Firm of the Future Symposium

On August 9-10 in San Francisco, Ron Baker and I will once again be presenting our Firm of the Future Symposium sponsored by Sage North America.

This symposium will be dedicated to the possibility that a professional organization can be run more effectively when it becomes a knowledge firm rather than a service firm. Creating such an organization is hard work and not for everyone as it requires professionals to think differently than they have in the past about what it is that they do.

Objectives

  • From a focus on revenue to a focus on profit
  • From a focus on capacity to a focus on capital management
  • From a focus on efficiency to a focus on effectiveness
  • From a focus on cost-plus pricing to a focus on pricing on purpose

Sage (Ed’s employer) has agreed to open a limited number of spots for firms that are not partners of Sage. If you are interested in joining us, please send me an email and I can get you registered. The price is $2,500 per person and comes with a 100 percent money back guarantee!

One of the more interesting stories to emerge from our previous FotFS, was that of Peter Coburn of Commercial Logic. They are publishers of, you guessed it, time and billing software. Peter underwent a conversion of sorts and posted a terrific article on it.

Timesheets are Terrible Cost Accountants

In general, there are four defenses for maintaining timesheets:

  1. We need them to price.
  2. We need them for project management.
  3. We need them for team member performance evaluations.
  4. We need them for cost accounting.

We here at VeraSage have proven, without a doubt, that every one of these defenses is incorrect, and that there are superior methods and tools for each of these objectives.

First, prices are set by value, not hours, even within the context of competition. After all, none of us buy the cheapest of everything, which proves there is room in all markets for price searching by sellers to take place.

Second, anyone who spends a day listening to Ed Kless teach project management cannot possibly come away thinking that “time spent” is more important than “duration”—that is, turnaround time—from a project manager’s perspective. Duration is where the bottlenecks occur, not time spent.

Third, anyone who has studied nearly every single private business, or a Results-Only Work Environment (ROWE), knows timesheets are not needed to conduct performance evaluations for team members.

Yet, it’s the last defense I really want to bury, once and for all, in this post, which was inspired by an excellent article by legal consultant Allison Shields in the May 2011 issue of Law Practice Today.

“Thaaaar She Blows”

When it comes to customers and profitability, another adaptation of the Pareto Principle applies. Run a Pareto analysis on your customers, ranked by revenue and you will most likely find approximately 20 percent of your customers generate 80 percent of your revenue. But what about profitability?

Professors Robin Cooper and Robert S. Kaplan of Harvard Business School have shown the result of their analysis of an insurance company’s customers, resulting in what author Matthew Stewart in The Management Myth calls “The Whale”:

The_Whale.pdf

Kaplan then explains:

The shape of the curve occurs in virtually every customer profitability study ever done, in which 15 to 20 percent of the customers generate 100 percent (or more) of the profits. In this case, the most profitable 40 percent of customers generate 130 percent of annual profits; the middle 55 percent of customers break even, and the least profitable 5 percent of customers incur losses equal to 30 percent of annual profits.

There’s an old joke about the perils of hourly billing: You work 12 hours, bill for 8, and get paid for 6. My good friend and colleague Ric Payne (Chairman of the Principa Group of Companies) has added this to make the joke even less funny: “and you actually make a profit on 4.”

Ric has confirmed Kaplan’s finding with empirical evidence from accounting firms. Using historical timesheet data, Ric constructed a macro in Excel that allocated actual costs—not the inflated “hourly rate” of the firm because that rate includes a desired profit, and hence is not cost accounting—to each customer based on hours.

At least Ric has used the timesheet as it was originally intended—as a cost accounting tool. Since most firms have this data, why aren’t they utilizing it in this manner to determine which customers to fire, or at least increase price?

Most firms simply use the time and billing system to invoice customers, not as a profitability tool. I have yet to see a firm fire a customer, or increase their price, because of timesheets, for if they did, realization rates would not consistently be below 100 percent.

When confronted with an analysis such as this, most partners will dismiss it by saying something to the effect of, “Oh, we know we lose money on some of our customers. But they are acorns who will grow into great opportunities one day.”

This is not bad logic, per se, as a firm should look at the total profit from a customer over its lifetime. The problem is, if this is so, then why the pretense of timesheets being used to measure profitability? What decisions do you make as a result of timesheets? Do the benefits exceed the costs? Once again, this is the illusion of control.

