December 12th Show Notes: Interview with Jody Thompson, Co-Founder of CultureRx

We had the pleasure of interviewing Jody Thompson, the Co-Founder of CultureRx® and Co-Creator of the Results-Only Work Environment™ (ROWE™), along with Cali Ressler. CultureRx® is the sole global authority on ROWE™ and the sole executor of organizational and individual certification.

Listen here to the interview with Jody Thompson

Thompson provides domestic and international keynote presentations on the 21st century workplace and has been featured on the covers of BusinessWeek, Workforce Management Magazine, HR Magazine, and HR Executive Magazine, as well as in the New York Times, TIME Magazine, USA Today, and on Good Morning America, CNBC, MSNBC and CNN. She has co-authored two best-sellling books on revolutionizing the workplace and the practice of management, Why Work Sucks and How to Fix It and Why Managing Sucks and How to Fix It.

Some Nuggets of Wisdom from Why Work Sucks

ROWE defined: Each person is free to do whatever they want, whenever they want, as long as the work gets done.

Sounds like college! It’s Tivo @ work.

Work is something you do, not a place you go.

The solution is not flextime. Flexible schedule is an oxymoron.

Work-life balance: balance impossible under current system (employee defined, not employer defined).

Time management – like finding freedom in a prison.

ROWE as the Antidote to the Labor Theory of Value

Employees are paid for chunk of work, not chunk of time.

If I build a cot under my desk but I’m not performing, does that make me a good worker?

If an employee is not performing, more hours won’t matter.

Myth: Time + Physical presence = Results 

Strangely, we only do this at work: “Don’t look at a pile of laundry and think, I’d better make sure I’m putting enough hours into this.”

Presenteeism: Your body is in the building, but your mind is somewhere else.

Ask: “Is there anything you need?” This knocks out Presenteeism.

Sludge: Negative commentary that occurs naturally in a workplace and is based on outdated beliefs about time and work.

Common “How” questions (Appendix II: “Yeah, Buts”)

How are the results going to happen?

How do we know we’re achieving our goals?

How will we know that everyone is pulling their weight?

Answer: “How do you know now?”

True slackers don’t last in a ROWE.

Involuntary turnover (fired) goes up, voluntary turnover goes down.

Final thoughts

Ed and I believe that ROWE is the next wave for true knowledge organizations, as it is centered around results, a high level of trust, and providing autonomy to knowledge workers enabling them to thrive.

Keep up the great work Jody and Cali!

December 5, 2014 Show Notes: Interview with Tim Williams

Ed and I were honored to be able to interview Tim Williams, Founder, Ignition Consulting Group, and VeraSage Institute Senior Fellow.

Tim is the author of two excellent books, Take a Stand for Your Brand: Building a Great Agency Brand from the Inside Out, and Positioning for Professionals: How Professional Knowledge Firms Can Differentiate Their Way to Success.

Tim was the CEO of R&R Partners, the ad agency that did the “What happens in Las Vegas stays in Las Vegas” campaign.

Tim's book1

Take a Stand for Your Brand

Agencies need to do for themselves what they do for customers: build a strong, distinctive, memorable brand.

Standing for everything is just another way of standing for nothing.

You can measure our agency by the clients we don’t have.

Specialist vs. Generalist—traditional dept stores died, Home Depot, PetsMart, etc. The goal is to exclusive, not inclusive.

The essence of positioning/strategy is tradeoffs, and being clear about what you won’t do. Steve Jobs said he was most proud of what Apple didn’t do!

Tim's book2Positioning for Professionals: How Professional Knowledge Firms Can Differentiate Their Way to Success, 2010

In business, imitation is not the most sincere form of flattery—it’s just lazy.

Positioning is the foundation of branding because it identifies what the brand stands for.

A brand can’t stand for two things at once.

Specialist vs. Generalist (we’d all fly to the Mayo clinic for a specialist, but not generalist). Of the two, which has:

  1. The greatest earning power?
  2. The largest geographical market area?
  3. The fewest competitors
  4. The greatest degree of respect from customer?
  5. The most sophisticated customers?

Instead of being afraid of focus, you should be afraid of mediocrity!

Check out the humorous our late colleague, Paul O’Byrne shot in Australia on the difference between the generalist and specialist.

Service is a commodity. Smart thinking is not.

Size is not a strategy!

Nobody buys a product or service because it can do everything, but rather because it can do something. Diversity Tax: Coke vs. Pepsi

Stop focusing on reclaiming old territory and instead discover new territory: Columbus, not Napoleon

Successful brands able to position on spectrum: Love and Hate. Either side desirable; middle is death

Tim quotes Rush Limbaugh: “Moderates by definition have no principles.” Ron adds: There’s not big in the library, Great Moderates in History.

“The aim of marketing is to make selling superfluous”—Peter Drucker.

Defining Your Brand Boundaries

Calling

Customers

Competencies

Culture—The formal and informal standards by which your firm makes decisions about serving its customers

Knowledge Workers Are Volunteers

Psychologist Howard Gardner:

If you are not prepared to resign or be fired for what you believe in, you are not a worker, let alone a professional. You are a slave.

Be sure to subscribe to Tim’s Propulsion Blog. We recommend you read as much as you can of Tim, a brilliant thinker and marketing strategist.

November 28th, 2014 Show Notes: Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays

Today, on Black Friday, and right before Cyber Monday—the biggest shopping days of the year—Ed and I thought it would be fun to discuss the interesting, funny, and thought-provoking book by Joel Waldfogel: Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays.

The author makes the case that the deadweight loss to the economy from gift giving, in 2007, totaled $12 billion, out of approximately $66.5 Billion spent (about 12%). Citizens Against Government Waste would classify Christmas as a wasteful government program.

