Golden Practices

Top 100 Firm (and Others) Prove Value Pricing Skeptics Wrong

For all the professionals who say that firms will never trash timesheets and move to value pricing, guess what? You can no longer say that. Four anomaly CPA firms who have proven you wrong are featured in Journal of Accountancy. (look for the print version soon!)

Still not excited? What if I told you one is a TOP 100 CPA FIRM!? Yeah, thought that might get your attention...

Okay, truth is, there are actually hundreds of firms that have been operating without timesheets (not just four), and many, many more using various methods of value pricing, yet still clinging to their beloved timesheets.

But the fact that a Top 100 firm is "tipping" is major news. And that Journal of Accountancy is now acknowledging the successful adoption of new operating models is also pretty huge. Though the article is organized and officially authored by Ron Baker, it mostly comprises case studies and quotes directly from the featured firms.

The Value Pricing movement is growing. Watch the talent flock to these "No Timesheet" firms!

The four featured firms are:

• Harrex Group

• Kennedy and Coe LLC

• Mark Bailey Co. Ltd.

• Snyder & Company

Changed 10/23: JofA changed the link to the article so I've changed the link above accordingly.

A New Value Based Law Firm (alt: What Pat Lamb is Up To)

Legal blogger and friend Patrick Lamb has been noticably absent from his blog lately (he promises to return when he remembers how to login write).

His absence isn't surprising when you learn what he's been up. Effective today, Patrick launches Valorem Law Group (valorem being latin for value) in downtown Chicago. The firm's placeholder website (at www.valoremlaw.com) will go up later this week.

Pat has been leading Butler Rubin which has stood out among similarly sized firms for its ability to compete with the big guys as a powerhouse litigation boutique. Pat is a believer in value pricing -- something Pat has demonstrated his curiosity and passion about on his blog, In Search of Perfect Client Service, but his collegues wouldn't go where Pat wanted to go with regard to VP.

In his own words, he describes the situation and his motivation to start Valorem, "...while many changes were instituted, the firm remained committed to working by the hour, and like other firms, its hourly rates continued to escalate with no end in sight. [He believes] that fees should be fixed, margins managed, and that performance should be a key factor in pay,"

I'm very happy for Pat who, along with two equally passionate members (and one more coming in April) starts this innovative new firm. They also begin with one full-time contract lawyer, two paralegals and an administrative assistant.

On a call with him yesterday (while he pretended to be sad about getting out of was distracted from moving into his new space) he told me about the 1920's era building they are moving into on Wacker with like-sized offices for all, lots of open collaborating space, a mock courtroom, and an edgy, high-tech set-up. Can't wait to see it!

You can read about his changes on Pat's Linked In profile.

Let's keep our eye on this firm; it will be one to watch as these lawyers set some precendent on the course toward the Firm of the Future. Happy 2008 Pat!!

Matt Homann on Fixed Pricing in Advance

Matt Homann on why he, as a lawyer, moved to fixed pricing. This is from an interview for his profile in ABA Law Practice Magazine

LPM:  How did you come by your understanding that a better way to practice law was to stop flogging hours?

MH: If necessity is the mother of invention, my inability to keep great timesheets was at least one of the motivating factors in my looking for a different economic model for my practice.

I also realized that I could never recoup any investment I made in becoming a more efficient lawyer unless I raised my rate or charged for the work I did differently.

Raising my rate was out of the question because as a young lawyer in a small community, my hourly rate was in essence capped by the amounts the other lawyers were charging in my town. Instead, I decided that if I were able to charge a flat fee for the work I did, then any benefit of becoming more efficient at delivering it had a direct impact on my bottom line.

Another unexpected benefit was that I could charge more for the work and that clients—happy to know the price of the work up front—were more eager to pay.

Gary Boomer on Pricing for Value

I've got to hand it to Gary. He wrote a brief but meaty article that appears in the Oct 8 Accounting Today (on-line at WebCPA "Pricing for Value") about intellectual capital and firms innovating to price on value captured for clients, and not efforts.

In his article, Gary writes: 

People create intellectual capital, yet many firms allow that intellectual capital to leave when people leave. They don't even account properly (from an economic sense) for intellectual capital - they expense it. They should take the time to package, name and differentiate unique processes. Much of what firms "give away" is what the client really values.

He's so right.