I argue that firms already know where their customers are on the Whale, without even looking at the analysis. However, if the analysis provides impetus to leaders of the firm to shed their unprofitable customers, then by all means it is worth undertaking (Ric has kindly offered to make his Excel Macro available on his Blog).

Timesheets are a Cost Allocation Tool

When we show the Whale, people claim the only way to calculate profitability per customer is with timesheets. Really?

First off, you don’t need timesheets to know your firm’s costs. Look at your income statement. Don’t confuse total costs with cost allocation.

Give me half a day, maybe less, with your income statement, revenue per customer, and allow me to interview your team, and I will allocate your costs over any time period you want, and the result will be the Whale.

Let’s get over the idea that any cost accounting—be it timesheets, Activity Based Costing, or any other method—requires 100 percent accuracy. The simple truth is, cost accounting is full of arbitrary allocations and errors, and if you don’t understand that, you’ve never been a cost accountant.

Cost accounting just has to be close enough, and the important point is that your costs need to be known before you do the job, not afterwards.

This is why Japanese manufacturing (especially automobile) companies utilize Target Costing, not standard cost accounting. They are about 40 years ahead of American companies with this practice.

This is an enormous difference, since value drives price, and price drives the costs you can incur to earn a profit you can live with. It does no good to know your cost allocation to the penny if the customer doesn’t agree with your value and/or price.

Further, costs are largely fixed in professional firms. This is why airlines, cruise ships, hotels, etc., do not engage in low-value cost accounting, but rather concentrate on yield management—that is, pricing for value, not to cover arbitrarily allocated costs.

Why Your Hourly Rate is Not Cost Accounting

However, I want to dive deeper on this issue, because the above logic doesn’t seem to convince many CPAs.

Your hourly rate is not even an accurate cost allocation method. Here’s why:

  1. It includes profit. There’s no such thing as allocating profit in cost accounting. That’s profit forecasting, not cost accounting. Opportunity cost has no place in cost accounting either, as that is an economic concept, not a cost accounting concept.
  2. Even if you remove the profit component from your hourly rate, it still bears no relationship to your firm’s actual costs. Since most firms establish their hourly rates based upon reverse competition—that is, what your competitors chare—the cost component is completely arbitrary. I have yet to encounter more than a handful of firms that tie out their cost per hour to the General Ledger.
  3. With the timesheet, you are attempting to run a Profit & Loss statement on every hour of work logged. This is absurd, since your firm is an interdependent system, and cannot be atomized into a series of recorded hours.
  4. The hourly cost allocation gives no weight to the lifetime value of the customer—and the lifetime value of the firm to the customer. Our colleague Paul Kennedy has illustrated why this is so more brilliantly than anyone I have ever read.

These are egregious errors for CPAs to commit, given our supposed fastidiousness when it comes to numbers.

And when you compare this costing method to target costing—or price-led costing—you realize timesheet allocation is suffering from what philosophers call a deteriorating paradigm—the theory gets more and more complex to account for its lack of explanatory power.

This is why many firms will allocate the same dollar of revenue three or four times, based upon different criteria—from origination to realization to cash collections—which is overly complicated and not a great use of limited executive attention.

But Wait, There’s More

Here’s a Gedanken (thought experiment).

Assume you’re a sole proprietorship, and have $100,000 of fixed overhead this year (rent, wages, pencil lead, etc.).

Further, let’s assume you plan to work 3,000 hours, and expect one-half of this to be “billable,” and the other half “nonbillable.”

The first question is do you divide the $100,000 of costs by 1,500 or 3,000 hours? Forget adding your desired profit, as that’s not cost accounting but profit forecasting.

The theory of hourly rates says you’d divide by the number of hours you expect to bill, not work, so that’s $100,000/1,500, or $66.67 per hour of allocated costs per hour worked.

Let’s also assume that you’ve billed 1,500 hours between January and November 30th of the current year, and you’ve completed all of your work, looking forward to your month off (you were able to get all your work done early because you took Ed Kless’s excellent project management boot camp).

Now, on December 1st, a new customer engages you to perform 100 hours of additional work that month.

