Why are Big 4 and Top 100 Firms Slow to Change Business Model?

Why hasn't one Top 100 accounting or law firm adopted Value Pricing and replaced timesheets?After all, Crispin and Porter, an advertising agency with over 1,000 employees, does not do timesheets and Value Prices all its work.Further, Coca-Cola and Procter & Gamble do not look at timesheets or billable hours in compensating their thousands of advertising agencies.This is one of the topics we discussed at our recent VeraSage Conference in Napa, California.Kurt Siemers, CEO of Kennedy and Coe, was in attendance and gave us his thoughts on this topic as well.At a major meeting of large firms that Tom Hood facilitated, changing the reigning business model was number 4 on the list of priorities, which is encouraging.To be fair, Kurt's firm is in the Top 100 and has made significant progress in the area of implementing Value Pricing.Tom Hood conducted interviews with Kurt Siemers, and myself after the conference.What About the Big 4?Brent Uken is a principal at Ernst & Young, a friend of VeraSage, and a profound and deep thinker.Unfortunately, Brent couldn't attend the meeting, but sent us his thoughts on why the Big 4 are slow to adopt—and by adopt, we mean change their business models from "We sell time" to "We sell intellectual capital."The following analysis from Brent, we think, is absolutely profound and is illustrative of what we in the professions are up against in our Quest to change the dying business model of professional firms.

Ron,On the "slow to adopt" topic, let me offer my perspective and opinions.What follows are candid thoughts that represent broad themes. No doubt that in an organization of 100,000+ you can find exceptions to what follows, but I believe based on my tenure/exposure within the firm, that these are in large part accurate.

• If it's slow to adopt abolishing timesheets—I think that's a non-starter. It will take firms/organizations outside of the Big 4 to effect this change, and they will migrate to it eventually—but only when forced to.There are several reasons why, but I believe the most compelling are that:
  1. there are decades of culture around the use of timesheets (it's embedded in the stories we tell);
  2. timesheets are literally at the center of all financial reporting in the firm;
  3. there is too much investment in timesheets and related financial systems for senior management to move in a different direction.

  Specifically on the last point, as liberating and competitively advantageous as it would be to do so, our senior leaders know no other way, and it would be too threatening for them to discard what many have built their careers around.Case in point: we still measure revenue per hour to the dollar on a weekly basis, produce literally thousands of pages of metrics a month that are based on the "chargeable hour" as the denominator in the equation, etc.Case in point #2: Hours x rates x realization is how we measure revenue...revenue, arguably the most important measure of performance in the firm.

