The Role of the Entrepreneur

You’ve seen those car commercials: the sleek, sporty car expertly threading through rural roads as it speeds its way towards bliss. And along the bottom of your screen in small print: “Do not attempt – Professional driver on a closed course.”

Man, what a let down. 😉

I’m here to tell you that value pricing is like that – if you’re not an entrepreneur, do not attempt. Value pricing is not in the professional mainstream yet (though one day will be), and you could wait for the rest of the herd to move before re-examining your business model (though realize that strategy comes with its own risk too).

But if you’ve decided to become a ‘professional driver on a closed course’ (a.k.a. an “entrepreneur”), I’d like to provide a little lay of the economic landscape to help inspire you on your journey.


The Function of An Economy

In order to understand who and what an entrepreneur really is, we have to step back and understand the broader function of an economy.

We hear about the “economy” all the time, but it’s one of those embedded realities that everybody knows about, but nobody really knows. (Like we all know what cars are, but very few of us can actually explain how they work.)

The origin of the word economy is “oikonomia”, from the Greek “oikos” (for “house”) and “nemein” (for “manage”). So literally taken, “economy” means “household management”. It was the Greek poet Hesiod in his great poem Works and Days, who first described the phenomenon where each of us has a finite set of resources, and must intelligently allocate it among various uses. (We all know that feeling: you need to pay utilities, but you’d also like to take that vacation.) Because of the reality of finite resources, we have to “economize” — which is not code for “cheap”, but describes the process of weighing trade-offs and arriving at our allocation. (For example, we might decide to eat out less for a certain number of months, so we can purchase that airplane ticket instead.)

Now take one household weighing these trade-offs, add it to another 100 million next door neighbors doing the same, and boom: you’ve got yourself a bona-fide, modern-day economy. The combined effect of all those decisions is literally shaping which, and how, and where that society’s resources are being directed, in an almost unseen orchestration through billions of micro-interactions.

An economy, then, is how a society makes the trade-off decisions to direct its resources towards what it values.

Now before we move off the topic of economies, it’s important to know that there’s more than one way to organize an economy. What I’ve described above is loosely a “free market” economy, where the individuals involved are free to make the value judgments and buy/sell decisions, creating a dynamic ecosystem that adapts to ever-evolving circumstances. But one alternative is a “centrally planned” economy, where a state agency is tasked with deciding the value of goods and services, and with making the decisions on which get produced and distributed. (Examples would be the former Soviet Union, as well as Cuba.) The reason this is important, is that entrepreneurs can only thrive, or even exist, in an economy that is free. And the reason why, is tied to the role the entrepreneur plays.


The Role of the Entrepreneur

As described above, an economy involves people taking their values, applying them to the choice alternatives they have, making a judgement, and then directing their resources (e.g., spending their money). At any one point in time, there’s a set number of choice alternatives available, and unless something else comes along, that set number of alternatives remains unchanged.

The ‘something else that comes along’, is the entrepreneur. An entrepreneur is an economic change agent: she looks at the existing choice alternatives, considers what’s possible, and decides to create a whole other choice that she thinks is superior. In order to understand this creative act, it helps to break out what a “choice alternative” looks like. I like to call them “value exchanges”, and an entrepreneur creates new value exchanges that look something like this:

If you examine the graphic closely, you’ll notice something strange: everybody who participates in the value exchange, leaves with more value than they came with. It’s the amazing and beautiful consequence of entrepreneurial creativity: good entrepreneurs aren’t re-slicing pieces of the same economic pie, they’re actually enlarging the pie altogether. It’s actually quite mind-blowing: thoughtfully re-arranging resources, can actually increase overall value. The entrepreneur, then, is proposing a better use of the finite resources we have.

To reflect on that phenomenon for a moment: we have all the exact same resources on this planet today that we did at the time of the caveman — nothing new. It’s not too much of a stretch to say, that it’s an entrepreneurial spirit which has progressively experimented down through the centuries, giving us the particular arrangement of those resources today: and because of it, an entirely different planetary experience. God-willing, it’ll be the same spirit which will continue experimenting forward through the centuries yet to come, proposing additional new arrangements that are even more impactful.

So this, then, is the role of the entrepreneur: to take the risk, to test the uncertain hypothesis, and to change how we direct our resources for the better. It requires intuition, imagination, and perseverance, and contributes to the overall human ecology and human experience.


The Risk of Changing Business Models

With this understanding of the function of an economy, and the role entrepreneurs play in that economy, you can come at what you do with different eyes. As Robert Sirico states in his book The Entrepreneurial Vocation, you can realize your

“greatest contribution lies in making profits, expanding jobs, boosting investment, increasing prosperity — and doing so in a way that promotes a wholesome, stable, and virtuous culture.”

If this sounds like something that interests you, strap on that driver helmet, buckle into your seat, and become a professional driver on an open course towards a better paradigm.

