David Maister and other prominent writers on professional services have all concluded that Law firms are over-managed and under-lead. . .
The fact that law firms simply suck in the leadership category is not worthy of discussion since that sad fact plainly speaks for itself. It is even more sad that, as David Maister so correctly points out, management has beat leadership and true people management is virtually non-existent in law firms today.
My experience is that law firms are full of people who cannot manage and people who refuse to be managed. I find this dichotomy to be quite interesting because you would think that it would take particularly skilled managers to manage a workforce of people who, by their nature "resists" being managed. Instead, firms have given up on trying to manage their people so there is very "management" going on at all.
When I ask Associates where they get feedback from they tell me they get a spreadsheet from "above" that lands on their desk every month with their billable hours on it (so they can worry endlessly about whether they are meeting their quotas).
When I ask what the reporting structure is at their firm most have no idea. When I ask when they last got a "review" with their manager they said "What? A Review?" Some said it happened once two years ago and never since. Most would never describe the person reviewing them as a manager at all. The title itself is simply nonexistent in law firms today. Think about it: The Managing Partner of a law firm does no really "manage" people either. Do you really think that the Partners at the big firm voted in Mr. Popular so that he could give them performance evaluations? Put simply, the Partners do no give ANYONE permission to manage them! They have autonomy! The only thing that Managing Partners really manage are big egos and fires in the firm.
So the problem with law firm structure (a dilution by consensus model) is that is lacks accountability and checks and balances altogether! Partners are not accountable to anyone. . . they are accountable to the collective only, none of which have any individual consent to be managing another. There is no Board of Directors holding the executives (Partners) accountable for being good. It is a corrupt system. . . the Partners are the Directors, the Shareholders, and everyone is the CEO of their own empire. There are no checks and balances at all.
It is no wonder why large firms are unable to build a consistent culture when they are stuck with the sub-cultures created by each Partner who leads a department.
It is no wonder why Partners can get away with treating Associates and Partners alike like crap and get away with it.
It is no wonder why the largest rainmakers are the ones who are allowed to sit on the compensation committees. One day they will accommodate themselves out of existence!
It is no wonder why people -- future leaders -- are not identified and developed within the firm.
It is no wonder why lawyers get away with hoarding their books of business -- the very people who are in a position to fix the problem of client hoarding are benefiting from their self-accommodation!
It is no wonder that attrition rates and burnout are at historical highs.
It is no wonder that a young attorney like myself finds no inspiration in the traditional model. . . one that has abandoned its young . . . one that, by its structure alone, speaks volumes about how they do not value who we are, how we develop as professionals, or whether we have a thriving organization to lead in decades to come.
It IS a wonder, however, why the most inquisitive of professionals do no themselves step off the treadmill once in awhile to take a look in the mirror. To see what you do from afar. To watch how the business model adversely effects your life and the lives of those around you. To escape for a moment the fact that you have spent more than two billing increments reading this blog and realize that you and everyone around you lives their lives this way. . . on a treadmill that simply will not stop . . . tick, tock, drop.
With all of the impact a new business model can have on the lives of professionals in this industry who are crying out for a better life. . . . It is NO WONDER why I would dedicate my professional life to abandoning the billable hour in favor of a model that makes sense and create a corporate structure with accountability, management, leadership, vision, and hope. . . . . . so that thousands fewer of us lawyers have to wake up every day on a treadmill, return home after our children sleep, and see every non-billed moment of our life as an opportunity cost. Finally, they can actually be happy! It would be my greatest pleasure to bring this sense of satisfaction to our people!
Wednesday, July 25, 2007
Monday, July 16, 2007
Distinguishing Price-Lead Costing from Cost-Plus Pricing
We are finally making some progress on the details of executing on a value-priced model. A reader and fellow attorney commented on a prior post with confusion on the differences between Cost Plus Pricing and Price-Lead Costing, writing:
"I am confused. Throughout your blog you mention that attorneys need to know their costs in order to have an adequate basis on whether to take on a job/client or not. Simple enough, get the accountants/bookeepers rolling and you have your cost basis per day/week/year.The confusion sets in when you say that you must get away from a cost + profit margin model and go to the more ephemeral value billing proposition. I get your value based theory, but I get lost on the details of arriving at "value" without factoring costs per day/week/year, etc. If what you are saying is like Lucky Brand - it costs them $5 per pair of jeans to make, but we as the client value them at $100.00 per pair of jean, then they have provided a value we are willing to pay for (don't get me going on Diesel or Sevens). Regardless, there is the value and then the price you are willing to pay for "fashion". Is this what you are talking about? In your paradigm, is cost important to know the minimum amount you would take from a client and still earn a profit?
