Episode #45 Preview – Interview with Brad Smith

Ed and Ron will interview Brad Smith, Global EVP of Customer Experience at Sage.
Brad is responsible for developing all aspects of the Sage customer experience, from product design to the invoice experience and all points in between. He has nearly 20 years of leadership in web consumer, enterprise software, and communication service provider industries. Brad is on the board of the Consortium for Service Innovation and loves talking about customer experience.

May 15, 2015 Show Notes: Public Choice Theory

Winston Churchill said,

Democracy is the worst form of government, except all those other forms that have been tried from time to time.

Public Choice Theory describes the extension of analysis to the political alternatives to markets. Many commentators talk about “market failure,” but far fewer ever mention government failure. Public choice theory sheds light on how government employees face incentives as much as employees in the private markets, and how these incentives can create bad policies, costly regulations, and other negative consequences.

Identify a problem to be “solved” by government. But there are no solutions, only tradeoffs.

Nobel laureate James Buchanan and Gordon Tullock, founders Public Choice Economics, insisted:

Any formula for government intervention that ignores political realities is unscientific.

Gordon Tullock wrote that public choice was “politics without romance.”

Economists are often blamed for having a religious faith in markets, but no one has pointed out more market failures than economists.

We underestimate how well markets work and over-estimate how well democracy works.

Four Insights from Public Choice Economics

1. Special-interest-group effect (concentrated benefits, diffused costs)

  • Sugar program cost each American $9.24 yet it raised each sugar grower’s annual income by an average of $617,000 in 2012

2. Rational ignorance—your vote won’t determine election

  • Put more time into developing your job skills, or a major purchase then into an election. You’ll only get small amount of benefits, or pay small amount of costs

3. Rent-seeking—lobbyists wasteful to society, redistribution transfers slices of the pie, does nothing to increase pie

4. Bundling effect—Example: shopping supermarket

  • Imagine having to pick between two shopping carts pre-filled with food. You could look, put not move items from one cart to the other
  • Outside observers cannot know that you chose that Cart A despite its offering of diapers and dog food rather than because of them
  • We can say nothing about the majority’s preferences for any individual policy
  • So politicians don’t know why they won (or why opponents lost)

The Myth of the Rational Voter by Bryan Caplan

Why are voters predictably irrational?

H.L. Mencken: “Democracy is a pathetic belief in the collective wisdom of individual ignorance.”

Voters are asked to do brain surgery and they can’t pass basic anatomy.

Democracy is a relatively inferior way of making decisions: marriage, career, state to live, home to buy, etc.

Most voters are worse than ignorant, they are irrational, according to Caplan. He claims democracy fails because it does what voters want—a built-in externality.

Wisdom of the crowds doesn’t work with voting because of systematic errors

Most voters have four biases:

  1. Antimarket bias––tendency to underestimate the benefits of the market mechanism
  1. Antiforeign bias––a tendency to underestimate the economic benefits of interaction with foreigners
  • Incessant worry about the “trade deficit”
  • Ideological purity is free! Severe biases can’t exist in betting or prediction markets, but can in voters
  1. Make-work bias––a tendency to underestimate the economic benefits of conserving labor
  • China excavating land with shovels; Milton friedman asks, why not tractors? Need jobs. Oh, then use spoons
  • We wouldn’t think this way in our household, where we love labor saving devices
  • You don’t worry how to spend the hours you save buying a washing machine
  • Saving labor is progress and responsible for our ever-increasing standard of living!
  • Illusion that employment, not production, is the measure of prosperity
  1. Pessimistic bias––a tendency to overestimate the severity of economic problems and underestimate the recent past, present, and future performance of the economy.
  • Pessimism sells: Club of Rome, peak oil, Malthus, etc.
  • As you do better, your children have to do even better, optimism declines

Analogy between voting and shopping flawed. You don’t “buy” policies with votes.

Democracy let’s people with severe biases continue to participate at no extra cost.

If people are rational consumers and irrational voters, it’s a good idea to rely more on markets and less on politics.

Other Books and Resources

An unhealthy Alliance video

Episode #44 Preview – On Public Choice

“Democracy is the worse form of government…except for all the others.” — Winston Churchill

 

In this episode, Ron and Ed will examine public choice theory, which describes the extension of analysis to the political alternatives to markets. Many commentators talk about “market failure,” but far fewer ever even mention “government failure.”

