Your Employees are Volunteers - Ron Baker
Human Capital (not Cattle) by guest blogger Ron Baker.
In the knowledge society, the most probable assumption for organizations--and certainly the assumption on which they have to conduct their affairs--is that they need knowledge workers far more than knowledge workers need them.
-Peter Drucker
The term human capital was first used by Nobel Price-winning economist Theodore W. Schultz in a 1961 article in American Economic Review. His basic thesis was that investments in human capital should be accounted for in the same manner as investments in plant and machinery.
The obvious challenge is that investments in tangible, physical assets can be counted and comprehended, but those in people cannot. It is as if accountants would value the average human being at $50 since that is the approximate worth of our various chemical components. Human capital is like the dark matter of the cosmos, we know it's out there but we can't measure it.
Once again, Peter Drucker was at the forefront of thought when he coined both the terms knowledge society and knowledge worker in 1961 and positing it was the G.I. Bill of Rights--which made available higher education to some 2,332,000 veterans and was certainly the largest single investment in human capital up to that time--which caused the shift to a knowledge society.
Presently, less than one-fifth of the labor force is employed in blue collar occupations, and approximately two-fifths are "knowledge workers"--those who work with their heads, not their hands.
Knowledge Workers Have Nothing to Lose but Their Chains
Knowledge workers are not like workers from the Industrial Revolution who were dependent on the employing organization providing the means of production (factories and machines). Today, knowledge workers themselves own the firm's means of production in their heads. This has been a tectonic shift in our economy, the ramifications of which we are still trying to comprehend.
For example, how does one measure the productivity of knowledge workers when what goes on inside their heads cannot be observed, let alone objectively measured?
In a factory, the worker serves the system; in a knowledge environment, the system should serve the worker. Knowledge work can only be designed by the knowledge worker, not for them. Unlike work on an assembly line, knowledge work is not defined by quantity but by quality. It is also not defined by its costs, but by its results.
It may be possible in a widget factory to work harder, but in a knowledge factory working smarter is the only option. The traditional metrics of productivity need to be replaced by judgment, and there is an enormous difference between a measurement and a judgment: a measurement requires only a stick; a judgment requires knowledge, insight, wisdom and discernment.
Knowledge Workers are Volunteers
There is a Chinese Proverb that teaches the beginning of wisdom is to call things by their right names. Your people are not assets, resources, or inventory, but human capital investors seeking a decent return on their investment.
In fact, your people are actually volunteers, since whether or not they return to work on any given day is completely based on their own volition. Consider for a moment how people decide which volunteer organizations to contribute some of their talent. It's usually based on a desire to contribute to something larger than themselves. They work hard--some would say harder than at their jobs--for these organizations because they are dedicated to the cause, they have the passion, the desire and the dream to make a difference in the lives of others. All for zero pay. Why?
This is not just an economic decision, it is a psychological and emotional decision. With all this evidence of human behavior, many firms still treat their people as if they will slack off if they're not held accountable for every six minutes of every day. Is this any way to inspire people to be their best? Is this any way to instill a spirit of service, creativity and innovation?
Or is this nothing but antiquated thinking about the nature of man being lazy and slothful unless forced to work, redolent of Frederick Taylor's time-and-motion studies? Your people may hang their hat at your firm, but where is their heart?
Becoming A Lightning Rod for Talent
It doesn't make sense to hire smart people and then tell them what to do; we hire smart people so they can tell us what to do. – Steve Jobs, Founder, Apple Computer
Attracting, hiring, developing and retaining talent are the most important jobs to which everyone in the firm can contribute input and ideas. Partners spend more of their time--or at least they should--making people decisions than any other. No other decisions have as many repercussions throughout the firm, or have lasting significant effects than who to hire.
Typically, a firm is batting 0.333 on its hiring decisions--that is, one-third turn out to be good decisions, one-third are minimally effective, and one-third are abject failures. It is rare in any other area that firm leaders would accept this level of performance.
The issue of attracting Human Capital investors is a marketing issue. As in all marketing, it does not look inward and ask, "What do we want and need?" On the contrary, it looks outward and asks, "What do you want and need?" There is an enormous difference between these two approaches.
In effect, firms have to do the same to win over people as they do to gain new customers--show them why the firm is their best competitive alternative.
Because knowledge workers are investing their Intellectual Capital with firms that will pay a fair return, the question should not be, "How much is this person worth to the firm?" The real questions are: "How much is the firm worth to this knowledge worker? How can the firm add to this person's Intellectual Capital, and develop it even further?"
A New Order of the Ages
Characteristics like passion, desire, obsession, motivation, innovation, creativity and knowledge may not show up anywhere on a firm's financial statements or timesheets, but they are the traits that will ultimately determine the fate of your firm. Knowledge work is non-linear and not subject to the cadences and rhythms of an assembly line; rather it moves by iteration and reiteration, a process of the mind.
