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.

Shakespeare was Right!

Latest blog post about communication and how being more effective at it (which involves taking responsibility for ensuring the message is received) can make a big difference. It can be found here.

Some Super Posts on PM

Late last week, I received the email from Wes McClure, a software development consultant and coach at Full City Tech Co.

He writes:

Hey Ed, I’ve been writing a lot about why value is important in the software development process from my personal experience. I’ve been consuming a lot of content from the VeraSage website and felt like some of this might help software development professionals make the leap to value based pricing. I wanted to share this with VeraSage if it’s of interest for the resources collection:

If it looks helpful, let me know what I can do to help you share it with others.

Thanks

-Wes

While Wes writes primarily about software and technology, he clearly understands the importance of the value conversation in the process.

Enjoy the posts!

Are You a Diamond Cutter?

imagesCAWN2O7U

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.

A Post On, Egads, Effort

images-5Regular readers of this space will know I am not a fan of the cult of efficiency that enraptures most businesses today. In my project management classes I stress that duration is the more important metric both the the professional and the customer.

That said, I would like to update the idea of comparative advantage as originally put forward by economist David Ricardo, but updated for the knowledge worker, especially the small firm. This idea seems to be about efficiency, but if one looks deeper, one will see that it is truly about effectiveness.

Adam Able is the owner/operator of a small IT consulting firm. Adam has been working in his industry for over 20 years and has a wealth of knowledge and domain expertise with the products with which he works. Because of this Adam, can slam out a new customized report in an average of two hours. He can also do an average migration of data in one hour.

Igor Egit is relatively new his profession; he has been at it a little over a year. Igor is not the brightest bulb in the drawer. On average it takes him three hours to deliver a new custom report, 50 percent more than Adam. While Igor does not suck at reports, he is a migration moron and it takes him four hours to develop a workable data migration, 400 percent longer than Adam.

This table shows the comparison.

  Igor Adam
Report 3 2
Migration 4 1
Total 7 3

 

If each does one report and one migration the total is 10 hours and the yield is two reports and two migrations.

Comparative advantage says that while Adam is better at both, and could theoretically do it himself in six hours, he is better off specializing in migrations and allowing Igor to do the reports, even though this runs counter to the idea of efficiency.

This table demonstrates the results of specialization.

Igor Adam
3 1
3 1
6 2

 

Notice again, that the yield is still two reports and two migrations, however, each received an hour of additional discretionary time. In addition, the total effort decreased to eight hours.

Now, some may argue that from an efficiency standpoint, it would be better to have Adam do both, since the total would be six hours not eight. What would that do to Adam’s leisure time? It would reduce it by four hours.

Looked at in this light, we can see that the question is: does it make sense for Adam to trade four hours of discretionary time in exchange for two reports from Igor. This is a value tradeoff that only Adam (and in a sense Igor) can make.

The trap is set, however, if we introduce the idea of a billable time rate to this example. Since it is unlikely that Adam’s rate would be three times that of Igor’s. Adam’s customers will either a) insist that they pay a reduced rate for Igor, or worse, b) insist that Adam himself do the work.

The traps is sprung! Adam, in the name of good service, will acquiesce to the customer. Likely, Igor will be out of a job; and Adam will miss more Little League games.

On Chunking

For those of you who struggle with ensuring that delegated tasks are completed on time, I have some good news for you. New work by some behavioral economists has shed some light on this difficult situation.

Most of us are familiar with the psychological concept of chunking in large part because of a famous paper published in 1956 by George A. Miller entitled The Magical Number Seven, Plus or Minus Two: Some Limits on our Capacity for Processing Information.

The idea is that our short-term memories can only remember 7 +/- 2 items in a list, such as number, unless we chunk it down into groups of numbers. Some common examples would be phone, credit card and social security numbers.

More interestingly, some behavioral economists have demonstrated that the same concept can be applied to the assignment of tasks. When an assignment is given to a person to complete, it is far more likely to be completed if it is chunked into two or three sub-tasks, rather than just assigned as a single task.

Rory Sutherland refers to this in many of his presentations. Here is one from the APA. He talks about this concept beginning at 2:45, but watch the whole thing it is great stuff!

The lesson here for professionals is this – whenever you give an assignment break into at least two parts, even if it seems somewhat artificial. Some examples:

  • “Enter this data, then call me.”
  • “Review this document for clarity, then email it back to me.”
  • “Create the report layout you want, then convert it to a pdf.”

I believe this will work when you assign tasks to fellow team members, but, more importantly, I believe it will help with tasks that you assign to your customers.

I have begun to experiment with it and it seems to be working.