On the one hand you state - know your costs. On the other you state that costs + margin should be avoided. Isn't it always cost plus margin. If you know your cost and propose a value billing system to your client, wouldn't it be cost + plus margin with a different definition of margin? "
This reader asks great questions and everyone needs to understand the differences and the subtleties here. First, let's do away with the notion that "billable" hours has anything at all to do with costing. . . IT DOES NOT!!! It costs you the same in salary, benefits, and overhead to pay your secretary whether she's writing a client letter or doing her nails! The attorney is absolutely right that I am saying you must "know your cost," but there are some key operational differences in the two business models:
I think the hang up is that the reader is trying to conceptualize costing the same way he does operating in his current billable hour environment In a cost-plus model, you mark up by a desired profit margin all of your resources so all that you have to account for is time multiplied by a rate. Can I challenge you to change your paradigm for a moment? Think of your business this way: (I simplify)
You have 10 attorneys at a fully loaded cost of $200k/yr each (average)
You have 5 paralegals fully loaded at $80k each
You have 5 Secretaries fully loaded at $60k each.
At a very simple level, your operational costs are $2.7Mil/yr whether you are all playing poker in he conference room or doing hard work. You know and I know that the cost by function can be broken down into monthly costs per resource, and that you have practiced long enough to get a sense of how many full-time equivalents at each level should be required to complete a trial or a legal project with NO CREATIVITY. Remember SCOPE???? This is really important because you have to first sit down with the client and SCOPE the job and let them define the desired boundaries. . . remember with a SCOPE defined you no longer have to "guess" what the boundaries will be because you will have defined it). Now, you are able to arrive at a rough cost.
NOW that we have "roughly" achieved a minimum cost (meaning that we need to add and charge for at least this value to make a profit), let's take a look at the differences between a Cost-Plus Model and a Value Priced model in operation by giving examples of each: first, note the language difference in Cost Plus Pricing (the word cost comes before pricing) and Price-Lead Costing (Price comes before true costing:
Cost-Plus Pricing law firm: Managing attorney evaluates the estimated "cost" of resources fully loaded to be $150,000 based on the Scope that customer provided in the fixed price agreement. As a firm, you decide that a desirable profit (mark-up) is 100 percent, so you give the customer a fixed price of $300,000 for the work. (Note: Take your Lucky Jeans example above . . . I just paid $100 each for the damn things even though I know it costs them $5 bucks to make. . . trust me, when I was shopping I was not thinking about how "lucky" I just make the Lucky Jeans executives, I was thinking about whether my butt looked good in the jeans (ask anyone in my firm!!!). I wish YOU were pricing those things because I could have paid much less than I valued them. Like the law example, you would have decided that 100 percent profit is good enough and in true cost-plus pricing fashion I would have myself a nice looking back end for only $10. I thank you deeply for the good deal! What is your problem? Look outside of your ivory tower. . . . see tall buildings. . . . your firm (and any other law firm) does not own a single one? Why the hell do you think that is? Do you think it could have anything to do with the hamster-wheel pricing model and minimizes profit in the name of risk-aversion? Well, the reason you think this form of pricing makes less sense in the law is because now you have shifted the risk of over-using resources to the firm without any premium in spite of the fact that customers will pay a premium to have peace of mind and certainty. . . . all things that you have not charged for.
