Tuesday, May 29, 2007

Note To The CFO: Lighten Up A Bit, Will You? - Part II

As someone who has served as a CFO and holds two degrees in finance you would think that I am a person that lives by the numbers. What I have come to realize in my professional experience as a Chief Financial Officer is the true limitations of numbers in providing guidance for running a company. We have all heard that numbers can tell you whatever you want to see in them. I remember reading in Ron Baker's Book "The Firm of the Future" that "according to numbers, everyone in this country has one testicle" (half of us are women). With technology and data capacity so great, it seems like we collect data just because we can and not because someone sat down and did the math and determined that the cost of keeping such vast amounts of data and creating hundreds of jobs to interpret it actually produces a positive return on investment. Take law firms, for instance. They measure their entire operation in 6-minute resolution, forcing their entire workforce to adhere to a regime that by all accounts "changes the way you live your life." The partners who operate the firm actually believe they need to count this way to be profitable in spite of the fact that the most profitable companies and industries in the world operate just fine without knowing where every minute went. In the meantime, countless hours are spent just counting time instead of actually doing something productive with your life.The biggest question that skeptical and fearful attorneys ask me is "how do you know you are profitable if you do not count every 6-minutes." After a moment of internal giggling (because I have worked the real world and understand quite well that no other business runs this way) I answer "Lighten Up A Bit, Will You? You don't need to know whether every single project you did made you a profit. What you need to know is that your business is operating profitably." The savvy questioner understands what I just said while the not-so-savvy one just sits there with a blank look on his face as if to say "Huh?". For those of you finance people out there, it is called portfolio theory. An investor has a portfolio of stocks (just like a law firm does clients) and the job of the portfolio manager is not to make sure every stock goes up, it is her job to make sure that the portfolio is profitable as a whole. This entails managing the portfolio as a "big picture," eliminating non-performers and increasing the investment in the winners (in law firms, this is called forced churn) Clearly, every organization has metrics that help guide you in making informed decisions for the organization, but Exemplar recognizes that myopia will not make the firm more profitable; that making thousands of highly educated people count their lives in 6-minute increments and sending them home to their loved ones trained to think of personal time as an "opportunity cost" is not just cruel but inhumane. At Exemplar, we are happy to come to work every day because of the opportunity to use every bit of our intellectual capital on activities that help our clients achieve success in the marketplace. We recognize that there is a high correlation between happy people and customer satisfaction (See Southwest Airlines), and thus profitability. My message to those who live by the clock is to "Lighten up a bit. Let your hair down. Manage your portfolio and stop driving your people crazy. They will love you for it and your clients will notice the difference. Ours certainly have!"

Tuesday, May 15, 2007

Embracing The Values: The Balance Between Growth and Excellence

In this post I would like to share some of my personal thoughts and challenges that weigh on my mind as I am building Exemplar. This is an act of crossing one of my hands in yours by sharing the balacing act that we face as leaders trying to build an organization of Excellence in the legal and business community. It is about values.

I have always believed that the "right people" are key to building an organization that cannot be beat. My belief was confirmed last year when I met Jack Welch and heard him say that the HR function was most important function in the organization next to the Chief financial Officer. Jack Welch went on to explain how he only hired the right people 50 percent of the time at the start of his career and it took him 30 years to get to an 80 percent accuracy rate. What he was really telling us was that 5 out of every 5 people were the WRONG people and what all of us business people know so well at a gut level that it is just as important to know how to dispose of the WRONG people as it is to bring in the RIGHT people! "Hire slow, fire fast" is the common wisdom . . . which runs against every instinct I have as a young leader because I believe in people so very much that look for reasons that they can succeed with more support. Yet, the leaders and mentors that I look up to all reinforce how important it is to have the right people on the bus, and, more importantly, get the wrong ones off. . . . fast!

I have grown more as a professional in the past 2 years of the life of Exemplar than ever in my professional life. I have learned about what people stand for, the stands they make or are too cowardly to take. . . the things that move them and the things that they won't move on at all. And for all of these lessons I have never felt more passionate about anything than building an organization around core values and principles that I cannot, must not, compromise on. . . at first for myself, and now for the people who have joined our team depending on me to make sure that we stay true to the values that attracted them to join the quest for Excellence from the beginning. I have learned that we are not hiring for skill, but instead for character. We are not hiring for the things that school can teach you but the gifts your parents should have given you as a child. Skill may get them a phone call, but character and values get you in the door. Over the past couple of years I have been faced with the opportunity to triple or quadruple revenues at the expense of our core principles, to obtain near-immediate success for only the soul of the firm, or grow our attorney base by leaps and bounds were it not for our values. As a young and impatient leader, I want so much to grow at the speed that clients demand it or with the pace that attorneys are knocking at the door to join. Were it not for everything that we stand for as an organization, only "Excellence," we could double tomorrow.