Great Moments in Value Pricing History

I am honored to be lampooned with Ron Baker in the new series of videos from Damn Good Hush Puppies. These two were premiered at the VeraSage event in Las Vegas which was sponsored by the AICPA and Sage.

Part 1 – Ron Baker

Part 2 – Ed Kless

Enjoy!

On Agile Project Management

Over the past few years, I have been hearing more and more about Agile development project management. For the most part the conversations have not been very positive.

This is not because I think there is something inherently wrong with Agile, but because those that espouse it have always tried to convince me of two things:

  1. Agile Development requires little to no planning
  2. There is no way to do agile development in a fixed price environment

You can imagine that I begin to shake violently at either of those ideas.

In the past month I have had two conversations that have corrected some of these misgivings. Mostly because I have come to the conclusion (confirmed by my conversations) that the folks with which I have had these previous conversations about Agile were full of shit.

Stephen Smith                 05e65fd

The two conversations – one with Stephen Smith, Chief Architect at Sage, the second with Rick Cobb, senior ERP consultant at Blytheco – have enlightened my thinking when it comes to Agile.

Rick had just taken a class and was kind enough to take me through the materials. I found that in many ways I am in alignment with many of the principles of Agile. For example, I really like the idea behind this:

image

Now, I would enhance the idea of customer collaboration to a more broad idea of comprehending customer value. Indeed, one weakness of all of the project management methodologies I have seen is the assumption of customer value. In all fairness, it is difficult to integrate value into any methodology because of it subjectivity, but that is for another post.

My conversations have led me to a few conclusions, all of which I am open to change based on more learning.

  • Agile is probably not for most knowledge worker projects. While I certainly see Agile working in many other places (some noted below) one-time knowledge projects (such as an implementation) is not one of them. The reason is that implementation projects tend to be more holistic in nature. For example, you cannot get the full value from one aspect of the engagement without having first set up another element of the project. Agile calls for prioritizations that make no sense in the context of these types of engagements.
  • Agile makes a ton of sense for any iterative type projects which are normally more creative in nature than say ERP implementation. For example, with ERP, ultimately debits must equal credits (i.e., conform to GAAP), whereas with CRM or web-site development there are no rules.
  • One area where Agile could make sense for implementation type projects would be in dealing with change requests and change orders. Often, these are mini-development projects and therefore Agile might be quite effective. I say might because on small engagements, some of the change requests might be so small as to only need an adjustment to the statement of work.
  • Another area where Agile excels is in communication. The daily standup meetings and one to two week scrums have some excellent communication touch points built in. I hope that when Agile is implemented that these processes are truly adhered to. There are definitely some things that Agile can teach us about better communications.

Ultimately, I think Agile is very much in line with the concept of results oriented project management that I presented in this space a few weeks back. This gives me some hope for being able to integrate some of the best idea from both methodologies into one more coherent approach.

My thanks again to Stephen and Rick who contributed to my thinking about this post.

ET HORA LIBELLUM DELENDA EST

On Words I Would NOT Use

At a recent Firm of the Future Symposium with the THRIVEal Network in Greenville, SC, Ron Baker and I were asked about some of our word preferences. On the spur of the moment we developed this quick list of words we believe should be avoided by professional knowledge firms.

Staff – This makes us think of a type of infection. We prefer team member, colleague, associate, or people as alternatives.

Client – In ancient Rome, the lawyers of the day functioned as public servants and were not paid for their work. Instead, they were appointed to their duties in working with their clients. The relationship was not one of equal status and implied a sense of duty and obligation to serve the great unwashed. The word still has this connotation in the context of social workers and their clients. We prefer the term customer which is an Anglo-Saxon word derived from the fact that it was the custom of certain people to frequent a particular place of business.

Value billing – Nothing will set a VeraSagi (our made up and officially adopted name for someone from VeraSage) off into a tirade faster than calling the pricing practices we espouse value billing. A bill is produced in arrears whereas a price is agreed to upfront. This term is linked with professionals when the do write-ups to a time calculated bill. We believe this practice to be more akin to mail fraud. The preferred terms are value pricing, pricing on purpose, or pricing with purpose. When discussing price with a customer we suggest the term fixed price or open (meaning transparent) price.

Fee – This word has a negative connotation as it is associated with governmental and penalty type incursions. We suggest the use of the more neutral word price.

Hours – We believe the only place time spent should matter is in prison. We would ban all use of the word hour and suggest a $5 fine whenever it is used. There is no acceptable substitute.

Training – Horses and dogs are trained, humans are educated. Training implies a bullwhip lashing sounds in the background. Also, do you want your 16-year-old daughter to get sex training or sex education.

Service – We believe most professional firms do not provide services. They provide access to and/or transfer of knowledge, results, objectives, and occasionally goals.