Will Uber Kill Time-Based Billing?

Why would Uber’s business model impact the standard billing method of established professional firms?

An interesting observation was made on a radio program I was listening to last night.  Apparently a number of taxi operators in larger cities in the US are now doing all their pricing up-front for the passenger before they start the trip.  This means that the old  method of turning on the meter and charging what the end result was is becoming redundant as the taxi operators have worked out that the customer wants pricing certainty.  If the cabdriver doesn’t provide it, the customer will go to Uber…

The disruption Uber has caused within the taxi industry globally has been well documented, however, it did get me thinking.

With increased penetration of up-front pricing for work that used to be based on an set (arbitrary?) rate by time, customers from all segments of the economy are going to start to question the logic of entering a transaction with no known end price.  Where very other industry is going down the path of providing pricing certainty on commencement of a piece of work, why do the professions still believe they are immune from the impacts of the change?

In many respects, the taxi industry is similar to the professions – time by rate and it doesn’t matter to the provider how many hours (or miles) are spent on a job as they will know they are getting paid “for what they do”.  The sad thing is this has been ripe for exploitation (who hasn’t been in a taxi which “took the long way” to get somewhere?)  Unfortunately, it doesn’t create a great experience for the user of the services as they just have to grimace and wear it.

Disruption in pricing and business models is going to increase and roll through many other industries and professions that used to work on the time by rate model.  Customers are experiencing more of it and are going to demand more of it.

Those firms that start on the path to pricing on purpose will see themselves gain a competitive advantage – those that don’t will wonder what the hell happened.

Have a look around the Verasage site – there’s lots of rich material in here (esp recommend a solid listen to Ron and Ed on their “The Soul of Enterprise” podcasts).

The professions are going to become “Ubered”.  I hope they are ready for it.

A Proposal to Managing Partners

The following article was originally published in October 1997, in the Total Quality Client Service Newsletter, published by Harcourt Brace.

Remember, time is money

–Benjamin Franklin: Advice to a Young Tradesman, 1748

Dear Colleagues,

When we see the advocates of alternative pricing boldly disseminating their doctrine, and maintaining that the right to value price is included in the basic human freedoms, we may quite properly feel serious concern about the fate of our profession; for what use will the American consumer put their hands and their minds when they live under a system of alternative pricing?

The professional organizations that you have honored with your confidence have been obliged to concern themselves with so grave a situation––that is, the death of hourly billing––and have sought in their wisdom to discover a means of protection that might be substituted for the present one, which seems endangered.

I propose that you forbid all of your firm’s associates to use their right hands.

Fellow colleagues, do not do me the injustice of thinking that I have lightly adopted a measure that at first sight may seem bizarre. Deep study of the hourly billing system has revealed to us this syllogism, upon which the whole of it is based:

  • Time is money.
  • The more hours one works, the richer one is.
  • The more difficulties one has to overcome, the more hours one works.
  • Ergo, the more difficulties one has to overcome, the richer one is.

What, in fact, is hourly billing, if not an ingenious application of this line of reasoning.  What, you may ask, is the purpose of forbidding the use of the right hand? As for the efficacy of the measure, it is incontestable. It is difficult, much more difficult than people think, to do with the left hand what one is accustomed to doing with the right. You will be convinced of this if you will deign to put my system to the test in performing some act that is familiar to you, such as, for instance, the dialing of the telephone. We can, therefore, flatter ourselves on opening to CPAs everywhere an unlimited number of job––and billing––opportunities.

Once the associates in every branch of your firm are restricted to the use of their left hands alone, imagine the immense number of billable hours that will be needed to meet the present demand for your firm’s services! So prodigious a demand for billable hours cannot fail to bring about a considerable rise in firm profits, and pauperism will disappear from the firm as if by magic.
As soon as all firms adopt my proposal, as soon as all right hands are either cut off or tied down, things will change. Twenty times, thirty times as many assistants, staff, managers and partners will not suffice to meet the national demand for CPAs. Yes, we may picture a touching scene of prosperity in the CPA profession. Such bustling about! Such activity! Such a rise in all billable hours!

Each tax return will busy a hundred fingers instead of ten. No young CPA will any longer be idle, and we have no need to indicate to your perspicacity the moral consequences of this great revolution. Not only will more young CPAs be employed, but each of them will earn more, for all of them together will be unable to satisfy the demand; and if competition reappears (such as from American Express Tax and Business Services), it will not be a threat because we, alone, will have the competitive advantage of, at least, twice the number of billable hours per professional.

You see, dear colleagues, my proposal is not only in accord with the economic tradition of hourly billing, but is essentially moral and democratic as well. In order to appreciate its consequences, let us assume that is has been put into effect, and, transporting ourselves in imagination into the future, let us imagine that the system has been in operation for twenty years. Nonbillable hours have been banished from all CPA firms; steady billable hours have brought affluence, harmony, contentment, and morality to every CPA firm; low realization rates, write-downs and low profits per partner are things of the past.