My favorite one dimensional test for creating a culture worthy of the respect and dignity of the people you are trying to attract is simply this: Would you want your son or daughter to work in your firm?
My colleague Dan Morris flies a flag over his firm's office building with its name and logo in three colors. It is interesting to me because when I first saw it, I recalled those who first called themselves liberals--in the classical definition of the word--had in mind three liberations (which explains why the appropriate liberal flag is always tricolore).
They intended, first, to liberate humans from tyranny and torture; second, to liberate humans from poverty; and, third, to liberate humans from censorship and other oppressions of conscience, intellect, and art.
It is time we hoist a new flag over The Firm of the Future and usher in a new order of the ages, one that respects the dignity, and earns the rewards, of its Human Capital investors.
links for 2006-02-10
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"I wish more developers would focus on solidifying and simplifying rather adding more and more features."
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You have to check out this very public note from coffee house employees to their now-former boss. Could this ever happen in BIGLAW?
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Great series of cartoons applicable to lawyer/client communications.
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Another nail in the real estate agent coffin?
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Aaargh! "Inspired by law firms around the world, I have decided to track my daily productivity as measured purely by the number of hours worked on various tasks. I downloaded TimeWriter to facilitate the task."
Things I wish I'd have known in law school.
Buffalo Wings and Vodka sets out a great list of classroom participation strategies. My favorites:
The Admiral Stockdale: Most professors will simply move on to the next student if faced with an answer like "POTATOES! I LIKE POTATOES! WHERE'S MY PONY? MOM? ARE YOU THERE? POTATOES!" Also known locally as "The Shawn Rutherford?"
The Paige Pipkin: Really just a stalling tactic, forces the professor to clarify as many parts of the question as possible while you frantically flip pages in your case book: "Could you repeat the question?" "Could you say that one word again?" "Could you give me the language of origin?" "Could you use it in a sentence?" "Could you use it in a sentence other than the original question?"
Scorched Earth Policy: If the professor is going to take you down, then you're going to take him down with you. Pull in an unrelated law review article. Cite Blackstone. Bring up the war in Iraq. Or abortion. Calling your professor a racist is also good for this, though it often takes a little bit of creativity in some of the drier classes. Trust your instincts.
To that, I’d add the Mutharika Mambo: When the professor dislikes your answer and asks you the question again, repeat your first answer verbatim. The professor will likely be so confused he’ll move on to another student. Or, in my case in first year contracts, reward the second answer (that, remember, was identical to the first) with a “very good, Mr. Homann.”
Marketing 101: Know what urgent problem your're uniquely solving.
Dave Pollard sums up marketing 101: “Know what urgent problem you’re uniquely solving.” Dave continues:
Over the years I have advised many entrepreneurs, worked with a lot of consultants, and coached executives. All three groups repeatedly make the same mistake: They try to introduce 'solutions' that are really interesting, quite feasible, and well within their area of competency, but which fail to uniquely solve an urgent problem (in the eyes of whoever is paying for it).
Here’s another nugget:
Unless you're willing to resort to such advertising hype, and burn a lot of bridges behind you, you need to focus on offering products and services that meet real needs. And if you're wise, you'll focus on urgent needs before important ones, because to most of us, there is always tomorrow to look after that important need, while the urgent need must be addressed today.
Go read his entire post. It’s really great.
Constraints for Lawyers?
Here is a good practical introduction to the Theory of Constraints from the Juice Analytics blog. The author is going to try imposing these constraints on his company:
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Create artificial deadlines with teeth. Something real and bad has to happen when a project extends beyond a deadline. What if a team had to write a document describing why a deadline was missed?
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Limit design freedom with less space, fewer colors, fewer tabs and buttons. At Juice, we recently found that we had some fairly radical limitations on the space available to create a web interface. What started as an annoyance helped us take some great steps forward.
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Cap team size. What if you limited every team to five or fewer people? Just imagine the efficiencies and focus — and all the people you could legitimately exclude!
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Try without money. What if you had no marketing budget for a new product? I bet most of the companies that succeed with viral marketing are those that need to. Big companies admire the power of using customers as a salesforce — but advertising is so much more well understood.
As the author notes, “There is pain in fitting into constraints. And it isn’t always worth it. But there can be pay-offs in innovation, efficiency and focus.” Where can you utilize the Theory of Constraints in your practice?
Technorati Tags: constraints, law+practice
You Are Your Customer List - Ron Baker
You Are Your Customer List by guest blogger Ron Baker
You're really not in business to make a profit, but you're in business to render a service that is so good people are willing to pay a profit in recognition of what you're doing for them. – Stanley Marcus (1905-2002)
The purpose of your firm is to add to your customer's wealth. By focusing on what customers really buy-expectations-and how important it is to exceed them, you will be well on your way to continuously delivering on that purpose at an increasing rate each day.
Your firm's value proposition is a combination of price, quality and service, which come together to create a unique offering for your customer in order to offer a superior alternative in comparison to your competition.
