Missed It By That Much

Thanks to Sheri Blaho from CS3 Technology for passing Three Ways Brush Factories Are Surviving In America from Planet Money on NPR on to me today. Audio here.

There is much with which to agree here.

However, the whole thing unravels for me with this sentence, “This allows Cheney to set prices based not on how much the bristle and block cost, but on how much time and effort went into it and how much it’s worth to the customer.”

So close!

It would have been perfect if they had said, “This allows Cheney to set prices based not on how much the bristle and block cost, and on how much time and effort went into it, but how much it’s worth to the customer.”

It never ceases to amaze me that we humans can make the same category mistake when the language involves labor as compared to materials.

There is no difference from a cost accounting perspective between the components and the labor and, therefore it effect on price, but for some reason, our brains just sometimes do not let us see that.

Thought Legion Webinar: How to Discuss Value

I’m proud to be part of Thought Legion, an Ignition Consulting Group venture, led by Tim Williams.

They have a great line-up of speakers presenting leading edge topics.

I’ll be conducting this webinar (“How to Discuss Value With Your Clients”) July 9th, 2013, 1:00-2:00 pm, EDT.

Whether or not you work in an ad agency, check out Thought Legion’s roster of events.

How to Tell Your Client Your Price is One Million Dollars

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CLIENT: I want to hire you for your expertise and your ability to create and execute transformational business ideas for my company.

FIRM: Excellent, we are ideal for that challenge.

CLIENT: Yes but before I hire you I have a few important questions.

FIRM: Okay, shoot. What do you mean?

CLIENT: What will you charge me?

FIRM: $1 million dollars for our ability to work with your organization to create the idea, and then if we move it forward another million because truly transformational business ideas are valuable and in limited supply.

CLIENT: Why $1 million?

FIRM: What to you mean?

CLIENT: I need to know why you charged me a million.

FIRM: Why?

CLIENT: Well if I don’t know how you arrived at your price, how do I know it’s fair?

FIRM: I don’t understand. What difference does it make how I arrived at the price?

CLIENT: Well if I understand how you arrived at it, then I can negotiate it down.

FIRM: But I do not want you to negotiate it down. That is money out of my pocket.

CLIENT: Yes, but it is a privilege to work on my brand and you will get lots more business from it.

FIRM: I will? Can you guarantee that?

CLIENT: No. But I still need to know how you got to your price.

FIRM: Well OK…I looked at the size and scope of the opportunity and considered the value of us addressing it for you and calculated a price that I am willing to do it for. A price that I believe to be competitive in the market and a price that affords me the peace of mind that I can make a bit of money.

CLIENT: Oh, but I need more than that. I need to know who will do the work… And the amount of time it takes for them to do it.

AGENCY: The team I said will do the work…and it will take as long as it takes until we have an outcome that everyone is happy with.

CLIENT: Yes…but what if just one person cracks it in one day…and you then execute
It with a small team in 3 weeks – that is not worth a million dollars.

FIRM: You’re 100% correct. It’s worth more…. If that happens, we will double it!

* * *

Such is the brilliant defense of Jason DeLand of Anomaly, one of the leading advertising agency luminaries in the realm of value-based pricing. Go thou and do likewise.

Yup, It’s the Client’s Fault (Again)

In this month’s Accounting Today, Roger Russell’s article Don t Let Clients Drag You Down furthers the belief system that accountants need to be cautious of “client’s” and their undocumented expectations.

The article opens, “Being sued for something you’ve done wrong is bad enough, but getting sued when you have performed your work diligently and correctly can be devastating. Yet that’s what oftentimes happens when accountants fail to communicate with their clients exactly what to expect.”

The article then prescribe the usual remedies: better engagement letters, better spelling out of the firm’s responsibilities, and, of course, “Be aware of what is a reasonable fee.”