Did we miss any of you favorites? If so, please leave a comment with the term to be avoided and your suggested alternatives.

ET HORA LIBELLUM DELENDA EST

Book Review: The E-Myth Accountant

I’ve long been a fan of Michael Gerber’s E-Myth book. His concept of working “on” the business rather than “in” the business was a major theme of the Accountant’s Boot Camp, developed by my good friends Paul Dunn and Ric Payne.

So when I learned that Darren Root co-authored The E-Myth Accountant with Gerber, and especially since I was presenting with Darren at the Sage Summit, I was looking forward to reading their views on what Darren calls The Next Generation Accounting Firm™. The Firm of the Future is a topic near and dear to my, and VeraSage’s collective, heart, and I was looking forward to learning another perspective.

image

Areas of Agreement

There is a lot of good advice in this book with which I agree. Here is a bullet point summary of some of their better recommendations, most of which come from the chapters that Darren Root wrote:

  • Darren asks a good question: “How did the accounting profession become a mass of technicians and very few business leaders?” David Maister’s book, True Professionalism, is necessary reading to overcome this.
  • Firms engage in mass client acquisition, whether or not they are a good fit for the firm. We call this the market-share myth, a form of cancer (growth for the sake of growth). It leads to incredibly weak pricing power.
  • Same as above with offering too many services, which Darren argues keep CPAs at the technician level as well. The debate between the specialist and generalist is over—the specialist won. This video from the late Paul O’Byrne illustrates this very effectively.
  • Darren writes:

    It’s time to trust your people, let go, and give yourself the opportunity to work on your practice…not in it.

    Good point. Follow this path to its logical conclusion: it leads to scrapping timesheets and implementing a Results-Only Work Environment (ROWE).

  • It’s hard to disagree with this:

    The old business model has long been to sell billable hours. Instead of selling billable hours, your firm sells complete solutions. If your goal is to get off the proverbial hamster wheel and build a business, it is critical to abandon the billable-hour model and adopt value billing [sic—he means value pricing].

    Darren believes that accountants are finally starting to hear the value pricing message, and I hope he’s right. He says that hourly billing doesn’t take into account efficiency or new technologies.

    However, that’s not the major weakness of the billable hour. It’s Achilles heel is it doesn’t take into account customer value, and is based upon an incorrect theory of value.

  • In a chapter written by Gerber (“On the Subject of Clients”), he discusses how to deal with client dissatisfaction with a 7-step process. What’s missing, though, is the recommendation that firms offer a guarantee to all customers.
  • Darren suggests spending a good portion of your marketing budget geared toward strengthening existing client relationships. Indeed. As the AICPA pointed out years ago, it costs eleven times more to acquire a customer than to retain one.

The Gap

For as many topics as we agree on above, I’m afraid the chasm that exists between my vision of the Firm of the Future and the one laid out in this book is simply irreconcilable.

But as with most disagreements, this is more a conflict of visions rather than a disagreement about facts. I’m reminded of what Blaise Pascal wrote in Pensees:

When we wish to reprove with profit, and show another that he is mistaken, we must observe on what side he looks at the thing, for it is usually true on that side, and to admit to him that truth, but to discover to him the side whereon it is false. He is pleased with this, for he perceives that he was not mistaken, and that he only failed to look on all sides.

The side the authors are coming from is to build the McDonald’s of professional firms, by laying out a path for creating “a highly efficient money-making practice.”

Yet a glaring omission from this work is any mention of the knowledge economy, or knowledge workers. This is the dimension the book ignores completely.

A professional knowledge firm isn’t McDonald’s, nor should it be. This example of Gerber’s has always irritated me, but it is particularly egregious in a book for professionals.

This is where the author’s analogies to the importance of systems break down in a knowledge economy. Gerber posits “The People Law: without a systematic way of doing business, people are more often a liability than an asset.”

This is strange statement, given that 75% of the world’s wealth resides in human capital, according to the World Bank.

The prominence given to the “system” over people is redolent of Frederick Taylor, who wrote:

In the past the man has been first; in the future the system must be first.

Peter Drucker refuted this logic in his 2002 book, Managing in the Next Society:

What made the traditional workforce productive was the system—whether it was Frederick Winslow Taylor’s “one best way,” Henry Ford’s assembly line, or Ed Deming’s Total Quality Management. The system embodies the knowledge. The system is productive because it enables individual workers to perform without much knowledge or skill….In a knowledge-based organization, however, it is the individual worker’s productivity that makes the system productive. In a traditional workforce, the worker serves the system; in a knowledge workforce the system must serve the worker.

Yes, knowledge workers will create their own systems. That’s the point. Two surgeons will not perform an operation the same way. Even two barbers won’t cut hair the same way (nor would we want them to).