Public choice theory sheds light on how government employees face incentives as much as employees in the private markets, and how these incentives can create bad policies, costly regulations, and other negative consequences.

In addition, we will also talk about the dynamics of group decision making in private organizations. Some of the same challenges confronted by government officials are also faced by people in private business.

We will explore the question, “What are the best ways for groups to make collective decisions?”

May 8, 2015 Show Notes: Interview with Dan Ariely

Ed and I were honored to have the opportunity to speak with Dan Ariely, James B. Duke Professor of Psychology & Behavioral Economics at Duke University, and New York Times best-selling author of four books.

Dan has had a major influence on the thinking of both of us in economic matters, especially in the areas of pricing, decision making, and choice architecture.

We asked Dan

  • Burning Man, which he tries to attend every year. He explains it’s a “gift economy,” not a barter economy.
  • Whether or not he was comfortable with the term “behavioral economics,” given that Austrian economist Ludwig von Mises argued that animals behave, but humans act (with a purpose or objective in mind), and they also learn. Dan uses the term “Judgment and Decision Making (JDM) in his first book, Predictably Irrational.
  • David Friedman says economists assume rationality because it’s useful and can predict human behavior about 50% of the time. Dan disputes the 50% figure, and explains why we need to explain failure points and mistakes in human decision making.
  • The “placebo effect” (Latin for “I shall please”). The term originally explained 14th century sham mourners. People get a larger placebo effect when the price of a pill was communicated to be higher than average.
  • Do the questions on the hospital in-take forms influence a patient’s ability to get well quicker?
  • The Economist subscription example Dan uses in his book and TED talk, with two and three choices, respectively. Is the “decoy” (or “dominated”) option manipulative?
  • Does Dan believe in the Subjective Theory of Value? He does say that value will never be perfectly objective, but we can do better at measuring it than we do now.
  • The backwards bicycle video. Dan hadn’t seen it, but discusses the power of habits and how hard they are to change.
  • In The Upside of Irrationality, Dan writes about the concept of “Hedonic adaption”: we humans adapt far more quickly than we think.
  • He also wrote in that book that “the market for single people is the most egregious market failure in Western society.” How has Internet dating has influenced this failure? Dan explains since it’s based on searchable and quantifiable aspects of people (height, income, etc.) it may not be very predictable of compatibility, like trying to understand how a cookie will taste by reading the ingredients. Humans are not algorithms.
  • Now that you’ve studied all of this irrationality, are you more rational? He focuses on habits, traps, and tries to establish rules (e.g., no eating bread).
  • In The Honest Truth About Dishonesty Dan explains “the fudge factor”: people’s ability to cheat, up to a point where they can still feel good about their own sense of integrity. He discussed how signing your tax return first would reduce cheating, and gave empirical evidence of how this worked with odometer mileage declarations for auto insurance (people declared 15% more miles when signing the form first).
  • His latest book, due out May 19th, Irrationally Yours, based on his popular Wall Street Journal advice column, and a new movie on dishonesty coming out May 22.

We highly recommend all of Dan’s books, blog, advice column and research.

Dan’s Books

Episode #43 Preview – Interview with Dan Ariely

Are we rational or irrational? Are we more like Mr. Spock or Homer Simpson? There are compelling arguments on each side of this issue. On this show, Ron and Ed will interview one of the country’s leading behavioral economists: Dan Ariely from Duke University. Dan is the New York Times best-selling author of Predictably Irrational, The Upside of Irrationality, and his latest book, The Honest Truth About Dishonesty. Folks, you won’t want to miss this show!

May 1, 2015 Show Notes: Best Business Books

Thousands of business books are published each year. Some are worthless, others have merit, fewer still have lasting value, but a handful possess the ability to transform your business (and possibly, your life).

Yet with today’s busy and demanding schedules, do you feel you don’t devote enough time to reading and absorbing new ideas? Then this show is for you. Ed and Ron will explore the best business books ever written, selecting their favorite all-time business books.

Ed and Ron discussed four of their all-time favorite business books. Stay tuned for further shows in this series where we will share more of our favorites.

Minding the Store, Stanley Marcus, 1974

Ron believes Stanley Marcus is the true grandfather of the customer service revolution. This is the single best book ever written on customer service, and the autobiography of a remarkable man who had a remarkable life.

“There is never a good sale for Neiman Marcus unless it’s a good buy for the customer.” Herbert Marcus, 1926, to Stanley Marcus on his first day working at the store.