Your cost allocation now becomes $100,000/1,600, or $62.50. Therefore, you’ve been over-allocating your costs by $5 per hour for eleven months of the year.

[It’s even more absurd if you originally divided the $100,000 by 3,000 hours worked (not billed), even though you no longer have the $5 per hour over-allocation issue. Why? Because, then, to which customers do you allocate the 1,400 “nonbillable” hours? And how do you determine that allocation? This is why cost accounting is full of arbitrary assumptions].

Multiply that by more and more employees, account for all the lies in timesheets, the eating of time, non-recorded time, and all the other games played, and you have an egregiously incorrect cost allocation scheme that is incredibly elastic, not accurate.

And, to add insult to injury, timesheets are not helping you price better, conduct project management more effectively (or even efficiently, for you Taylorite disciples), qualify your customers better, predict the performance of your team members, or measure what matters to your customers—and, they are lagging indicators.

All this said, what’s the point of timesheets?

As Ed Kless says, “If you suck at what you do, bill by the hour…”

And I would add, given the logic of the above, “…and keep timesheets.”

If you think the above is flawed, please let us know where.

This debate is getting stale, and we should have moved on a long time ago, since there are many more important issues for the professions to deal with rather than wasting time on a deteriorating paradigm.

Book Review: Target Cost Management

Target costing is a term often used in pricing circles but rarely defined. We know it was pioneered by Japanese companies, especially Toyota, but what, exactly, does it mean? Target Cost Management: The Ladder to Global Survival and Success by Jim Rains sets out to shed light on a practice that is all but unknown in the USA.

Rains has an interesting background: He worked for 32 years at General Motors. He learned about Target Costing (TC) in 1993 from an Arthur Andersen report, “Product Development: Global Best Practices.”

Rains admits he’s never deployed the techniques he writes about because GM wouldn’t listen to him (though he does consult on them now). Further, no USA company he knows of has embraced TC, leaving the USA 40 years behind the Japanese (Toyota began using TC in 1963, but I’ve read elsewhere it was doing it long before then, though admittedly maybe not in the way Rains describes now).

Obviously the book is written for manufacturers, but I think there are some lessons in here for Professional Knowledge Firms, which I’ll share at the end.

The Japanese term for TC is Genka Kikaku, literally ‘planning for the achievement of true costs.” Rains provides his own definition of TC:

TC is a system that plans for and expects a constant, consistent, and acceptable level of profitability now and far into the future.

TC is not about management of cost, but rather management by cost. Rains goes on to distinguish TC from budgets and cost accounting, which deal with past costs, not future costs:

TC is not just about setting cost targets. It is an entire value chain approach to managing an enterprise. Cost targets are not budget targets. Too many managers have been taught that budgets are what you spend. Cost targets, by contrast, are something that you achieve.

TC is not a financial system. Typically financial systems are used by the finance department to report costs that have already been spent, rather than to manage cost expenditures before they occur.

The definition used by the Japanese is probably better since it incorporates the customer:

TC is a comprehensive profit management activity to plan and develop a product through establishing targets for quality, price, reliability and delivery satisfying customer requirements and through striving to achieve the targets simultaneously across the processes.

The formula looks like this:

Market Price — Target Profit = Target Cost (TC)

The process is really value engineering (VE), recognizing that the design phase is where most costs are committed, and value is what drives the market price. This is different from Activity Based Costing (ABC), which allocates past costs based on activities.

VE focuses on the function (Function-Based Costing, FBC), which acknowledges that only a few functions drive the total cost, and the importance of the function has little correlation to the cost to perform the function.

What makes FBC so effective is the focus is on the functionality the customer is willing to pay for. Rains provides an example of door hinges. GM tends to change them every year, whereas Toyota keeps the same ones since the customer doesn’t really care about the aesthetics of the hinge, only its function.

The average car contains approximately 10,000 parts, so it’s easy to imagine how this approach can avoid a large number of costs.

Traditional managerial accounting has no way to capture cost avoidance, hence it’s not rewarded. Japanese companies think about cost avoidance through the entire design and manufacturing processes, which is why they are not guided in their decision making by standard cost accounting procedures. Indeed, Toyota and other Japanese companies don’t even utilize standard cost accounting.