Since the 1980s, the Total Quality Management movement arose as a way for firms to increase their quality, moving towards a Six Sigma, or zero defects, standard. The flaws in this strategy for an professional firm are obvious, since to err is human and rather than focusing on zero defects, I propose a zero defections standard, along with an effective customer complaint recovery strategy.
The most successful firms in the world today turn away more customers than they accept because they have a rigorous pre-qualifying process and they understand that, ultimately, bad customers drive out good customers.
In my last post, I suggested the metaphor of your firm's fixed capacity as a Boeing 777 airplane, in conjunction with the concept of the Adaptive Capacity Model, in order to segment your customer base by the value they place on your offerings. I believe The Firm of the Future is just as diligent in forecasting this capacity-in terms of its yield and load factors-as the airlines are today.
Customers will continue to patronize businesses where they are invited and remain where they are appreciated. Your firm will get the customer behavior it rewards. Customer loyalty is worth rewarding.
Of course, that does not imply you need to accept all customers, or keep low-valued customers within your firm. Since you cannot be all things to all people, it is important to work with only those individuals and businesses you enjoy and who have personalities you get along with.
In surveys conducted by David Maister, he found professionals spend between 55% and 80% of their time working with people they are either indifferent about, or just don't like. Why do professionals do this? As Maister pointed out in his book True Professionalism:
Supposedly, professionals are among society's most bright, educated, and elite members--people who are supposed to have more career choices than anyone else. Yet they seem to be willing to accept a work life made up largely of "I can tolerate it" work and clients, and they feel that they cannot safely do anything about all that.
The fact is, you can do something about it, and you do have a choice of whom you work with and whom you accept as a customer. There is no justifiable reason for accepting--or retaining--customers whom you or your team members personally do not like. Toxic customers can have a negative effect on team member morale, which will ultimately have a deleterious effect on the firm's wealth-creating ability.
If, on the other hand, you work with people you enjoy, not only will you do better work, be a more effective marketer, cross-sell more services, and attract like-kind customers, you will be a better professional and have a better quality of life.
Indeed, you are your customer list. How does that make you feel?
Baker's Law: Bad Customers Drive Out Good Customers - Ron Baker
Baker's Law: Bad Customers Drive Out Good Customers by guest blogger Ron Baker
We hold these truths to be self-evident, that all men are created equal,…
-Thomas Jefferson, The Declaration of Independence, July 4, 1776
Whenever anyone quoted those immortal words from the Declaration of Independence — all men are created equal — Federalist Fisher Ames, an ardent opponent of Thomas Jefferson and a superb congressional orator, would retort: "And differ greatly in the sequel."
While Fisher's admonishment might not be the best way to administer a country's laws — where all should be treated equally — it is profound when it comes to understanding no two customers are equal. A German Proverb teaches, "He who seeks equality should go to a cemetery."
Maximum vs. Optimal Capacity
All firms have a theoretical maximum capacity and a theoretical optimal capacity. From a strategy perspective, it is essential to see how that capacity is being allocated to each customer segment. Your maximum capacity is the total number of customers you firm can adequately service, while the optimal capacity is the point at which customers can be served adequately while maintaining your competitive advantage and pricing integrity.
Insuring a proper amount of capacity is allocated to various customer segments, while offering a differentiating value proposition within each segment, is an essential element of implementing value pricing strategies. It also prevents bad customers--those who are not willing to pay for the value you deliver--from crowding out good customers.
The Adaptive Capacity Model
Think of your firm as a Boeing 777 airplane, similar to the one below:
When United Airlines places a Boeing 777 in service, it adds a certain capacity to its fleet. However, it goes one step further, by dividing up that marginal capacity into five segments:
A. First class
B. Business class
C. Full fare coach
D. Coach
F. Leisure, Priceline.com, and Bereavement fares
The airlines — and hotels, cruise lines, golf courses, car rental agencies, and other industries with fixed capacity — are adept at managing and predicting their adaptive capacity to maximize profitability.
Lessons from Yield Management
The airlines understand it is the last-minute customer who values the seat the most and hence they reserve a portion of each plane's capacity for their best customers. They do this even at the risk the plane will take off with some of those high price seats empty — and that revenue can never be recaptured since they cannot inventory seats.
Why do they take that risk? Because the rewards of reserving capacity for price insensitive customers comprise the majority of their profits.
Airlines allocate only so many seats to coach, leisure, Priceline.com (or bereavement) seats, which they offer well in advance of the flight. However, no airline adds capacity in order to accommodate these customers.
This point is noteworthy, as too many firms will, in fact, add capacity — or reallocate capacity from higher-valued customers — in order to serve low-valued customers. This is the equivalent of the airlines putting the upper deck in the back of the plane rather than the front.
