Book Review: The E-Myth Accountant

I’ve long been a fan of Michael Gerber’s E-Myth book. His concept of working “on” the business rather than “in” the business was a major theme of the Accountant’s Boot Camp, developed by my good friends Paul Dunn and Ric Payne.

So when I learned that Darren Root co-authored The E-Myth Accountant with Gerber, and especially since I was presenting with Darren at the Sage Summit, I was looking forward to reading their views on what Darren calls The Next Generation Accounting Firm™. The Firm of the Future is a topic near and dear to my, and VeraSage’s collective, heart, and I was looking forward to learning another perspective.

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Areas of Agreement

There is a lot of good advice in this book with which I agree. Here is a bullet point summary of some of their better recommendations, most of which come from the chapters that Darren Root wrote:

  • Darren asks a good question: “How did the accounting profession become a mass of technicians and very few business leaders?” David Maister’s book, True Professionalism, is necessary reading to overcome this.
  • Firms engage in mass client acquisition, whether or not they are a good fit for the firm. We call this the market-share myth, a form of cancer (growth for the sake of growth). It leads to incredibly weak pricing power.
  • Same as above with offering too many services, which Darren argues keep CPAs at the technician level as well. The debate between the specialist and generalist is over—the specialist won. This video from the late Paul O’Byrne illustrates this very effectively.
  • Darren writes:

    It’s time to trust your people, let go, and give yourself the opportunity to work on your practice…not in it.

    Good point. Follow this path to its logical conclusion: it leads to scrapping timesheets and implementing a Results-Only Work Environment (ROWE).

  • It’s hard to disagree with this:

    The old business model has long been to sell billable hours. Instead of selling billable hours, your firm sells complete solutions. If your goal is to get off the proverbial hamster wheel and build a business, it is critical to abandon the billable-hour model and adopt value billing [sic—he means value pricing].

    Darren believes that accountants are finally starting to hear the value pricing message, and I hope he’s right. He says that hourly billing doesn’t take into account efficiency or new technologies.

    However, that’s not the major weakness of the billable hour. It’s Achilles heel is it doesn’t take into account customer value, and is based upon an incorrect theory of value.

  • In a chapter written by Gerber (“On the Subject of Clients”), he discusses how to deal with client dissatisfaction with a 7-step process. What’s missing, though, is the recommendation that firms offer a guarantee to all customers.
  • Darren suggests spending a good portion of your marketing budget geared toward strengthening existing client relationships. Indeed. As the AICPA pointed out years ago, it costs eleven times more to acquire a customer than to retain one.

The Gap

For as many topics as we agree on above, I’m afraid the chasm that exists between my vision of the Firm of the Future and the one laid out in this book is simply irreconcilable.

But as with most disagreements, this is more a conflict of visions rather than a disagreement about facts. I’m reminded of what Blaise Pascal wrote in Pensees:

When we wish to reprove with profit, and show another that he is mistaken, we must observe on what side he looks at the thing, for it is usually true on that side, and to admit to him that truth, but to discover to him the side whereon it is false. He is pleased with this, for he perceives that he was not mistaken, and that he only failed to look on all sides.

The side the authors are coming from is to build the McDonald’s of professional firms, by laying out a path for creating “a highly efficient money-making practice.”

Yet a glaring omission from this work is any mention of the knowledge economy, or knowledge workers. This is the dimension the book ignores completely.

A professional knowledge firm isn’t McDonald’s, nor should it be. This example of Gerber’s has always irritated me, but it is particularly egregious in a book for professionals.

This is where the author’s analogies to the importance of systems break down in a knowledge economy. Gerber posits “The People Law: without a systematic way of doing business, people are more often a liability than an asset.”

This is strange statement, given that 75% of the world’s wealth resides in human capital, according to the World Bank.

The prominence given to the “system” over people is redolent of Frederick Taylor, who wrote:

In the past the man has been first; in the future the system must be first.

Peter Drucker refuted this logic in his 2002 book, Managing in the Next Society:

What made the traditional workforce productive was the system—whether it was Frederick Winslow Taylor’s “one best way,” Henry Ford’s assembly line, or Ed Deming’s Total Quality Management. The system embodies the knowledge. The system is productive because it enables individual workers to perform without much knowledge or skill….In a knowledge-based organization, however, it is the individual worker’s productivity that makes the system productive. In a traditional workforce, the worker serves the system; in a knowledge workforce the system must serve the worker.