Neiman Marcus (NM) was established (September 8, 1907) as a result of the bad judgment of its founders, Herbert Marcus, his younger sister, Carrie Marcus Neiman, and her husband, Al Neiman.

They established a sales promotion business in Atlanta, GA, and received two offers to sell out, one for $25,000 and the other for an exclusive franchise for the state of Missouri or Kansas for a relatively new product called Coca-Cola.

Stanley Marcus’s innovations:

  • First weekly fashion shows/bridal fashion shows
  • His and Her Xmas Gifts
  • Christmas Catalog
  • Fortnight (themes) to overcome October bus lag!
  • Personalized gift wrapping

Stanley took over store in 1950, after death of his father.

Women’s Wear Daily hung “the melancholy Plato of retailing” label on him.

People liked what they didn’t find at NM. Stanley wrote:

It’s up to management to decide, not whether the article will sell, but whether it should be sold.

Another excellent book on Marcus is Stanley Marcus: The Relentless Reign of a Merchant Prince, by Thomas E. Alexander.

Stanley wrote four books during his lifetime but this one of the only ones I’ve seen written about him by an insider, Thomas E. Alexander, who met Stanley in 1965 and served nearly 20 years as his Executive Vice President of Marketing.

This was an incredibly demanding job, since Marcus was the consummate marketer, and many previous men failed at in this role.

Alexander gives you an insider’s view of the famous Neiman Marcus Fortnights, a Dallas institution until they were discontinued in 1986.

Many of the pictures come from the Stanley Marcus Collection at South Methodist University, DeGolyer Library.

You’ll read about the first out-of-state store in Bal Harbour, Florida, opened in January 1971, and also the controversy of the San Francisco store opening at Union Square. Herb Caen was an incredible critic of Neiman Marcus opening there, and the irony was that Stanely Marcus was farther to the left than Caen ever dreamed of being.

One very amusing anecdote about Marcus are the two things that exceeded his expectations, which were very high. One was Sophia Loren, and the other was the Bohemian Grove in San Francisco.

Another is the story of Marcus’s falling out with the world famous architect, Frank Lloyd Wright. Upon hiring another architect and Wright seeing his drawings, sends Marcus a letter and under his signature writes, “Looks to me like you dropped big money to pick up small change.”

In the final chapter, “Saying Goodbye,” Alexander tells of Marcus, age 95, reflecting: “Without change, there is no challenge, and without challenge there is only the status quo but no progress.” Wise words.

Other books by Stanley Marcus

The Halo Effect…and the Eight Other Business Delusions That Deceive Managers, Phil Rosenzweig

Ed’s Summary:

  • Tom Peters gets destroyed.
  • Jim Collins gets destroyed.

Halo Effect: the tendency to look at a company’s overall performance and make attributions about its culture, leadership, value, and more.

Business books: scientific rigor or storytelling?

Do business questions lend to scientific investigations? Rosenzweig says, in many instances, yes. He believes there’s no need to veer between extremes: humanities and science.

We have no satisfactory theory of effective leadership that is independent of performance

Does strong financial performance creates employee satisfaction, or vice versa?

We yearn to find out how we can avoid the seemingly inevitable fate of decline and death.

Nothing recedes like success.

The book really debunks the work of Jim Collins, especially his book Good to Great.

Physics envy: we can predict the movement of planets, so why not the performance of companies?

Collins book offered a picture of business somewhere between Norman Rockwell and Mister Rogers

Profit Beyond Measure: Extraordinary Results through Attention to Work and People, H. Thomas Johnson and Anders Broms, 2000

In 1987, as mentioned before, H. Thomas Johnson and Robert S. Kaplan published Relevance Lost: The Rise and Fall of Management Accounting, which was named in 1997 one of the 14 most influential management books to appear in the first 75 years of Harvard Business Review’s history.

The book is credited with launching the activity-based costing revolution. Yet, these two thinkers have gone down very different paths since then: Kaplan going on to pioneering work in the field of performance measurement, creating the Balanced Scorecard, and Johnson moving on to what he calls “management by means.”

In fact, they are now feuding with each other, and have not spoken in years.

Johnson’s book Profit Beyond Measure is a seminal work, although not yet fully developed. And while I have severe misgivings about some of his environmental rants in the book, when he profiles Toyota and Scania—the latter now owned by Volvo—as two manufacturers that do not have a standard cost accounting system, he is on firm ground.