Ladder to Global Survival and Success

A ten-rung ladder is illustrated that plots the journey to TC, while the book is designed to focus on the top three rungs. The bottom 7 include strategies such as Lean, Six Sigma, Value Analysis, Theory of Constraints, Benchmarking, VE, ABC and a host of other acronyms I won’t bore you with.

The top three rungs are “Begin TC; Utilize Cost Tables; and TC Institutionalized.” Developing Cost Tables is the Holy Grail of TC, as they allow companies to project future costs and achieve TC objectives. There are three ways to formulate cost tables:

  1. Time motion study
  2. Actual plant floor benchmarks
  3. Statistically derived parametric estimation or regression techniques

What’s interesting is how Japanese companies have embedded TC into their DNA. Every major Japanese company has a cost planning department, with half of them being separate departments, 40% report to engineering, the rest to purchase and finance.

Nissan alone employs 220 people in cost engineering. Cannon, the most profitable Japanese company, has 267 people, and even Isuzu has 60.

These folks aren’t just concerned with cost, but also are responsible for value creation and establishing the Market Price.

The chief engineer at Toyota, for example, spends one year in between projects in the field interacting with both dealers and customers to determine value. This is similar to the functions we advocate the Chief Value Officer (CVO) perform for PKFs.

Disagreements with the Book

Not everything in this book is worthwhile. The author seems to think that Japanese companies are superior because of TC, and no doubt that may be true among automobile companies. But the USA is far more innovative than Japan in many other sectors, so TC can’t be holy grail he claims it is.

The author also doesn’t seem to realize that costs are prices, and have their own value component built in. He advocates suppliers share full costing data with the company, and then tack on a desired profit—that is, cost-plus pricing, the very opposite of what he thinks companies should be doing.

If Value is right for Toyota, then why isn’t it right for suppliers to Toyota? The contradiction is never addressed.

He also claims that raising prices isn’t normally an option in today’s global economy, but this is nonsense. Price is set by value created, not costs incurred. Lowering costs is just one alternative to increasing profitability. Creating more value is another, not to mention more strategic pricing strategies.

Yet my biggest disagreement with this author is his attitude that business is war, and that you have to be so competitive your competition doesn’t survive.

This, too, is nonsense. Business is not war. It doesn’t destroy, it creates. Sure, a lot of companies fail—like GM—but that doesn’t mean that outcome should be the overarching the goal of Toyota. The market is big enough for many competitors, even in automobiles. The author’s zero-sum mentality makes me question other topics he addresses in the book on corporate strategy.

Lessons for PKFs

Rains also seems to believe in Frederick Taylor’s distinction between managers and workers, writing:

Those involved in intellectual work should not be diverted from it by other responsibilities. Line managers and workers are there to realize the plans created by the intellectual efforts of others.

I don’t know if this attitude comes from his years at GM and its militant unions, but it seems to me that Toyota treats all of its workers as knowledge workers, which is why they implement so many ideas (over a million per year) from line workers.

This attitude is very similar to the strategies laid out in the E-Myth Accountant by Michael Gerber and Darren Root, which are suboptimal because they don’t tap into the knowledge that exists across the entire firm.

In a PKF, everyone is a knowledge worker and is in charge of designing their own responsibilities, contributions, plans, processes, and systems. All the knowledge is not embedded at the top, but dispersed throughout the knowledge workers themselves.

There is no “one best way,” as Taylor and Gerber advocate, in a PKF.

In an auto plant, the worker serves the system and a lot of the knowledge is embedded in that system. But in a PKF, the system serves the knowledge worker, with the knowledge embedded in the human capital.

This is precisely the difference between an Industrial/Service Era organization and a PKF.

Reading this book taught me a lot about TC and it was interesting, but it also convinced me that TC is not the right approach for a PKF. Focusing on creating value, implementing Value Pricing, appointing a CVO, establishing a Value Council, implementing project management, and conducting After Action Reviews are far superior strategies than fretting about costs that are largely fixed.

Cost Tables really don’t apply to a PKF. You have to pay the rent and salaries (the overwhelming majority of costs in the average PKF) no matter what, and trying to allocate those costs to any activity or function by the hour is completely arbitrary and fraught with misguided and misleading assumptions. Hint: you can allocate rent by the hour, but you’re on the hook for the whole lease cost once you sign.