The left hand being very clumsy to work with, jobs are superabundant, and the pay is above-market. Everything has been organized on this basis; consequently, CPA firms are thronged with willing associates. Is it not true that if at such a time utopian dreamers were suddenly to appear, demanding freedom for the right hand, they would throw the profession into a panic? Is it not true that this supposed reform would upset everyone’s life? Hence, my system must be good, since it cannot be destroyed without causing suffering.

And yet I have a gloomy foreboding that one day there will be formed a CPA firm that may allow its associates to use their right hands. I have the feeling that we can already hear the advocates of freedom for the right hand. Therefore, it will not be inappropriate for the proponents of left-hand CPAs to intermingle a few threats, among their fine theories––such as time is money––to these radical both-hand CPA advocates.

“What! You wish to substitute the billable hours of the right hand for that of the left, and thus force down, if not entirely abolish, time, the sole and most important road to success and wealth? And this at a time when increased competition is already imposing painful sacrifices upon CPAs, causing them to worry about their futures, and making them more readily disposed to listen to bad advice and to abandon the wise course of conduct to which they have hitherto adhered!”

I am confident that, armed with such cogent reasoning, if it comes to a battle, the left hand will emerge the victor. If that fails, however, we’ll need appropriate regulations, to be enforced by the rule of law––promulgated by the various state’s board of accountancy––and backed up with severely harsh punishments meted out to those CPAs who refuse to use only their left hands.

Nevertheless, I do not intend to conceal from my fellow colleagues that there is one respect in which my project is vulnerable. We may be told that in twenty years all left hands will be as skillful as right hands are now, and it will then no longer be possible to count on left-handedness to increase the number of billable hours, jobs, income and profits, in CPA firms across the country.

My reply to this is that, according to learned doctors, the left side of the human body has a natural weakness that is completely reassuring for the future of CPA’s prosperity. If, then, fellow colleagues, you consent to abide by this proposal, a great principal will be established: All wealth stems from the intensity of labor.

It will be easy for us to extend and vary its applications. We shall ordain, for example, that it shall no longer be permissible to work except with the foot. Men and women have even been know to write without using either hands or feet. You see, fellow colleagues, that we shall not be lacking in means of increasing the number of billable hours in your firms. As a last resort, we should take recourse to the limitless possibilities of amputation.

Finally, fellow colleagues, if this proposal were not intended for publication, I should call your attention to the great influence that all measures of the kind I am proposing to you are likely to confer upon men and women in positions of power. But this is a matter that I prefer to reserve for a private audience.

Author’s Note Adopted from Economic Sophisms, by Frederic Bastiat (1801-1850),  Second Series, Chapter 16, “The Right Hand and the Left,” (New York: The Foundation for Economic Education, Inc., 1996).


Do you understand what your customers are wanting?  Really?


There is a lot of noise (especially in the accounting press) about the move from the classic compliance offerings from accountants into more advisory work.  All the industry pundits are saying that the accounting profession is going through a period of change and we, as professionals in the industry, need to adapt.  I fully agree with them.

The issue seems to be though that many of our colleagues are fearful of the change.  I believe this has a lot to do with the type of people who have been attracted to and trained in the profession.

The following is a short list of adjectives that can describe the approach adopted by a lot of people in the profession:

  • amiable (nice people to have a chat with)
  • good listener (wanting to get to the heart of the issue)
  • loyal (will “go in to bat” for their clients)
  • dependable
  • sincere

We can couple these with a few more for the real technocrats in our industry:

  • accurate
  • precise
  • fact finder
  • careful
  • cautious
  • conservative

All absolutely perfect for an accountant preparing your financial statements and assisting you with your taxation and compliance matters.

Contrast those traits with the approach required to help a customer in the advisory space.  Adjectives we might use to describe people in this arena include:

  • direct
  • inquisitive
  • daring
  • assertive
  • driving

Mixed with a few of the following:

  • persuasive
  • enthusiastic
  • confident
  • influential
  • positive

Now when I look at the lists above, I see polar opposites.  The “traditional” accountant approach and style can be somewhat disconnected with the “advisory” accountant style.

When you look at the changes that are imposing themselves (being imposed?) on the profession at the moment, consider whether your mindset and approach is what is truly required to deliver the service your clients want.  Having worked as an accountant for over 20 years, I know a hell of a lot of my colleagues are very precise, accurate and cautious.  And that is a great thing.  In the right area.

I find the same issue crops up with the firms who move proactively into issues like value pricing and changing the way they engage with their clients.  The more conservative, “classic” accountants do the whole fear and attack response when challenged.  They will generally evade the issues and resort to “the rules” rather than assess the opportunity on its merits.  They will, politely, pay lip service to the idea while telling you it cannot work.