Gary goes on to list several steps to take to start thinking and operating in this newer, better way. Numerous firms really are doing it. Others who are thinking about it wonder, "how."

Select a "value champion" for your firm...This person should communicate frequently with clients and determine their perceptions. More importantly, she should understand each client's dangers, opportunities and strengths...By doing so, it is easier to provide services that clients perceive as valuable. (Many of these have less risk and greater margins than compliance services.)

Assign an intellectual capital task force. This team should inventory intellectual capital, then document, name and package it so that the firm can train to unique processes and price on value, rather than hours multiplied by dollars.

Reach outside the firm for help. Don't continue to let old paradigms limit value and profitability. Even though people mean well, it is what they don't know they don't know that costs them - and limits their growth and value. Get coaching, read and educate yourself.

Define the profile of your firm's ideal clients and filter out those who do not fit it. The plans, people, processes, technology and pricing that got you to this level will not enable you to transform into the emerging industry.

Embrace a training/learning culture. In such a culture, everyone learns and everyone teaches. It is a two-way street. Thorough training encompasses much more than technical continuing professional education - it also includes soft skills, as well as technology.

My friend and fellow VeraSage Fellow, Tim McKey (from Baton Rouge, LA) says, "I'd rather sleep under a bridge than go back to billing by the hour." If that doesn't convey how much of an improvement value pricing is, I don't know what will.

Gary says, above: "Reach outside the firm for help."

On Monday, Oct 22, in Las Vegas, meet and hear from Tim McKey and many others who have taken the path Gary describes (including me).  If you really are curious about "how" you need to be in Las Vegas.

At least 7 or 8 VeraSage Fellows (from Accounting & Law) and several employees of these Fellows' firms will be there. The night before and the evening of the 22nd, many of us will be hanging out at a Rio lounge to talk with attendees.

It's a rare opportunity to have a whole bunch of "converts" in one place. Do come! And pick our brains.

Spend the day at the Rio with VeraSage. Seriously, it's only $129 (just to cover room & A/V costs...not to make $$). (Rio room nights Sun and Mon are about $100.)

Go here to sign up:  https://www.onlineregistrationcenter.com/register.asp?m=187&c=53

Gary, I hope you'll come, too!

Marston's On Fire With 'Why Professionals Don't Get It'

My always controversial friend (and fellow VeraSage fellow) Chris Marston musta had an extra shot of espresso on Thursday...he was heated!

30-something Christopher Marston runs Exemplar Law Partners, the Boston law firm touting "no hourly bill, no hourly bull--law practice the way it should be."

He not only graduated from the relatively new schools of value pricing and blowing up the partnership model, he is breaking new ground daily in both of these areas. He shares his thoughts regularly on his Inside the Firm of the Future blog.

In keeping with his 'take no prisoners' blogging style, Chris' latest post, "Top 10 Reasons Why Professionals Don't 'Get It' When it Comes to Pricing and Service" doesn't sugarcoat how he really feels about most of the legal profession (much applies to accounting, too).

Abrasive? Yup. But well worth the read. Chris makes several valid points.

Resolve to Improve Profitability

Want to be more prosperous in 2007? If you're really ready to move the needle on your firm's profitability, this post is for you.

The most impactful way is to implement Value Pricing. And recognizing that you may not be ready to abandon billing by the hour, that's fine, you don't have to jump in the deep end of that (wonderful) pool just yet...but keep reading because this one action will help your improve profits no matter how you price:

Get a Handle on Scope Creep: Use Change Orders

If you bill by the hour, do you ever have write-offs? Time you "can't" bill? My bet is that you do. Sure, some of that time stacks up because it took, in your own judgment, more time than it "should have" to do the work, so you don't charge it to your client.

But what about all that time that accumulates because of unanticipated work you did either (a) thinking that it would be "just a tiny amount, no big deal" but...it grew or, (b) you didn't know about it because somebody else did it, or (c) you just didn't take the time to call the client to discuss this "extra" work before you started doing it and so you feel bad charging them later.

As you should. It's unauthorized work, right?

After all, You wouldn't appreciate being charged for something you didn't know was coming, either. Sometimes we bill it anyway, but each time it is a risk met either with understanding or annoyance. Usually annoyance. Clients leave over this stuff.

The hardest thing, in my mind, about Value Pricing (which we do here) is the same, exact thing firms that bill by the hour struggle with. Change Orders.