It is hard to argue with results, and Toyota is one of the most respected companies in the world, and has produced one of the highest-quality products at the lowest cost in the industry for years, dating back to 1926 when it started as a weaving machinery manufacturer.

As Glenn Uminger, a financial controller at Toyota Motor Manufacturing-Kentucky (TMM-K)—which Johnson studies in depth in his book—since 1988, says, “TMM-K has never had a standard cost system to track operating costs, and we probably never will.”

So how do they do it? How can a manufacturing company run without a standard cost accounting system? Toyota understands price drives costs, not the other way around. Here is how Johnson explains it in his book, Profit Beyond Measure:

None of these comments is meant to imply that Toyota does not have accounting and production planning information systems. Of course it does. Toyota has a comprehensive array of information systems, accounting and otherwise, with which to plan, in advance of operations, and to report results of operations after the fact. But information from such systems is not allowed to influence operational decisions.

Toyota management discharges its responsibility for costs not by taking arbitrary steps to manipulate operations, but largely in the vehicle planning stage. During the design stage, long before the first penny has been committed to making a vehicle, Toyota has always placed enormous importance on setting and achieving cost targets. To do so, over the years Toyota has developed a famous technique for target costing. Simply stated, target cost is the maximum cost the company can afford to incur to produce and sell a vehicle and still earn a required profit at the price customers are expected to pay.

Johnson goes on to explain his theory that Toyota operates under “management by means” rather than “management by results.” It is an interesting viewpoint because it views the organization as a living system, based on interdependent relationships, and those are nearly impossible to quantify.

He notes Dr. Edward Deming’s observation that over 97 percent of the events that affect a company’s results are not measurable, while less than 3 percent of what influences final results can be measured:

Because cost and profit are not objects, but are properties that emerge from relationships, quantitative measures can only describe them, they cannot explain them. Quantitative measures, unlike art, music, or the stories and myths that humans fashion with words, cannot convey understanding of the multidimensional patterns that shape the relationships from which results, such as cost and profit, emerge in a living system.

If Andrew Carnegie said, “Watch the costs and the profits will take care of themselves,” Johnson is saying, “Nurture the means. The results will take care of themselves.” Kaplan would say, “Measure the result and the means will take care of themselves,” and I say, “Watch your value, and the profits will take care of themselves.”

Turning to One Another: Simple Conversations to Restore Hope to the Future, Margaret Wheatly, 2009

Ed shared the ten questions from this book:

  • Do I feel a vocation to be fully human?
  • What is my faith in the future?
  • What do I believe about others?
  • What am I willing to notice about my world?
  • When have I experienced good listening?
  • Am I willing to reclaim time to think?
  • What is the relationship I want with the earth?
  • What is my unique contribution to the whole?
  • When have I experienced working for the common good?
  • When do I experience the sacred?

Episode #42 Preview – Best Business Books

Thousands of business books are published each year. Some are worthless, others have merit, fewer still have lasting value, but a handful possess the ability to transform your business (and possibly, your life). Yet with today’s busy and demanding schedules, do you feel you don’t devote enough time to reading and absorbing new ideas? Then this show is for you. Ed and Ron will explore the best business books ever written, selecting their favorite all-time business books. If you want to share your favorite business books, call the show at: 866-472-5790, or tweet us at #ASKTSOE.

April 24, 2015 Show Notes: Free-Rider Friday

Welcome to “Free-Rider Friday.” Most of our shows are “topic” driven, where we dive deep into one subject. Free-Rider Fridays are designed to be “event” driven—whatever issues are in the news that we (or you) find worthy of commentary.

In economics, free riding means reaping the benefits from the actions of others and consequently refusing to bear the full costs of those actions. This means Ed and Ron will free ride off of the news, and each other, with no advanced knowledge of the events either will bring up.

You can also comment on Twitter at #ASKTSOE.

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Ed’s Topic – More on the “one-percent”

The top 1% of income earners in the USA pay nearly 40% of federal income taxes. You can see another breakdown here, based on 2012 IRS data, from the Tax Foundation.

Ron’s Topic – Net Neutrality Regulation Update

Ajit Pi (pronounced “Ah-JEET Pi”), FCC Commissioner, was interviewed in the April Rush Limbaugh Newsletter (no link available). Here’s some of what he said:

The FCC is wielding a regulatory sledgehammer to pound down a nail that simply doesn’t exist.