Yes, knowledge workers will create their own systems. That’s the point. Two surgeons will not perform an operation the same way. Even two barbers won’t cut hair the same way (nor would we want them to).

This is why Steve Jobs says:

The system [at Apple] is that there is no system. That doesn’t mean we don’t have a process.

Sure, there are things that can be turned into a repeatable process, but the value in knowledge work lies in where there is applied judgment, creativity, and wisdom. And you simply can’t systemized those virtues. Indeed, if you try—with Six-Sigma, Lean, etc.—you kill them.

The better solution is to capture the knowledge that is tacit in those unique ways of doing things so the knowledge can be spread across the firm. Yet any discussion of knowledge management and capture is missing from this book.

The authors also seem to think that the systems should only be designed by the firm’s owners, rather than its workers—this is a large part of working “on” the business rather than “in” it.

But to borrow from Steve Jobs again, does it really make sense to hire smart people and then tell them what to do? Apple hires smart people so they can tell Apple what to do. Welcome to the knowledge era.

The idea that all the intelligence rests with management didn’t work in Frederick Taylor’s industrial era and it certainly doesn’t work in a knowledge economy. Worse, you cannot inspire creative knowledge workers by spouting Taylor’s efficiency mantra.

Today, knowledge workers are the system, which means they have to have a hand is designing it. Even auto manufacturers understand that those closest to the work are the ones who can improve it the most. See Toyota.

Yet the cult of efficiency is worshipped throughout the book, even though Darren quotes Steven Covey:

If the ladder is not leaning against the right wall, every step we take just gets us to the wrong place faster.

Nowhere is the recognition that there’s nothing more wasteful than being efficient at doing something that shouldn’t be done at all. Or that efficiency—and technology—are mere table stakes, not a competitive advantage, since your competition can easily replicate those gains.

Darren even suggests you identify those services you do best, which he defines as being able to perform with a high level of efficiency. But surely you should identify those services that you can perform most effectively—better yet, efficaciously—and that create the highest value.

If there’s that much efficiency to be gained, they are probably low-value services that should be outsourced (see the Stan Shih Smile Curve).

Peak efficiency is a sign of no innovation.

The same error is made when he claims the major factor driving realization is the existence of proper systems and processes. But this is incorrect. Price drives profit more than any other factor.

Further, he writes that his firm’s realization is over 100%, but that just means he’s still comparing price to hours x rate; it has nothing whatsoever to do with pricing commensurate with value, as he claims.

He also proclaims he’s not a proponent of throwing away timesheets, since they can catch scope creep, measure efficiency, benchmark against other firms, and allow him to manage what he can measure.

These are weak arguments for timesheets. If you’re catching scope creep from timesheets, it’s way too late to price it—you’re billing and ducking in arrears at that point, and by the hour. Project management is far more effective.

And the idea that timesheets measure the efficiency of a knowledge worker has been well destroyed in all of my books. This is illusion of control and one of the seven moral hazards of measurement.

This defense of timesheets is particularly amusing when compared to what he writes toward the end of the book:

Remember: Just because you’ve always done things in a certain way doesn’t mean you have to continue that tradition. If it’s not working, it’s not working. Abandon the old and make way for the new.

Except, of course, when it comes to the ancient tradition of maintaining timesheets.

Also, towards the end of the book, Gerber explains that Time is not money; time is life. If true, then why are we dividing a firm’s revenues and costs by life?

[And even if you still believe the old canard that time is money, all that means is we are dividing cost by cost if we use the hourly metric system].

There are other major areas of disagreement with the book. Their concept of a firm’s vision is too focused on what and how, not why. It’s far more effective to develop your firm’s why, letting that drive your what and how, consistent with Simon Sinek’s TED talk, and book Start With Why.

Gerber posits that there are six types of clients around which your entire marketing strategy must be based. But I find this unconvincing, and it could benefit from Occam’s Razor. Asking customers about their expectations would be more effective. Also, innovation is the firm’s job, as customers don’t innovate, they iterate.