Firms tend not to use them much because it doesn't SEEM as detrimental at the time when you have the hourly cushion to fall back on. Plus, Change Orders mean that you must actually think through any extra work you are about to delve into, talk with the client FIRST to discuss "what it might take" and then receive PERMISSION to proceed.

This may be called a "change order," "work order," "revision of scope," or "new project" and it is a crucial part of successfully managing a customer's expectations. This should be a formal and regular process in your organization.

Skipping this step is a costly mistake. It either costs you in collections or it costs you in client relations.

An irony I see is that practitioners sometimes become ANGRY and RESENTFUL of their clients as they begin to gripe about unexpected billings. "Oh, they are fee sensitive," we hear. Or, "they don't appreciate how hard we worked for them." Sometimes decide this makes them a "bad client." And firms fool themselves into believing that the client's imminent departure is good for the firm.

HUH?? This is a problem on the service provider side. It's an expectation problem. It's really bad for the reputation. And it kills a potential referral pipeline, to boot.

Without trying to quantify the cost of a damaged reputation and lost referral revenue--both big numbers, to be sure--let's just focus on the proportion of write-offs that can be recovered by checking scope creep once and for all.

Most firms seem to have WIP write-offs of 10-20% of gross. Most firms we work with tell us that about a third of this is efficiency related...they just ran up more time than they should have. The other 2/3 is truly money left on the table for failing to talk to clients in advance of additional work being performed.

One $8M dollar firm we know that had a staggering $2M in WIP write-offs for 2005 is confident that well over $1M could have been kept if they'd had a handle on their scope creep because most of it was work that was outside of their very clearly defined engagements. They are fixing this and you can, too.

How? Step up project management and communications:

1. think through what IS and is NOT included in your project before you start it -- I cannot over emphasize the importance of this step
2. talk to everyone involved in the project at the outset to be sure everyone completely understands #1
3. create the expectation internally that anyone performing work not first approved by the client is putting the both the client relationship AND the firm's financial health at serious risk
4. put in place an appropriate communications channel to assure that associates and staffers bring to the attention of their supervisors/managers/partners any potential changes in scope
5. be sure the the person with client relationship responsibilities has enough information to set the client's expectation about the financial or other impact of this change
6. contact the client and get approval (written is always most appropriate) before tackling the work

I bet my 2007 revenues that if you take these steps, that your existing projects will be more profitable. And a lovely side benefit is that they lay excellent groundwork for Fixed Price Agreement work should you move to that model somewhere down the road.

In the event you'd like to read more about other ways to improve profits, see my previous post, Profitability Through Pricing.

Best Wishes for Greater Prosperity in 2007!

How to Know When You REALLY Get Value Pricing

My colleague Ron Baker has a great post on the VeraSage blog today. He writes:

How can you tell when someone really understands—at a deep and meaningful level—something as complex and multifaceted as Value Pricing? I struggled with this question for years, since professionals follow radically different learning curves, with some "getting it" almost immediately, others take years, while others never understand it at all.

Is there one telltale sign? What's the common BFO—that Blinding Flash of the Obvious nearly everyone experiences once they finally see the light?

Read Ron's post to learn how those of us at VeraSage can tell when someone really understands how the price they charge relates to the value their customer perceives.

Measuring What Matters

Those who've read me for awhile probably know that I'm a strong supporter of the writing, research and theories of my brilliant colleague at VeraSage Institute, Ron Baker.

Well, he's done it again. One of the messages Ron has been delivering to professional service firms, since long before I met him in 1999, is that timesheets measure the wrong stuff in professional service firms.

"If I don't use timesheets, how will I know how much to charge?" That's the first question we PSFs ask Ron, literally, every time he speaks. 

The next question asked is:

"But if we don't use timesheets, how do we 'measure' productivity?"   

People argue: "I cannot manage my people if they don't fill out timesheets--I won't know what they are doing."

There are several issues at hand in answering these questions. First, let's admit that there is a successful business or two out there that, without timesheets, seems to inspire and intellectually stimulate their human capital to be highly effective. That's the bottom line firms want, too, right? Effectiveness.

Then there's the question I have: if using timesheets to manage people helps us to be better managers, why are there so many partners and managers with very poor people management skills? (Could it be they are letting timesheets be the 'managers' in lieu of them?)

