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:

  • 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?
  • 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.
  • 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!
  • 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? 

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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?

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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: 

777-2003-1

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.

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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.

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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.

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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.

 

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The Firm of the Past - Ron Baker

The Firm of the Past by guest blogger 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

Nothing fails like success. Professional service firms have been operating under a predominant theory of the firm since at least the 1940s, which has served lawyers, accountants, among others, quite well.
 
The problem is, this theory is no longer relevant to the intellectual capital economy. We need a new theory of the firm. All learning starts with theory, since a fact, measurement or assertion not illuminated by a theory is absolutely sterile––we might as well read the phone book.
 
Why Theory is Important
 
There is also nothing more practical than a good theory, since it allows us to predict, control, or prescribe. We are ruled by our theories, whether we admit it or not. Professionals bill by the hour––and keep timesheets––because of a theory.
 
Yet theory is a dirty word in most business books and seminars. Usually the author will state something like:<!--D(["mb"," “This book is not based on ivory tower theory, but on real world examples you can use Monday morning.” I recoil when I hear that, because I know I’m about to be bored silly with checklists and a plethora of platitudes that rarely rise to the level of common sense.
The scientific method originated in Europe in the 16th century, and is one of the creations that has significantly bettered the human condition and shaped the world we now inhabit. It is one of the fourteen meta-inventions Charles Murray documents in his fascinating and scholarly book, Human Accomplishment.
The concepts of observation, hypothesis, falsification, parsimony, and the experimental method are all components of the scientific method. All science progresses through dissension, not agreement, and being able to falsify theories and posit better ones is the catalyst needed in order to gain a deeper understanding of what we are studying, whether in the hard sciences, economics or business.
The Old Practice Equation
What is the theory of the professional service firm that has created the success we’ve enjoyed? If you were to think deeply about it, I believe you’d end up with an equation that looks like this:
\t\t\t",1]);//--> “This book is not based on ivory tower theory, but on real world examples you can use Monday morning.” I recoil when I hear that, because I know I’m about to be bored silly with checklists and a plethora of platitudes that rarely rise to the level of common sense.
 
The scientific method originated in Europe in the 16th century, and is one of the creations that has significantly bettered the human condition and shaped the world we now inhabit. It is one of the fourteen meta-inventions Charles Murray documents in his fascinating and scholarly book, Human Accomplishment.
 
The concepts of observation, hypothesis, falsification, parsimony, and the experimental method are all components of the scientific method. All science progresses through dissension, not agreement, and being able to falsify theories and posit better ones is the catalyst needed in order to gain a deeper understanding of what we are studying, whether in the hard sciences, economics or business.
 
The Old Practice Equation
 
What is the theory of the professional service firm that has created the success we’ve enjoyed? If you were to think deeply about it, I believe you’d end up with an equation that looks like this:
<!--D(["mb"," Revenue \u003d People Power x Efficiency x Hourly Rate
In 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
In 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.<!--D(["mb"," In other words, whether professionals are using a quill pen or a laptop computer, they can only charge so many hours in a year and realize so much on those hours.
Yet the theory leads partners to believe efficiency is the be all and end all of running a profitable firm. This is demonstrably false. I’m sure the buggy whip manufacturers were a model of efficiency before they were replaced by the automobile. What if you are efficient at doing the wrong things?
A business doesn’t exist to be efficient. It exists to create wealth for customers. The relentless focus on efficiency is misplaced in a knowledge environment, where we do not even have proper metrics to measure the output of a knowledge worker, let alone to value it. Yet we cling to our 100+ year-old metrics––designed for manual laborers––because they give us a false sense of security.
I’d rather be approximately right than precisely wrong, by making subjective judgments about the right things not precise calculations of the wrong things. We simply do not know how to measure a knowledge worker’s “efficiency,” because it’s not a simple matter of looking at inputs and outputs. No one would suggest tallying the cost of canvases, paints and the hours Rembrandt took to create his paintings in any way measures his efficiency, let alone the value of his output.
Was Einstein on budget for his research? Would you care?
No efficiency expert told Bruce and Jim Nordstrom to put pianos and piano players in their department stores. It certainly decreases efficiency, lowers sales per square foot, etc. Yet, how effective––in terms of customer service and competitive differentiation––has this strategy been? The legal profession has let efficiency retard its effectiveness, innovation and creativity. ",1]);//--> In other words, whether professionals are using a quill pen or a laptop computer, they can only charge so many hours in a year and realize so much on those hours.
 