Then Darren writes that clients are a firm’s greatest assets. But customers are not owned by firms, anymore than human capital is owned. Speaking of them as assets is inhumane and demoralizing.

The book does not contain any endnotes, a bibliography, or index. Outside of the few books and authors mentioned, it would be helpful if the authors shared the books that have shaped their thinking.

In conclusion, if you read this book, do so with this caveat: the book’s gap of not discussing the knowledge economy is simply too wide for me to overcome. It overshadows everything they write, and the logic traps them into the cult of efficiency rather than one of creating value.

We no longer live in an industrial economy where the talisman is Frederick Taylor’s enigma of efficiency and the “one best way.” A PKF is a human relationships-based entity, not a factory.

On the positive side, now that I’ve met Darren, there’s an opportunity for ongoing dialogue. If all goes well, we’ll get him to trash his timesheets someday.

Is Your Firm Made for “Fire and Ice?”

We’ve been talking a lot about Simon Sinek’s TED talk on the importance of a company figuring out its “Why”—its purpose. The idea that customers buy not what you do, or how you do it, but why you do it.

One man who understood both was Charles Revson. At the age of 25, Revson tweaked his last name to make it sound less harsh and launched the Revlon cosmetics empire in 1933, introducing color-coordinated nail polish and lipstick during the Great Depression. Talk about lousy timing for launching a vanity business.

Many commentators hailed the bright colors as “trashy,” but Revson instinctively understood women needed color to feel pretty. And during the Great Depression women were wearing drab colors, recycling rather than buying new fashions, so there was a ready market for relatively inexpensive glamour.

Revson’s competitors acted as if the product was a commodity, but he knew better. Nail enamel was not just a concoction of chemicals, or a beauty aid, but a fashion accessory, and he believed women should use different shades to suit different outfits, moods, and occasions.

This, of course, greatly expanded the market, as women now purchased multiple nail colors, and matching lipstick expanded the market again. Indeed, he understood better than his competitors what his customers were really buying, how to differentiate it, and price it.

His famous saying, “In the factory, we make cosmetics; in the store, we sell hope,” reflects the wisdom of a man in touch with his customers’ expectations.

Revson refused to believe what he sold was a commodity, and reportedly spend forty-five minutes in front of a seminar of his international marketing executives having a dialogue with a glass of water, attempting to illustrate the meaning of product differentiation. As explained by his unauthorized biographer Andrew Tobias in Fire and Ice:

…the water glass caught his eye. He picked it up, held it out in front of him, and said, in his friendliest way, “Hello, glass. What makes you different? You’re not crystal. You’re a plain glass. You’re not empty, you’re not full…” and then he began telling the glass how it could be made special…by changing the design, changing the color of the water, giving it a stem, and so on.

Revson didn’t compete on price, since he understood Revlon was selling the chance of turning the right head or lend a touch of class. While other polish sold for a dime, Revlon’s sold for .50¢, and its lipstick for $1.00 compared to .49¢, all during the Great Depression.

The most famous—and effective—shade promotion was launched, Fire and Ice, in the fall of 1952. There’s a little bit of bad in every good woman, Revlon marketers felt, what Kay Daly (a Revlon executive who was probably the highest paid female executive in the country) called “a little immoral support.”

Along with a picture of model Dorian Leigh, the ad copy ran the headline “ARE YOU MADE FOR ‘FIRE AND ICE?'” You were, the ad stated, if you answered eight of the fifteen questions in the affirmative.

The ad caught the country by storm, with nine thousand window displays devoted to it, every newspaper and magazine wrote about it, and every radio announcer made reference to it.

Norman B. Norman, head of Revlon’s advertising agency, Norman, Craig & Kummel, said:

All Revlon marketing had to do with emotions: how women thought, how they lived, how they loved. That’s quite different from what most companies do, where they describe their products, the benefits of them. Revlon never did that, which was a brilliance of its own.

One of the things that frustrates me about the distinction between B2B and B2C is it doesn’t take into account that humans purchase everything. And emotions are an enormously important factor in all decisions.

So here”s my question. What would a Fire and Ice campaign look like for a Professional Knowledge Firm? What questions would you ask?

