Making the Wrong Mistakes: A [Frustrating] Question for VeraSage

I'm here in Sydney, Australia, overlooking Darling Harbour, having just finished the annual Principa Conference with Ric and Kerry Payne. I spent a lot of time discussing the TIP Clause, and sharing stories with the group how to structure, negotiate and secure TIPS. This is a very effective pricing strategy when you are at the top of the Value Curve, where you know the value created will be much more than you could ever lie on a timesheet.

When I finally checked E-mail, I had the following question from a reader come in under "Ask VeraSage?" It's the type of question I have received countless times before, each time being very depressing. It illustrates just how dysfunctional our pricing strategies are in the professional knowledge firm world, and how much we have to learn about customer psychology, behavior, leverage, economics, and other practices of sound pricing.

As you read the following question and answer, keep in mind the following profound wisdom from Yogi Berra. In his inimitable way, Yogi Berra explains this problem eloquently in his book When You Come to a Fork in the Road, Take It!:

When we played the Pittsburgh Pirates in the 1960 World Series, it was hard to believe we lost. It was real strange. We crushed their pitching. We won three of the games, 16-3, 10-0, and 12-0. We were the more experienced and stronger team. But we lost in a wild and weird Game 7 when Bill Mazeroski hit that homer in the ninth inning over my head in left field. To this day, I thought the ball was going to hit the fence. Anyway, when a reporter asked me later how we could lose to the Pirates, I said, "We made too many wrong mistakes."

In baseball, like everything, mistakes are physical or mental. In tennis, they say "forced and unforced errors." I like to say there's mistakes—and there's wrong mistakes. What I mean is that wrong mistakes are more serious, more avoidable, more costly. They're usually more mental than physical. There's nothing to be learned from a second kick of a mule.

That last sentence is also profound. When will PKFs wake up to the dysfunctionality of hourly billing? How many times do they have to make the same mistake?

Here's the E-mail question I received on March 6, 2007:

I need a second opinion. I am a trusts and estates attorney / mediator and a former trust officer all in New York City. I am now solo. My biggest family client had a cash flow dilemma/house purchase need that I solved with a very innovative plan in three days. The plan provides the adult child over $2MM of capital with zero out of pocket cost to him. It also protects the family lender and the family trusts.

HOW do I value bill him for this? I already presented the solution after vetting it with the various bankers and accountants. The family is ecstatic.

I did not propose a price in advance because (a) it was a three day rush and (b) I did not know how overwhelmingly successful my plan would be until it came together.

I need a price and language to use with the family to get that price.

Many thanks in advance.

Here's my reply:

Thank you for your question. I only wish I had good news for you, and a nickel for every time we get a similar question from professionals regarding a missed pricing opportunity. They are among the most depressing e-mails we receive, since they illustrate how endemic poor pricing practices are within professional knowledge firms.

The cardinal rule for all Value Pricing is to price the engagement BEFORE you do the work. A service needed is ALWAYS worth more than a service delivered. We only have pricing leverage before the transaction, not after, since value cannot be retroactively managed. The customer is least price sensitive before a transaction, and measurably more so afterwards.

In this instance, I would have recommended you negotiate a TIP Clause with the customer (sometimes referred to as a success price, or retrospective price), up-front, before you began the work, and certainly before you discovered the solution. The fact the job was a three day rush is not the issue. If I take my car to a mechanic in an emergency, he'll fix it, but he'll give me a price up-front; same with Kinko's doing a rush job, or an airline making capacity for me at the last minute to get on a flight (by bribing another passenger off the plane, for example).

When you believe you might obtain a great outcome, and you work is poised on the top of the Value Curve, a TIP is an appropriate method to capture some of that additional value created. But you can only effectively receive a TIP if it was part of the discussion with the customer BEFORE you performed the work. Afterwords, they are likely to simply ask: "How many hours did you spend?" And if you have a signed representation agreement that mentions your billing rate, you're stuck with your billable hour. If your agreement doesn't mention price at all, you may have more leeway, but it's still going to be based on precedent.

This is not to say we haven't seen professionals receive a TIP after the fact who didn't discuss it up-front, but it's a minority of cases, and usually depends on the nature, generosity, and length of the customer relationship, less so than the value of the result.

You could try the following: "Mr. customer, as you know, we were able to develop a strategy that provided the following benefits...[state the value of everything you did, including reduction of long-term risk], in record time. Our normal price for this would be $XX,XXX [state the price you believe it was worth]. We are willing to let you pay what you think it was worth. Does that sound reasonable?"

There are, of course, other ways to phrase this, but I think you get the point. It all depends on the generosity of your customer, and if they are use to paying by the hour, or a fixed price for everything you do, then you're going to be stuck with that amount. Chalk up the difference between the value you created and what you eventually get paid to what we at VeraSage call the ultimate accounting equation:

Debit: Experience

Credit: Cash

But don't be discouraged. When confronted with this situation again, talk price before hand. You could, for example, quote a fixed price to start the project and include the TIP clause language below in order to capture more value for an extraordinary result. The important strategy is, this must be discussed when you have the leverage (not the customer), which is before the work is performed, not after.

Tip Clause: In the event that we are able to satisfy your needs in a timely and professional manner, you have agreed to review the situation and decide whether, in the sole discretion of [customer], some additional payment to [professional knowledge firm, PKF] is appropriate in view of your overall satisfaction with the services rendered by [PKF] and/or the financial results achieved by [customer] for this transaction/project.

Good luck with this, and please let us know what happens. I wish I had the magic bullet for you, but it's simply not possible to capture the value created unless and until PKF begin to Price on Purpose, like every other business on the planet.

Sincerely,

Ron Baker, Founder

VeraSage Institute