Furthermore, many companies will turn away high-value, last minute work from its best customers because it is operating near maximum capacity, usually at the low-end of the value curve for price sensitive customers. This is common during peak seasons; the lost profit opportunities are incalculable.
Many worry about running below optimal capacity and cut their prices in order to attract work, especially in downturns or slow cycles. This strategy is fine, but you must understand the tradeoff you're making. Usually, that capacity could be better utilized selling more valued services to your first-class and business-class customers, who are less price sensitive than new customers.
This way, the firm does not cut its price and degrade its pricing integrity in order to attract price sensitive customers, sending a signal into the marketplace it is willing to engage in this strategy and affecting the perception of its value proposition.
The conventional wisdom is you have to be at maximum capacity — where demand exceeds supply — to raise prices. But since when do you have to wait to be fully booked to demand a premium price? Do not confuse working harder (supply-side capacity) with working smarter (demand-side pricing).
Prices are determined by value created for the customer, not the internal capacity constraints of your firm.
How much fixed capacity are you allocating to each customer class? What will be the criteria you use to ascertain where in your airplane each customer sits?
By viewing your firm as an airplane with a fixed amount of seats, you will begin to adapt your capacity to those customers who appreciate-and are willing to pay for-your value proposition.
Technorati Tags: ron+baker, pricing, law+firm, economics, value
The Marketing Concept - Ron Baker
The Marketing Concept by guest blogger Ron Baker
There is only one boss: the customer. And he can fire everybody in the company, from the chairman on down, simply by spending his money somewhere else. -Sam Walton, founder of Wal-Mart (1918-1992)
I miss Peter Drucker. He was one of the few management consultants who had original insights, could write without making his readers feel like they were watching a fly ascend a drape, and has taught me so many lessons there is no way I can even separate his thinking from my own. He deserved a Nobel Prize, and it's a shame he didn't get one (they are not given posthumously).
One of his lessons was you are not in business to make a profit. Profit is merely oxygen for the body; it is not the reason for being. Profit is nothing more than a lagging indicator of what is in the hearts and minds of your customers.
He indefatigably pointed out that "there is only one valid definition of business purpose: to create a customer." This is known as the marketing concept.
The purpose of any organization--from a governmental agency, non-profit foundation to a corporation--exists to create results outside of itself. The result of a school is an educated student, as is a cured patient for a hospital. For a law firm, a happy and loyal customer who returns is the ultimate result.
The only things that exist inside of a business are costs, activities, efforts, problems, mediocrity, friction, politics, and crises. There is no such thing as a profit center in a business; there are only cost and effort centers. In fact, Peter Drucker said in a 1997 interview, "One of the biggest mistakes I have made during my career was coining the term profit center, around 1945."
The only profit center is a customer's check that doesn't bounce. Customers are absolutely indifferent to the internal workings of your firm in terms of costs, desired profits levels and efforts. Value is only created when you have produced something the customer voluntarily, and willingly, pays for.
For example, cosmetic companies, as Revlon founder Charles Revson pointed out, sell hope. What makes the marketing concept so breathtakingly brilliant is the focus is always on the outside of the organization. It doesn't look inside and ask, "What do we want and need?" but rather it looks outside to the customer and asks, "What do you desire and value?"
Your firm exists to serve real flesh and blood people, not some mass of demographics known as "the market." In the final analysis, a business doesn't exist to be efficient, to do cost accounting, or to give people fancy titles and power over the lives of others.
It exists to create results and wealth outside of itself. This profound lesson must not be forgotten.
Thank you Mr. Drucker. R.I.P.
Technorati Tags: peter+drucker, cost, profit, law+firm, ron+baker
You Only Need Four Ideas
From this month’s edition of Brainmail:
A US study says that just four ideas copied thousands of times account for 80% of all breakthrough new businesses created between 1965 and 1995. The four ideas are: power retailing, focus/simplify/standardize, value chain bypass and mega-branding. Ref: Strategy + Business (US)
Which of the four will your firm rely upon to create your breakthrough new business?
Why Customer, Not Client? - Ron Baker
Why Customer, Not Client? by guest blogger Ron Baker
Customers are people; consumers are statistics.
--Stanley Marcus [1905-2002], Quest for the Best
Stanley Marcus was the son of one of the founders of Neiman-Marcus. I believe he understood customer service better than almost anyone, and I have learned many things from his books.
One of his favorite sayings was: "No 'market'--or 'consumer'--ever purchased anything in one of my stores, but a lot of customers came in and bought things and made me a rich man."
Words mean things. The words we use and the language we adopt, as a firm and as a profession, take on certain meanings over time. They become part of our culture, the way we do things.
When I began researching the Total Quality Service (TQS) and customer loyalty movements in the late 1980s, it struck me how many organizations have tried to call their customers something other than a customer.
The word client, when you look at its etymology, is an inappropriate word to describe the relationship between a professional and the person he or she serves in today's marketplace. Client is derived from the Latin word cliens, which is a follower, retainer, one who follows his patron. In other words, a person dependent on another, as for protection or patronage.