Perhaps Rains himself says it best:

Managing the intellectual effort should focus not on improving efficiency but on achieving effectiveness in product specifications.

Ultimately, effectiveness is achieved by creating value and capturing a fair portion of it, not achieving exact cost targets.

However, if you have manufacturing customers you may want to have them read this book. It could be the beginning of a very interesting journey.

There’s no doubt in my mind that TC is superior to standard cost accounting and Activity Based Costing.

I wonder how many Six Sigma Black Belts advocate TC? Rains is skeptical about Six Sigma, claiming the ROI on it has been much higher for the Black Belts than any company. I wonder why?

The ABH is not an ECE

image“Would you want to buy from you?” I asked this somewhat rhetorical question at a recent Sage ECE (Extraordinary Customer Experience) Workshop I delivered to Sage business partners.

I continued, “Would you want Sage to bill you by the hour for support regardless of the outcome of the call?” The reaction was clear. “HELL NO!” one participant shouted.

imageYet, the majority of Sage partners (and all professionals for that matter) that I encounter still bill their customers by the hour. Some have even twisted the idea into thinking it is the right thing for a customer. “You will only pay for what you need,” they claim.

I am here to tell you using the ABH (almighty billable hour) is not an ECE (extraordinary customer experience). Sage partner, Sonia Gray, once told me that after she switch to fixed price agreements, one customer told her, “I am so glad you price this way now. I always thought the billable hour was a license to steal.” Wow!

Here is a list of just the customer experience reasons to abandon the ABH, based on Chapter 7 of Ron Baker’s treatise Professional’s Guide to Value Pricing.

  1. It creates a conflict of interest between the consultant and the customer (the very person you are trying to help). It is the customer’s best interest to reduce the number of hours; it is the consultant’s best interest to increase the number of hours. Hmmm.
  2. It focuses on the efforts, not the results. Your hours are the inputs, not the output. The output is the solution to the customer’s problem. Focusing on hours would be like counting the number of swings a batter takes in baseball and ignoring the hits or lack thereof.
  3. It puts the risk of the engagement back onto the customer. This is lunacy because the customer is paying you to reduce the risk, billing by the hour transfers this risk back to the customer, no wonder they don’t want to pay your bill. When you reduce your risk, you also reduce you potential reward, meaning your potential profitability. Being in business is a risk, embrace it.
  4. It creates a corporate welfare system. Often times it is the C and D customers who complain most and are granted relief of, at least part of their payment. In order to make up for this in the aggregate your company must do something in order to remain profitable. The something is, ultimately, charging more to the A and B customers who complain least and rarely do not pay. You are, in effect, subsidizing your C and D customers, by taking more from your A and B customers. You are giving to the have nots at the expense of the haves.
  5. It makes you a lazy project manager. Because the customer is “paying for what they need,” scoping and change requests become a non issue. Why bother? They are not paying for a scope of work, they are paying for your hours. This allows you to a) not scope the work properly in the first place and b) assume every change requested by the customer to be in the “new” scope. Partners then complain about scope creep. This is nonsense because, in my opinion, you never really had scope in the first place.
  6. Lastly, it does not set your price upfront. An hourly rate is not a price unless you are only selling one hour. A range-of-hours proposal (always couched with “this is an estimate”) is a guess. Worse still the customer will only look at the low number, whereas, you will only look the high (plus 10 percent). Customers, like you when you buy stuff, want a price. It is a rational request, honor it.

Have I missed any? I am sure I have.

Personal After Action Reviews–Parent and Child Editions

In a recent Facebook post made by a old friend, John Stulak, (old as is long-time, not age-wise). John stated that he was 16,443 days old and that he was awakened at 3am with this thought:

The day is the natural cycle of our lives. The cycle of light and dark, being awake and sleep, has more significance than the cycle of the seasons. The day is what counts. Each day is a complete unit in itself. At the end of each day I can look back and take stock. How have I been? What have I learned? What can I be grateful for? I can hold a day’s experience in my mind quite easily. Trying to go back and take stock of a whole year is much harder. Numerous incidents and discoveries are inevitably forgotten. I also find it far more meaningful to think that I have lived through over 16,000 days this life, rather than 45 years.

imageHis post reminded to get back in the habit of doing a personal AAR (after action review) each day. In a ten-year journal given to me by my wife a few years ago, I record the answers to the following questions:

  1. What did I hope to do today?
  2. What went well? Why did that go well?
  3. What went wrong today? Why did it go wrong?
  4. What am I going to do different tomorrow?