Maybe we should have a contest for the best questions, with the winner given a bottle of one of Dan’s best wines?

[N.B. Fire and Ice is in my top 100 all-time favorite business books. Just an excellent read of an incredibly shrewd and driven man who changed the country’s culture. Many would argue he was a misogynist. He might have been, but he sure understood what women were really buying. Visit my Shelfari.com bookshelf, and click on the tag “bbb” for the Top 100 best business books. You have to register for an account. Shelfari is owned by Amazon.]

Chief Value Officer Gains Some Traction

From the September 9-15, 2011 Pittsburgh Business Times comes this article quoting Stephan Liozu on the idea of appointing a Chief Value Officer.

I met Stephan at the Professional Pricing Society conference in Chicago last April. We are collaborating on a book chapter, dealing with the C-level position of CVO.

Thank Fidel for Amazon

Mike Bezos was 15 years old when he escaped from Cuba and fled to the USA, working his way through the Univ of Albuquerque.

He gave his stepson, Jeff, a 1988 Chevy Blazer, and while Jeff’s wife Mackenzie drove across the country to Seattle, Jeff typed up the business plan for Amazon.

Not bad for a first generation immigrant. Thank Fidel for Amazon!

I remember George Gilder writing that Fidel wanted to create the world’s greatest city in Cuba, so he expropriated all of the physical capital, suffering from the “physical fallacy”—the idea that wealth resides in tangible things.

Fidel did create a great city—in Miami—since the most important capital fled.

Profit is an index of altruism

Because George Gilder believed (and wrote) the following, Ayn Rand denounced him.

The moral code of capitalism is the essential altruism of enterprise. The most successful gifts are the most profitable—that is, gifts that are worth much more to the recipient than to the donor. The most successful givers, therefore, are the most altruistic—the most responsive to the desires of others.

The circle of giving (the profits of the economy) will grow as long as the gifts are consistently valued more by the receivers than by the givers. A gift is defined not by the absence of ANY return, but by the absence of a PREDETERMINED return. Unlike socialist investments, investments under capitalism are analogous to gifts, in that the returns are not preordained and depend for success entirely on understanding the needs of others. Profit thus emerges as an index of the altruism of a product.

Rand despised altruism, but I believe Gilder is right.

The most profound thing I have ever read on the morality of capitalism is Gilder’s “Soul of Silicon” speech delivered to the Vatican in May 1997. It’s not a light read, but well worth the investment.

Book Review: Car Guys vs. Bean Counters

As a follow-up to my post yesterday on why CFOs know the least about your business, here is the book review I mentioned.

Bob Lutz has written an important diagnostic book on the demise of General Motors: Car Guys vs. Bean Counters: The Battle for the Soul of American Business.

Spanning a forty-seven-year career with the Big Three (and BMW), and after retiring from Chrysler in 1998, he was asked back into GM, serving as Vice Chairman from 2001 to 2010, during which time it had filed for bankruptcy.

Lutz is a “car guy,” who has the instincts to know what turns the customer on (see Chrysler’s Dodge Viper and PT Cruiser). This worldview would repeatedly clash with that of the “bean counters,” who were so mired in metric mania they substituted the perceived precision of numbers for common sense.

He certainly understands that marketing and quality is all about the customer, and he points out many of the ways in which GM lost its way and for decades produced a stream of mediocre, uninspiring cars.

He is, however, a lousy economist, and there’s much that is wrong when he discusses various economic issues, such as value, fuel prices, imports, etc., which I’ll discuss later.

First, let’s look at what he found upon returning to GM in 2001.

Process Over Results

There are countless examples in the book of how GM lost its way, and many lessons apply to Professional Knowledge Firms (PKFs) as well. Here are some of the highlights.

  • The bean counters decided in the 1980s that Cadillac needed to greatly expand its sales volume to become the nation’s number one luxury brand—sort of like aspiring to be the “World’s Tallest Midget,” according to Lutz. The over-production created a glut of Cadillacs on the market, lowering resale values, increasing the lifetime cost of ownership, and destroying the “aspirational and exclusive” image of the iconic brand.
  • There were fourteen VLEs—Vehicle line executives—modeled after Toyota “shusas,” usually engineers responsible for the entire production of an automobile. They were held accountable for various Key Performance Indicators: cost, investment, quality, warranty cost, assembly hours per vehicle, percentage of parts reused from prior vehicle (thought to be Toyota’s key to success), and time to program execution (duration, in Ed Kless’s project management parlance).