The transition in the accounting profession is therefore going to be quite painful for many of our colleagues.  Their natural style will make it incredibly difficult for them to make the move.  In effect, they want to see a lot of other firms make the change before they do.  This will, in their eyes, reduce the risk of such a move.

The challenge with this approach is that they will be starting well behind the game and therefore struggle to catch up.

There are piles of surveys and reports indicating what it is that clients want from their accountants.  The problem is a lot of accountants are too busy being focused on the compliance aspects of their businesses, and they will miss the significant opportunities that lie directly under their feet.

We have had some success of late by talking with clients about what they are wanting.  They really want support to think and act for the future – not tell them what happened last year (which you cannot do anything about).

Many younger practitioners are “getting” the whole idea, but they are more focused on marketing than delivery.  With this situation, a melding of the old and the new – marketing with the “young guys” and delivery (with experience) from the “old guys”, can be a powerful combination.

When you next have a conversation with an accountant, ask them how they are going remaining relevant with and for their clients.  If they say that the industry transition doesn’t apply to them or their clients, ask them just one question.  Really?

Beware the Progressive Promise

With more firms moving to the Verasage pricing model (good on them – great move), we occasionally come across examples where firms haven’t really arranged their systems and processes to support the delivery of services.


We are fortunate enough to be picking up a new customer (via referral) from a competitor who has “productised” their offering and built their model around cloud accounting.  Terrific.

The customer in question has been working with their accountant for many years and supported them as they moved the model to an agreed pricing platform (I don’t believe based on our discussions with the customer that the firm is anywhere near value pricing their services).  They had been paying the monthly direct debit to cover all the services required.  They had been providing all the information required to enable the firm to do what was required.

Now, put yourself in this customer’s shoes.  They’ve been paying a monthly amount to the firm for the various compliance obligations for the past three years.  However, they have only just now received the financials and tax returns for 2013/14 and 2014/15.  Are they frustrated?  Bloody oath.

To be clear here, they are pretty happy with the quality of the work they were getting – when they got it.  They were driven up the wall by the constant chasing up to get information from the firm.  They like the accountant they have been working with.  But they feel like they have been “left for dead”.  The experience they have had has been very unsettling for them. As they said – “we’ve paid for the work, why hasn’t it been done?”

Many firms are making the move to productising their offerings and moving more to an agreed pricing model.

They fall down badly though when their focus is on marketing and “brand building” rather than service delivery.

Having your customers pay into your account regularly is great for your cashflow.  When you’re not delivering the services agreed to under that model, you have a problem.

The firm our new customer was going to is widely lauded as a “leader” in its field.  It is held up as a paragon of virtue and “a major disruptor”.  The problem is, the lived experience of their customers doesn’t support the hype.

We will be making sure we deliver our agreed services to them on time and support them up hill and down dale.  We will also regularly check in with them to ensure they are happy with our delivery and service.  The great thing is, once they get embedded into our firm, they are wanting to refer a whole heap of their mates to us who are also with this “progressive” firm as they are all having the same experience.

The other thing is, we are value pricing the engagement with the customer.  They are wanting a heap more real-value services and they are more than happy to pay for them.  This is money the “disruptive, progressive” firm was leaving on the table by productising their offering.  The firm’s focus wasn’t on the customer, and that has created a marvellous opportunity for us.

When you do go down the path of changing your model, please ensure that you deliver what you agree to and keep the customer in the loop.  It’s no use being a “leader” in the industry/profession if your walk doesn’t match your talk.

You also need to have the value conversation with the customer and listen to their needs and wants.

Ends up being a far better outcome for all concerned.

Your Costs Are None of Your Client’s Business

Transparency Not for PricingCan you imagine taking a test drive in the breathtaking new BMW 7 series, turning to the salesman and asking “Wow, I’m really interested in buying this 750, bu
t how many hours did it take to build it?”  This question is out of place because buyers don’t generally expect to know what something cost to build before they buy it.  They judge the price based on a variety of factors — the quality of the product, the reputation of the brand, and a whole set of other rational, emotional and sensory factors — but not the actual cost of making the product.

In the great majority of categories, buyers have no idea what actual production costs are, nor do they expect to know.  Buyers accept that costs and margins are the seller’s business.  They know that sellers ha
e to make a profit, and that prices are set above costs, but they don’t presume to be able to dictate what the seller’s margin should be.  The main judgment buyers make is about the product’s value, both real and perceived.

A strange aberration: pricing professional services

These buyer/seller dynamics apply to everything from leasing a car to buying a new mobile phone.  In an Apple store, it’s unlikely you would ever hear a prospective iPhone customer remarking to a blue shirted Apple employee “I can’t really justify spending this much for a phone unless I know what Apple’s actual cost is.  How much exactly do they pay Foxconn to build it?”  A potential iPhone buyer is instead going to make the decision to spend $800 based on the phone’s features, design, functionality, and integration with other Apple services.