Gift giving severs link between buying decision and item’s value to its user—the transaction actually destroys value. To add insult to injury, we are obliged to pretend to be grateful!

His complaint is not the level of spending or the consumption, but the waste.

We discussed the four ways you can spend money in the economy:

Four Ways to Spend Mondy

Former Congressman Dick Armey pointed out how difficult spending is in Category II (Gift), let alone Category IV (Government):

Every year, I worry and fret select the right birthday gift for my wife, Susan. Every year, try as I might, I manage to choose the wrong thing. If I can’t figure the needs and desires of the one person who is closest to me in the world and who I deeply love and care for, how can we expect the government to do a better job?

Three groups spend other people’s money: children, thieves, politicians. All three need parental supervision.

Hierarchy of value of gift giving

  • Aunts & uncles & grandparents = 75%
  • Parents = 97%
  • Friends =91%
  • Siblings =99%
  • Significant others = 102%

Further, we spend approximately 2.8 billion hours shopping in December. To put that number in context, the old USSR—before it imploded—spent 35 billion hours annually standing in line for everyday products and services.

Infographic from Deloitte’s 2014 annual holiday survey

Deloitte annual holiday survey: Infographic by Deloitte University Press

Economist Ian Ayres said this about Waldfogel’s book:

Joel Waldfogel is one of the smartest and funniest economists on the planet. I think of him every time I start to unwrap a present. Buy Scroogenomics for your friends and family. It makes the perfect Christmas gift.

November 21, 2014 Show Notes: Playing with Fire: Price Discrimination in Practice

. . . [N]ot only is price discrimination pervasive in society, it is an important way in which society covertly and unintendedly redistributes consumption, much of it from rich to poor. . . . [I]ts effects on output and welfare relative to single-price firms with monopoly power are likely to be positive. . . . [I]t tends to make consumption more equal across income classes.

—Mark Skousen and Kenna C. Taylor – Puzzles and Paradoxes in Economics

Consumer Surplus

I can remember finding a rare first edition of Stanley Marcus’ book Quest for the Best in a used bookstore in San Diego. I had been searching for this book for a couple of years, since this was before the Internet, and was elated when I stumbled across it by chance. As soon as I skimmed through it and learned it was in good condition, and autographed by Stanley himself, I would have been willing to pay $100 for it. Of course, the bookstore owner had no idea, nor does he even know me or of my desire to own this rare book. He priced it at $10. I can assure you I did not offer to split the difference between my value price and his asking price. I left the store, as an economist would say, $90 wealthier, keeping the entire consumer surplus to myself.

This raises an interesting moral and ethical question: If it is unethical for businesses to charge high prices, is it also unethical for customers to seek out low prices? Is my keeping 100% of the consumer surplus any more or less unethical than the bookstore owner capturing any portion of it above $10?

This is why Alfred Marshall thought the consumer surplus was a measure of customer well-being and satisfaction, because as prices become lower, and more and more consumers can buy a greater quantity of products at the same price, the equivalent of having more income.

On the other hand, there is also a producer surplus, the difference between the price for which a producer would be willing to provide a good or service and the actual price at which the good or service is sold. The consumer’s and producer’s surplus provides a measure of the gain to both parties, and the sum being the social gain, or welfare gain, due to the existence of the market.

While the consumer surplus is the gain the buyer receives from trade, the producer surplus is sometimes referred to as economic rent—the amount received by sellers of an item over and above what they would have accepted.

Michael Jordan and Tiger Woods receive an enormous amount of economic rent above what would be needed to induce them to play their favorite sport. There is also a consumer detriment, representing the customers who are willing to pay more than cost but less than the market price. While consumer surplus makes customers happy, it is economic rent that makes companies—and individuals—rich.

Charging different prices to different customers is the definition of price discrimination, a term coined in 1920 by Arthur Cecil Pigou in The Economics of Welfare. Price discrimination occurs when a good or service is sold at different prices that do not reflect differences in production costs. Companies engage in this practice in order to extract the consumer surplus from various customers.

It is worth reiterating that price discrimination does not imply discriminating against people based on race, gender, religion, ethnicity, and so forth, but only on their willingness and ability to pay, which is based on the value they are receiving.

Price Discrimination Principles

In a perfect market (from the seller’s perspective anyway), customers would each pay their reservation price for each product or service, defined as the maximum amount they are willing and able to pay for a product. This would be the ultimate expression of pure price discrimination.

Unfortunately for producers, the marketplace is not perfect and other methods must be devised to ascertain how much different buyers value their offerings, such as popcorn lovers valuing the movie experience more than non-eaters. Successful pricing strategies are designed to induce customers to better reveal their reservation price, thereby capturing a larger percentage of the consumer surplus. To achieve price discrimination, four requirements must be met:

  1. The firm must have market power—Not monopoly power, but a downward-sloping demand curve, so a firm can raise prices without losing all of its customers—as would happen with a completely horizontal demand curve—imperfect, as opposed to perfect, competition.
  2. Buyers with different demand elasticities must be separable into submarkets—Differences arise from income disparities, preferences, locations, etc.
  3. The transaction cost is less than the potential profit—Costs associated with separating buyers with differential demands must be lower than the differential gain in profit expected from the multiple-price as compared with the one-price strategy.
  4. The seller must separate buyers to avoid arbitrage—Otherwise, products sold more cheaply in one location can be purchased there and transported to a higher-price location.

These four requirements present barriers to engaging in price discrimination, but they are surmountable, and as we shall see, many companies have developed very imaginative and creative ways to overcome these challenges. Let us explore each of the four requirements.

First, companies must have market power, meaning a downward-sloping demand curve. Even the most elastic products meet this requirement, which means the company has some ability to control the price they charge rather than merely being a price taker.

