

VeraSage Senior Fellow in the advertising agency business, Tim Williams of Ignition Consulting who has made a successful career advising his clients how to truly differentiate themselves, points out that there are many myths about most firms so called differentiated positioning strategies.“Size” is not a strategy,neither is “full service”, “middle-of-the-road-stand-for-everything” nor is “hope” or “effort”. Tim’s definition of a truly differentiating positioning strategy is- well, actually being different: meaning “going deep versus wide”, narrowing your focus and defining not only the features your firm has, but importantly the features you don’t have.

Whilst there is nothing wrong with being better than your competitors often your customers will not know (and you may not want them to know) whether or not you are better than your competitors.Your customers will however know if you are different to whoever else they might contemplate for your services. When I ask members of firms what differentiates them from their competitors in addition to what is on their website (if they have read their website) they will often use words like “our premises”, “our technology”,” our technical skills”, ” our clients”,”our people”, “our culture”. It is only these last 2 responses-people and culture-that go a fair way in defining what truly differentiates one firm from another.

I believe that the primary attribute that you as a firm has that no other firm in the world has is you, and anyone else in your firm.Together with the internal relationships between firm members, plus the external relationships you and your firm have with your clients this is what makes your firm unique. Everything else- be it technology, premises, precedents, systems, or your processes- can and is being replicated-and probably being replicated better than how you do it.Your clients are even being replicated as you may share them with other firms. What you don’t share and what cannot be replicated though is yours and your firms relationship with those clients.

I come across firms that use energy and scarce resources on endlessly seeking to improve their internal efficiencies and/or beating themselves up with any number of institutional copying called benchmarking.I believe at least some of this would be better spent by firms uncovering and capitalising on what they already have-by inspiring their motivated people (hint: ditch any unmotivated people if you have them) and doing all they can to create a culture of innovation.

I particularly despair when I see smaller professional firms that intuitively have great potential (often because they have flexibility and a less rigid and formalised structure of larger firms), being advised to basically replicate the business model of those larger firms whether it be time recording, improving their leverage, improving their realisation and utilization,introducing rules and policies upon policies,etc. The larger firms will always have a size and process advantage over things like that (it is after all what made them larger firms in the first place) but that doesn’t make them great,it doesn’t make them different  and it certainly doesn’t make what they do right for a smaller firm.

Adam Smith wrote

” In mature markets, profits don’t come from increased efficiency, but rather from increased innovation and differentiation”.

Most of  us operate in mature markets and in such markets an increasing number of external disruptors,start ups and the odd innovative incumbent,are truly differentiating themselves whether it be with their service offerings,their strategic focus,their structures or their pricing. They are more innovative,creative and take more risks.Profit after all comes from risk.Many incumbent firms say they want to be different but what they really mean is they only want to be a tiny wee bit different. There is after all safety in numbers.It is not easy being different.It means you cannot stand for everything. Standing for everything is the same as standing for nothing.It means you will not be able to appease everyone nor act for everyone.It means saying no sometimes.

Keep Mini-Me in Hollywood. Instead take time to look deeply as to what already does,or will,make your firm different,remarkable and stand out from the crowd.

Even in the most competitive markets the market is not saturated with professionals-it is saturated with sameness.

 

School-of-benchmarking

 

 

 

How would Charles Darwin see you?

DodoIt isn’t about survival of the fittest. Darwin actually held that the most adaptable were the survivors. So, are you and your business adapting or are you heading down the path of the Dodo?

The current environment is one where there are so many changes taking place that the firm of 20 years ago will find it hard to compete. I know looking at my business and the work we do that to produce our current output, 20 years ago we would have required a heap more people and resources. Thankfully, technology has developed and enables us to create the results etc that our customers want and need.

But, there are two other components that are vital – your people and your customers. Unfortunately, a lot of firms “out there” have taken on (some very grudgingly) the technological change, but they have made few, if any steps, toward adapting their approach to their people or their customers.

Most of my thinking here comes from the “Growth Curve” approach which looks at “Three Gates” – people, process and profit. The technology has helped us deal with and adapt to the process gate, but I am seeing very little in the way of adaptation to the profit or people gates.