Nowhere is it suggested that a conversation about the value to the customer be had. Nowhere is it suggested that the professional and the customer should agree to a fixed price upfront before the work is performed. Nowhere is it suggested that the customer be given some choices with regard to the work performed. Nowhere is it suggested that the professional is responsible for managing the scope creep and scope seep.

Once again the advice is to treat the symptoms, not the cause, which is never even mentioned in the article – The ABH (Almighty Billable Hour).

William Cobb on the Cobb Value Curve

At the Sage Firm of the Future Symposium in March 2013, William Cobb, devisor of the oft cited Value Curve, was on hand to explain his concept to the attendees.

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The Cobb Value Curve

He was kind enough to let us record it. Enjoy!

The Virtual Roundtable: Value Pricing for CPA Firms

I’m happy to announce a new program being launched by the CPA Leadership Institute: The Virtual Roundtable.

A series of six conferences call will be conducted on a given topic over several months.

My topic is The Eight Steps to Implementing Value Pricing.

The first session is a free introduction, which will take place on October 31.

The Paradox of Value Pricing

The beauty (and wisdom) of Value Pricing is that services provided to, and received by, customers are fully customized. Customization fulfills a basic human need to be connected and to feel special. Fill a seminar room with 10, 100, or 1,000 professionals from all branches and they will almost unanimously agree with the horrors of the time sheet, of the pervasive inequity of hourly pricing, of the demoralizing results to a team of articulate and educated knowledge workers who are measured like an office assembly-line factory worker, and to the wasted (hence inefficient) use of firm talents to track and monitor and justify and think about all of the permutations associated with their beloved time and billing system. Yet, although they trot to the pond, gaze upon the crystal clear nourishing waters, the vast majority retreat to the ultimate comfort of what they know……….billing by the moment.

Why?

Why is it that really smart, essentially logical and well educated people, are able to acknowledge a better path, a brighter future, a more enjoyable life do they ultimately turn their hearts and minds off to commit the ultimate mentacide (killing of the brain) and keep doing what shouldn’t be done?

It may simply be that the paradox of Value Pricing is that the unconditioned brain tires too easily when forced to consider options. The paradox is that hourly billing is simple. It is Rate X Hours=Price (well at least as a start since nearly all firms never achieve their RxH, they receive closer to 80% of RxH – but that isn’t the message for this post). Hourly billing is simple. It is redundant. It is easily expressed. It is easily taught. Hourly billing has all the trappings of VD. It is easy to catch and damned difficult to get rid of. Logic, like antibiotics can only help so much and so often. The root cause of the disease is the rampant bad behaviors of the carriers (Managing Partners, Partners, Brown-Nosing Partner Wanna-bees, most Charlatans that masquerade as Consultants, and large software providers that like to write simple code rather than complex code). Since we can’t easily destroy the disease carrying hosts (DDT was outlawed years ago) (DDT = Dynamic Disruption of Totalitarians) – Since we can’t easily eradicate the hosts, we must find alternative treatments.

The initial treatment is to simplify. To allow the unaccustomed mind time to get into VPC (Value Pricing Condition) — like the marathon runner who started with walking, jogging, 1k, 5k, 10k, 15k, 10k, 20k, 10k, 25k….until she reaches 26.2 miles of endurance, we must start out slow and simple. Although the logical mind likes the concept of choice and choosing, the survival brain doesn’t. As the Otis Redding lyrics said – “I can’t do what 10 people tell me to do, I think I’ll go sit on the dock of the bay”. When confronted with choice and option, it requires more energy then many are capable of investing, so the default is to do what has always been done. Hence they live inside a Firm of the Past rather than traverse to a Firm of the Future.

Never mind that these same professionals will agree that their decision is wrong, like an overweight person that wants to diet but chooses not to, the investment is beyond their current capacity.