Innovators, engineers, and technologists have decided how the Internet works—but now it’s going to be regulators, politicians, and lawyers.

He also mentioned how Netflix’s CFO said: “We didn’t really like Title II. We would have preferred a non-regulated solution.”

Allegations Netflix (1/3 of all traffic at peak) purposefully sends traffic on worse roads; refused open video standards to intentionally worsen the experience of users to gin up support for net neutrality regulation.

There’s no regulation of content contained in the 400 pages, which is good news. But Mr. Pi says it’s possible.

The “Universal Service Fee” (USF) now applies to broadband, not just voice. So expect to see this on your broadband bill.

Mr. Pi believes these regulations will help big companies at the expense of smaller ones—less competition, less choice, etc.

Ed’s Topic – AppleWatch

The Apple Watch pre-sold 2.3 million units. We discussed the blog post by pricing consultant and author Rafi Mohammed, who grades Apple an A for ambition, but a D in pricing strategy. Here’s why:

Problems

  1. Upgrades
  2. No carrier subsidies
  3. Price range too wide ($349 to $17,000)

Should have

  1. Narrow price range $249-$2000
  2. Offer a monthly payment plan
  3. Trade-in program
  4. Bundle watch with iPhone

It remains to be seen if the most profitable company on the planet really launched with a sub-optimal pricing strategy.

This is wonderful thing about enterprise: all value is subjective, and subject to the test of the market—that is, the preferences of individuals.

Ron’s Topic – Peter Drucker and 2020

An HBR blog post by Rick Wartzman, “What Peter Drucker Knew About 2020,” was discussed.

Here’s the article on the company that introduced a $70,000 minimum wage for its 120 employees.

Ed’s Topic – Learn Liberty and the TIP Story

Many great educational videos on economics, different schools of thought of classical liberalism, etc., at LearnLiberty.org.

Ron would also recommend Milton Friedman’s “Free to Choose” TV series, both the original 1980 series as well the updated series done in for 1990.

You can watch both for free at freetochoose.tv, along with other excellent content.

Ed also asked Ron about the TIP Clause used in some professional firms when they are delivering extraordinary value.

Here’s the story, as told in Ron’s Book, Implementing Value Pricing: A Radical Business Model for Professional Firms:

In 1997, Tim was the managing partner of top accounting firm, and his best, long-term customer (of 20 years) had come to him wanting to sell his $250 million closely held business. He told Tim (and I am paraphrasing here), “You’ve been my CPA for 20 years and I trust you with my life. It is time for me to sell my business and enjoy my golden years. Here is what I want you to do:

  • Update our business valuation to maximize the sales price.
  • Fly with me anywhere we have to go to meet with potential buyers.
  • Be actively involved at every stage of the sales negotiation.
  • Perform the due diligence, along with the attorneys, of the qualified buyers.
  • Work with the attorneys on the sales contract to make sure my interests are protected.
  • Perform tax planning and structure the deal in such a manner as to maximize my wealth retention.”

Obviously, this was a very sophisticated customer and it is true Tim had no idea, at the outset of this engagement, how long it would take to close the deal, and how much firm capacity (his and his team members) it would require. But he did know more than an average salesman would know, which is one of the enormous advantages professionals possess when it comes to pricing the customer, not the service. He knew the customer’s business was well niched, profitable, and growing. This would indicate a very high probability of success.

He also knew this customer was an audit customer of the firm’s and therefore he would not be able to charge a contingency price based upon a financial outcome (such as a percentage of the sales price, or of any tax savings), since that would impair independence, which is illegal for an auditor.

When I asked Tim how he priced this engagement, he proudly proclaimed that every hour charged to this project was at his highest consulting rate of $400 per hour, indicating, right from the start, Tim knew there was more value on this project than he would ever be able to pad on a timesheet.

He further explained how he had updated the business valuation, negotiated with two buyers, and did all of the other tasks requested by the customer. As a result of Tim’s work, the customer received (and saved in taxes) an additional $15,000,000, and acknowledged Tim was directly responsible for this outcome. In Tim’s own words, the customer was “elated.”

Tim then told how he priced the engagement. He reviewed all of the hours from the work-in-progress time and billing system, believed it did not adequately reflect the value he provided, and marked it up an additional 25 percent over the $400 hourly rate. He then sent out an invoice for $38,000, which the customer promptly—and happily—paid.

He believed he was value pricing. He was not—he was value guessing, since the customer had absolutely no input into the price up front, and only a customer can determine value.