Second, separating buyers with different demand elasticities requires that a company understand its customers’ motivations, how they benefit from its product, and how it will be used in order to judge the marginal value. If you sell in business-to-business markets, understanding your customer’s business model, how they make money, and how you can help them be more successful is essential in separating them into various value segments. This is obviously easier with long-term customers, with whom a deep relationship has been established.

The third requirement is that the potential profit must be greater than the costs of separating buyers for price discrimination purposes. A case in point where this requirement became a barrier to charging different customers different prices was Disneyland’s A–E ticket system (E stood for exciting), used to price its attractions. On October 11, 1955 (the year Disneyland opened) A, B, and C tickets cost from 10 cents to 50 cents each, depending on the attraction. D tickets were added in 1956 and E tickets in 1959, priced at 50 cents each.

From a pricing perspective, the A–E ticket system was a pure price discrimination strategy. However, over time the problems with the A-E system began to outweigh the benefits.

Disney had to print the tickets, its guests had to wait in long lines to purchase them (thus diminishing the fun and experience of the park visit), and the cast members at each ride had to handle and the police the tickets, sometimes turning guests away carrying the wrong ticket. The total costs of engaging in this type of customer segregation began to exceed the marginal profits derived from it, and in 1982 Disneyland changed to the Disneyland Passport, a fixed-price, unlimited use of attractions, all-day pass.

The fourth, and final, requirement, avoiding arbitrage, is much easier for service providers to meet than product sellers. If a bakery were to sell pies in two nearby towns, and price them $10 in one town and $5 in the other, eventually customers would buy in the lower-price location. Some customers would even buy pies in the lower-price location and transport them back to the higher-price location and sell them, thus keeping some of the consumer surplus for themselves, a process known as arbitrage.

We witness this with drugs being purchased in Canada by American citizens due to lower prices. Some high-priced U.S. drugs, such as for AIDS or Norplant, sell for much lower prices in less-developed countries, due to a more elastic demand curve. Sometimes drug companies will package products differently in different markets, varying the sizes and quantities in order to make arbitrage more difficult.

But one cannot arbitrage services. You cannot send your butler, who may be charged on a sliding scale based on his income, to get your kidney transplant. A customer cannot sell their tax return or legal services to someone else. Services consumed on location, such as movie theater popcorn or medical and dental care, are not susceptible to arbitrage, making it easier for companies in these industries to engage in price discrimination.

We have studied the four requirements necessary to price discriminate, let us now examine the three degrees of price discrimination:

  1. First-degree price discrimination—Charging each customer the most that he would be willing to pay for each item that he buys, thereby transferring all of the consumer surplus to the seller.
  2. Second-degree price discrimination—Charging the same customer different prices for identical items.
  3. Third-degree price discrimination—Charging different prices in different markets.

Due to the high transaction costs of determining what each and every buyer is willing to pay, auctions and negotiable price markets are the closest approximation to first-degree price discrimination. Whether it is the late Princess Diana’s dresses or articles from the Kennedy estate, buyers line up and identify the maximum amount they are willing to pay, and thus the item is sold to the individual who values it the most.

Second-degree price discrimination exists when businesses charge the same customer different prices for identical items, such as Proctor & Gamble giving Wal-Mart a discount on Pampers for large-quantity orders. Another example is utility companies and cellular phone companies charging different rates for “peak” and “off-peak” use, the theory being that a phone call placed during peak hours is more valuable (say, for a salesman to make an appointment with a prospect) than a call during off-peak hours (say, to order a pizza on the way home from work).

An example of third-degree price discrimination—charging different prices in different markets—is coupons. If Proctor & Gamble can make a profit selling a box of Tide soap with a 50-cents-off coupon, what are they making when a customer buys a box without a coupon?

Other Resources

Pricing on Purpose: Creating and Capturing Value, by Ronald J. Baker

Implementing Value Pricing: A Radical Business Model for Professional Firms, by Ronald J. Baker

November 14, 2014 Show Notes: Interview with Rabbi Daniel Lapin

Ed and I were honored to interview Rabbi Daniel Lapin. Ron’s been a big fan of the Rabbi, listening to his radio show, and reading his books, for years.

We only had the Rabbi on for about 30 minutes, but he has graciously agreed to return at some point. We then discussed his four books, listed below.

Biography

Rabbi Daniel Lapin, known world-wide as America’s Rabbi, is a noted rabbinic scholar, best-selling author and host of the Rabbi Daniel Lapin Show on San Francisco’s KSFO. He is one of America’s most eloquent speakers and his ability to extract life principles from the Bible and transmit them in an entertaining manner has brought countless numbers of Jews and Christians closer to their respective faiths.   In 2007 Newsweek magazine included him in its list of America’s fifty most influential rabbis.

Before immigrating to the United States in 1973, Rabbi Daniel Lapin studied Torah, physics, economics and mathematics in Johannesburg, London and Jerusalem.  This seemingly unlikely combination forms the bedrock of his conviction that no conflict exists between the physical and spiritual, virtue and strength, or faith and wealth.  He quickly became persuaded that God continues to smile on the United States of America and he became a naturalized citizen on what he describes as the proudest day of his life.

Rabbi Daniel Lapin was the founding rabbi of Pacific Jewish Center, a now legendary Orthodox synagogue in Venice, California.  He implanted the community’s mission of demonstrating the relevance of traditional Faith to modern life.

Books

America’s Real War: An Orthodox Rabbi Insists that Judeo-Christian Values are Vital for Our Nation’s Survival (1999)

Buried Treasure: Secrets for Living from the Lord’s Language (2001)

Thou Shall Prosper: Ten Commandments for Making Money (2002)

Business Secrets from the Bible: Spiritual Success Strategies for Financial Abundance (2014)

Other Resources and Readings

 Ron’s review of Thou Shall Prosper

Rabbi Lapin’s website: www.youneedarabbi.com. Be sure to sign-up for Thought Tools, a free weekly email teaching, offering practical tips and insights to enhance your Family, Faith, and Financial life.

