Reed Holden is a genius. I’ve said it, written it, and mean it. He is a graceful, patient and effective scholar.
I have learned more from him about the practicalities of pricing than anyone else, through his teachings, presentations, and book. Reading his book was a huge epiphany, and it changed my life. One doesn’t easily forget that type of impact.
I first met Reed at a Professional Pricing Society program, and then attended his pricing seminar, Pricing: Strategy and Tactics, at the University of Chicago Graduate School of Business. In short, he’s taught me a lot. He further honored me by writing the Foreword to Pricing on Purpose, and has since read and provided feedback on all my books.
Reed is currently working on his next book, along with his colleague Mark Burton: Pricing with Confidence: 10 Rules to Stop Leaving Money On the Table. It is due out in February or March of 2008. I can’t wait to read it, since Reed graciously let me provide feedback on the title and the ten rules.
It was during that process when I was confronted with a conundrum: how does one disagree, in this instance quite vehemently, with one’s mentor? In an email challenging him on one of his proposed rules, I wrote this:
Reed, this is hard for me, especially when I challenge my mentor, not an easy thing to do. But it’s done in the spirit of learning, which I’ve concluded comes more from dissent than consensus. It’s also done with incredible humility.
This is how Reed responded, which I think proves how intellectual honest and curious he is:
Ron: This is great feedback. Challenging people is about what an intellectual debate should be about. When you can’t challenge a mentor, you have a problem but the mentor has a bigger problem. I think it was back in the 1980’s, a JAL 747 was landing at SFO. It landed short—in fact, it landed right in about 6 feet of water. The entire cockpit crew, who knew that he was landing short, was afraid to challenge the captain. Nuff said?
Then in early May, Reed sent out the final ten rules to be included in the new book. I promised him I wouldn’t disclose them, but I had a vehement disagreement with the explanation for rule #9, which read:
There is nothing wrong with cost-plus pricing as long as it does a good job of leveraging the financial value you create for customers.
What? Did I read that right?
After all Reed has written about the deleterious effects of cost-plus pricing, and with all I’ve written about it—which is far more scathing and probably goes further than Reed may be comfortable with—how could he write this? But I know we are in essential agreement that cost-plus pricing is an inward-looking method, and if it does correlate with value, it is purely by accident.
In fact, my personal opinion is the chances of cost-plus pricing correlating with external value are about the same as finding bird shit in a cuckoo clock.
In any event, once again I was forced to challenge my mentor, writing:
This is great [the final ten rules to his book], I can’t wait to read it.
The only reservation I have is your Rule #9, particularly in the context of professional knowledge firms. I can just hear all the bean counters saying to me: “See, even YOUR mentor believes cost-plus pricing is okay.” You’ve provided a loophole they will drive their antiquated truck through. They’ll cling to anything to support their outmoded belief in the billable hour.
I just fear it lets executives off the hook from looking outside the company at value, keeping their focus internally on costs and efforts. That scares me. I suppose I’m the reformed alcoholic zealot, given my CPA background. It took me years to learn the damage historians with lousy memories can wreak on companies (aka CFOs). Peter Drucker, in one of his last public appearances, talked about exactly this, which I posted on my blog.
That said, if we agreed on everything one of us would be unnecessary—me, I’m afraid!
Thanks for letting me participate in the birth of the book.
Your faithful student,
Here is Reed’s reply:
Ron: Great feedback—we’ll see what others say and might move that one a bit. The point we’ve found is that companies don’t know how to move off of cost plus pricing—especially professional services firms. We’ve nudged them in a better direction with a “better” cost plus program that looks at high value activities and managing the real scarce resources of the firm better. If you look at the article in the Journal on Parker Hannifin, that’s what they did—still cost plus but different formulas to reflect the value of the product.
Another problem is that some firms have moved into “value pricing” too fast and it blows up on them. Our message is slow and steady.
thanks for the feedback
To which I replied:
I agree, PKFs should move gradually. But I can tell you most firms don’t invest enough in their Value Pricing programs, which is why they blow up—and I don’t mean money investments but intellectual capital.
They still don’t do project management, After Action Reviews, Change Orders, value marketing and selling, learn and manage customer expectations, and other things necessary to make a VP initiative work. In fact, I’d argue the billable hour lets them off the hook from doing all of these things, which is why it is so pernicious.
It’s a lousy carpenter that blames his tools. VP is sound in theory and practice. PKFs are intellectually lazy, clinging to a past that is dying, and since we humans are guided far more by our beliefs than what we know, changing those beliefs is quite difficult. And it is a gradual process. But I remain optimistic because we have seen hundreds of firms successfully make the change.
But believe me, I know and understand totally what you are saying. We could spend years on this topic (and I have!).
Thanks for letting me rant!
And the last reply, from Reed:
Funny, I guess I’ve gotten used to the blindness of management. Was at Columbia last week and watched a group of fairly high level managers play with numbers—doing all these calculations and they didn’t have a clue either what the number was or what the calculations lead to—it was quite revealing. Plenty of time to do things, no time to think. Who’s fault is that?
Of course, I’d argue it is the fault of leaders who are more interested in being precisely wrong rather than approximately right. This is precisely why I wrote Measure What Matters to Customers—to counteract the idea that what we can measure and quantify we can manage. What nonsense. Quantifying should never push out intuition, common sense and judgment, but it does, which is why PKFs are in love with the billable hour and timesheets.
Not to mention their constantly confusing being busy with being effective. Knowledge workers need time to think, but when your pricing model is cost-plus, there is simply no code for “thinking.”
What a sad commentary on leadership today.
But what an awesome experience to be able to freely challenge your mentor without fear. I hope these clash of ideas lead to better ones, and I know Reed would agree with that sentiment.