So, how does one start on the journey of the VPC? Simple. On day one – choose to simply invoice all customers for their next fiscal year of services equal to their price in the current year and perform all of the same services, lock stock and barrel. This may not be elegant but it is simple. It is clean. It is clear cut. If you are risk adverse, add 10% to cover inflation, and your fear factor. Stop using your timesheet for all billing activities, and free up your day (and your team’s day) –

Think about it. If you are “an average firm” with “average people” (you know, the kind that bill by the hour, that write down more than you write up, and measure all of those balancing scorecards – face it you are average and mediocre) you will free up 30 minutes or more, per work day to spend on more fun activities like………..sleeping, reading, FaceBooking, Tweeting, avoiding porn-laced spam (unless you privately enjoy your porn-laced spam – just be smart and don’t share it at the office or you can spend quality time with lawyers who will most likely bill you by the hour and trust me that will treat you like you have been treating others – so maybe you should go ahead and freely share that pic-of-the-day your cousin sent you with your colleagues) – or, heavens sake, a conversation with your customers to learn more about them, to help them create their future, and to boldly become the penultimate advisor that is harboring in your DNA – but has yet to surface because of your disease.

The Paradox of Choosing is a significant barrier facing all of us. Too many choices leads to maintaining a comfortable habit even though it is killing me. Too many choices creates a world where you put off until tomorrow what you should start today. And we all know that tomorrow never arrives. The disease has us. The habit has us. We need a cure and the cure is a simple switch to a simple system where you free your mind to get into Value Pricing Shape by removing the inherent challenges of figuring out the perfect way to transition and hence stuck with too many choices – and choose a simple one and move on it. Trust in yourself. You will never look back and think you should have stayed with a timesheet and its cousin, hourly billing cancer.

Challenge your brain. A marathon begins one step at a time. The Firm of the Future begins the same way.

Now – call me (or anyone of us) and we’ll help you train for the best race in your professional life.

Pricing That Makes You Go, “Huh?”

images-4So this morning I called to renew my, errr, son’s subscription to the MLB Insiders Club. It gets us him some “free” stuff as well as a monthly baseball magazine. Overall, I think it is a good deal.

I called because the letter I received had no place where I could renew on-line and, well, filling out a form and sending via the USPS is beneath me. I found it odd that you can join the program on-line, but not renew. So be it.

On the mail-in form the prices for renewal were listed thusly:

  • Three years – $59.00
  • Two years – $44.00
  • One year – $24.00

Not bad. This is pretty standard term-based preferred pricing, but here is where is gets weird.

When I called, the representative took my member number and said she would be happy to renew me at the following “rates:”

  • One year – $9.00
  • Two years – $18.00
  • Three years – $27.00

I renewed for three years, but now I am totally confused.

First, why is it cheaper, significantly cheaper, to call to renew as opposed to sending in the form?

Second, why did they present the prices highest to lowest on the mail piece, but lowest to highest over the phone?

Third, in both cases they used even dollar “9” pricing as the base, yet the form used the three-year price as the base and the call-in used the one-year price as the base. Why is that?

Fourth, why is it that via mail, I get a preferred price for a longer subscription, but via the phone, the price is less, but there is no preferred price for multiple years?

Fifth, is this an example of a great price discrimination strategy – charging more to the people who just renew using old technology (i.e., the mail) or an example of a company without a fricking clue as to pricing?

Sixth, why do I even care about this?

Sorry, that last question was my inside voice.

Your thoughts on the first five questions would be appreciated. I’ll reserve the last one for my shrink.

Certified General Accountants: Outlook magazine interview

I was honored to be interviewed by Lynn Sully for the CGA’s publication, Outlook.

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We discussed the idea that “you are your customer list,” among other Firm of the Future topics.

You can find the interview here, beginning on page 38.

The Bottom Line: Beyond the Billable Hour

I’m happy to be the cover story in this issue of the State Bar of California’s Law Practice Management and Technology Section. You can even earn an hour of MCLE reading my article (I flunked).

VeraSage is quoted throughout the issue, including Mark Chinn and Jay Shepherd, and Exemplar Law gets a mention, too.

It’s also encouraging to see so many “director of pricing” folks who are quoted throughout the articles.