Exemplar's Model: Take the same facts as above: We ROUGHLY estimated minimum resource requirements for the desired SCOPE at $150,000. Now, that number stays internal and is put away in a safe for the moment. Now, we use good questioning and understanding of what the customer VALUES to see what all of the non-time related value adds are in the job, what the customer's objectives are, and how we can be CREATIVE to accomplish the customer goals in less time (thus lower cost). We estimate the VALUE of this great creativity and work product to the client based on what THEY want. Remember I said we provide what customers VALUE, not that we provide a list of legal work we can do. Customers VALUE a lot of things. . . . hell, we'll send a town car to pick you up and serve you Godiva chocolates at every meeting if that is what you value. . . we are the Ritz! I will wear a pink underwear if a client values it as much as I do my Lucky Jeans and it only cost me $5 to buy it. Really, we give them a proposal offering a few different options of how we can achieve their objective and price based on the value to the client. Let's say we offer 3 options:
1- Bronze - (economy class)
2- Silver (Coach/Business class)
3- Gold (Premier Class)
If the VALUE of any package falls below our RESERVE price (the internal Least-Cost Estimate) then we will not include it in our proposal. You see, We are not really costing first, we are pricing first and ONLY comparing the Value Price against the Accept/Reject price of $150K.
Now, our work is not done: Project management and creativity is KEY to making a significant profit. Let's say you have a litigation and say our least-cost-estimate is $150k and our client valued it at and paid $450K. Now, I know that they want to resolve the matter as quickly as possible and they have certain bargaining points and are willing to give up others to get a resolution.. . . .we are now able to use effective and creative strategies to get exactly what the client wants WITHOUT spending all those resources. As a client, your interests are now aligned with mine. . . YOU WANT IT DONE!!!! So, If we resolve the case in 3 months at a resource cost of $80K, we made a significant profit and achieved a superior outcome to any law firm in the city. After all, when big firms bill by the hour why on holy earth would they not bill hours adding up to $450k if the client could afford it? Then, they have a big bill, a long trial with no peace of mind or resolution, pissed-off shareholders, and an executive team that is endlessly focused on your clock and not your superior strategy and business savvy.
So, in a Value Pricing model, pricing is made without regard to cost with the only exception that we quote only prices above a rough least-cost-estimate. Then, true costing is an exercise of effectiveness, efficiency, and creativity of our project managers.
I really hope this helped you reconcile my statements about knowing your cost yet not using a cost-plus model. At the end of your comment you wrote:"A little guidance would be helpful as getting away from the billable hour would be a life goal and free up a lot of extra time to spend with people who will appreciate your time more."I am everyday connected with the people who read my blog and whose lives could change if they were able to escape from the billable hour. I see attorneys burning out, losing loved-ones (divorce) and leaving the profession as a result of the never-ending billable hour wheel. My heart is with everyone of you who lives this way and I am living my professional life to help you to discover how you can change yours. . . so that you can see your family. . . see your children smile before they go to bed, to do the things you dreamed to do in your life . . . and to find new meaning in the work you do every day. . . so that you wake up one day and realize that it is not much work at all. It is a passion. A true profession!
"I am confused. Throughout your blog you mention that attorneys need to know their costs in order to have an adequate basis on whether to take on a job/client or not. Simple enough, get the accountants/bookeepers rolling and you have your cost basis per day/week/year.The confusion sets in when you say that you must get away from a cost + profit margin model and go to the more ephemeral value billing proposition. I get your value based theory, but I get lost on the details of arriving at "value" without factoring costs per day/week/year, etc. If what you are saying is like Lucky Brand - it costs them $5 per pair of jeans to make, but we as the client value them at $100.00 per pair of jean, then they have provided a value we are willing to pay for (don't get me going on Diesel or Sevens). Regardless, there is the value and then the price you are willing to pay for "fashion". Is this what you are talking about? In your paradigm, is cost important to know the minimum amount you would take from a client and still earn a profit?
On the one hand you state - know your costs. On the other you state that costs + margin should be avoided. Isn't it always cost plus margin. If you know your cost and propose a value billing system to your client, wouldn't it be cost + plus margin with a different definition of margin? "
This reader asks great questions and everyone needs to understand the differences and the subtleties here. First, let's do away with the notion that "billable" hours has anything at all to do with costing. . . IT DOES NOT!!! It costs you the same in salary, benefits, and overhead to pay your secretary whether she's writing a client letter or doing her nails! The attorney is absolutely right that I am saying you must "know your cost," but there are some key operational differences in the two business models:
I think the hang up is that the reader is trying to conceptualize costing the same way he does operating in his current billable hour environment In a cost-plus model, you mark up by a desired profit margin all of your resources so all that you have to account for is time multiplied by a rate. Can I challenge you to change your paradigm for a moment? Think of your business this way: (I simplify)
You have 10 attorneys at a fully loaded cost of $200k/yr each (average)
You have 5 paralegals fully loaded at $80k each
You have 5 Secretaries fully loaded at $60k each.