This is why Steve Jobs says:

The system [at Apple] is that there is no system. That doesn’t mean we don’t have a process.

Sure, there are things that can be turned into a repeatable process, but the value in knowledge work lies in where there is applied judgment, creativity, and wisdom. And you simply can’t systemized those virtues. Indeed, if you try—with Six-Sigma, Lean, etc.—you kill them.

The better solution is to capture the knowledge that is tacit in those unique ways of doing things so the knowledge can be spread across the firm. Yet any discussion of knowledge management and capture is missing from this book.

The authors also seem to think that the systems should only be designed by the firm’s owners, rather than its workers—this is a large part of working “on” the business rather than “in” it.

But to borrow from Steve Jobs again, does it really make sense to hire smart people and then tell them what to do? Apple hires smart people so they can tell Apple what to do. Welcome to the knowledge era.

The idea that all the intelligence rests with management didn’t work in Frederick Taylor’s industrial era and it certainly doesn’t work in a knowledge economy. Worse, you cannot inspire creative knowledge workers by spouting Taylor’s efficiency mantra.

Today, knowledge workers are the system, which means they have to have a hand is designing it. Even auto manufacturers understand that those closest to the work are the ones who can improve it the most. See Toyota.

Yet the cult of efficiency is worshipped throughout the book, even though Darren quotes Steven Covey:

If the ladder is not leaning against the right wall, every step we take just gets us to the wrong place faster.

Nowhere is the recognition that there’s nothing more wasteful than being efficient at doing something that shouldn’t be done at all. Or that efficiency—and technology—are mere table stakes, not a competitive advantage, since your competition can easily replicate those gains.

Darren even suggests you identify those services you do best, which he defines as being able to perform with a high level of efficiency. But surely you should identify those services that you can perform most effectively—better yet, efficaciously—and that create the highest value.

If there’s that much efficiency to be gained, they are probably low-value services that should be outsourced (see the Stan Shih Smile Curve).

Peak efficiency is a sign of no innovation.

The same error is made when he claims the major factor driving realization is the existence of proper systems and processes. But this is incorrect. Price drives profit more than any other factor.

Further, he writes that his firm’s realization is over 100%, but that just means he’s still comparing price to hours x rate; it has nothing whatsoever to do with pricing commensurate with value, as he claims.

He also proclaims he’s not a proponent of throwing away timesheets, since they can catch scope creep, measure efficiency, benchmark against other firms, and allow him to manage what he can measure.

These are weak arguments for timesheets. If you’re catching scope creep from timesheets, it’s way too late to price it—you’re billing and ducking in arrears at that point, and by the hour. Project management is far more effective.

And the idea that timesheets measure the efficiency of a knowledge worker has been well destroyed in all of my books. This is illusion of control and one of the seven moral hazards of measurement.

This defense of timesheets is particularly amusing when compared to what he writes toward the end of the book:

Remember: Just because you’ve always done things in a certain way doesn’t mean you have to continue that tradition. If it’s not working, it’s not working. Abandon the old and make way for the new.

Except, of course, when it comes to the ancient tradition of maintaining timesheets.

Also, towards the end of the book, Gerber explains that Time is not money; time is life. If true, then why are we dividing a firm’s revenues and costs by life?

[And even if you still believe the old canard that time is money, all that means is we are dividing cost by cost if we use the hourly metric system].

There are other major areas of disagreement with the book. Their concept of a firm’s vision is too focused on what and how, not why. It’s far more effective to develop your firm’s why, letting that drive your what and how, consistent with Simon Sinek’s TED talk, and book Start With Why.

Gerber posits that there are six types of clients around which your entire marketing strategy must be based. But I find this unconvincing, and it could benefit from Occam’s Razor. Asking customers about their expectations would be more effective. Also, innovation is the firm’s job, as customers don’t innovate, they iterate.

Then Darren writes that clients are a firm’s greatest assets. But customers are not owned by firms, anymore than human capital is owned. Speaking of them as assets is inhumane and demoralizing.

The book does not contain any endnotes, a bibliography, or index. Outside of the few books and authors mentioned, it would be helpful if the authors shared the books that have shaped their thinking.

In conclusion, if you read this book, do so with this caveat: the book’s gap of not discussing the knowledge economy is simply too wide for me to overcome. It overshadows everything they write, and the logic traps them into the cult of efficiency rather than one of creating value.

We no longer live in an industrial economy where the talisman is Frederick Taylor’s enigma of efficiency and the “one best way.” A PKF is a human relationships-based entity, not a factory.

On the positive side, now that I’ve met Darren, there’s an opportunity for ongoing dialogue. If all goes well, we’ll get him to trash his timesheets someday.