So why is it the buyers of most professional services — like advertising, accounting, and law — request to see the actual costs of the services being provided?  At the very least, most procurers of professional services request to see a schedule of hourly rates (which they know are a cost-plus calculation).  Worse, many procurement professionals now consider it their right or privilege to know a firm’s actual costs, right down to salaries, benefits, and overhead.  These professional buyers can then precisely calculate the seller’s profit.  Some will go so far as to dictate what profit margin they consider to be acceptable.

When searching for a new advertising agency partner, a major retail chain distributed a Request for Proposal that contained the language “Requested net profit margin,” as though the winning agency will be granted a profit as some kind of favor.  This same RFP goes on to ask for the agency’s tangible direct labor costs, specifying this “should include but not be limited to vacation, pension plan contributions, 401K contributions, and payroll taxes.”  Are you feeling insulted yet?

Unfortunately, most ad agency execs have come to accept this intrusion into their business as standard operating procedure, dutifully filling out spreadsheets that sometimes even demand to the salaries of individuals by name. The built-in formulas on these client-provided spreadsheets effectively show the agencies involved exactly what will be “allowed” as overhead (regardless of what the agency’s actual overhead is) and of course the resulting maximum profit margin the client will accept.  Many of these repressive vetting processes cap profit margins at around 11%, despite the fact that the stated profit goal of most agencies — especially those owned by the big holding companies — is roughly twice that (20%).  Why would an agency agree to a compensation deal that yields only half of what the firm needs to remain financially healthy?  If you suspect that most agencies find a way to make better margins than those “allowed” you would be right.  And guess how they do it?

The very definition of no-win

This nonsensical buying and selling of inputs (hours, FTEs, time of staff) produces neurotic behavior on the part of buyers (who live in constant fear of getting less than they paid for) and less-than-scrupulous behavior on the part of sellers (who fret about getting all their hours billed by the end of the year so they can earn their full fee).  This serious misalignment of economic incentives produces not only an environment of mistrust, but virtually insures that neither party fully gets what they want.  It also prevents the type of “partnership” that is a stated goal of both the firm and its client.

Curiously, this type of financially-asymmetrical relationship doesn’t really exist anywhere else in the business world except for the buying and selling of commodities (think pork bellies).  Surely professional services, performed by highly educated experts, is not a commodity.  How, then, did this become an accepted practice, and — more importantly — how can we change it?

As for the devolution of agency pricing practices, there is no better recap and explanation than the book “Madison Avenue Manslaughter” by Michael Farmer.  As Farmer points out in his excellent retrospective, the reasons are not really economic as much as they are psychological (lack of confidence) and cultural (lack of effective management practices).

But to the question of how to change it, I’ll offer a simple prescription.  Professional services firm must stop selling inputs (hours, efforts, activities) and start selling outputs (end-products, programs, solutions). They must price the destination instead of the journey; the hole instead of the drill.

Furthermore, it’s the seller’s job to implement new pricing practices, not the buyer’s.  Do you recall the airlines asking your permission last time they changed their pricing structure?

Costs and profits are the seller’s business.  Transparency is for windows, not for pricing professional services.


Tim Williams leads Ignition Consulting Group, a U.S.-based consultancy that advises advertising agencies and other professional services firms in the areas of business strategy and pricing practices.  He is the author several books, including “Positioning for Professionals: How Professional Knowledge Firms Can Differentiate Their Way to Success.

Twitter: @TimWilliamsICG

Could not say it better myself!

Only just received the 2015 copy of the “Good, Bad Ugly” report on the Australian Accounting profession prepared by Business Fitness.  Makes for interesting reading.

head in the sand

There are a couple of points that are worth repeating:

  • revenue per partner has decreased by 8.9%;
  • average client fees have reduced by over 18% in the past two years;
  • for firms using timesheets, productivity is falling;
  • lower marketing spend over the past three years; and
  • 6% increase in firms using outsourcing (reasonable number, but not very many firms are doing it).

There is one very telling comment made in the introduction to the statistics in the report (my highlights):

When analysing the 14 years’ worth
of data relating to high-performing
firms, we can conclusively say that
productivity based on chargeable
hours has no correlation to

Having just returned from the Verasage get-together in Boston, it has become even more apparent that the old models of firm management are not only redundant, they are dangerous.  Much of the discussion at the symposium related to the way successful firms focus on relationships – both internal and external.  This has to do with building, maintaining and honoring decent relationships.  Not relationships where everything is about flogging the crap out of your people and billing the hell out of your clients.  Relationships which are based on trust, accountability and common goals.