Yet the theory leads partners to believe efficiency is the be all and end all of running a profitable firm. This is demonstrably false. I’m sure the buggy whip manufacturers were a model of efficiency before they were replaced by the automobile. What if you are efficient at doing the wrong things?
 
A business doesn’t exist to be efficient. It exists to create wealth for customers. The relentless focus on efficiency is misplaced in a knowledge environment, where we do not even have proper metrics to measure the output of a knowledge worker, let alone to value it. Yet we cling to our 100+ year-old metrics––designed for manual laborers––because they give us a false sense of security. 
 
I’d rather be approximately right than precisely wrong, by making subjective judgments about the right things not precise calculations of the wrong things. We simply do not know how to measure a knowledge worker’s “efficiency,” because it’s not a simple matter of looking at inputs and outputs. No one would suggest tallying the cost of canvases, paints and the hours Rembrandt took to create his paintings in any way measures his efficiency, let alone the value of his output. 
 
Was Einstein on budget for his research? Would you care?
 
No efficiency expert told Bruce and Jim Nordstrom to put pianos and piano players in their department stores. It certainly decreases efficiency, lowers sales per square foot, etc. Yet, how effective––in terms of customer service and competitive differentiation––has this strategy been? The legal profession has let efficiency retard its effectiveness, innovation and creativity.<!--D(["mb","
I would suggest the most innovative firms––from Intel, 3M, and Disney, to FedEx, Apple and Microsoft––are not the most efficient. They are, however, amongst the most innovative, and profitable. Consider 3M, which provides its employees up to 15% personal time to work on whatever projects they desire.
It’s not the most efficient scenario, but if they didn’t offer that type of personal time for people to create and innovate, we wouldn’t have Post-It Notes (and think of the wealth created in that market). I think most partners would be horrified to implement a similar policy. Hence, professional firms are not hotbeds of innovation and creativity. If professionals brought the same methods and metrics they use in their firms to the computer industry, we’d have Vacuum Tube Valley, not Silicon Valley.
Last, the Almighty Hourly Rate. The profession has taught approximately two generations of lawyers the only thing they sell is their time. This is unadulterated nonsense, for a very fundamental reason––no customer buys time. How can you sell something the customer doesn’t buy?
Look at how any customer judges the success (or failure) of their attorney. Customers buy expectations, results, sleep, peace of mind, etc, not hours. The focus on hourly rates has held the profession back from getting paid for the value it creates, and that has to change before another generation is corrupted.
Alternative to a Flawed Theory
It is one thing to light a candle in the darkness and shed light on the obsolescence of a reigning theory; it is a valuable undertaking in order to complete the falsification step in the scientific method. The harder work is constructing a better theory, one that comports to the realities professionals find themselves in today––an intellectual capital economy, where wealth is created from ",1]);//-->
 
I would suggest the most innovative firms––from Intel, 3M, and Disney, to FedEx, Apple and Microsoft––are not the most efficient. They are, however, amongst the most innovative, and profitable. Consider 3M, which provides its employees up to 15% personal time to work on whatever projects they desire. 
 
It’s not the most efficient scenario, but if they didn’t offer that type of personal time for people to create and innovate, we wouldn’t have Post-It Notes (and think of the wealth created in that market). I think most partners would be horrified to implement a similar policy. Hence, professional firms are not hotbeds of innovation and creativity. If professionals brought the same methods and metrics they use in their firms to the computer industry, we’d have Vacuum Tube Valley, not Silicon Valley.
 
Last, the Almighty Hourly Rate. The profession has taught approximately two generations of lawyers the only thing they sell is their time. This is unadulterated nonsense, for a very fundamental reason––no customer buys time. How can you sell something the customer doesn’t buy? 
 
Look at how any customer judges the success (or failure) of their attorney. Customers buy expectations, results, sleep, peace of mind, etc, not hours. The focus on hourly rates has held the profession back from getting paid for the value it creates, and that has to change before another generation is corrupted.
 
Alternative to a Flawed Theory
 
It is one thing to light a candle in the darkness and shed light on the obsolescence of a reigning theory; it is a valuable undertaking in order to complete the falsification step in the scientific method. The harder work is constructing a better theory, one that comports to the realities professionals find themselves in today––an intellectual capital economy, where wealth is created from<!--D(["mb","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.
Stay tuned for the next post, where I will present the new theory: The Firm of the Future.