    Yet any measurement system will be gamed by us humans. Rick Wagoner, the CEO, in exasperation over one car program once blurted out:

    I’m tired of seeing financial analyses telling us it’s better to do a lousy car earlier rather than a good one later. We are going to delay this program and get it right!

    Worse still, the “world’s most appealing car in the segment” was conspicuously left out of all the measurements, since that’s too subjective—not quantifiable in wonk-speak.

    Also, according to Lutz, there’s not a car company in the world that has fourteen people qualified to produce aesthetically pleasing vehicle designs. Most are lucky to have two or three. Lutz is full of contempt:

    Having nondesigners pass judgment on design is a bit like sending a sports bar full of beer drinkers to a wine tasting.

  • Another ritualistic time-waster Lutz would have done away with if he had been CEO was the Performance Management Process, or PMP. This was to make sure that goals would be aligned, and individual objectives were consistent across functions and geographies. There’s no customer value in this process, for two reasons:

    First, the “objectives” are all based on a series of dubious projections on market size, economic activity, competitor actions—none of which ever come true.

    Two, a senior executive who needs a quantified list of objectives to know what he or she should be working on should not be a senior executive in the first place. [Amen!].

    The “value” is only to the small army of human resources personnel who keep track of the whole mess.

  • Lutz would continually point out that it was better to build high net-margin vehicles that took many more hours, than being the best in the world building low-hour vehicles that GM would take a loss on. Timesheet devotees take note!

    Lutz also understood that GM was an “interdependent” system:

    We need to recognize that everything is a trade-off, that we can’t maximize the performance of any one function to the detriment of overall profit maximization [another huge problem with the timesheet mentality in PKFs—the idea that you can optimize every six minutes and maximize the whole firm].

    Suboptimizing profitability by geographic entity makes about as much sense as declaring every U.S. state a “profit center” for GM North America.

    Another error of the PMP process is that it crowds out art, creativity, and spontaneous invention, not to mention doesn’t take into account human being’s irrational side:

    It assumes that automotive consumers are highly rational people who will perform analyses and elaborate feature comparisons before making their purchase. As we all know, they don’t. The customer buys brands, and some are cool, and some aren’t. The customer is highly design-sensitive, and some cars are attractive, and some aren’t.

    Lutz spares no contempt for “Total Quality Excellence” consultants [are you listening to this Six-Sigma belts?]:

    …then the concept of “process and standardized work” were expanded beyond manufacturing. If it’s good for the factories, some reasoned, why wouldn’t it be good for every other part of the company, even the creative ones?

    Here is where the profound intellectual error was made: the rest of the company isn’t a factory. Almost nothing is done repeatedly, exactly the same way, a thousand times per day. Whether it’s Design (the least amenable to standardized work), Sales, Marketing, Purchasing, Engineering…new situations, vendor products, competitive actions, legal changes, and software upgrades occur daily and weekly.

    The attempt to reduce these activities, which require flexibility, adaptability, initiative, and “Hey, let’s try this shortcut” thinking, to a “process” merely results in an unthinking, robotic organization where everyone is on autopilot.

    The best part is that if you follow process and the results stinks, you’re safe: you did what you were told. A lot of money was misspent in the last couple of decades of the last century on process apostles.

    One VLE came to Lutz, his PMP scorecard showing all green, hitting every target. He was asked, “How is it selling?” “Well, really not that well. But, I can’t be held accountable for that.”

    As TV’s House, M.D., said: “We must not let results get in the way of process.”

  • When Lutz complained that GM’s exterior body paint was dull and grainy, he was told by the bean counters he was wrong. J.D. Power reports the lowest number of paint defects per car of any company, including Toyota.

    Once again, the usual confusion: a restaurant that advertises “the lowest incidence of food poisoning of any restaurant in the state” does not necessarily serve the best food. “Absence of complaints” does not equal excellence.