Having seen the damage done by the Almighty Billable Hour and looking at the impact this approach has on the cultures of firms, it amazes me that so many firms still use this model.

There is change already here in our industry and, as the GBU report reveals, this change is having an all-pervasive impact on our profession.  Either adapt or die.

How to reply to a professional who gives you a rate

Friend of VeraSage, Jim Hart, and I traded a few messages on Facebook today. During one of the exchanges we had this conversation:

Jim: Buddy… this world is still upside down.

Ed: How so?

Jim: I am trying to engage a lawyer. I met with her yesterday and she gave me a “rate.” Because I thought you would enjoy that I am standing on premise, here is my response:

Ed: Do tell.

Jim: Hi NameWithheld:

I’m hoping we can work together. I have been consulting for many years. I don’t charge by the hour. As a corollary to that, I also don’t pay by the hour. You see, I’m paying for your knowledge and expertise; not your effort.

That said, my hope would be that we could meet, agree on a scope of work and you could give me a price for that expertise.

Let me know if that would be acceptable.

So far, there has been no reply. I think that this is fantastic response to the professional who tosses out a rate. If you are a potential customer of a professional firm who has just quoted you a rate, go ahead and try a version of the above reply. Alternatively, you could just go to the VeraSage List.

Does this Really Work?

Ohhhh, the frustration!

I recently posted about a seminar I attended last week.  The feedback I have received from that post has been significant.  The responses have ranged from “Oh my Lord – that’s us” to “so, there is a way forward”.  Great, but I want to concentrate on the first type of replies received.

So many firms understand that the way they operate and their business model isn’t great, but it’s all that they know.  To try and move them to a new, more effective model takes a great leap in mental construct on behalf of the owners and managers in those firms.

One of the responses I received was from a bloke I know well who has just taken over as CEO of a professional knowledge firm.  Well established, reasonable size and “good, traditional” brand.  And he is frustrated up the wazoo!

It would appear from his email that the following issues pervade the organisation:

  • staff are rewarded with bonuses for hitting “productivity” targets;
  • The transfer from WIP into debtors (you know – actually billing the customer) is fraught in that, once the bills are raised, the customers get pissed off;
  • Consequence of this is that a lot of work remains in WIP as the senior people responsible for billing the WIP are too scared to raise the bill as they don’t want to have to deal with an angry customer;
  • Debtors ledger is out of control as there are a large amount of accounts “in dispute” which means that the whole thing is taking a massive amount of time and effort to clean up.

Now, from my view, this appears to be the antithesis of everything a professional knowledge firm should be.  Let me posit my view of the warped thinking that enables such an environment to exist, let alone continue:


We want our people to be working – agree on that.  But, do we want them to be working on things that make a difference to the customer and are valued by the customer or do we want them doing things that waste a heap of time on customer accounts?  The behaviour you reward is the behaviour that continues.  By tying rewards (bonuses) to productivity targets, we are encouraging our people to bill as much time to the Holy WIP Ledger as possible.  The argument goes that, when we record everything, it gives us a basis for billing everything to the customer (more on this below).

But what is the real message that we are sending to our people when we bonus (often ridiculous) productivity?  Is it a message about effectiveness?  And is it really a message about efficiency?  Too many times, firm leaders sprout on about efficiency but the bonusing system actually penalises people from working more efficiently as their productivity targets won’t be met (the thinking goes: if I do this job more quickly, I won’t spend as much time and therefore, I stand less chance of getting the bonus).  Where is the incentive for them to be more “efficient”?

As part of this system, you get the inevitable build up of your Holy WIP Ledger.  Many firms see this as a “lead indicator” (as per last week’s post) when, in fact, it is a wish list that often bears very little resemblance to collection.

The other message you send to your people with the focus on hitting production targets as far as time spent is that they will only see a customer as something to be billed, not valued.  The training that occurs as a consequence is that the “up and comers” get taught that to get ahead, you need to focus on pleasing the partner/manager with high productivity rather than pleasing the customer by delivering great outcomes.

As an aside, it is often the case that the less senior people very rarely (if ever) get to meet with the customers.  How is this going to play out in their career development?  How is this going to assist them with understanding the file and the customer needs?  All information is “filtered” through the senior people before it gets to the actual “doers” of the work.  The outcome – they flog their guts out to get promoted and then have no experience in dealing with customers face to face.  I know of one firm in town here where the only people who see customers are the partners.  Talk about rate limiting factors!  An obvious outcome of this is that there is more rework required and heavier partner involvement in getting a file “customer ready” as the instructions are, more often than not, “lost in translation”.  This though, in the warped world of timesheet based billing, is good – more chargeable hours to bill, higher “productivity” and a bigger Holy WIP Ledger.