\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.

 
Stay tuned for the next post, where I will present the new theory: The Firm of the Future.

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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.

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Temping in BigLaw

Temporary Attorney writes about temping in BigLaw.  The blog’s author, Tom the temp, has been thinking a lot lately about how law schools report their employment numbers:

Isn't the legal profession and the law schools one big "Enron" kind of scandel? Think about it. Every year thousands of college graduates decide whether or not they want to "invest" in a legal education. (often a $100,000 proposition). They decide the feasibility of this investment not by relying on a 10(k), but rather by relying on the career statistics put out by the schools. The career statistics are standardized not by the SEC but rather by something called the NALP.

Whether law schools "outright lie" on their NALP forms Tom the temp wouldn't know. This did get Tom the temp thinking about something he heard recently concerning a recently unemployed 2004 tier 2 law school graduate. Supposedly this woman was unemployed after passing the bar exam. Her career center wanted to know what she was up to because it was time to file their annual NALP employment report. At the time she was working a two day temp job stuffing envelopes in a law firm for four hours a day. Guess what the school reported? They took her hourly rate multiplied it by 2000 and claimed that she was an attorney in a 20-30 person law firm making a "projected" income of $50,000-60,000 dollars per year. Wow! Talk about an arithmetic trick. Under this mathematical model maybe Tom the temp isn't doing so bad after all. If only the mathematical illusion matched the reality of Tom the temp's unfortunate existence.

 

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Entrepreneurial Lessons Learned

Rob May at BusinessPundit has given up entrepreneurship (for now) and gone back to a regular pay check.  He shares some of the lessons he’s learned in this fabulous post.  Here are a few of my favorites:

Know how you make money. Ideas are great, and I'm all for doing cool things, but cash is still king. How do you get cash?

Your estimates are wrong - Yes, even your worst case estimates.

You aren't your own boss - Your customers are way more demanding than any corporate boss could ever be.

Nobody cares that you are smart or knowledgeable (and you need to know if you really are) - Why not? Because everyone thinks they are smart and knowledgeable. Everyone is convinced they are good at business. Everyone thinks they can hire a talented team. Everyone thinks they can sell. Everyone thinks there is something special and different about them that will make them successful. But accruate self-evaluation skills are critical to entrepreneurial success. You have to know what you are good at, what you aren't good at but can learn, and what you will probably never be good at. I think this is a major reason businesses fail.

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Doing Business with Friends and the Cost of Creativity

As the New Year begins, I admit I’m still in a bit of a reflective mood.  Here are some brilliant insights in this post from Speak Up:

Art and commerce have an uneasy balance in all of our lives. Costs and figures and negotiating have a way of blurring the focus we should have towards the work. It is why pro bono work can be so fun. It is why creative directors have so many other things to do during their day besides create.

The stresses. The paperwork. The bad dogs, sick kids, missed busses and fights with our significant other can all factor into a job. Every job brings with it a new set of challenges. Some of which will not come from the work.

Just like there is a cost of doing business, there is a cost of creating. I am still learning how to put a price on that.

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Should You Give it Away?

Continuing with the pricing theme for today is this post from Presentation Zen that discusses the differences between giving away services and discounting them:

I may be naïve, but my philosophy concerning public speaking has long been to remain open to non-paid opportunities, outside the business world, if I can actually be of help. Doing "free gigs" does not lower the value of what I usually "sell." In fact, doing the unpaid work outside of business probably adds value to my "brand" so to speak. My thinking is that discounting my services, say, to an investment firm, may indeed cheapen my brand. So I don't do that. However, I do not think doing some (sometimes more) work 100% free of charge cheapens what you have to offer, depending on the circumstance. Discounts cheapen, but free is free — and some of the best things in life are free. (They don't say, "Some of the best things in life are...discounted 50%"). Selling yourself (too) "cheap" is different from "giving it away." For example, Starbucks is not going to discount their drinks, but maybe they'll give free hot chocolates on Christmas Eve evening in certain stores for tired, procrastinating shoppers.

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Set Your Billing Rate to $10,000 per Hour.

Steve Pavlina  has an interesting take on hourly billing:

The big problem is that when you tell yourself your time is worth $50/hour, you’re simultaneously telling yourself that it isn’t worth $75/hour or $200/hour or $10,000/hour. You’re programming your subconscious mind to limit the range of opportunities you will notice. Because you won’t be on the lookout for $10,000/hour ideas, you’ll overlook them completely. If you tell yourself you earn $50/hour, you’ll think in terms of $50/hour opportunities.