In my short life I have seen the power of positive people empower and inspire our people to greatness and I have seen the tyranny of distrust and negativity tear down the walls the people put their hearts on the line to build, and at some point I decided that the cost of the wrong people is TOO HIGH. The kind of change we want to inspire in our profession is the kind that necessitates only the strongest leadership, un-tempted by greed or by false possibility and with an unending conviction to succeed. Leadership starts at the top and as a leader I must accept that the Exemplar standards which I wake up every day and strive to live up to fall first on my shoulders above anyone else. . . they help me to be a better person and to be a living example to our people. And so in the infinite wisdom of Jack Welch I have learned to hire slow in spite of the wealth of interest in our model and to hire for character. . . the things that great leaders are made of. I can teach skill, but I cannot teach integrity. I can train a corporate lawyer but I cannot teach trust. I can show you how to build a company but cannot teach you to respect the janitor. These are things your parents should have taught you long ago. And so I continue down the road with my monogram on one sleeve and my heart on the other. . . values intact and the vision alive and well. I am rich in my heart knowing that we are taking the right steps to build a great organization.

I had drinks with a gentleman who was of high rank in the US Military who recently told me "you've got to bleed to lead," which I cross referenced with a quote that leaders "bleed willingly and joyfully" to endure the lessons that are too difficult for the rest, and pass on the bits of wisdom that make this life worthwhile and make a real difference in the lives of others. To what end, you ask? When I started Exemplar someone asked me why I would take on such an enormous challenge as a young professional. . . why endeavor to inspire transformational change? Almost out of instinct I responded: "Because I can, I must."

Sunday, May 06, 2007

Pricing Misconception #2: The Difference Between Cost-Based Pricing and Price-Lead Costing

In this post I would like to talk about another big misconception that many attorneys have about using a fixed-priced model. The largest one has to do with understanding how, exactly, we arrive at a price. Many attorneys think that the trick to setting a price has to do with estimating how long it will take to do a job. That is entirely incorrect. There are numerous reasons why this practice will not work:

1) It assumes you know
2) In a multi-person organization it does no consider the differences in costs associated with using different human and other resources
3) It assumes that you cannot get it done faster or achieve the outcome more creatively
4) It is inherently task oriented because you are attempting to estimate the time to complete tasks -- this is backwards because the client is not coming to you to buy "tasks," the client is buying an outcome. You cannot estimate the time of an outcome. . . so STOP TRYING!!
5) Once you estimate time in order to price, you are less likely to be resourceful and think about how you can accomplish the outcome in less time
6) All of this brain twisting is inward-facing. . . it is all about you. . . if you don't charge by the hour then you have to retrain-your-brain to understand that clients really don't care what you do with every hour of your day. They want results.

I could go on forever, but to put it simply these are examples of Cost-Based Pricing. It is a LOSING proposition to price based on cost. The client does NOT CARE how much it costs you to do work. They care how much they VALUE the work you do. I know your ego is already big, so stop thinking about yourself and start thinking about VALUE TO THE CLIENT!

Studies of the most profitable companies in America show that they price based on the value of the good or service to the client, NOT based on cost plus a margin. Anyone who thinks it cannot be done has simply no done their homework. . . . most attorneys do not know how to comprehend value because they spend their entire careers looking inward at how much "time" they take and what "tasks" they do to justify their rates. Value pricing looks only at the client. unlike the most profitable companies who operate on a Value Pricing model (this does not mean cheap, it is the name of the pricing theory), attorneys have the luxury of meeting one-on-one with each customer and ask questions to determine how much it is worth to each of them. With this, attorneys (and accountants) can do a much better job of determining a price based on value than other businesses.

How are we profitable by pricing based on value?

1) We work with the client to define the SCOPE of the work, defined in outcomes NOT in tasks
2) We use project management skills to have the appropriate human resources doing work at the right level

So, If you lose money on a Value-Price model, you are most likely doing so because:
1) You defined the scope too broadly, or your proposal is task-heavy
2) You did not manage the SCOPE and are now doing work that the client did not originally want without getting paid for it!
3) Poor Project Management Skills: This is a huge problem. Now, instead of thinking of yourself as the person who does all of the work, you need to think about how to get it does cost-effectively. Profitability is improved in our model through balancing cost-efficiency with winning results every time.

There are several books written only on the topic of project management so I will not attempt to summarize them in a blog. The point is that there is a lot more to being profitable in a fixed price model than meets the eye. If you are curious how to pull it off, you really need to do your homework. Understand Project Management, delegation, Scoping for outcome, managing scope, and understanding and communicating value. If you understand these you will be well on your way to success in a value-priced model. Give it a try: It will change your life and your clients will thank you!

Questions: Post a comment and we'll discuss!