And, last time I checked, timesheets tell someone what somebody else did yesterday (lagging indicator). Not what they should be doing tomorrow (leading indicator). Shouldn't management focus on directing future results more than reading about past inputs?

Further, in a value pricing environment (one in which we aren't considering hours as a factor in price) we need to assure we are delivering value to our customers in accordance with the expectations we set and the prices we ask. To accomplish this, we need a means of assuring we do the 'right things' (usually client-oriented things as opposed to our own 'realization') to meet those expectations.

So how do we make sure we and the people we manage are doing the "right things tomorrow"?

We must align individual efforts with the goals of the firm which, for optimal firm success, should be aligned with the objectives of the client and establish Key Predictive Indicators for the firm's success through meeting customer expectations and needs.

Ron's newest book entitled Measuring What Matters to Customers: Using Key Predictive Indicators covers this in excellent detail, yet it's an easy read at only 200 pages. You can buy it from Wiley at VeraSage Institute's preferred pricing. (If you don't see -15% applied at checkout, enter code aff15 in the Promotion Code field and click the Apply Discount button.)

Ron's other books including three FREE PDF books can be found at VeraSage's website. The PDF books are: Trashing Timesheets, Burying the Billable Hour (on the move to Value Pricing) and You Are Your Customer List (on customer selection and DEselection).

Full disclosure: I am a Senior Fellow of VeraSage Institute but I do not benefit financially from the organization or any book sales.

The Safety Net of Hourly Billing

Allison Shields has a really good post on shifting from hourly to fixed pricing. Think about how her paragraph, below, illustrates a way in which hourly billing has become a serious "safety net" -- but at the expense (literally and figuratively) of the client! And not without negative impact on your client relationships, too.

"Often lawyers [sub: accountants] take on a case without fully investigating or exploring not only the facts surrounding the matter, but the client's specific expectations and values. One advantage of changing the pricing structure is that these longer and more detailed conversations will likely help lawyers pre-qualify clients better, alert them to potential problems earlier, and help them weed out ‘nightmare’ clients before they become a headache."

Skipping these important conversations and the subsequent thinking about project depth and scope is only made possible because hourly billers know they usually won't "lose" no matter what since they'll bill what it actually "takes."

This lack of communication on the front side results in our lack of understanding/planning and the high likelihood of our client being "surprised" with an unknown bill amount (usually higher than what we or they would have anticipated) is an absolute service faux pas.

Of course this shift of all risk to the client (from us) means the client loses in every way because they go into the project even more blind than us. Some clients will certainly object to the final price, but with hourly billings, you won't know until AFTER you've done the work--when you're on the defensive and they've received the benefits of your service. Some "nightmare" clients wouldn't be nightmare clients at all had they been given the opportunity to make a more informed purchase in the first place.

Allison also makes some strong points about setting up more complex projects in phases or stages and determining/articulating the value of the work you are doing as opposed to our typical default conversation about "how long it takes."

Without discussing project scope/intensity and value up front, you cannot possibly set expectations. If you cannot set them, you sure as heck are going to have a hard time meeting them!

Think about this:

With many legal and accounting services, the client is facing unknown processes (or at least processes outside of their comfort zone) with unknown--an largely unguarantee-able--outcomes.

Shouldn't the client at least be able to count on a pretty well-defined price (at least phase by phase) and clear communications from the professional, in advance, about the same?

Hourly billing's 'safety net' has encouraged professionals to withhold the few assurances you can actually provide to them.

Pricing Innovation?

Did you see that Hellman's mayonaise has modified their "quart" jar?

Despite years of hearing claims (by accountants) to the contrary, maybe accountants have figured out a way to apply examples from the product world to their own practices...

Taking a cue from Hellman's Mayonnaise, who recently redefined the quart as 30 ounces instead of 32, the approach is simple. Hours are now 54 minutes long instead of 60.

Echoing Unilever, Bill Billum said, "At DOB&H we have always taken great pride in offering the highest quality services at reasonable and fair prices. Recently, inflationary pressures have brought about by the increased costs of our people. Rather than raise our prices, we chose to slightly reduce the size of the hour."

Enjoy this post (in its entirety) from my clever colleague, Ed Kless: Dewey, Over, Billum & Howe Innovates the Accounting Profession

Pricing from the Master

The Firm of the Future is here.