Holy WIP Ledger (HWL)

So, we have a whole heap of people billing the Holy WIP ledger as hard as they can as this is the basis on which they get rewarded.  The HWL is seen as a current asset in the books of the business and the financiers and owners of the business see it as “money in the bank”.  All that needs to happen is for it to be billed.

Herein lies a bit of a problem.  I have yet to meet with a firm where they state, honestly, that the HWL is fully recoverable.  I know of one firm I have been dealing with who ran a HWL that was a pure estimate.  They had timesheets to (sort of) back it up, but they knew that they were all rubbish so they just did an estimate.  It was probably as approximately right as the timesheet based one anyway.

I recently did some work for a customer in a professional knowledge firm regarding the exit of a Partner.  The HWL was obviously an issue to be addressed as the approach they were considering was one based on a mixture of profit and net assets.  To get a true picture of net assets, there needed to be a full review of the HWL as everyone recognised that it was not valid and certainly not all collectible.  In this circumstance, I suggested that we not go through this process.  Instead, we developed an approach which looked at what the exiting Partner was happy to receive for his equity and what the continuing equity holders were prepared to pay for the share.  As I said to the Managing Partner – “We can go through the whole process and get a result.  The real risk here is, whilst it might be very right as far as the number goes, someone is likely to be pissed off”.  The approach we used meant that my business didn’t get a whole heap of extra money for going through the valuation process, but, we did ensure that the Partners (exited and remaining) have kept very very good relationships and our customer very much values the creative approach we have adopted to solve their problem.  In short, we provided value rather than a number.  And we have further strengthened our relationship which will lead to more referrals and customer longevity.

The HWL is never right.  The term in most professional firms is “lock-up” – how many days the firm has “locked up” in WIP and debtors.  Often time, this number is horrendous – I know of some firms who have nearly one year’s worth of revenue “locked up”.  For what purpose?  You can’t spend it as it’s not real.  Why bother measuring something that is so subjective as to be useless?


To get a bill done from your HWL, it needs to go through a process.  Often, it will be a senior person or Partner who goes through this process.  More often than not, they will sit down and agonise over the process “If I bill them what’s on the HWL, they will have a melt-down”.  So, what happens is that a bill will be raised against the customer for some portion of the HWL balance outstanding – in effect, what the person doing the billing believes they can get away with.  Conversely, if you do bill them for everything that’s on the HWL, you are almost guaranteed to get a pissed off customer on the phone three days later (or, worse, never – as they quietly leave and have no intention of using you again – or paying your bill).  There is no positive outcome that arises from this.  For anyone.

Now, the current thinking with regard to this is that firms should budget for “write-offs”.  In other words, they are saying (in words and deeds) that they know the HWL is crap.  But they then hold that the basis of their charging of the client is on time spent.  So, if the client has agreed to appoint them on time spent and they don’t bill the full time, are they really engaging them on that basis or on a “best estimate” at the end of the job?  This is where “estimated ranges” of accounts come in to it.  The client is told the cost of doing the work will be in the “range” of (say) $5,000 and $10,000.  The client hears “$5,000”, the Partner hears “$10,000”.  When the bill ends up being $8,000, both parties are pissed off.

What happens more often than people care to recognise is that there is a lot of “stuff” on the HWL that the senior guys are just too scared to bill.  I have seen some aged HWLs which record work done up to two years prior that is yet to be billed.  Seriously?  Is it ever going to be billed?  Or is it just there as a tacit admission that the system ultimately doesn’t work?  This then leads to other KPIs in firms about the ageing of HWL.  Most of these are there but not adhered to.  If the WIP isn’t billable, write it off – with all the “appropriate” consequences.

But, back to the staff posting time to the HWL.  How do they feel when the time they put in to a client is then written off?  Where is the feelgood out of this?  For anyone?  What is their thinking at the end of a job when, they are encouraged and incentivised to record all the time only to have it written off?  How will they think about the Manager/Partner who has “done this to them”?  What message does it send about the “system”?

So, after much navel gazing and internal brinkmanship, the bill is sent out to the unsuspecting customer.  The customer gets angry.  Now, one of two things happens.  The customer ring the Partner to have a whinge about the bill – the firms sends out a detailed HWL report to the customer detailing everything they have done (including the 15 minute phone call – billed as 18 minutes – where the customer recalls at least half of it was spent discussing the football results) for the period the bill covers.  Guess what, they get more angry “They’re charging me for what?”  Then they start to do the maths.  “If he is $500 per hour and he spent 8 minutes talking about the football, he wants me to pay him $100 for that?”  Not a great outcome.



The other thing that can happen is that the customer simply doesn’t pay the bill.  So, they start to get harassed by the ever-vigilant accounts department in the firm.  The “friendly reminders” come out, then the “is there a problem” letters and so on until the letters get more threatening.  Really good, positive stuff about customer engagement through this whole process.