Rabbi Lapin on the Radio: Sundays from 7am-8am Pacific Standard Time, (10am-11am Eastern Standard Time) on the Internet. Go to http://www.W4CY.COM  The Call-In telephone number will be (561) 623-9429. You will also be able to join in by Skype and Chatroom

November 7, 2014 Show Notes: How vs. What Matters

Ed and I discussed Peter Block’s seminal book, The Answer to How is Yes: Acting on What Matters.

In my first discussion in May 2004 with Ed, he informed me he read two books in the prior year that changed his life: my first book [out of print], Professional’s Guide to Value Pricing, and Peter Block’s The Answer to How is Yes.

It is an absolutely profound work. I told Ed it’s the book I’ve always wanted to write.

SCA_Slides_pptx

The following are some snippets from the book, along with the six most common “how” questions, which questions Block says should be asked instead, and then how Ed’s tweaked two of Block’s questions based on his experience in change programs.

Book Snippets

  • Epigraph: “Transformation comes more from pursuing profound questions than seeking practical answers.”
  • We often avoid the question of whether something is worth doing by going to the question of “How do we do it?
  • Give up saying “how” for six months!—give priority to aim over speed.
  • Value what matters, not just what works.
  • How implies we just lack the right tool, it becomes utilitarian and pragmatic.
  • How questions deflect us from considering our deeper values.
  • Also assumes we don’t know, a defense against taking action—we become the blind man looking in a dark room for a black cat that is not there.

Here are the six questions that postpone the future and keep us encased in our present way of thinking:

  1. How do you do it? (Skips “Is this worth doing?”)
  2. How long will it take? (Oversimplifies the world)
  3. How much does it cost? (Ignores what price are we willing to pay?)
  4. How do you get those people to change? (Ignores the fact that you can’t get others to change!)
  5. How do we measure it? (If you can’t measure it, it does not exist. Things that matter most defy measurement [love, art, poetry, music, life]. Our obsession with measurement is really an expression of our doubt—we’ve lost faith in something. So much for imagination and creativity [how do we measure something new?])
  6. How have other people done it successfully? (We want to be leaders without risk of invention and innovation)

The alternative to asking “How” is saying “Yes,” a stance towards the possibility of more meaningful change

Here are Peter Block’s alternative questions:

  1. How do you do it? To What refusal have I been postponing?
  2. How long will it take? To What commitment am I willing to make?
  3. How much does it cost? To What is the price I am willing to pay?
  4. How do you get those people to change? To What is my contribution to the problem I am concerned with?
  5. How do we measure it? To What is the crossroad at which I find myself at this point in my life/work?
  6. How are other people doing it successfully? To What do we want to create together?

Ed has changed two of Block’s questions: #3 to “What is the value of it to me?”

And also #5 to “What is the judgment I need to make?”

Some Final Thoughts from Peter Block

When we follow fashion and ask for steps, recipes, and certainty, we deny our freedom, for we are trapped by the very act of asking the question. Freedom asks us to invent our own steps. “to be the author of your own experience.”

Asking how is an escape from freedom/accountability. We wish to go to heaven and not die.

Knowing how to do something may give us confidence, but it does not give us our freedom. Freedom comes from commitment, not accomplishment.

The pursuit of certainty and predictability is our caution speaking. Freedom is the prize, safety is the prize, what is required is faith more than fact and will more than skill.

There is little discussion of faith in organizations, but it is only with faith that significant changes can begin.

Idealist is “one who follows their ideals, even to the point of impracticality.” The willingness to pursue our desires past the point of practicality (the heart wants what the heart wants).

Who decides what is possible and what is practical?

Idealism dissolves in a world of measurement and instant results.

Institutions are based on consistency and predictability, while intimacy relies on variation and surprise (people aren’t resources/assets).

Without willingness to go deeper, little chance for any authentic change. We prefer actions and answers.

What is absent in a world dominated by the engineer and economist is the artist. The artist needs to enter our institutional experience in order to create a space for idealism, intimacy, and depth.

One of the beauties of volunteer organizations is that they know how to take advantage of people’s gifts, whereas what he calls “systems” are more concerned with people’s limitations.

Demanding a solution, or an action plan for everything, is also arrogant. It’s a wish for perfection. It’s our wish to be God.

We keep going from fashion to fashion, consultant to consultant, looking for an answer that’s not there—like looking for the fountain of youth.

Not “scientific management.” Organizations never in control, the unpredictability and mystery of life.

We do walk by faith, not sight. Peter Block’s philosophical book reminds me of how George Gilder ended his classic book, Wealth and Poverty, by Quoting Reinhold Niebuhr:

Nothing worth doing is completed in one lifetime.

Therefore, we must be saved by hope.

Nothing true or beautiful makes complete sense in any context of history.

Therefore we must be saved by faith.

Nothing we do, no matter how virtuous, can be accomplished alone.

Therefore we are saved by love.

Other Resources

The text of the speech can be found here, including Q&A.

October 31st Show Notes: Interview with Pricing Expert and Mentor, Dr. Reed K. Holden

Ed and I were honored to interview Dr. Reed K. Holden. Reed is a legend in the pricing profession, and has been a mentor to Ron ever since they first met at a Professional Pricing Society conference, back in 2000.