At a very simple level, your operational costs are $2.7Mil/yr whether you are all playing poker in he conference room or doing hard work. You know and I know that the cost by function can be broken down into monthly costs per resource, and that you have practiced long enough to get a sense of how many full-time equivalents at each level should be required to complete a trial or a legal project with NO CREATIVITY. Remember SCOPE???? This is really important because you have to first sit down with the client and SCOPE the job and let them define the desired boundaries. . . remember with a SCOPE defined you no longer have to "guess" what the boundaries will be because you will have defined it). Now, you are able to arrive at a rough cost.
NOW that we have "roughly" achieved a minimum cost (meaning that we need to add and charge for at least this value to make a profit), let's take a look at the differences between a Cost-Plus Model and a Value Priced model in operation by giving examples of each: first, note the language difference in Cost Plus Pricing (the word cost comes before pricing) and Price-Lead Costing (Price comes before true costing:
Cost-Plus Pricing law firm: Managing attorney evaluates the estimated "cost" of resources fully loaded to be $150,000 based on the Scope that customer provided in the fixed price agreement. As a firm, you decide that a desirable profit (mark-up) is 100 percent, so you give the customer a fixed price of $300,000 for the work. (Note: Take your Lucky Jeans example above . . . I just paid $100 each for the damn things even though I know it costs them $5 bucks to make. . . trust me, when I was shopping I was not thinking about how "lucky" I just make the Lucky Jeans executives, I was thinking about whether my butt looked good in the jeans (ask anyone in my firm!!!). I wish YOU were pricing those things because I could have paid much less than I valued them. Like the law example, you would have decided that 100 percent profit is good enough and in true cost-plus pricing fashion I would have myself a nice looking back end for only $10. I thank you deeply for the good deal! What is your problem? Look outside of your ivory tower. . . . see tall buildings. . . . your firm (and any other law firm) does not own a single one? Why the hell do you think that is? Do you think it could have anything to do with the hamster-wheel pricing model and minimizes profit in the name of risk-aversion? Well, the reason you think this form of pricing makes less sense in the law is because now you have shifted the risk of over-using resources to the firm without any premium in spite of the fact that customers will pay a premium to have peace of mind and certainty. . . . all things that you have not charged for.
Exemplar's Model: Take the same facts as above: We ROUGHLY estimated minimum resource requirements for the desired SCOPE at $150,000. Now, that number stays internal and is put away in a safe for the moment. Now, we use good questioning and understanding of what the customer VALUES to see what all of the non-time related value adds are in the job, what the customer's objectives are, and how we can be CREATIVE to accomplish the customer goals in less time (thus lower cost). We estimate the VALUE of this great creativity and work product to the client based on what THEY want. Remember I said we provide what customers VALUE, not that we provide a list of legal work we can do. Customers VALUE a lot of things. . . . hell, we'll send a town car to pick you up and serve you Godiva chocolates at every meeting if that is what you value. . . we are the Ritz! I will wear a pink underwear if a client values it as much as I do my Lucky Jeans and it only cost me $5 to buy it. Really, we give them a proposal offering a few different options of how we can achieve their objective and price based on the value to the client. Let's say we offer 3 options:
1- Bronze - (economy class)
2- Silver (Coach/Business class)
3- Gold (Premier Class)
If the VALUE of any package falls below our RESERVE price (the internal Least-Cost Estimate) then we will not include it in our proposal. You see, We are not really costing first, we are pricing first and ONLY comparing the Value Price against the Accept/Reject price of $150K.