I can’t tell you how dramatic the improvement is over time. Consulting guru, Alan Weiss calls this change The 1% Solution, improve by one percent and in 70 days you are twice as good.

About six months ago, my genius wife, Christine, developed a similar tool with our five-year old son, Sean. When putting him to bed each night, we ask him to say:

  1. One thing good about today.
  2. Hope he has a good nights sleep.
  3. One thing he is looking forward to tomorrow.

We do it in the form of a prayer after he says his Gloria Patri, as it connects to the past, present, future form of the prayer, but I think this is easily modified and adapted without a religious spin.

Thoughts?

Your Vote Needed – Best Timesheet Video

Below is a list of videos I found on youtube that are related to the timesheet with a link to a playlist I created if you want to view them consecutively. Please view them and let us know which is your favorite.

  1. Do your timesheet by joebeegnish – This would be funny if it were not serious.
  2. Time Sheet Song by liltam21 – There is even a song about this…
  3. Time After Timesheets by PaulDesRosiers – …and a cover/parody of a real song…
  4. Time sheet drama by pumpkin1017 – …and a cartoon version…
  5. timesheet by manuviora – …and even one en Espanol!?
  6. May Timesheet Reminder by tracywald – Yes, Godfather parody…
  7. June Timesheet Reminder by tracywald – …and a Matrix parody. This is a whole series from one person. I wonder what she puts on her timesheet when producing these.
  8. Gordon filling out his Timesheet by 94WYSP – An absurdist drama…
  9. Saw Timesheets by hordeman70 – …and a horror flick.
  10. How to Create Stickies Timesheet Reminders by tsgvids – Funny for its unintentional earnestness.
  11. Workamajig Creative Management: Angry Men by workamijig – Because “creatives” love filling out timesheets online.
  12. Timesheets by BereaCollegium – Finally, the truth!!!

So which one is your favorite?

Bonus question: If you fill out a timesheet, what did you code watching these to?

Ed Kless Is Wrong

Once again, the self-proclaimed Defender of the Timesheet and Champion of the Dissenters, Greg Kyte, is at it again. This time he takes me on rather than Ron.

Dear Ron,

Quite awhile ago, I sent the following letter to the Journal of Accountancy, but apparently they were too scared to print the truth. Enjoy as I expose the falsehood of your co-conspirator, Ed Kless.

In April 2010 the Journal of Accountancy published the article, Project Management for Accountants by Ed Kless. Although the article contained a significant number of words, many of those words created lines, and if one reads between those fabricated lines, one may find the same offensive subtext that I found. The author is waging a guerilla war – not against gorillas, but against the accounting profession. Project management is for ignoble professions such as contractors, engineers, and doctorate-level pharmacology researchers. Project management may be good enough for those and other financial Cro-Magnons. We accountants, however, are the progeny of a dignified tradition, and our collective pecuniary prowess has led us as a community to a near-universal acceptance and usage of the financially sophisticated and elegantly simple concepts of the billable hour and the timesheet.

Mr. Kless’ approach to project management is his attempt to rob our profession of the fringe benefits that accompany the billable hour and the timesheet. In his article, Fast Eddie lists eleven essential components of a scope statement. He advocates the use of a scope statement because it is designed to limit “scope creep”; however, he ignores that fact that under the billable hour paradigm, scope creep creates revenue. Ergo, Fast Eddie is trying to decrease your firm’s revenue, and if you consult your accountant, she’ll verify that revenue is a good thing.

In his opinion, all assumptions between a firm and a client are to be clearly enumerated. Mr. Kless exhorts us to “answer the question, ‘What should we not leave unsaid?'” But since I bill by the hour, there is only one assumption that I can’t leave unsaid-the assumption that if I work on an engagement for an hour, the client is going to pay me for an hour.

I actually liked his idea of maintaining a “future project list.” It’s a list of possible projects and major tasks that will be deferred until the future . like when I need more billable hours.