Our discussion with Reed covered a variety of topics: Who were his mentors in pricing (Tom Nagle and Dan Nimer, author of Visionary Pricing); Fair vs. Just price; the market share myth; his mantra: innovate for growth, price for profit; how the Stan Shih Smile Curve impacts strategic pricing, will pricing become profession (Reed says it already is), and is he working on any new books. We also discussed his most recent books, Pricing with Confidence and Negotiating with Backbone.

Holden Advisors publishes a monthly newsletter, which you can subscribe to for free here. We highly recommend it for all business owners.

smile-curve

 About Reed Holden 

ReedHolden_mgmt

Reed Holden, D.B.A., Founder & Coach  
Dr. Reed K. Holden (Concord, MA), Founder of Holden Advisors, is a world-class pricing expert who helps clients build go-to-market strategies to drive price leadership, selling backbone and profitable growth. Dr. Holden specializes in helping sales organizations avoid the Procurement Buzz SawSM by implementing value strategies to recognize and counter margin-reducing buying tactics. He is an enthusiastic and persuasive advocate for demonstrating customer value and price leadership with companies that need to adapt in highly competitive markets.

A dynamic and engaging presenter with over 20 years of experience, Dr. Holden is a regular speaker and keynote for executive and sales events for Fortune 1000 companies. He is engaged to facilitate negotiation, pricing and customer value workshops and coaches sales people and senior executives in companies that strive for price leadership.

 Additional resources

 

October 24th Show Notes: What Are You Worth?

When Larry Page and Sergey Brin were students at Stanford they developed technology that was designed to search Stanford University’s Web pages, which immediately became popular among the students and faculty. This was 1996, and everyone thought that Yahoo! was the dominant search engine, and there could never be another one.

Larry and Sergey did not think their technological innovation was the basis for the company they wanted to start, so they put it on the market—at a price of approximately $1 million.

Fortunately for the rest of us, there were no takers. Had they found a buyer, Google probably never would have been born. It is an excellent example of how overpricing can have salutary effects.

Unfortunately, most professionals under price their intellectual capital. They justify this with a variety of excuses:

  • We do not have enough quality customers.
  • Customers view what we do as a commodity.
  • Customers do not understand the value we provide.
  • Our people do not understand their worth.
  • When customers engage in hardball negotiation tactics, we capitulate.
  • Our profession has too much capacity, which drives prices down.

Most of these are nothing but excuses to explain away a lack of purpose, strategy, marketing effectiveness, and poor customer selection. But I believe there is a deeper reason, which I truly did not understand until I began teaching value pricing to my colleagues.

Many participants of my courses have commented that they would “feel guilty” about charging a substantial multiple of their hourly rate. The epiphany for me was that this was not a strategic, or even a pricing competency issue, but rather a low self-esteem issue.

Low self-esteem (or self-respect) does go right to the heart of why professionals question the value of the service they provide. Do you truly believe the benchmark of your value is the hours you spend? What about the years of experience that stand behind that $1 million marketing idea that took 15-minutes to create? Is the value really one-quarter your hourly rate?

You Are Your First Sale

The lesson is vital, and it is this: Before you can charge a premium price, you first have to believe, internally, that you are worth it. If you do not think you are worth multiples of your hourly rate, your customers never will believe it either.

Have you ever dealt with a professional, such as a doctor or a consultant, who came highly recommended? When you learned of the price, did you try to negotiate it downward?

Most highly recommended professionals will not budge on their pricing, because they know they deserve it and are worth it. They are secure and confident in their worth, and they price above the market as a result. Obviously, not everyone can do this. But the ones who do all possess a common characteristic: high self-esteem.

Psychologist Nathaniel Branden has done extensive work on self-esteem. His treatise on the subject is The Six Pillars of Self-Esteem, wherein he defines it as:

  1. Confidence in our ability to think, confidence in our ability to cope with the basic challenges of life; and
  2. Confidence in our right to be successful and happy, the feeling of being worthy, deserving, entitled to assert our needs and wants, achieve our values, and enjoy the fruits of our efforts.

In his book Self-Esteem at Work, Branden discusses the critical role self-esteem has in the success of enterprise:

A simple example is the fact that analyses of business failure tell us that a common cause is executives’ fear of making decisions. What is fear of making decisions but lack of confidence in one’s mind and judgment? In other words, a problem of self-esteem.”

Branden says “Self-esteem is the reputation we acquire with ourselves.” That is profound. Professionals are deeply concerned, and rightfully so, with their reputations: They care what their customers think of them, of their firm, of their integrity. But what about their reputation with themselves? Most professionals were never taught even to ask the question. According to Branden:

If low self-esteem correlates with resistance to change and clinging to the known and familiar then never in the history of the world has low self-esteem been as economically disadvantageous as it is today. If high self-esteem correlates with comfort in managing change and in letting go of yesterday’s attachments, then high self-esteem confers a competitive edge.”

There is no Standard Price for Intellectual Capital

In today’s world, intellectual capital is the chief source of all wealth. Shelly Lazarus, former chairman and CEO, Ogilvy & Mather Worldwide, explained what advertising agencies are really selling:

Advertising is an idea business: That’s all we are. And ideas don’t come from the air, they come from human beings.”

According to the New York Times, Merv Griffin (and his estate) has made between to $70-80 million in royalties from the “Jeopardy!” theme song, which he wrote in less than one minute.

In 1935, Edgar Kaufman, the German-American businessman and philanthropist who owned Kaufmann’s department store, asked Frank Lloyd Wright to design a small summer home for him near Mill Run (75 miles southeast of Pittsburgh).

Wright surveyed the site but procrastinated on the design. When Kaufman telephoned him one day saying he was nearby and would like to stop by to see the design, Wright replied, “Come on Edgar, we’re ready.”