Ron Baker, the most advanced thinker on Value Pricing for the professions, will be here in the St. Louis area for a full day presentation on "Shift from Hourly Billing to Value Pricing" on Sep 27. Whether a member or not, you can hear him through the Missouri Society of CPAs (his message is just as applicable for lawyers!).

No, I don't get a commission...just love to see people moved by Ron's teaching...

If you really want to delve in to Ron's stuff, on Sep 28, he is teaching on Trashing the Timesheet!

Ron is author of six editions of Professional's Guide to Value Pricing (newest: CCH, 2005); Firm of the Future: A Guide for Accountants, Lawyers, and Other Professional Services (Wiley, 2003); Pricing on Purpose: Creating and Capturing Value (Wiley, 2006) and the upcoming Measure What Matters to Customers (Wiley, Oct 2006).

For more on his books including discounted purchase, visit VeraSage Institute where you can also download free PDF booklets on several of his topics (see bottom of linked page).

Cheap. It's the New Expensive.

Just combing through some of my gazillion Bloglines posts and saw some common thread between these two posts on The Business Innovation Insider blog by Fortune.

You've no doubt heard about New York Knicks basketball player, Stephon Marbury, marketing his new basketball shoe at an amazing price point...less than $15. But did you know the current average price for a suit in the US is less than $125?

Innovation? Commodities? You decide.

What the $100 suit can teach you about innovation

and

A premium athletic shoe for $14.98

What does this mean for professional service firms? How will you innovate for all price points and still feel great about what you are selling?

Some firms are doing it--it's a powerful strategy.

Defining Value

  With all the discussion going on about value pricing, at least half of the articles and posts on the subject seem to be seriously missing or misapplying this VERY key point:

That which goes into your product (time, materials, etc) has NOTHING whatsoever to do with its ACTUAL value to the buyer.

My VeraSage colleague, Ron Baker, posted "The Fundamental Economic Assumption" from which I quote (bolding for emphasis, and bracketed words, are mine):

Three economists, from three different countries, developed the theory of marginalism and created a revolution: William Stanley Jevons [1835-1882], from Great Britain, Leon Walras [1834-1910] from France, and Carl Menger [1840-1921] from Austria. Here is how Menger defined the true source of value in an economy in his book Principles of Economics, published in 1873:

Value is...nothing inherent in goods, no property of them. Value is judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men...The value of goods...is subjective in nature.

The determining factor in the value of a good, then, is neither the quantity of labor or other goods necessary for its production nor the quantity necessary for its reproduction, but rather the magnitude of importance of those satisfactions with respect to which we are conscious of being dependent on command of the good. This principle of value determination is universally valid, and no exception to it can be found in human economy.

The significance of this shift in thinking cannot be over-emphasized, especially since it hasn't happened yet among most professionals.

A coat is not worth eight times more than a hat because it takes eight times longer to make it. [RATHER] its producer is willing to invest eight times more labor into producing a coat because it is worth eight times more to a customer. [Think About That!]

You'd be willing to pay almost anything for a gallon of water if you were dying of thirst in the desert, but much less if you're washing your car. Water would have a negative value to you if it flooded your basement, as you'd have to pay to have it removed.

Value is dependent on time, place, context, and subjective judgments [OF THE BUYER] that cannot be precisely calculated. We are ruled by our theories, whether we admit it or not.

The labor theory of value is endemic in the cultures of most professional service firms, and it is past time to replace it with the subjective theory of value. We owe an enormous debt of gratitude to the Marginalist economists—let's start to repay it by at least catching up with their thinking and teachings on the true source of value.

Let's stop blabbering about billable hours being related to value. It's an idea from the day before yesterday. An idea whose time has passed.

Pricing Risk

On the VeraSage blog, Ron Baker posted "Lloyd's of Lawyers (or, If only insurance companies would learn how to price)."

It's a thought-provoking piece reminding us that if an actuary can determine "how" to price disaster insurance in advance, certainly a seasoned lawyer can determine how to price a litigation matter.

It's not that NO lawyers are providing fixed prices, it's that those who don't offer their greatest barrier as the RISK in fixed prices.

We find that the lawyers who do fixed pricing (in advance), even for litigation, price per phase of work.

While one may not know all the possible steps involved from beginning to end in any matter (especially with regard to surprises from opposing counsel), each step starting with establishing the case and performing discovery, can be pretty well defined by those with experience.

Enjoy Ron's post and please be sure to comment.

What's Behind Exemplar's Approach?