According to my Dictionary, "among the ancient Romans a client was a citizen who placed himself under the protection of a patrician, who was called his patron; a master who had freed his slave, and retained some rights over him after his emancipation; a dependent; one under the protection or patronage of another." Are these the type of images you want to project?
The Problem with the Contemporary Meaning
I realize words change in meaning, and they adopt contemporary usage and generally accepted definitions, and client is no exception. The Dictionary also describes client as "a person or company for whom a lawyer, accountant, advertising agency, etc. is acting; loosely, a customer; a person served by a social agency."
But visit any governmental agency that dispenses aid to individuals, and you will soon discover they too use the word client. A social worker may have clients but I do not believe this describes the relationship we have (or want) with our customers.
What has happened to the word customer, and why do so many businesses attempt to describe the people they serve as something else? After all, customer is derived from the word custom, which is something done regularly. Therefore, a customer is a person who buys, especially one who buys regularly.
Why is it when you see the doctor, you're a "patient," when you board an airplane, a "passenger;" when you get into a taxi, a "fare;" to your utility company, a "ratepayer;" to your insurance company, a "policyholder;" and to a newsletter, a "subscriber."
What's going on here? Why not call customers what they are? Why do businesses develop a special terminology to describe what is, in essence, a commercial transaction? It is as if professionals believe we are not subject to the laws of supply and demand along with everyone else.
Partially, it's arrogance, a way for us to feel superior about ourselves relative to our customers. After all, one doesn't "sell" to a client; one doesn't pander in the marketplace with non-professional advertising to attract clients; rather they rush to seek us out for our expertise, experience, guidance, etc. Does this sound like the current environment in which we operate?
The customer is sovereign, period. We may not like it, we may wax nostalgic for the good old days when customers lined up like passive sheep to be fleeced, but those days are gone, forever. Professionals can no longer place themselves above the "crass marketplace." We must participate in it, and we must differentiate ourselves from the competition if we are to succeed.
Walt Disney insisted his customers be called "guests." His attitude, which still permeates the entire culture of all Disney theme parks, is that the role of employees ("Cast Members") is to entertain the guests and show them a good time. The words used to describe the people served by a business are a good indication of the attitude of the firm.
I'm not suggesting if you change your vernacular you will automatically instill a culture committed to the customer. Far from it. But the words you use to describe the people you serve says an enormous amount about the attitude of your firm--and it is the attitude and actions of your people that ultimately determine your firm's culture.
I don't expect many professionals to adopt the word customer. And that's a good thing, for you. After all, you're reading this Blog for the purpose of differentiating yourself from the competition, because competition really is conformity. Start referring to your clients as customers, and you will discover it has a salutary effect on your attitude, firm culture, customer loyalty and respect, and ultimately, your bottom line.
Technorati Tags: ron+baker, client+service, customer+service
The Firm of the Future - Ron Baker
The Firm of the Future by guest blogger Ron Baker
In my last post, I exposed the predominant practice equation for The Firm of the Past, and dissected the problems with it, how it does not explain the success of professionals (because it is far too focused on hours, efficiency, and inputs, rather than results, output and value), and why it no longer comports to the intellectual capital economy professionals inhabit today.
The New Practice Equation offers a viable and proven alternative to leveraging the real critical success factors of The Firm of the Future:
Profitability = Intellectual Capital x Effectiveness x Price
The Market Share Myth
This theory has many advantages over the old one. First, rather than focusing on top line revenue, the firm is forced to think about the profitability of each customer. Business is a game of margins, not market share, and growth for the sake of growth is the ideology of the cancer cell, not a profitable business.
Further, not all customers are equal, and many firms could stand to lose up to 40-60% of their customers, and they’d be more profitable if they did so. Marginal customers may contribute revenue, but they also absorb precious, fixed capacity that is better allocated to more valuable customers.
Mind Over Matter
Second, professional firms don’t sell hours. They create and sell — and their customers buy –– Intellectual Capital (IC). This is a far broader view than thinking about leveraging people and hours. Microsoft didn’t create the wealth it has by pricing by the hour, and I doubt Bill Gates keeps a timesheet.
A firm’s IC consists of three components: Human Capital (its people); Structural Capital (its systems, proprietary software, checklists, resources, etc., that enable it to perform its work); and Social Capital (customers, vendors, suppliers, referral sources, alumni, and alliances). These components are the real levers of profitability in any professional service firm, not people hours. You can’t leverage an hour; time is simply time, and all businesses –– indeed, all living beings –– are constrained by it. So what?
There are so many more ways to leverage the three components of IC, but it requires a radical change of mindset to get away from the notion that “billable hours” drive a firm’s profitability. As Archimedes said, “Give me a lever long enough, and I shall move the earth.” The real lever in a professional service firm is its IC.