Two of Wright’s draftsmen who heard the call could not believe it, since no one had drawn a single line. Draftsmen Edgar Tafel explains what happened next in his book about Wright:

Wright hung up the phone, walked to the drafting room and started to draw, talking in a calm voice. ‘They will have tea on the balcony…they’ll cross the bridge to walk into the woods,’ Wright said. Pencils were used up as fast as we could sharpen them. He erased, overdrew, modified, flipping sheets back and forth. Then he titled it across the bottom: Fallingwater.

Two hours later, when Kaufmann arrived, Wright greeted him and showed him the front elevation. ‘We’ve been waiting for you,’ Wright said.

They went to lunch, and we drew up the other two elevations. When they came back, Wright showed Kaufmann the added elevations.

This is why intellectual capital, expertise, wisdom, judgment, ability to synthesize information, along with all the other characteristics of knowledge work, cannot be denominated in hours, efforts and costs to produce.

Napoleon Hill wrote in Think and Grow Rich:

There is no standard price on ideas. The creator of ideas makes his own price, and, if he is smart, gets it.

Do not feel guilty or ashamed of your success, and do not let low self-esteem interfere with being paid what your worth.

Other references:

Paul Potts Video

Emotional Intelligence by Daniel Goleman

Working with Emotional Intelligence by Daniel Goleman

Simon Sinek – Start with Why

October 10th Show Notes: The Best Learning Method Ever Devised: After Action Reviews

The only irreplaceable capital an organization possesses is the knowledge and ability of its people. The productivity of that capital depends on how effectively people share their competence with those who can use it.

––Andrew Carnegie

Between 1644 and 1737, in the small northern Italian town of Cremona, lived Antonio Stradivari, who made over 1,000 violins, violas and cellos; a harp; and a couple of lutes that bear his famous name. These instruments are the most sought-after, and expensive, in the world, regularly selling in the millions of dollars.

Today, even with all the advances in modern technology we still cannot replicate the musical quality of an instrument handcrafted over 300 years ago. The knowledge—known as “the Stradivarius secret”—has been lost.

With the so-called Graybe Boom, the average age of the workforce in the rich world is increasing at the same time many of the Boomers are anticipating retirement, making them the first wave of knowledge workers to do so.

Companies lose knowledge from people leaving, forgetting, retiring, and so on. Knowledge also becomes obsolete (what Alvin Toffler calls obsoledge) and must be constantly replenished. No one knows what the cost of this lost knowledge might be. Given the coming demographic trends, how can knowledge organizations capture some of that valuable knowledge before it is lost, like the lost Library of Alexandria?

Before we can leverage this knowledge, we must first understand how knowledge is possessed.

We Know More Than We Can Tell

A teacher tells one of his pupils to write a letter to his parents, but the student complained: “It is hard for me to write a letter.” “Why! You are now a year older, and ought to be better able to do it.” “Yes, but a year ago I could say everything I knew, but now I know more than I can say.”

Michael Polanyi, drew a distinction between tacit and explicit knowledge. To illustrate tacit knowledge, he said, try explaining how to ride a bike or swim. You know more than you tell.

Tacit knowledge is “sticky,” in that it is not easily articulated and exists in people’s minds. It is complex and rich, whereas explicit knowledge tends to be thin and low-bandwidth, like the difference between looking at a map and taking a journey of a certain terrain. It is the difference between reading the employee manual and spending one hour chatting with a coworker about the true nature of the job and culture of the firm.

Explicit is from the Latin meaning “to unfold”—to be open, to arrange, to explain. Tacit from the Latin means “silent or secret.” Try describing, in words, Marilyn Monroe’s face to someone, an almost impossible task, yet you would be able to pick her out among photographs of hundreds of faces in a moment.

Germans say Fingerspitzengefühl, “a feeling in the fingertips,” which is similar to tacit knowledge. The French say je ne sais quoi (“I don’t know what”), a pleasant way of describing tacit knowledge. The highest levels of knowledge and competence are inherently tacit, being difficult and expensive to transmit.

This type of knowledge transfer is a “social” process between individuals, and is especially important in knowledge organizations where so much of the intellectual capital (IC) is “sticky” tacit knowledge.

One of the most effective ways to capture knowledge is by utilizing an After Action Review.

Knowledge Lessons from the U.S. Army

The Army’s After Action Review (AAR) is arguably one of the most successful organizational learning methods yet devised.

––Peter Senge

We are not taught how the evaluation is ultimately more important than the experience. The average knowledge worker is so busy doing they do not have the time to reflect on what they have done, let alone discover major breakthroughs. But action without reflection is meaningless.

In Latin, reflect comes from the verb meaning refold, implying the action of turning things inward to see them in a different way. Reflection without action is passivity, but action without reflection is thoughtlessness. Combine experience with reflection, and learning that lasts is the result.

The Army’s use of AARs began in 1973, not as a knowledge management tool but as a method to restore the values, integrity, and accountability that had diminished during the Vietnam War.

Perhaps we ignore innovations in the military because its mission—to break things and kill people—is so divergent from that of a civilian organization. But this is far too parochial an attitude; and once again we discover a useful practice from another sector.

In fact, because the AAR is such a useful method for turning tacit knowledge into explicit knowledge, not to mention to foster learning and sharing of knowledge throughout the organization, I highly recommend you read Hope Is Not a Method: What Business Leaders Can Learn From America’s Army, by Gordon R. Sullivan and Michael V. Harper’s .

Here are the questions you need to ask in each AAR:

  • What was supposed to happen?
  • Why actually happened (the “ground truth”)?
  • What were the positive and negative factors here?
  • What have we learned and how can we do better next time?

The Army suggests you divide your time in answering the AAR’s questions into 25-25-50: That is, 25 percent reviewing what happened, 25 percent reviewing why it happened, and the remaining 50 percent on what to do about it and how can you learn from it to improve.