For anybody wondering "what is the deal?" with the rebel firm, Exemplar Law Partners, the Adam Smith Esq. blog features an OUTSTANDING post getting to the heart of it all.

ELP is the law firm that has completely re-engineered the traditional law firm operating and pricing models. Bruce MacEwen interviewed ELP CEO Chris Marston and he tells the story beautifully.

I think MacEwen summarizes it well:

Is Exemplar the most unorthodox law firm I've ever encountered?  Are a passel of the ills besieging our profession to be laid directly at the doorstep of the billable hour?  Do a large cohort of clients prefer fixed fees?  Can, in fact, high-end legal services be priced that way?  Has Chris Marston drawn a line in the sand?   Yes, in spades, to all.

Inside the Firm of the Future

Exemplar Law Partners is causing quite a stir. This is the Boston firm, launched and led by CEO Christopher Marston, that touts "No Hourly Bill, No Hourly Bull."

Many are keeping a watchful eye on this firm.

Some hope beyond hope that Exemplar succeeds because it will mean they lead, in the limelight, the movement away from timesheet-based billing in the legal profession. If Exemplar pulls it off, maybe their firm can, too.

Others speculate (and I suspect even hope) that the firm won't be able to make it work. Surprised I'd say that?

I believe that some people hope the firm will fail as proof that their comfortable-as-an-old-pair-of-jeans hourly model isn't broken after all. And if it fails, they don't ever have to think about addressing such a massive change in their firms.

There's no doubt...changing IS hard to do. It requires forethought and planning. I admit that, having done it myself for a long time, hourly is most certainly the laziest way to price.

There are many skeptics to the concept of value billing. This isn't a casual topic easily dismissed with a subject change. This topic evokes more passion, on both sides of the discussion, than I've ever witnessed in the professions.

Most of those who can nod their head a bit at the idea of value pricing cannot understand or accept that timesheets shouldn't be used in a firm that doesn't bill hourly.

Actually, practitioners who've made the switch from hourly to value are the strongest proponents of ditching timekeeping. They know it keeps them mired in the thinking that time (perceived as cost) should impact price. Read a true tale of the evolving mindset of accountants that made the switch quite successfully.

The purpose of my post is to tell you that Chris Marston of Exemplar has started a blog called Inside the Firm of the Future in order to share his firm's growth in this process.

Exemplar, I admire all of you for what you are doing--especially for your "Believing is Seeing." May you succeed beyond everyone's wildest dreams.

Value Pricing Isn't Easy, But Neither is Writing off a Bill

I was writing to Bay Street Consultant Rick Telberg today on another matter and mentioned that I’ve been enjoying conversations with Ron Baker and our other VeraSage colleagues about this recent reply submitted to Rick about his CPA Trendlines blog post “You Are What You Charge” about value pricing.

Personally, my suspicion is that the gentleman didn’t implement value pricing (VP) properly in his firm. Or fully (which he openly states). First, it is really hard to see it work if you don’t implement fully. I can say this with conviction because of my own personal experience.

I started implementing a couple years ago and just went “all the way” (i.e. no timesheets) very recently. I can really see both sides of the pro/con argument when it comes to operational barriers to implementing VP. 

I implemented VP in my practice for ethical, practical, and customer satisfaction reasons. It is the right thing to do both with regard to customers and employees. And if I believe that, and believe it is best for other professional service firms, then I absolutely have to practice what I preach.

HERE IS WHAT I LEARNED:

It IS a lot more work up front to thoughtfully consider the scope and document it before just jumping into the work. But on the back end, there are NO ugly fee discoveries (we spent HOW MUCH time on it??) or those horrible conversations with the client (after the fact and when pricing leverage is completely gone) about why the bill is so high (meaning “time got away from me").

This is really the way it should be...respecting the customer’s choice to buy or not buy at a price you are comfortable with.

If the customer isn’t willing to pay a price at or above what you’re willing to do the work for (your lowest walk-away price) both you and the customer know it up-front. No time invested or written off, no hard feelings. Better expectation management, more enjoyable doing the work because you don’t need to fret over the ever-growing WIP.

And when Baker says your “gut” knows what to charge, he is absolutely right.  Anyone who’s been in business for any length of time knows roughly where to start in discussions with clients about what “it takes” and what it is “worth” from a value standpoint to the client. I maintain that the biggest hurdle to overcome is the temptation to equate your past “hourly” price with the current “value” price. Big mistake. Easy to do and I’ve fallen victim to it myself, but it IS curable!