At the end of the day, it gets nasty and people start defending positions.  The firm will (usually) relent and write-off a part or the whole bill or, sadly, take the customer to arbitration.  On this note, I remember a number of years ago when Ron Baker did his “Firm of the Future” tour around Australia.  During this tour, I met with a number of the Legal Services Commissioners from various states around Australia.  Their major source of work?  Fee disputes.  Their fervent wish was that all firms priced up front as the firms that did this hardly ever had a fee dispute.

So, we have a debtors ledger that is somewhat suspect as to the real collectability of the balance.  Which means, when coupled with the HWL, the “lock up”metric used by a number of firms is inherently questionable.

After all of the above, is it any wonder why my firm dumped timesheets in 2007?  It has saved innumerable hours, it has reduced customer complaints and has meant that the team in here are far more focused on delivering positive customer results rather than inputs.  As stated above, the behaviours you get in your firm are the ones that you reward.  Is your reward program incentivising the right behaviours?  Is your firm business model one which is team and customer focused?

There is a better way of running a professional knowledge firm.  Far less stressful, more enjoyable and one where you actually want to come to work.  if you look after your people and customers, the profits will (generally) look after themselves.

The frustration of firm management can be reduced and/or removed.  There are a band of highly experienced guys and girls at the Verasage Institute who can help you make the move.  But you have to make the first step.  I strongly encourage you to do so.

The Pain of Old Firm Management

This week, I attended a seminar where, to be frank, there were some arguments put that had me considering the option of tearing my skin off and rolling in salt – it would have been less painful.


Consider some of the points made at in one of the presentations at the seminar (and this is not an exhaustive list, my comments/thoughts are in italics):

  • You should get your “star performers” and keep loading them up with work as they get in front of the pack.  In effect, reward them for their great performance by loading them up even more and putting more pressure on them – what an incentive that is!;
  • Apparently, your WIP balance is a leading indicator for your firm (!) – not sure how this works, but some in the room lapped it up – how exactly is the WIP report a lead indicator other than for the bills you are going to raise at the end of the month which will be the cause of the client complaints in the month following?  So, maybe it is a lead indicator – of client complaints – the higher the WIP, the more complaints;
  • The seminal approach to customer happiness: “If you touch the client, you bill the client – for everything”.  This phrase reminded me of a discussion I had the other week with a somewhat more visionary firm in Adelaide.  They have some folk who are not all that happy not recording the time they spend working on/for/with/around their customers.  I asked them during the discussion “Do you record the time you spend thinking about your customers over the weekend or at night when you’re at home?”  Of course they don’t.  However, according to the approach being promoted, you should.  Work that out, or, better yet – set a budget for it!;
  • You need to budget for write-offs each month;
  • References to “fixed price estimates” – what, exactly, are these? I have been racking my brain about this – if someone can provide some clarity for me around this concept, I would be grateful;
  • Apparently, client satisfaction is important, “but we do have to make a profit though” – in essence, the firm’s goal is profit first – if that has anything to do with happy customers, all well and good.  To me, this seems somewhat arse-about;
  • You need to ensure that your clients understand that their actions reduce firm efficiency – OMFG.  So, we should punish the clients for interrupting our work – actually laughed out loud at this one; and
  • Clients need to pay for the inconvenience they cause – as it would seem that they are the cause of all the problems that exist in the first place.

According to the sage presenting this, “clients don’t understand how accounting firms work”.  Really?  Do they need to?

It was argued that firms need to focus on productivity and efficiency at any cost as these are your major drivers for profit.  You need to ensure that you are flogging the be-Jesus out of your people (they will apparently love you for it) and encouraging them to work harder so that you can load them up even more.  This bit I found offensive.  People are volunteers in your business – they can choose to turn up or not.  I hear many firms complain about staff-churn and turnover – any bloody wonder!  If your culture sucks, you get the team you deserve.  Culture is the result of the language, behaviors and focus of a business.  If these are all based around profit at any price, then they get the culture that supports that.  Won’t be happy or contributory or collaborative, but it will be, well, there.

I have been a willing recipient of the famous “Verasage Headache” on numerous occasions.  They are positive, challenging and serve to help me grow.

Unfortunately, the headache I received from this session was entirely different.  It is a headache based around people being measured on productivity and chargeable hours rather than on effectiveness and customer relationships.  It is a headache that resulted from arguing that the customer is there to be charged heavily and charged often – this based on the theory that any bill they get from you will be a good bill (driven, of course, by your “leading indicator” WIP report).

So, at the end of the session, I felt sad.  Very sad.  There were owners and managers of accounting firms in the room who were assiduously taking notes – picking up tips to make them better at flogging the crap out of their people and not really giving a shit about their customers.

Tim, our GM, was at the session with me.  His words at the end of it summed the whole thing up beautifully – “Pretty scary shit actually”.

The salt room beckoned.