In our experience, there are two reasons why Value Pricing fails in firms. First, the price quoted was simply too low because the value created was misunderstood, or—and this is more common—the firm just wimped out on the price.
The reasons why this happen are many—no Chief Value Officer, no pricing cartel formed, no responsibility or expertise in pricing, not willing to take risks, not learning from successes and failures, no intellectual curiosity, among others too exhaustive to list.
Second, firms are horrific at scoping projects, project management, and communicating with customers up-front about what is covered in the price and what is not. This leads to the insidious scope creep, the largest killer of Value Pricing initiatives across all firms.
There’s a saying that if you do something stupid once, it’s a mistake. Do it twice, it’s an ideology. Why professionals can’t learn to back off from work that isn’t pre-authorized by the customer has always amazed me. I couldn’t do when I practiced because of what I was taught by my leaders. It wasn’t until I became convinced it was the right thing to do for the customer that I began to change my behavior.
None of us would give our auto mechanics a blank check for repairs just because they found another problem. If auto mechanics and contractors can adequately define scope and issue change orders, why can’t we?
Ed Kless and Chris Marston have both written wonderful posts on scoping projects, another of which is on Chris’ blog. There is a framework to follow, but as with the rest of Value Pricing, you have to find your own way.
In that spirit, Trailblazer Matthew Tol sent me this thought-provoking email on his firm’s approach to scoping projects as well as managing the customer’s expectations.
I have just come from a meeting with a business which was looking at us to do some work for them. From that meeting, I learned an interesting new concept with regard to scoping and explaining it fully to the potential client.
The business they are in is an absolute mess—they have no idea of where they are financially and have spent the last eight years building an operation which has grown at in excess of 65% (compound) annually. In short, they have done a spectacular job of getting to where they are now but they’re not sure where that is!
The first problem is that their systems are way way way below the level they need to be. They want help in getting their information up to date and then assisting them with developing new systems to cope with their planned growth from here on in.
The second problem they have is they have an ex Consultant (ex Big 4 Accounting Firm) who was wanting a fixed price (which is a good start) for the agreed scope. In our discussions however, it unfolded that many of the issues they had assumed were within their scope were in fact potentially outside of it.
Issues such as incomplete records, erroneous assumptions on the part of prior staff and God knows whatever else. We proceeded to have a rather detailed discussion on the scope whereby we likened the issue to peeling back the layers of an onion—the initial scope was to peel back one or two layers. If we then found that we needed to keep peeling back layers due to what we’d found, then we would be downing tools and seeking a discussion with them as to their preferred method of progress from there on—they fix it or we have a Change Order and we’d attend to it.
It is the assumption gap that creates the issue here—unless the scope is very precise and detailed, you’re bound to have problems. To ensure your scope is correct and valuable to the client, you need to spend a fair bit of time questioning not only what they want but why they want it and what they will do with the outcomes from the engagement. The understanding leads to precision.
The base learning in scoping discussions is that initially we assume that everything is OK (natural when you’re speaking with a potential new client). Once you’ve done it a few times, you find the scope is a bit like an onion—we need to understand that the scope may expand down through a number of different layers.
Having your initial scoping deal with the known and unknown layers ab initio can save a pile of time (and pain, angst, badwill and fees) down the track. It will ensure the relationship gets off to the best start and gives it a great chance of developing and growing over the duration of the engagement.
Maybe our lawyer friends could take something from the above that will help them get on the bus (ref “Talkers are no good doers” post).
Thanks for sharing your intellectual capital Matthew, your progress continues to inspire all of us here.
Some of our fellows believe one way to incrementally implement Value Pricing is to begin with a clear scope document in the Fixed Price Agreement and start issuing change orders.
You don’t have to be very skilled at pricing to achieve this. And since it’s the hardest part of Value Pricing, as well as the largest reason for failure, it’s probably a good place to start.
Perhaps another Key Predictive Indicator for the pricing cartel could be how many times someone identified scope creep, and what percentage of the time does that lead to change orders.
We’d love to hear from other firms on how they approach scope creep.