The thing is, this level of thinking about the scope should be done ANYWAY in order to provide excellent service and properly understand/manage customer expectations. But this usually isn’t done. Instead, we delve into the work living in this false sense of security that the customer will pay us that hourly rate “because that’s how long it took to do it” — it being whatever we thought the customer wanted but we never really took the time to define.

THE IMPORTANCE OF SCOPE

On April 9, professional service firm management guru David Maister shared an excellent blog post called “What Do You Want From Me.” His post addresses what should occur no matter how you price. It is excellent advice:

Whether you are being given work to do by a client or a boss, it’s common that people will assign work to you badly, and that will cause you problems.

How can you do what they want if they don’t tell you clearly what they want? The key is to take responsibility and ask permission to ask questions.

When someone gives you a task to do, say something like ‘I really want to do a great job for you, so can I clarify a few things?’ Most people will say ‘Yes.’ You can then be sure you understand the following details about your assignment —

1) The context of the assignment — ‘Please could you tell me what you are going to do with this when I get it done, tell me who is it for, and where does it fit with other things going on?’

2) Deadline — When would you like it, and when is it really due?

3) Scope — Would you like me to do the thorough job and take a little longer, or the quick and dirty version?

4) Format — How would you like to see the output of my work presented? What would make your life easier?

5) Time budget — Roughly how long would you expect this to take (so I can tell whether I’m on track or not?)

6) Relative priority — What’s the importance of this task relative to the other things you have asked me to do?

7) Available resources — Is there anything available to help me get the job done? For example, have we done one of these before?

8) Success criteria — How will the work be judged? Is it more important to be fast, cheap or perfect?

9) Monitoring and scheduled check points — Can we, please, schedule now a meeting, say, halfway through so I can show you what I’ve got and ensure that I’m on track for your needs?

10) Understanding — can I just read back to you what you’ve asked me to do, to confirm that I got it down right?

11) Concerns — before I get started can I just share with you any concerns about getting this done (e.g., other demands on my time) so that I don’t surprise you later?

Yes, your client...should be good at delegating or assigning work and giving you this information anyway. But the truth is that many people won’t have thought through what they really want from you until you guide them through their ‘either-or’ choices.

If you have not received answers to these questions, you don’t yet know what to do, and the risk of being judged a failure is high!

Don’t rely on your...external client...to give you all this information. Pull it out of him or her.

Scope definition is essential to VP. And it should be just as important to apply even when pricing by the hour. The point is to create accurate expectations for your customer and then meet them. No matter how you price, no customer likes billing surprises or service disappointments.

(originally posted at VeraSage.com)

VeraSage Institute Launches New Site and Blog!

Finally! We've "pushed the button" and launched the much anticipated website and blog for our think tank--a project we've been fast-tracking over the last 2 months.

I'm really proud of this work because:

1) it is always a joy and privilege to work with Ron Baker and my fellow VS colleagues

2) I had this fun and interesting creative opportunity to deviate from law, CPA, and financial/investment advisory firm websites

3) I got to work closely with Peter Flaschner The Blog Studio and Flashlight Design) whom I met at BlawgThink! last November. Peter is very talented and performed miracles to meet our entire programming wishlist as well as a very aggressive time-line. Peter is awesome and further supports my claim that I have never met a Canadian I didn't like. Looking for his link to post, I see he has blogged about working on the site here (thanks, Peter, you are very kind)

4) The functionality of our website/blog really kicks a**!  This site is still being populated but has (will have) an enormous amount of intellectual capital. The search-ability and indexing is outstanding. Peter recommended Expression Engine for the site's programming and his advice was excellent. The power for administering the site (set up as multiple blogs) is tremendous.

If you are involved in any professional service business and are at all interested in value pricing, alternatives to hourly billing/time tracking, understanding and motivating knowledge-workers, and so much more, you will want to spend some time going through this site. There is a ton of information and samples too. Lots there and much more to come.

VeraSage invites discussion in the form of new ideas, shared experiences and even dissension.

We are still working out a few quirks, but as VeraSage's webmaster, I certainly appreciate any feedback at all about the site.

Lawyers Leaving Hours Behind

I'm pleased Robert Ambrogi and Patrick Lamb posted about Exemplar Law Partners -- a new firm not charging by the hour.