The profit gate needs to be adapted to by looking at the way that you engage with your customers, the service you offer them and the methods by which you price and they value what they get from you. The arcane approach that is the timesheet is becoming less and less popular (as can be evidenced by a brief review of other posts on this site) and customers are demanding more certainty, clarity and comfort that they are not signing on to an annuity stream for the advisor whereby they are being charged and billed for the advisor’s inefficiency or learning. In effect, given the timesheet places the customer and the advisor in directly opposed positions, the customer is now waking up to the fact that they want to know in advance what the price for the work will be. Those firms that do not adapt to this emerging reality will find it very difficult to retain or attract customers where other firms out there offer this as an alternative.

The people gate is the other area where firms are finding it difficult or are not wanting to adapt. The blunt object that is the timehseet that is used for performance management in many firms is rapidly becoming redundant. As an example, we recently advertised for an accountant and one of the headlines in the ad was “no timesheets”. We have had some sensational applicants for the role who are currently working in accounting firms in town where they are managed and measured by the timesheet. I don’t know about you, but if my performance is being measured in 6 minute increments, it is going to be fairly meaningless to me. I want to be judged on results and outcomes. Inputs are irrelevant. Hence – particularly with our Gen Y guys – our people want to be and remain relevant and highly valued based on what they have added to the business, not how much time they have spent doing it.

Many of the firms with which I speak are afraid of moving from the timehseet and adapting their business model to what the world is slowly going to demand of them. These poor bastards are going to be wondering what hit them in about 5 years’ time when it will be all to late.

They will have few staff and fewer customers but they will be able to account for every single minute of their day.

They will be preceisely irrelevant.

And a future Charles Darwin will wonder why they chose not to adapt.

The Billable Hour Is Dead-Sort Of.

 

the demise of the dinosaurs (2)Fearless lawyer Mike Ayotte who is never afraid to express his opinions as The Last Honest Lawyer, recently wrote a post titled “The Billable Hour is Dead” and likened lawyers use of the billable hour to the demise of dinosaurs, whilst conceding that even after dinosaurs met their fate lizards pulled through (as did crocodiles and sharks!).

As you know, I would so love to believe that the billable hour is indeed dead-but I regret to report it is not- at least not yet. It is no doubt sick, but if it is dying its death throes are still reverberating.

I recently returned from the US attending some legal conferences and meeting with many lawyers, law firms, legal commentators, consultants, academics, legal authors and law students. Almost without exception (the exceptions primarily being legal consultants and software vendors who peddle time “capture” methodologies and who perpetuate the “lawyers sell time” myth) all agreed that the billable hour is pretty crook, is a sub optimal model and is no longer meeting the business needs of either the law firms or their clients (let alone the social and cultural needs of those who work in law firms).

What then has largely been the response from the profession to this sickness?

Apart from the innovative and courageous outliers- whose numbers I hasten to add are increasing all the time- and who have put the billable hour out of its misery by completely changing their business model- most firms apply a bandaid approach and continue to work within, and therefore prop up, the existing leveraged based business model.

Some firms have come up with all sorts of ingenious ways to increase the billable hours of their lawyers especially by spending huge dollars on technology & training so lawyers can better (“more accurately”) record their time wherever they might be and whatever the day or night of the week. (Atticus Finch’s tombstone would these days read something along the lines of “Here lies Atticus-a heroic biller & time recorder”). Whilst it is true many firms have adopted Alternative Fee Arrangements (mostly in response to client demands, rarely of their own volition), most of those AFA’s look to me to be billable hours in drag (“if it walks like a duck, quacks ……”) based around fixed fees, capped fees, blended rates, etc- all calculated on the time x rates x people model.

Is it any wonder good people are increasingly looking for better alternatives than working in a private legal practice; clients are looking to other providers to add value to their businesses; and that external disruptors will continue to flock to the legal profession in droves to exploit law firms’ soft underbelly-our lack of flexibility, failure to innovate, unwillingness to collaborate, our short term greed for the almighty dollar, our 19th century governance structures, absence of diversification-and most of all our cultural desert.