    General Motors is testament to the failure of applying Six-Sigma thinking to knowledge work—whether it’s design, innovation, creativity, or other processes of the mind. It’s illustrative of the Seven Moral Hazards of Measurement.

    It’s also proof that companies need to measure what matters to customers, not just measure for the sake of measurement. The idea that a PMP would show all green but the car wasn’t selling is all you need to know about how far GM moved away from holding people accountable for creating results that mattered.

Lutz is a Lousy Economist

Even though Lutz’s diagnoses of GM’s problems are right on, when he ventures beyond microeconomics to macroeconomics, he’s much less of an expert. About the only area I agreed with him on is his skepticism regarding global warming.

He didn’t think Japanese imports were “fair,” but life isn’t fair. He believes the Volt is an example of GM’s vision and risk-taking capacity, but only if you believe government subsidies and risking taxpayer’s money equates to vision.

He’s a big believer in European-level fuel prices, to subsidize mass transit, which would also make us a poorer nation, with a larger government.

He thought the government was right to bail out Chrysler in the 1970s, since they paid it back, even making money. Well, you can win at Russian Roulette every once in a while, but in the long run the odds suck—see Chrysler’s bankruptcy thirty years later.

Lutz believes that the US has lost its manufacturing prowess, since we don’t make anything anymore. And those jobs are gone forever, which is why Obama’s trillion dollar stimulus isn’t working.

But this is nonsense, a form of manufacturilism [ok, I made that up]—like mercantilism—that Adam Smith refuted back in 1776.

In any event, the purpose of an economy is not to create jobs, but to create wealth. Otherwise, we could simply employ a guard for every mailbox, or indeed create the TSA—Thousands Standing Around.

But the most illiterate of Lutz’s views comes from this:

We need to remember that economic value is basically created only one of
three ways:

  1. Mining the material from the bowels of the earth
  2. Growing food and wood on the surface of the earth
  3. Manufacturing and distributing the products of the first two

Everything else is simply trading “value” that has already been created.

Wow, that would come as a shock to pharmaceutical companies, insurance companies, software companies, Google, Apple, and a myriad of other knowledge companies that don’t produce tangible things.

Lutz should stick with what he knows—how to make cool cars that people want to buy. Leave the economics to people who understand that wealth is far more than producing automobiles.

Warning: CFOs and CPAs Won’t Like this Post

Ed Kless recently reminded me of one of Peter Drucker’s last live appearances. It’s worth revisiting, especially in the context of a book I just read by Bob Lutz: Car Guys vs Bean Counters: The Battle for the Soul of American Business (review coming in my next post).

On December 21, 2006, my mentor, George Gilder, wrote on his blog about the last time he saw Peter Drucker live. It is such a profound piece that goes to the heart of how accounting is becoming increasingly irrelevant to the spirit of enterprise, it is worth quoting in full:

The last time I saw Peter Drucker, he was keynoting a Forbes conference in Seattle for CEOs. In the auditorium at the International Trade Center next to the bay, they had wheeled out the great man to the middle of the stage in a great fluffy easy chair.

Close to 90 years old—at the end of the previous century gazing toward the next—he was the numinous name and Delphic presence at the conference. Everyone leaned forward to hear what he had to say.

Then a gasp shook the rows of CEOs. The conference management stood there stricken, unable to move: “For the Love of Malcolm’s motorcycle…What is this?” The CEOs sat popeyed.

The hoary sage’s balding pate flopped back in the chair as if he had fallen asleep…or worse.

Perhaps Forbes had erred in staking a major conference on an aging guru seemingly well over the hill and in parlous health.

Then his entire body fell forward. I was ready to run up to catch him if he should tumble toward the crowd. But he somehow caught himself. His eyes opened, and he looked out intently at the throng of CEOs. Everyone sighed with relief. He was awake. He had their attention.

Drucker growled: “I have just one thing to tell you today. Just one thing…”

Wow, I said to myself, it better be good.

“Noone,” he continued, “but noone in your company, knows less about your business than your See Eff Oh.”

Huh?

This was the era of the heroic Chief Financial Officer (CFO). Scott Sullivan of Worldcom, Andy Fastow of Enron, clever, inventive folk like that.