When I asked Tim what he thought the customer would have paid if he had utilized a TIP clause (also referred to as the retrospective price, or success price), such as the following:

In the event that we are able to satisfy your needs in a timely and professional manner, you have agreed to review the situation and decide whether, in the sole discretion of XYZ [company], some additional payment to ABC [CPAs] is appropriate in view of your overall satisfaction with the services rendered by ABC.

The TIP is being based on the “overall satisfaction with the services rendered,” and not any financial contingency, which is the origin of the acronym TIP—to insure performance. This TIP clause would be discussed with the customer before any work began. If needed, you could put a minimum price on the engagement (such as $40,000) to cover immediate firm capacity.

But in this case, given the 20-year relationship with the customer, even a price solely determined by a TIP would have been acceptable, since the customer was not likely to take advantage of Tim after the services he rendered and the long-term relationship they had.

In answer to my question, Tim said his customer would most likely have paid him $500,000, a sum I believe to this day is below the real number—but at least better than the $38,000 he finally charged. Nevertheless, since Tim knows the customer better than I do, let us take his number as correct.

I informed Tim he had made the Ultimate Accounting Entry:

Debit Credit
Experience $462,000
Cash $462,000

Tim was providing extraordinary value to this customer yet his cost-plus pricing theory prevented him from capturing a fair portion of it. Are we not ruled by our theories? This is why it is imperative to extinguish the cost-plus mentality from your firm.

No one in any seminar I have shared this story with believed Tim would have received less than $38,000 for his services on this engagement. In effect, Tim paid a reverse risk premium—he was assured he would not go below his hourly rate, but in return he gave up the added value the customer already believed he had created. This is not a risk worth taking if you want to maximize your firm’s profitability.

The deleterious effects of this are deeper than just being deprived the value from the work you provided on any one engagement. The problem lies at the very core of a firm’s measurement system and points out how it does not offer the opportunity to learn from lost pricing opportunities, or pricing mistakes.

In his inimitable way, Yogi Berra explains this situation with his quip, “We made too many wrong mistakes.”

When it comes to pricing, the wisdom from Yogi is profound. Tim made the wrong mistake, and here is why: He will not learn anything from it because the firm’s primary assessment is billable hours—once again the billable hour is the incorrect measuring device for value. When the partners review the realization report on this engagement, they will see 125 percent, which is excellent when you consider most firms realize between 50 and 95 percent overall on each hour.

Most likely, Tim will get nothing but accolades and praise from his fellow partners. No one will ask where the $462,000 is because the billable hour metrics do not have a way to capture that type of information, which is precisely why pricing is more of an art than a science.

This is an excellent example of a wrong mistake for another reason: Tim (or the firm) will not learn anything from this lost pricing opportunity. The $462,000 simply vanishes into thin air (or, more precisely, the consumer surplus remains on the customer’s income statement).

No knowledge was gained by the firm on how to price the next similar engagement in accordance with value—it will simply perpetuate the same mistake, over and over. Being a more accurate activity-based cost-accountant, or even excellent project manager, would also not have helped Tim to capture the value.

This is not meant to imply with value pricing you will never make mistakes. You certainly will. The difference is they will be the right mistakes, because with value pricing, as opposed to cost-plus pricing, you are forced to receive input from the customer as to your value, and have in place pricing strategies that will capture more of that value (like the TIP clause).

If you engage in After Action Reviews (AARs), which perform value assessments on each engagement, and elicit feedback from your customers, you will learn from your mistakes and become better at pricing in the future.

Most feedback firms receive on pricing is negative: “Your price was too high.” Or it is ambivalent: “Your price was just right.” No customer ever discloses how much money your firm left on the table. Since humans emerged from the cave and began to barter, it is the customer’s job to do everything in their power to push down prices. There is nothing new about this, and it should not surprise any executive. Your firm’s job, however, is to push back. The only effective way to accomplish this is by emphasizing value.

Ron was also interviewed for an article on the TIP clause, which you can read here.

April 17, 2015 Show Notes: We’re All Consultants Now!

Ed discussed how we are all consultants now. This material is based on Peter Block’s seminal book, Flawless Consulting.

Consulting Definitions

A consultant is a person in a position to have some influence over an individual, group, or organization, but who has no direct power to make changes or implement programs.