Doing the Right Things
Third, the Firm of the Future will focus on effectiveness, not efficiency. There’s not much the average firm can do to squeeze another 15-20% efficiency from its Human Capital, which are only fallible human beings. The focus on billable hours has hindered professional firms from focusing on being effective with their customers.
If you study surveys of how customers select –– or fire –– their attorneys, efficiency is never mentioned. It is always because of outstanding service, or lack of service –– issues such as they don’t ignore me, they are proactive in looking after my interests, they are aggressive in helping me pursue opportunities, etc. You can’t do all of these things if you are focused on nothing but billable hour quotas.
Therefore, the Firm of the Future will measure and judge team member effectiveness by utilizing Key Predictive Indicators (KPIs), which are leading indicators of performance. Timesheets are lagging indicators, and don’t offer firm leaders a relevant, or timely, measurement of the right things (effectiveness); instead, they attempt to focus on doing things right (efficiency). And they do a lousy job of it, since one can look great on a timesheet while having a lousy service attitude, or upsetting colleagues, or performing sub-quality work.
I will take effectiveness over efficiency any day in a knowledge environment. Let me be clear: The Firm of the Future does not have timesheets.
Pricing on Purpose
Last, Firms of the Future recognize they are a business just like the airlines, hotels, rental car companies, etc. Businesses have prices, not hourly rates. You’d never fly an airline that tried to charge you $4 per minute. The idea is simply ludicrous. In fact, professional firms need to start pricing up-front for everything they do, period. No more excuses.
To retort a firm can’t do that because it doesn’t know exactly how long it is going to take is specious. The customer doesn’t care how long it takes, they only care about the price relative to the value, and they want to make that comparison before they buy, not after. Do you care how long it took Toyota to build your car?
Besides, from the firm’s perspective, it is much better to know the customer doesn’t agree with the price before you do the work, which helps you prevent committing precious firm capacity to customers who don’t value the work.
Pricing earthquake and other disaster insurance is far more complicated than legal services, yet my insurance company gives me a fixed price, before I buy (and before they know what their costs are going to be). It’s called risk, and it is where all profits come from. The professions are going to have develop pricing competency if they are serious about capturing the value they create, and if that means they have to hire pricing professionals, including actuaries, then so be it.
Pricing is the number one driver of profitability in any business, and is far too important to leave to people who lack the creativity, imagination and self-esteem to price based upon value. You know who the mediocre and wimpy pricers are in your firm. They are severely handicapping your profitability by leaving money on the table, since they are far too focused on costs, hours, and efforts to think clearly about results, outputs and value to the customer.
Lawyers are subject to the same laws of economics, and consumer psychology as every other business. It is time they learned to Price on Purpose, and stop hiding behind the veil of billable hour.
Do Professionals Hate Change?
Other consultants will tell you professionals won’t take this journey to become a Firm of the Future because they hate change. In fact, the physicist Max Planck once said “Science progresses funeral by funeral.”
I reject this line of reasoning. I don’t think a profession progresses by shooting its elder members. It is not change, per se, lawyers fear, it is the uncertainty of the effects of the change they fear. That is a much different issue to deal with.
If I was Lloyds of London, and I could insure a firm’s losses for a given period of time if they were to try my theory and it failed, I think many more would change. Unfortunately, I’m not Lloyds and can’t do that.
I have to convert my colleagues based upon the logic of my arguments and ideas, through the use of words. I am optimistic I can do that –– I have a fairly good track record so far –– which is why I will continue to write, lecture, educate, and disseminate my ideas into the national conversation, through our think tank, VeraSage Institute.
In fact, the Fellows at VeraSage are so committed to this process –– a group of 14 dedicated professionals world-wide assembled in order to better the professions and quality of life –– we offer any firm assistance, in the form of e-mail and telephone consulting, if they are truly serious about making the transition. They can learn from our collective experience –and from other firms –– and this will help them avoid the mistakes others have made, thereby lowering their risk.
A Paradigm Worthy of a Proud Profession
Professional firms are Intellectual Capital organizations, and it is time for them to begin acting as if they understood this fact, rather than trying to constantly enhance efficiency by treating their Human Capital as if they had no mind of their own, redolent of the days of Frederik Taylor’s time-and-motion studies.
Humans are not simply machines that exist to bill hours, yet the old practice equation keeps us mired in this mentality. No one entered this profession to bill the most hours; it is simply not a relevant metric to judge the success of an attorney. I believe we can –– indeed, must –– do better than the one-dimensional opportunities presented by an antiquated model.
When I first publicly presented and contrasted The Firm of the Future with The Firm of the Past, a CPA explained to me at the break why she thought the new equation was so superior to the old. She said, and I’m paraphrasing here, “Your equation presents so many more factors that enable a firm to achieve its objectives than the old one did. It is like being freed from a cage that has restricted our firm for decades.”