Now, our work is not done: Project management and creativity is KEY to making a significant profit. Let's say you have a litigation and say our least-cost-estimate is $150k and our client valued it at and paid $450K. Now, I know that they want to resolve the matter as quickly as possible and they have certain bargaining points and are willing to give up others to get a resolution.. . . .we are now able to use effective and creative strategies to get exactly what the client wants WITHOUT spending all those resources. As a client, your interests are now aligned with mine. . . YOU WANT IT DONE!!!! So, If we resolve the case in 3 months at a resource cost of $80K, we made a significant profit and achieved a superior outcome to any law firm in the city. After all, when big firms bill by the hour why on holy earth would they not bill hours adding up to $450k if the client could afford it? Then, they have a big bill, a long trial with no peace of mind or resolution, pissed-off shareholders, and an executive team that is endlessly focused on your clock and not your superior strategy and business savvy.
So, in a Value Pricing model, pricing is made without regard to cost with the only exception that we quote only prices above a rough least-cost-estimate. Then, true costing is an exercise of effectiveness, efficiency, and creativity of our project managers.
I really hope this helped you reconcile my statements about knowing your cost yet not using a cost-plus model. At the end of your comment you wrote:"A little guidance would be helpful as getting away from the billable hour would be a life goal and free up a lot of extra time to spend with people who will appreciate your time more."I am everyday connected with the people who read my blog and whose lives could change if they were able to escape from the billable hour. I see attorneys burning out, losing loved-ones (divorce) and leaving the profession as a result of the never-ending billable hour wheel. My heart is with everyone of you who lives this way and I am living my professional life to help you to discover how you can change yours. . . so that you can see your family. . . see your children smile before they go to bed, to do the things you dreamed to do in your life . . . and to find new meaning in the work you do every day. . . so that you wake up one day and realize that it is not much work at all. It is a passion. A true profession!
Monday, July 09, 2007
What You Compensate is What You Get! Top Line Versus Bottom Line Growth and Why You Should Care.
I am having more fun blogging than ever before. . . finally, readers are asking the intelligent questions that will get us closer to making value pricing a reality. The last comment focuses on compensation systems:
"You mentioned that "we bonus our project managers for managing profitability". What measurement metrics do you use to do that? I had kicked around the idea of bonuses based on revenue per manager or % of deliverables completed on time... which would incentivize them to increase productivity but not necessarily profitability (they might use a quicker more senior resource to get the job done). How do you get to client profitability to incentivize lowest cost delivery?"
Let me first put my comments in context: The incentives that I discuss are ones that will work in a fixed price model but not in a billable hour world. The problem with billable hour firms is that the compensation systems are inherently short-sighted. They are based on lagging indicators of performance and are entirely focused on rewarding and promoting top-line growth (sales commission/origination credit), often at the expense of profitability. Since most law firms are still run by lawyers (and the ones running the show got to be the circus clowns by being the top top-line revenue producers in the firm), They simply do not understand their business well enough to know how to compensate for profitability (not to mention that the greedy bastards on the compensation committee, all who are top-producers and many who make the rules in their favor, have no incentive at all to explore the issue of profitability) I don't know about you, but I would rather have a $50Mil business that is 30 percent profitable than a $52Mil business that is 20 percent profitable.
Now onto some real answers. There were 2 questions presented here:
1) What measurement metrics do you use to bonus project managers for managing profitability
We take a top down approach to this. Remember, every organization has a 100 percent pie to divide up among its people. This game of compensation is really just about wealth redistribution in your organization. First, you should GRADE all of you clients, and instead of giving your people origination credits at the point of sale, wait a year and give the originator a bonus based on the "grade" of the client. After some time, you will realize that some rainmakers are generating top-line revenue growth by bringing in crappy clients. . . some who don't pay and others who are so happy that they will go tell all their cheap friends about you! Reward the RIGHT people for bringing in the RIGHT clients. You should always be grading your clients based on their profitability to the firm.
As for your project managers, the key is to think more broadly than professionals typically do. . . if your business is like ours in that we have long-term clients and not one-time deals, you want to compensate based on total profitability for the client account, NOT on a per-project basis. There are numerous valid business considerations for investing in loss-leaders or going above and beyond to wow a client. Project managers need the room to exercise discretion and then need to held accountable for making good decisions. I get hand-written letters from clients telling us how pleased they were with our service. I'll bonus any project manager who can produce a handwritten client letter! Why? If they took the time to write me a note they will certainly tell 10 of their business colleagues about us. . . and voila. . you have a sales force. Profitable? Certainly? Warm and fuzzy? OK, maybe that too.