He argues that constraints need to be brainstormed and specified. Constraints are limitations and restrictions that could hinder the efficiency of an engagement. The article states that constraints are “risks in waiting.” Don’t look at constraints as risks in waiting; look at them as semi-avoidable wellsprings of cash flow.

Possibly the most offensive part of this article was the following assertion made while discussing how to calculate percentage of completion: “Measuring the completeness of your projects by hours billed is akin to listening for the smoke detector to determine when your cookies are done. The alarm only goes off when it’s too late.” This is blatantly invalid. The beauty of using billable hours is that we don’t need to measure completeness. Billable hours and timesheets are actually like cooking with the Ronco Rotisserie and BBQ Oven: “Just set it and forget it!”

Once again, Greg demonstrates that he is quite deserving of his self-developed moniker.

Sage Insights MegaSession – Creating the Firm of the Future

On Wednesday, May 19th from 1:30pm to 5:30pm at Sage North America’s annual partner conference, Insights, I will be presenting a session entitled Creating the Firm of the Future (GEN52-1,2&3).

This session will be dedicated to the possibility that a professional organization can be run more effectively when it becomes a knowledge firm rather than a service firm. Creating such an organization is hard work and not for everyone. It requires us to think differently than we have in the past about what it is that we do.

I am planning to live stream this at ustream.tv. If possible, please join us.

image

Learning Objectives:

  • What is a knowledge firm?
  • Moving from revenue to profit
  • Moving from capacity planning to knowledge management
  • Moving from efficiency to effectiveness
  • Moving from hourly billing to fixed pricing

April is turning out to be a big month

First, I received word that an online comment I made on a Harvard Business Review blog post would be printed in the magazine.

image

For those of you that can’t make it out, my 15 seconds of fame reads, “Business ain’t science.” I told the copy editor that I had more to offer than that and that I usually am grammatically correct, but they did not seem interested. “No, your thought really says quite a lot.” Uh-huh.

Next, my article on using project management to replace the timesheet finally made it into the Journal of Accountancy. Please comment there as I would love to get a big long string going.

Could it be that the Mets getting out of the gate strongly? I can only hope!

Instead, I’ll let you be the judge

Yesterday, I was forwarded a post from Dwayne Wright who could not be more wrong about project management and value pricing. Please read his post before continuing.

I posted wrote a comment, he rejected it saying, “Well, just rejected the first comment for a blog that wasn’t clearly SPAM. It came from a value billing advocate and was equally harsh, combative and lacking of substance.”

“Harsh, combative,” HELL yes. “Lacking in substance,” I’ll let you be the judge.

My comment:

I am probably the original source of the comment about billing by the hour as being unethical. (It is clearly suboptimal and I believe immoral as well, but that is a whole other story.)

First, let me be clear, I do not accuse anyone personally of being unethical; it is the practice that is unethical because it promotes some very bad habits.

  1. It puts the consultant and the customer is an adversarial role. It is in the consultant’s financial interest to maximize hours; in the customer’ interest to minimize hours.
  2. You state, “It also says this (hourly billing) is often used when a precise statement of work cannot be quickly prescribed. Does that sound familiar to you and your consulting business?” Yes, it sure does and that is just plain wrong. Prescription before diagnosis is malpractice in any profession.
  3. While the PMBOK (and PMI, in general) have some good things to say about project management, they are overly obsessed with costs. After all most of this stuff comes from government (think defense contractors and NASA). In business, customers do not care about your costs, nor should they. They care about the results. They pay for results not efforts. This again is a misalignment.
  4. You are arguing that the risks should be borne by both the customer and the consultant. That is just wrong. You are the one with the knowledge not the customer. It is your job to spread diversify your risks across all your customers not put it back on each of them. Your customers hire you because of risk. If what you did was easy, you would not be hired in the first place. To put it back on them is ludicrous.

Lastly, it is not “vale billing” is it “value pricing” or better yet “pricing on purpose.” A price is set ahead of time a bill comes after the fact. You bill now, we at the VeraSage Institute, encourage you to set a price beforehand.

Ed Kless

Senior Fellow, VeraSage Institute

www.verasage.com

 

By the way, Dwayne Wright, you are free to post any comments here they will not be rejected. You can thank me later for giving you are larger audience then you ever thought possible.