• If it's slow to adopt value pricing—I am much more optimistic. However, it is amazing to me that we continue with old/sub-optimal behaviors even in the face of concrete evidence that contradicts them.As you and I have discussed, I know that it is human nature to do so—to remain on the shores of the familiar, as the forces that draw us to the familiar are incredibly strong. Nothing new to you here.I think in the Big 4, however, the culture around timesheets and value pricing are linked (and if we can't migrate away from timesheets/charged hours, by extension it's going to be difficult to migrate to value pricing).We've literally been trained (indoctrinated) that we sell our time, that we bill by the hour, and that clients want/expect us to bill by the hour and will not tolerate any other arrangement.What perpetuates this is that indeed some clients, perhaps due to habit—perhaps because some are astute (they capture more of the value created by our services if they pay by the hour)—would prefer hourly billing (so there is just enough "evidence" in the market that supports our professionals' views that it is the most appropriate billing arrangement for our services).
• I don't believe that we really understand the value equation, or maxims like "strategy dictates spend."I think we've lost our relevance, and that the supply-demand curve for our services has shifted against us over the past decade.Not so long ago, there was more than enough work to be had, and not enough capacity in the industry (remember it wasn't too long ago that Andersen was imploding, SOX was being introduced, etc.—heck, we were even firing clients!!).That resulted in strong financial results, but it provided zero incentive to think differently. In sum, we are not identifying and understanding our clients' strategic objectives. Obviously, if we don't even know what they are, it's impossible to align with them, support them—or help our clients achieve them.
• We haven't cracked the code on structure, either. There's a thought provoking book entitled ReOrganize for Resilience that powerfully drives this point home.We have been too internally focused for too long, and our structure doesn't allow us to shift our focus to what is most important—the problems, initiatives and strategic objectives of our customers.Our structure and performance management metrics are barriers we need to reduce/eliminate.
• We have trouble articulating our own strategy. We've allowed benchmarking to peers and operating efficiency to be our proxy for strategy for so long that I can't say that there's much that's truly unique about any of the Big 4.And what's implemented by one is quickly copied or adopted by another.I do believe that we have the potential to truly differentiate, but we're not seizing it. We haven't found our competitive advantage or created a "blue ocean" (reference to Blue Ocean Strategy).In my mind, the Big 4 is the epitome of competitive convergence (reference to Michael Porter's HBR article, "What is Strategy?").On a related note, to draw on Theodore Levitt's work ("Marketing Myopia"), we don't know what business we're in, or what our customers truly value.
• We're over managed and under-led. We could benefit from revising the "Why?" question, as we've been differentially focused on the "What?" and "How?"It would be refreshing to have something that is truly bigger than each of us to rally around, and to have a leader(s) articulate a compelling vision and rallying cry.It is easy to get lost in the day-to-day activities that masquerade as importance. The advice Drucker provides is truly timeless, and unfortunately we aren't heeding it.

These are some of the major forces at play that are top of mind currently. I'm still trying to flesh this out, however...and I need to, as I create/align the change management strategy required to move us forward.Contrary to the tone I may have set above, all is not lost.Instead of the foregoing truly depressing me, I am extremely hopeful/optimistic. Because if we (EY, TAS, CT, Valuation—all the groups I am affiliated with) can figure this out, we can make the quantum leap over our competitors (Big 4 and others).The resources and talent are there, and we do have a strong base on which to build (we're a large firm with strong operating results and strong client base).I personally feel that it is my responsibility to make this happen. As campy as it sounds, I truly feel that I'm on a crusade to effect the change we need.I have 15 years left with the firm until I am forced to retire, and the clock is ticking for me. I want my legacy to be that I was the one at the center of this movement.I hope this helps further the dialogue this weekend. Have a most excellent session!Regards,Brent

I've talked to a lot of Big 4 folks, and outside of the marketing and talent areas, it's nearly impossible to find someone who gets it as much as Brent does.Samuel Adams was right:

It does not take a majority to prevail, but rather an irate, tireless minority keen on setting brushfires of freedom in the minds of men.

Allow me to close by quoting Peter Drucker on two points (from a masterful book, Technology, Management, and Society). The first is why professions are so slow to change:

Indeed, in the business enterprise we have the first institution which is designed to produce change. All human institutions since the dawn of prehistory or earlier had always been designed to prevent change—all of them: family, government, church, army.Change has always been a catastrophic threat to human security. But in the business enterprise we have an institution that is designed to create change. It means that every business, to survive, must strive to innovate.

The professions are not exactly incubators of innovation. I addressed this topic in my VeraSage DET in Napa (note: We will be posting in the future all of the VeraSage DET talks given in Napa).The second point is illustrated by the pithy line from physicist Max Planck:

A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.

This statement has often been interpreted as "science progresses funeral by funeral."This seems a rather pessimistic view of mankind's progress, as if we had to line up our elders and shoot them in order to advance. Yet, sometimes it seems so.Again, Peter Drucker said it best:

The young are always in the right, because time is on their side. And that means we have to change.

Among those young professionals is Jason Blumer and Michael Hsu.Tom Hood conducted an interview with Michael Hsu after the VeraSage Conference, a young CPA who embraces our radical business model.No doubt that young knowledge workers are going to be the main driver of change in the professions, since they are not overly invested in a business model that is already dying.What do you think?