Awesome! This is a better way of doing business that is gaining momentum across multiple professions including law, accounting, advertising, IT and consulting. Even I've been working (for years) toward being 100% fixed price and am in the process of transitioning the last of my hourly buyers to fixed pricing.

But let's talk more about law. Here are 3 more examples:

I had the pleasure of meeting some St. Louis attorneys last week, Simon Passanante, a more than 30-person firm, who are litigating IP matters on a contingency model just as they do product liability cases. Truly not expecting an affirmative answer, I prompted: "Tell me you don't keep time sheets...?" to which John Simon, Tony Simon and Erich Vietch answered, "No, only when we absolutely have to on a class action." I confess, the employees that I saw all looked, um, happy...

David Ambrose runs a small real estate finance firm in Portland, OR, that is moving to a fixed price/no timesheet model. They were featured in CNN Money/Fortune Small Business a couple months ago, here. This is a good story covering his many considerations in the shift.

And then there is Sherman & Jeffries, a family law firm in AL. They have a blog that is really good, here it is. Michael Sherman says their firm works entirely on a fixed price basis and would never go back to hourly billing. (Sherman was at the original LexThink in 2004.)

There are certainly many more who deserve kudos and are worthy of study as they are absolute trailblazers adopting these business practices despite great skepticism from their peers.

CPA Tim McKey (who runs a practice in Baton Rouge, Louisiana with no timesheets and 100% value pricing) is the newest fellow of VeraSage. He said it best when he told Ron Baker: "I'd sleep under a bridge before I'd go back to running my firm under the old method." 

Edu Debt Influences Job Choice

In my (lengthy) post the other day about The Profitability Problem, I cited some average education debt amounts from memory because I couldn't recall where I saw them.

Just found it on Ernie Svenson's blog and my numbers were actually a little conservative.

"About 80 percent of law school students obtain loans to pay for law school, and the average loan debt is $76,763 for private law school graduates and $48,910 for public school graduates."

The Law.com article Ernie points to (that I just now read) further supports my assertion about the state of the profession:

"While law school costs have exploded, associate compensation has not. According to the National Association for Law Placement (NALP), the median salary for first-year associates in private practice in 2004 was $80,000, the last year that figures for comparison were available. The 2004 number represents a 60 percent increase over the median salary in 1990, which was $50,000.

"Between 1990 and 2004, inflation totaled 45 percent, which means that in 2004 an associate would have needed a salary of $72,400 to have the same earning power of $50,000 in 1990, regardless of the much greater law school costs."

More....

"Even at the nation's biggest firms -- those with more than 501 attorneys -- salaries in 2004, which averaged $125,000 (not including bonuses), have risen just 78 percent since 1990, compared with the 267 percent increase in the cost of public in-state education and the 130 percent escalation in private law school education.

"There's a major concern," Sebert said. "If you graduate with average private law school debt and earn something other than the average salary, you are going to have trouble."

"The prognosis also is bleak for new attorneys in smaller firms, who typically earn much less than those at large firms. The median salary for first-year associates in firms with 26 to 50 attorneys was $65,000 in 2004, just 44 percent more than the median salary at those firms in 1990, which was $45,000. Beginning lawyers at law firms with two to 10 lawyers earned $48,000 in 2004, compared with $30,000 in 1990."

And finally....

DEBT INFLUENCES JOB CHOICE

The effect of burdensome student loans on the legal profession is a subject that NALP currently is grappling with, said executive director James Leipold. His group is planning a summit next year with other legal organizations that will explore the ramifications to the legal community of ballooning law school costs and debt. Anecdotally, however, he said that more graduates are entering big-firm practices with the "deliberately stated goal" of paying down debt and then leaving.

So perhaps NALP and firms will conclude that the legal profession should price more similarly to the medical profession. (You have to know how much I hate using HC as an example because of what insurance has done to cloud transparency of how much we are actually paying for what.)

Just look at the fact that you don't pay for the amount of time the doc spends with you, but for all the collective wisdom and tools of their expensive education and environment in which they operate (ha! no pun intended).

Law or accounting...think about it. In most cases, you offer a lot more value than just your hour.

Every hour is NOT equal.

Some hours are rather unproductive. But, in another mere hour, you can provide life altering advice. When you do, isn't it worth more than a few hundred dollars?!