The objective is not just to correct things, but rather to correct thinking, as the Army has learned that flawed assumptions are the largest factor in flawed execution—another way of saying there is no good way to execute a bad idea.

The AAR could be videotaped, audio recorded, or summarized later in a formal report, any of which could be deposited into the organization’s knowledge bank. The Army also recommends answering the following summary questions to wrap up the AAR:

  • What should the organization learn from this experience of what worked and did not work?
  • What should be done differently in the future?
  • Who needs to know these lessons and conclusions?
  • Who will enter these lessons in the knowledge management system, or write the case up for future use?
  • Who will bring these lessons into the leadership process for decision-making and planning

Imagine the benefits of having a library of AARs for almost any type of project, process, or method the company may encounter. Imagine a culture that understands AARs are real work, where time is spent on not just doing the work, but also improving the way work is done.

Perfectionist cultures, however, resist this type of candid reflection, as they tend to be intolerant of errors, and mistakes are associated with career risk, not continuous learning. Confucius said “being ashamed of our mistakes turns them into crimes.” The medical world has an appropriate axiom for mistakes made: forgive and remember. Fear is another reason for learning not taking place.

AARs mitigate fear, if they are used not as a method to place blame but to learn from mistakes so they do not happen again, and identify best practices so they can be spread throughout the organization.

Your firm’s intellectual capital is the most important source of its long-term wealth creating capacity. It must be constantly replenished and created to build the firm’s invisible balance sheet. Constantly focusing on doing rather than learning, creativity, innovation, and knowledge sharing is the equivalent of eating the firm’s seed corn.

Capturing the tacit knowledge that exists in the heads of your human capital and making it part of your organization’s structural capital will insure that your firm knows what it knows, and can deploy it quicker and at a greater value than the competition. This is why former HP CEO Lew Platt said, “If HP knew what HP knows, we would be three times as profitable.”

The After Action Review is the best method to achieve these objectives.

Other resources

After action review meeting agenda

September 19th Show Notes: The Moral Hazards of Measurements

As long as measurements are abused as a tool of control, measuring will remain the weakest area in a manager’s performance. —Peter Drucker

The illusion of certainty in our measurements creates—to borrow an important concept from the insurance industry—a moral hazard.

Simply defined, people have an incentive to take more risks or act carelessly when they are insured. Fire insurance causes arson; unemployment insurance allows people to not be as diligent in finding a job; life insurance causes suicide, or worse, murder; auto insurance can cause reckless, etc.

Our current cult of calculation, perpetuated by the infamous McKinsey maxim—what you can measure you can manage—creates the same type of risk, offering today’s business executives the illusion of control and mastery of knowledge.

It allows them to substitute statistics for thinking. It gives them a false sense of security where there should exist more doubt.

If we want to peer into the unknown future, our measures need to be linked to a theory, otherwise we are simply predicting the past—since history is the only dimension for which numbers can provide precision. With theory, we can also avoid the moral hazards of measurements so prevalent in today’s society.

Seven Moral Hazards of Measurements

In the Handbook of International Trade and Development Statistics, 1988, per capita output in 1988 in East Germany—one year before the Berlin Wall was pushed over—was placed at roughly seven-eighths of the West German level.

But as any Berlin taxi driver crossing through Checkpoint Charlie after the fall of the Wall could have told you, the economy of East Germany was manifestly inferior to that of West Germany, yet somehow—due to the moral hazard of measurement—those in the know got it precisely wrong rather than approximately right.

Taking into account the following seven moral hazards of measures may assist executives in avoiding these types of errors.

Moral Hazard 1: We Can Count Consumers, But Not Individuals

Singer Joan Baez used to say it was easier for her to have a relationship with 100,000 people than with one person. Stalin’s famous remark that “one death is a tragedy, whereas a million is a statistic” illustrates the danger of lumping individuals into aggregate, amorphous lumps as if they did not have a soul.

Stanley Marcus, the son of one of the founders of Neiman-Marcus, led the store through the difficult Great Depression, and one point he was especially fond of making was there was no such thing as a market, only customers.

In 2003, General Motors sold 8.59 million vehicles, yet each was sold one at a time. The micro level, where the customer interacts with the seller, is inherently a flesh-and-blood transaction. As economist Herbert Stein always used to say, “There is nobody here but us people.”

In the final analysis, markets and consumers are statistical abstractions, whereas customers are human beings who want to be treated specially and individually.

Moral Hazard 2: You Change What You Measure

Scientists call it Heisenberg’s Uncertainty Principle, which applies to all measures: that the observer in a scientific experiment affects the result. Central bankers call it Goodhart’s law: Any target that is set quickly loses its meaning as it comes to be manipulated. People will always find ways to make their numerical targets, even if it leads them to ineffective or, sometimes, unethical behavior.

A further hazard lies in the fact that in order to count something it must stand still, which is why the first statisticians were called “statists.” But people don’t stand still; they are constantly moving, changing, growing.

Moral Hazard 3: Measures Crowd Out Intuition and Insight

Once a measure becomes entrenched as part of the conventional wisdom, it is usually impenetrable to logic, intuition, critical thinking, or better ways to do something. Poverty statistics are a perfect example, as everyone accepts them as a precise measure of those citizens living below what we consider an acceptable standard of living. But how was this measure developed? Where did it come from?

The poverty rate measures the income of the poor, not their consumption, which is a false talisman of someone’s standard of living. It is not what you earn, it is what you are capable of spending; thus consumption should be measured, which would take into account nonreported earnings, noncash subsidies, and other services provided.

It is also a national statistic, and does not take into account regional differences in the cost of living. Further complicating the error, during the Johnson administration’s war on poverty, it was decided the “poverty rate” would be set at an arbitrary three times the cost of the U.S. Department of Agriculture’s economy food plan, as explained by Nicholas Eberstadt in his book The Tyranny of Numbers: Mismeasurement and Misrule.