I have offered you a testable hypothesis, one that is subject to the falsification principle of the scientific method. I hope someday this theory will be replaced with an even better one, as that is how all knowledge creeps. I only hope to live long enough to see it.
Clare Boothe Luce used to say, “The only difference between an optimist and a pessimist is the pessimist is usually better informed.” When it comes to the professions, I certainly hope she was wrong. But the road not yet traveled is long, and it seems the professions, to paraphrase Winston Churchill’s exhortation of America, will do the right thing –– once they have exhausted the alternatives.
Despite this, I remain optimistic. Milton Friedman tells a wonderful story that may illustrate what we need:
A young nun was out driving a car down a superhighway and ran out of gas. She remembered that a mile back there had been a gas station. She got out of her car, hiked up her habit, and walked back. When she got to the station she found that there was only one young man in attendance there. He said he’d love to help her but couldn’t leave the gas station because he was the only one there. He said he would try to find a container in which he could give her some gas. He hunted around the gas station and couldn’t find a decent container. The only thing he could find was a little baby’s potty that had been left there. So he filled the baby potty with gasoline and gave it to the nun. She took the baby potty and walked the mile down the road to her car. She got to her car and opened the gas tank and started to pour it in. Just at that moment, a great big Cadillac came barreling down the road at 80 miles an hour. The driver was looking out and couldn’t believe what he was seeing. So he jammed on his brakes, stopped, backed up, opened the window, and looked out and said, “Sister, I only wish I had your faith!”
The Firms of the Future must lead the profession by following a model worthy of its proud heritage. If we reinvigorate and revitalize the professions, begin to understand and leverage the Intellectual Capital it creates, there is no limit to what we can achieve, as long as we do not lose faith in ourselves.
Technorati Tags: ron+baker, billable+hour, efficiency, timesheets, intellectual+capital
links for 2006-02-07
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Top ten Cluetrain imperatives for Presenters
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BlawgThink on a Boat!
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A bunch of billable hour resources, by a company called "The Billable Hour."
The Firm of the Past - Ron Baker
Nothing stops an organization faster than people who believe that the way they worked yesterday is the best way to work tomorrow. To succeed, not only do your people have to change the way they act, they’ve got to change the way they think about the past.
––John Madonna, former Chairman, KPMG International
<!--D(["mb"," Revenue \u003d People Power x Efficiency x Hourly RateIn Greek language, analyze means “unloosen, separate into parts,” which we will proceed to do with this theory to expose its many weaknesses.First, since most firms have a relatively high contribution margin (revenue less direct labor costs), it gives them a false sense that any revenue is good. This in turn leads them to accept customers who are not as valuable to the firm as others, since marginally valuable customers take up a firm’s precious capacity, and keep it from reserving capacity for its most valuable customers.Second, the way most firms were built in the last century was by leveraging people, literally building a pyramid structure. As technology came on the scene––and especially when the computer hit the desktop––the pyramids began to flatten and firms started to leverage technology. Most firms, however, will put revenue before capacity, always playing catch-up to the workflow and customer demand, and working their people at full tilt. Most other businesses––think of FedEx, Intel, etc.––will put capacity before revenue.This constant full capacity utilization seriously hinders a firm’s ability to attract top talent, valuable customers and cross-sell additional services to existing customers, not to mention innovate. It also makes the partners and firm leaders believe the way to prosperity is to leverage people, and worse, billable hours. What David Maister calls the donkey strategy––prosperity by carrying a heavier load.Third, most firms focus on efficiency by measuring such things as utilization rates and billable hours. Yet, if you study statistics going back at least fifty years, you’d find utilization rates and billable hours are within a very tight range.",1]);//-->Revenue = People Power x Efficiency x Hourly Rate
\n",0]);D(["ce"]);//-->mind, not matter. Where ideas and knowledge––what economists term human capital––comprise 75% of any nation’s, or law firm’s wealth-creating ability.
Technorati Tags: ron+baker, timesheets, billable+hour, efficiency
Introducing Ron Baker - Guest Blogger
One of the coolest things about blogging for me is that I have gotten to know some really amazing people. One of those folks is Ron Baker. When I first started blogging, I called him an absolutely amazing visionary and called two of his books, The Firm of the Future (with Paul Dunn) and The Professional's Guide to Value Pricing “absolute must reads.” Ron left a comment to that post, and since then he and I have grown to be friends.
Ron and I were talking about his new book, Pricing on Purpose, and I asked him if he’d like to promote it on this blog. Instead of a quick Q&A, he’s written several provocative posts for my readers. The first will follow today.
I can’t tell you how excited I am to have him here on the [non]billable hour this week. I hope you enjoy what he has to share.
For those of you who don’t know Ron, here’s his bio:
Ronald J. Baker started his accounting career in 1984 with KPMG Peat Marwick's Private Business Advisory Services in San Francisco. Today, he is the founder of VeraSage Institute, a think tank dedicated to teaching Value Pricing to professionals around the world.