But reading through the articles has been less than encouraging. Here are some brief comments on each article.

Will Hoffman: I’ll let our lawyers comment on the “comprehensive petition pending” to the California Supreme Court. But the fact that the Bar should acknowledge and encourage Alternative Fee Arrangements (AFAs) is, I suppose, progress, even though it lags way behind the free market.

Ed Poll: “All pricing is arbitrary.” What? This would come as a shock to the thousands who work as professional pricers. Why are they needed then? We’ll just let computers do it all.

Poll is still stuck, like most of the other authors, in an Industrial Era mindset of efficiency and cost cutting. There’s no mention of why or how knowledge work and knowledge firms work differently then Henry Ford’s factories.

This worldview invalidates nearly everything he writes about value and pricing.

Dr. Silvia Hodges: Silvia interviewed Mark Chinn for her article, along with Pat Lamb, and she mentions Exemplar Law. She quotes the ACC’s definition of value, which is unnecessarily complex. The ACC has yet to understand that all value is subjective, and they continue their quest to provide a checklist to quantify and qualify value.

She writes:

The purpose of AFAs is not to reshape a firm’s business model—although this is exactly what it might do in some firms—but to meet clients’ needs.

But Value Pricing is a business model change; it’s much more than just meeting the needs of clients. It’s also about meeting the needs of the professionals who work in those firms, as well keeping the profession relevant.

One of the reasons why so many of these articles are muddled is because they seem to get the idea of value being externally determined, but they miss the concept when the work comes back into their firms. They insist on applying Industrial Era, Six Sigma, and cost accounting principles to that same work. This is a prescription for failure, since it’s a contradiction to the theory of a Professional Knowledge Firm.

She also cites Pat Lamb, and if he’s right that most firms’ work is not customized, then their value is on the low-end of the Value Curve. But even here, a firm can utilize Value Pricing—see Southwest’s pricing on any flight offering a wide range of offerings.

But I believe Lamb to be wrong. The work that adds the most value is, by definition, customized and represents the applied judgment of experienced lawyers. To apply cost accounting principles to such work is to misunderstand—at the most fundamental level—the patterns and cadences of knowledge work.

Henry Turner, Jr.: Henry is with Valorem Law Group, and writes:

A proper value fee will not involve adding up the number of hours you think a matter will take and then quoting a fixed fee based on those hours. That is simply a “wolf in sheep’s clothing.” If you commit to pricing on a value basis, you can no longer think about pricing in terms of hours.

True. Why, then, does Valorem continue to maintain timesheets? He who says A must say B, and if hours are meaningless externally to the customer, they are also meaningless to the internal workings of a knowledge firm.

He uses the Apple store and iPhone as an example, but here’s the point that he and the rest of these authors are missing: the Apple store employee is not told to spend less time with you to lower costs and make more profit.

Rather, she’s taught to spend as much time with you as necessary, and Apple considers this cost an investment in the lifetime value of the customer.

Tracking time, and cost accounting, destroys this attitude, which is Paul Kennedy’s point in this brilliant essay. Read this essay and you won’t have to pick up a book on Lean Six Sigma.

Donna Seyle: Jim Hassett is quoted as saying he’d switch to hourly billing for his business in a heartbeat?

Wow, this is truly ignorant, as hourly billing is suboptimal for capturing value. The entire pricing revolution was started to move away from cost-plus pricing, not to hold it closer.

It also makes me wonder why he is spending so much time writing on Value Pricing and encouraging firms to make the change? The cognitive dissonance is indefinable.

Donna suffers from the same efficiency and cost containment mindset as the others in this issue. She also writes that a lawyer’s knowledge has “intrinsic value.” But nothing in this world—except for human life—has intrinsic value. Value is subjective.

Reading these articles illustrates the importance of linguistics. These authors will never truly understand the subjective theory of value if they continue to hold on to their existing vocabulary of commodization, cost control, efficiency, lean six-sigma, etc.

What do you think?