You remember them. Across the country, CFOs were in the saddle. CEOs would not move without consulting them.

What could Drucker have meant?

He was stating law number one of the Telecosm.

Knowledge is about the past. Entrepreneurship is about the future.

CFOs deal with past numbers. By the time they get them all parsed and pinned down, the numbers are often wrong. In effect, CFOs are trying to steer companies by peering into the rearview mirror. Past numbers do not have anything much to do with future numbers.

Moreover, CFOs tend to focus on internal problems. But most internal problems cannot be solved internally.

Determining business outcomes are decisions made by customers and investors and both are outside the company and not directly managed by the company. Their views can change in an instant, casting all the existing numbers into oblivion.

To reach customers and investors takes outside vision and leadership, not internal problem solving.

Tech companies should not try to solve problems. Solving problems sounds good, but it is a loser. You end up feeding your failures, starving your strengths and achieving costly mediocrity.

Don’t solve problems—that’s the CFO’s forte and pitfall. Pursue opportunities.

A Deteriorating Paradigm

Approximately 70% of the average company’s value cannot be explained by traditional GAAP financial statements.

Adding more arcane and picayune rules to GAAP, or converging existing GAAP with international accounting standards, will not solve this problem.

The accounting model is suffering from what philosophers call a deteriorating paradigm—it gets more and more complex to account for its lack of explanatory power.

In all fairness to accounting, it never was meant to predict value prospectively, only to record transactions retroactively. In effect, accounting can only measure the price of exchanges after they have taken place.

This is why accounting can only record the “goodwill” of a business until after is has been sold. Accounting has no way to place a value on that goodwill until a transaction takes place. That is why our late colleague Paul O’Byrne said goodwill is the name we give to our ignorance.

The best an accountant can do is to extrapolate the past into the future, and unless one’s theory is that the future is going to be the same as the past, this technique is fraught with hazards. This was Drucker’s point at the CEO conference in Seattle.

CEOs have to create the future, not relive the past, and the only way to do that is with a theory of the business, and to get outside of the four walls of their organizations and connect with external reality—where all value is created.

Value Pricing: An Over-Baked Trend?

An interesting article ran in Lawyers Weekly, May 7, 2010, by [star] reporter Angela Priestley: “Blasting Billable Units in the Top-Tier.”

Australian firm Freehills’ managing partner, Mark Rigotti, discusses his views on “alternative pricing strategies.”

But he’s not so sure the demands from clients are as intense as people think. Here’s an intriguing line:

Like all trends, it might be a little over-baked at the moment. I say that both from the client and law firm’s perspective. Hourly rates still feel like old slippers, they might be a little worn and a little ragged to look at, but they are still something that are comfortable.

This is similar to what King George III wrote in his diary on July 4, 1776:

Nothing of importance happened today.

Yet the firm has formed a pricing committee, while Rigotti admits:

Freehills needs to be at the vanguard on it and needs to be understanding and participating in it—instead of just waiting for it to happen.

One is left wondering why you’d want to be in the vanguard of an “over-baked” trend?

He cites an example of a client who refused an alternative pricing structure and stuck with the billable hour.

Sure, if you give them an option. But law firms—especially those in the top-tier—are going to have to learn that sellers change pricing strategies, not buyers.

If the only way to become a customer of Freehills is to accept its pricing strategies, then client’s reluctance will wane very fast.

Do you see sports fan revolting at teams adopting “dynamic pricing”—that is, charging different prices for different games, times, etc.?

At least Rigotti understands the big issue:

The debate about alternative billing is not about discounts, it’s about value. It’s not a threat, it’s an opportunity for both clients and for law firms.

If that’s true—and it is—then why say one thing and continue to do another?

Why the reluctance to throw away those ratty old slippers, Mr. Rigotti?

Lawyers_Weekly_Freehills.pdf

The One Best Way: Frederick Taylor and the Enigma of Efficiency

The world’s first and most famous preacher of the efficiency gospel was Frederick Winslow Taylor, born on March 20, 1856, into a prominent Quaker family in an upper-middle-class suburb of Philadelphia.