As a frequent speaker at events and conferences, and a consultant to professional service firms on implementing Total Quality Service and Value Pricing, his work takes him around the world. He has been an instructor with the California CPA Education Foundation since 1995 and has authored eleven courses for them.
He is the author of the best-selling marketing book ever written specifically for the professions, Professional's Guide to Value Pricing, Sixth Edition, published by CCH, Incorporated. Also, Burying the Billable Hour; Trashing the Timesheet; and You Are Your Customer List, published by The Association of Chartered Certified Accountants in the United Kingdom. His book, The Firm of the Future: A Guide for Accountants, Lawyers, and Other Professional Services, co-authored with Paul Dunn, was published in April 2003 by John Wiley & Sons, Inc., and is in its fourth printing. His latest book, Pricing on Purpose: Creating and Capturing Value, was published in February 2006 (John Wiley & Sons, Inc.). His next book, The Canary in the Coal Mine: Why Your Company Needs Key Predictive Indicators, is due out in the latter part of 2006 (John Wiley & Sons, Inc.).
Ron has toured the world, spreading his Value Pricing message to over 70,000 professionals, including leading a seminar series of Value Pricing seminars for the American Association of Advertising Agencies in 2005. He has been appointed to the American Institute of Certified Public Accountant's Group of One Hundred, a think tank of leaders to address the future of the profession, named on Accounting Today's 2001, 2002, 2003, 2004 and 2005 Top 100 Most Influential People in the profession, and received the 2003 Award for Instructor Excellence from the California CPA Education Foundation.
He graduated in 1984 from San Francisco State University with a Bachelor of Science in accounting and a minor in economics. He is a graduate of Disney University, Cato University, and the University of Chicago Graduate School of Business course: Pricing: Strategy and Tactics. He is a member of the Professional Pricing Society and presently resides in Petaluma, California.
Technorati Tags: value+pricing, billable+hour, ron+baker
Announcing the LexThink! Lounge
OK, I know I have hinted at this a few times, so here’s the skinny:
On April 19, 2006, one hundred invited guests will congregate in Chicago for the inaugural LexThink! Lounge, presented by Dennis Kennedy, Matthew Homann and JoAnna Forshee.
Taking place on the eve of the American Bar Association's TECHSHOW*, the LexThink! Lounge is a salon-like gathering of some of the brightest minds in legal technology today.
Beginning at 4:00 pm, and continuing into the evening, the LexThink! Lounge will combine LexThink! collaborative brainstorming techniques, OpenSpace facilitation, and small discussion groups with fine food and drink to create an amazing atmosphere for in-depth discussions about the future of legal technology.
Attendees at the invitation-only event are expected to include many of the TECHSHOW speakers, prominent legal and technology bloggers, alumni of prior LexThink! events, and other Chicago-area innovators and influencers.
The centerpiece of the evening will be a "Legal Tech Five by Five," where five legal technology pioneers will offer their five tech predictions and a glimpse into the future of legal technology.
Oh, and did I mention bowling?
If you want to come, I’ll post more info next week. If you are an alumnus of either of our previous LexThink! events, your invitation will be in the mail soon. If you are interested in sponsoring the event, e-mail me at Matt@LexThink.com
* The LexThink! Lounge is not affiliated in any way with the American Bar Association or TECHSHOW (though we like them a lot).
Thank You, Yvonne
I love Yvonne DiVita, even if she hadn’t written these kind words about LexThink! when talking about a recent conference she attended:
1. Not enough audience interaction – because you didn’t plan enough time for Q&A. It wasn’t the speakers or the presenters faults…it was the organizers fault! Puh-lease! The Q & A is THE best part of the event. Say, you should talk to Matt Homann over at the [non]billable hour. He and Dennis Kennedy know how to run a conference where everybody wins. They’ll set you straight. I hear they're available to help plan your next event in the open space style.
If you are planning a conference, I’d love to chat with you and share some of the lessons we’ve learned at our two “unconferences,” LexThink and BlawgThink.
LegalTech NY ... Whew!
Just got back last night from LegalTech NY, ALM’s mondo legal technology event. I’ll post some thoughts on the conference later, but one thing I would have loved was a “Best in Show” award for the coolest product. Here’s my vote: the O-yA search appliance. Very cool!
NY LegalTech Blogger Meetup
Dennis Kennedy and Tom Mighell have organized a blogger meetup at NY LegalTech. Here are the details:
This is going out to everyone who expressed interest in meeting up (bloggers or otherwise) on Sunday night in NYC. Rather than try to find a restaurant that would fit all of us, we decided that you're on your own for dinner. Let's meet for drinks at 8:00 p.m. at the Hilton New York's Bridge Bar. The address is 1335 Avenue of the Americas. It's just off the lobby. The Hilton is where LegalTech will be held, so hopefully you'll all be somewhere in the neighborhood.
See you Sunday night!
I’ll be there a little late. See you tonight!