Using a consumption-based, rather than an income-based, poverty measure, Eberstadt has concluded elsewhere the rate drops from approximately 13 percent to between 2 and 3 percent. Quite a difference, and illustrative of how far off even old measurements can be and how firmly entrenched they remain despite being precisely wrong.

If you have ever been bribed off an oversold airplane—with a free flight voucher, upgrade, or airline money equivalent—you have economist Julian Simon (1932–1998) to thank. Until 1978, and before the airlines were deregulated, travelers were bumped off overbooked planes rather capriciously (the airlines preferred to bump old people and military personnel on the theory they would be least likely to complain) and this caused enormous amounts of customer complaints and ill will.

Worse yet, the problem fed upon itself, because passengers began to expect being bumped and so would book several flights under various names to ensure a seat on at least one. This caused the airlines to increase bookings even more to ensure decent load factors, which of course were measured very precisely.

Had the airlines changed the process and tested Simon’s idea sooner, the airlines and its customers both would have been better off. Simon did not analyze countless numbers and statistics, but used his intuition, grounded by the economist’s theory of human behavior being rational, to solve a quite vexing problem.

Daniel Boorstin, librarian of Congress, wrote: “The greatest obstacle to discovery is not ignorance—it is the illusion of knowledge.”

Moral Hazard 4: Measures Are Unreliable

A country’s per capita gross domestic product increases when a sheep is born but decreases when a child is; or how divorce actually increases the GDP since almost two of every commodity must now be purchased rather than just one.

Picasso once said, “Art is a lie that tells the truth.” It seems in some instances, measurements are truths that tell lies.

Another example of the unreliability of measures is illustrated by the consulting firm Bain & Company’s Web site, where it proudly proclaims: “Our clients outperform the market 4 to 1,” shown over a graph from 1980 to 2012 depicting the S&P 500 Index and Bain clients.

This is the equivalent of the rooster taking credit for the sunrise because he crows every morning. One expects this type of unscientific hyperbole from politicians, not management consultants. I would be willing to bet that Bain’s clients perform better than the S&P 500, thus have more money to spend on consultants.

Moral Hazard 5: The More We Measure the Less We Can Compare

Engage in this gedanken: You (or a loved one) need(s) heart surgery. You talk to nurses, friends, and other people you trust and respect, and two surgeons are consistently recommended to you. You go online to do some research on these two practitioners and discover their mortality rates (i.e., the risk of dying from surgery: surgeon A = 65 percent; surgeon B = 25 percent. Which surgeon would you choose?

I have conducted this gedanken in seminars attended by various educated professionals—who certainly have taken a statistic class or two—and, astonishingly, the overwhelming majority select surgeon B. When I ask why, they say because of the lower probability of death.

Perhaps they think they need to choose between the two without gathering other information. But that is not how I set up the thought experiment: I left it open as to whether they could ask further questions. Not many do.

But wouldn’t you want to know what type of patients the two doctors serve? What if surgeon A takes a disproportionate share of hard cases and thus has a higher failure rate? He or she just may be the better surgeon.

The point is, we simply do not know without gathering more information, both quantitative and qualitative, and making further judgments based on our own risk profile. Seeing the two numbers side by side seems, though, to give people a false sense of precision and, in this case, could lead to a deadly decision.

Moral Hazard 6: The More Intellectual the Capital, the Less You Can Measure It

Ideas only come from sentient beings, not inanimate objects or pets. Since 80 percent of any country’s wealth-creating capacity resides in its human capital, how could it be otherwise?

To complicate matters, a lot of that knowledge is tacit, which is hard to capture in spreadsheets and pie charts. We may be able to count the physical assets of a Google or a Microsoft, but traditional accounting pays no attention to its human capital, what has been labeled the “invisible balance sheet.”

Traditional book value accounting—assets minus liabilities equals equity—can only explain about one-fourth of the value of the market capitalization on the nation’s stock markets. Accountants call the difference between market value and book value goodwill; but that is just a label for their ignorance. In an intellectual capital economy, debits don’t equal credits, because value is subjective and flows from free minds, not tangible commodities.

Data, reason, and calculation can only produce conclusions; they do not inspire action. Good numbers are not the result of managing numbers. As David Boyle wrote in The Sum of Our Discontent (Cloth): Why Numbers Make Us Irrational: “Decisions by numbers are a bit like painting by numbers. They don’t make for great art.”

Moral Hazard 7: Measures Are Lagging

Imagine driving your car with your dashboard gauges informing you of last month’s speed, fuel level, temperature, oil pressure, RPMs, and the rest. This is precisely the status of accounting information: it is like walking into the future backward.

It is a lagging indicator—or at best coincident, assuming real-time accounting takes place. This type of information can only tell us where we have been, never where we are going. Auditors come in after the battle and bayonet the wounded; they are historians with lousy memories.

Summary

The Danish philosopher Søren Kierkegaard wrote: “Life is lived forward but understood backward.” Certainly measures help us reflect on past events and aid us in improving our theories. But they can never take the place of dreams, imagination, passion, and the soul of enterprise where entrepreneurs toil and struggle to create our future.

No measure is capable of capturing the richness of free minds operating in free markets dreaming of better ways to improve our future, and it is folly to believe otherwise. It may even lead us into moral hazards, or a world where we are so preoccupied about measuring past performance we do not take the time to dream about the future.

Other books and resources mentioned

Uncharitable (Civil Society: Historical and Contemporary Perspectives), by Dan Pallotta

The Sum of Our Discontent (Cloth): Why Numbers Make Us Irrational, David Boyle

Minding the Store, Stanley Marcus