A surrogate manager is a person in a position who acts on behalf or in place of a manager. If you are being asked to “complete this report,” “design this system,” or “figure out what to do,” you are in the position of surrogate manager.

Consultants and surrogate managers are two distinct roles. You cannot be both because that would be a contradiction. It is irrational.

Consulting Assumptions

Whenever performing in a consulting role, it is important that the consultant must be clear about one’s own basic beliefs. Our own behaviors must be consistent with what we recommend.

It makes sense to spend some time thinking about what your personal beliefs are about what makes for good management and leadership. To this end, presented below are three assumptions about consulting for the purposes of our dialogue.

Problem solving requires valid data. This data not only includes objective or hard data, but personal or soft data. Hard data are not only computer system data, but other hard facts such as events or situations. Soft data are also facts, but relate to the personal feelings of those involved. If people feel that they have not been trained effectively on a new system, then this is a fact, even if we have a sign-off sheet saying they were trained. Throwing away this data because it is soft, puts actual problem solving in peril.

Effective decision making requires free choice. If a decision is to be truly implemented, the people involved in carrying out the decision must feel that they were a part of the decision. When they do not feel a part of the decision, they have a tendency to get defensive. If “no” is not a choice, than it is not really a decision.

Effective implementation requires customer commitment. If a customer is not fully committed to the implementation of a decision, it will fail. Support is not enough, commitment is required. In order to gain commitment, people need to clearly see the benefit this will have for them.

Consulting Levels: The FORD Model

Customers desire consultants to work on many different levels within an engagement. Often times the desired consultant level is not effectively communicated by both parties.

It is critical to the success of any engagement that both the consultant and the customer are clear about the desired level. These levels are:

  • Findings
  • Options
  • Recommendations
  • Decision

See Ed’s blog post on the FORD Model.

Chris Marston’s Concentric Circles blog post.

Consulting Goals

Along with consulting assumptions, a consultant should have some basic goals. These goals may not always be attained, but they should indicate your preference. Like assumptions, presented below are three goals for this material.

To establish a collaborative relationship. Collaboration is proven to be the most effective way to maximize both the consultant and customer’s resources. Secondarily, it provides a model for the customer to see and use to solve problems in the future.

To solve problems so they stay solved. Many consultants act in a way so as to fix the immediate problem. This is what has given consulting a bad connotation. Solving problems so they stay solved is a key differentiator. Teaching customers to solve problems on their own in the future requires a higher level of skill.

To ensure attention is given to both the technical problem and the relationship. Most organizations pay attention only to their technical problems. Consultants are in a unique position that allows them to see the people and process issues that surround the technical problem.

To develop customer commitment. As was stated earlier, without customer commitment the consultant has no chance to succeed. Therefore, the underlying goal of every action is to develop customer commitment to a solution to the problem.

To quote Peter Block:

We may cling to the fantasy that if our thinking is clear and logical, our wording eloquent, and our convictions solid, the strength of our arguments will carry the day. Clear arguments do help, but they are not enough. The customer will experience doubts and dilemmas that block commitment. Flawless Consulting, p 21.

Positive Deviance

I also asked Ed about Peter Block’s concept of “positive deviance”: Are we here to merely solve a problem, or create a new future for ourselves?”

Peter Drucker thought we should pursue opportunities, not just solve problems. Solving problems, at best, only returns us to the status quo. Executives need to spend the majority of their time—and allocate their best talent—to the opportunities of tomorrow.

Ed’s Statement of Intent

“It is my intention to help you and your organization make the best possible decision.”

Not Final Thoughts

What I love about Ed’s concept that we are consultants now is that is positions professionals at the top of Joseph Pine’s Progression of Economic Value Curve—that of transformations.

For if consulting is done right, you are transforming a person, a group, or an organization, rather than just delivering services.

This is one of the most effective strategies to de-commoditize your offerings!

Episode #41 Preview – Free Rider Friday

The last Friday of every month Ed and Ron will do “Free-Rider Friday.” Most of our shows are “topic” driven, where we dive deep into one subject. Free-Rider Fridays are designed to be “event” driven; whatever issues are in the news that we (or you) find worthy of commentary. In economics, free riding means reaping the benefits from the actions of others and consequently refusing to bear the full costs of those actions. This means Ed and Ron will free ride off of the news, and each other, with no advanced knowledge of the events either will bring up. If you’d like to call-in during the live show, the listener line is: 866-472-5790. You can also participate on Twitter at #ASKTSOE.