Thinking in terms of an hourly rate may help limit your downside, but it also severely limits your upside. And that’s a really bad trade-off, bad enough that it requires me to dismiss this whole paradigm as utterly stupid. There’s no way the upside of turning some $20 hours into $50 hours can compensate for missing those $10,000 hours. That’s penny-wise, pound-foolish.

One $10,000 hour is worth 200 $50 hours. That’s more than a month of full-time work! You don’t need too many of those huge payoff hours to pick up the slack of some of those less productive $0-20 hours, but if you miss out on even one of those $10,000 hours, it’s a crippling blow that overwhelms all other thoughts about financial productivity.

In the long run, your greatest financial risk isn’t whether you made the mistake of succumbing to doing $20/hour work when you could have done $50/hour work. Your greatest risk is missing those $10,000 hours. And most people miss out on them completely. It’s ironic that people think of being a salaried employee as being low-risk and being an entrepreneur as high-risk. The reality is just the opposite. One of the reasons I chose the entrepreneurial path is that it’s just way too damn risky to be an employee. I’m not kidding. It’s easy to hit a good number of those $10,000 hours as an entrepreneur, but it’s a lot harder to do so as an employee.

How many $10,000 hours did you enjoy this year?

Go ahead and read the whole post.  Really thought provoking.

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Price like Wal-Mart?

Will Keller has a great post up on his Accounting Blog disecting WalMart’s pricing strategy:

WalMart goes to great lengths to have an alluring and unbeatable opening price point item in each category- from TV sets to cosmetics to bathing suits. These are the "unbelievable" prices that the company has become famous for (for example, a microwave oven for $14.67). The psychological impact of this opening price point is huge- consumers are led to believe that all of WalMart's prices are this low. However, the reality is quite different. As confirmed in interviews with former store managers, WalMart does not have the lowest price on every item in every category. In fact, the company often has higher prices than other big retailers (i.e. you might get a better deal down the road at Target). However, in most cases the game is already over because consumers believe that WalMart's prices are lower across the board. Furthermore, evidence shows that most shoppers don't even buy the opening price point item. Instead, the low price lures them into the department, where they end up buying a brand name or higher quality item that they are more comfortable with. (emphasis added)

That’s pretty powerful stuff.  The price gets customers in the door, but they don’t even buy the products whose price brought them there.  Anyone out there using this strategy with success among professional service providers?

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Value Does Not Equal Cost

Lawyers who struggle with pricing their services (and I think that includes all lawyers) should check out this post on the Loud Thinking blog:

The inability to price at value instead of cost is what separates nice (or niche) businesses from great businesses, what fizzles good ideas, and what turns would-be entrepreneurs into "starved artists".

This is naturally what attracts me to simple problems. What's the least amount of work I can do that ends up having big value? Before I've cleared all the simple problems of high value, it's just not for me to engage in solving hard problems. Too much risk, not enough ratio.

And remember this: “value” is measured from the customer’s/client’s perspective, not yours.

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Money ain't Nothin'

Barry Moltz points out this Entrepreneur.com article by Mark Diener about Mastering the Six Laws of Money.  Write these down and keep them in front of you.  A sampling:

1. Money sooner is better than money later. Eliminate the risk of not getting paid by getting your money upfront. This also tests whether the other side is serious.

2. Go to the source. Paul could wait until John gets cash from Peter, but if I were Paul, I'd rather call Peter myself. The names may be confusing, but the lesson's simple: Go upstream.

6. Get the right to offset. Savvy buyers won't pay everything when a deal closes. They insist on the right to hold back money to cover against future problems

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The Printable Partner - For Solos?

David Seah introduces his Printable CEO (remixed here), that he developed to help him in his solo business:

What I need is executive focus from a leader that understands how to grow my business, a manager that knows how to motivate me. I once read that the most effective executives ask themselves a simple question: What can I do to add value to the company? If the task at hand doesn’t add value, then screw it! Do something else that does!

Hiring my own personal CEO would be great, but who has the time and money to do an executive search? I’ve got MP3s to sort! So I did the next best thing: I designed a printable form to motivate my business development activities.

I really like this idea.  Keeping track of billable time is one thing, but David’s idea forces you to keep track of business-building time as well — all with an easy scoring system.  Simply brilliant.

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