His ideas permeate our thinking to this day, a classic example of a thinker of whom Justice Oliver Wendell Holmes wrote, “a hundred years after he is dead and forgotten, men who never heard of him will be moving to the measure of his thought.”

Today, if you work in a professional firm, you are still moving to the measure of this man’s thought. Peter Drucker wrote that Taylor’s Scientific Management (SM) idea is perhaps “the most powerful as well as the most lasting contribution America has made to Western thought since the Federalist Papers.”

Robert Kanigel has written a scholarly, well-balanced, book on Taylor’s life. At over 600 pages, it is not an easy read, so I thought I’d provide a review, albeit long, that synthesizes the work of Taylor as well as this enigma known as “efficiency.”

Taylorism Defined—Sort of

Taylor set out to prove that management is “a true science” with “laws as exact, and as clearly defined…as the fundamental principles of engineering.”

Thus Taylorism can be defined as:

The application of scientific methods to the problem of obtaining maximum efficiency in industrial work or the like.

To his credit, he viewed knowledge as the prime productive resource. The problem is he thought the knowledge only existed among management, not the workers, and that the system would embed the knowledge, saying in 1911: “In the past the man has been first. In the future the System must be first.” He separated the doing from the thinking.

Economists of the day coined the term “Deskilling,” the idea that knowledge lies with management, not the workers. Taylor, in effect, help create the white-collar workforce.

Taylor wasn’t as interested in how long a job took, but rather how long it should take. He searched for the ideal human performance. Work consisted of discrete pieces, each of which could timed and studied to maximize speed.

He began work at Midvale Steel in 1878, where he became an industrial engineer, testing his time theories on the factory floor among his coworkers.

He pleaded, cajoled, and even fined workers, creating a shop full of resentment. He believed a 35% pay increase was necessary to induce workers to extraordinary efforts, even more for some types of work, such as 70-80%, or even a doubling.

But how do you get workers to work faster? Pay them. Accumulative rates, Taylor called it the differential rate: you earned an amount that depended on your output for the whole day: thirty-five cents per piece, say, for producing less than what Taylor’s science decreed, fifty cents for exceeding it. And you earned the fifty cents for the whole output, not just the amount exceeding the first tier.

The Spread of Taylorism

After he left Midvale, Taylor became a “management consultant” in the 1890s, charging $35 per day (approximately $1,000 today).

He presented a paper on June 23, 1903 at the 47th meeting of the American Society of Mechanical Engineers titled “Shop Management.” In it, he laid out time-and-motion studies, including a sketch of a decimal-dial stopwatch.

With the notoriety this paper achieved, SM came to be described as a religion, with Taylor the messiah, attracting both disciples and apostles, and the rest becoming members of the church.

A writer to the New York Times asked: “And didn’t the legal profession need some science, too?” …get Mr. Taylor to take a few stop watch observations in a typical court, and in a typical lawyer’s office, and make an estimate of the existing and obtainable efficiencies.”

Sound familiar? The father of both the timesheet and the billable hour, Reginald Heber Smith, was greatly influenced by “Speedy Taylor,” as evidenced by his writing “Efficiency and economy are a race against time.”

Taylor’s champions included Louis Brandeis, “the People’s Lawyer,” and Ida Tarbell, the legendary muckraking journalist. Henry L. Gantt—known for his eponymous chart—was a disciple of Taylor.

Frank Gilbreth, a former bricklayer, read the 1903 paper and became a disciple, calling the paper “a work of genius.” Gilbreth was even more obsessed with motions than was Taylor, and 2 of his 12 children later wrote a portrait of him titled Cheaper by the Dozen, later made into a Hollywood movie with Clifton Webb as Gilbreth.

If Taylor was idiosyncratic, Gilbreth was an even stranger duck, as David Boyle humorously points out in The Sum of Our Discontent:

Gilbreth was obsessed with measuring, breaking down every manual operation into what he called

Australian Trailblazer David Vilensky Article: Value Pricing is Self-Evident

David Vilensky, managing partner of BBV in Perth, Australia, wrote an article for the current issue of IFA magazine, which he generously shared with us.

David_Vilensky_article.pdf

Thanks, David, for such a cogent explanation of the salutary effects of fixed pricing.