Profitability has 2 components: Good Pricing, and Good Costing. Since a fixed price model is about letting the price determine the cost, project managers AND the sales team who made the value proposition are responsible for profitability together. Since in our business the pricing is not set by the project manager alone, but by a committee, there is a standardization of sorts for pricing in our organization. Therefore, what you will notice is that overall defects in profitability should be the responsibility of the pricing committee and project manager specific profitability problems can be taken into consideration in the total compensation scheme at year-end for each PM.
Here is my point: Project manager performance needs to be considered as a whole after multiple projects are completed because some projects will be winners and some may be losers. If you bonus a PM after a big winner and she bombs the next one, you did not reward performance you just rewarded luck at the expense of your year-end winner! Result: A wealth distribution system failure. If you know your business, I'll bet you can rank your top performers and your worse ones. Remember, the comp game is about wealth distribution. Take average salaries. Take your PMs. Rank your top PMs, Rank your Lowest PMs. (You will know who they are too). Take your pie and create a wealth distribution scale in excel that distributes the pie. . . more to the best, less to the worse. Simple, right? (if you have specific questions about profitability metrics, write me and email because it is the topic of a book rather than a blog)
2) How do you get to client profitability to incentivize lowest cost delivery?"
Great question. Notice the subtle distinction between client profitability and least-cost-delivery? What drives your business is client profitability. Ironically, PM's need to learn least-cost-delivery first and certainly need to know that least-cost delivery is NOT least-time-delivery! Why? Because PMs are often likely to think they should do something themselves instead of delegating because:
1) They are control freaks
2) They think they can do it better than you so they don't delegate, or
3) They just do it because they can get it done faster
Each one of these are TERRIBLE for profitability in your business. Control freaks simply don't think about profitability because they are so concerned with controlling everything that they care more about themselves than they do the business! "I can do it better than you" people have a problem because they think the game is about doing low-value (low challenge) work better than you and not about delegating so that they can improve on the high-value work the client really cares about. Time sensitive PMs who do things because they can do it faster than you are also missing the boat. I just want to look at the PM's in category 2 and 3 and just say "no shit! If I did something 10,000 times I would be able to do it better and faster than you too. Is that what you want to do with your life? Is that what kind of life our people should have? Because you can't learn how to delegate your work to someone who values a challenge you have essentially sentenced our younger work force to becoming expert document-reviewers!!!!!!! If they were to send you a hand-written card, what would it say? I'm almost certain it would read "HELP, I'm mired in discovery hell and have been down here for months. How about using some of my Harvard education and delegating some challenging work!?!?" Least-time delivery? Certainly not, but I am smart enough to know that you retain smart people by offering them as much challenge and responsibility as they can handle. . . . and that doing so is a big key to profitability in our organization.
Sunday, July 01, 2007
Intelligent Questions Deserve Intelligent Answers
Finally, a professional who commented on my last post asked some intelligent questions worthy of attention and discussion. For the purposes of this post, I will include his questions and comments in quotes and then answer them. Although there are far too many good questions here to answer them all in detail, I will choose a couple and we can move onto the rest in a future post. The professional asked:
"Do you use timesheets internally?I am having trouble letting go of timesheets for internal firm management and am not sure if I should even be trying to. Externally we fixed-price our services, but if I really think about it we arrive at our pricing by asking ourselves 1) what is a client willing to pay and 2)will it be profitable enough for it to make sense for us to service it. It is that second part that requires the measurement of time. Although the time we spend on a project does not dictate the value we create, it does dictate how profitable the firm can be."
Great question! The answer is NO WAY! Time sheets are like toilet paper in a normal business. Forget about professional service firms for a moment and think about the companies that are far more profitable and own billions of dollars in assets. Ask yourself this: Does their profitability depend on the COST of making and delivering their product? Hell yes it does!! News flash: Not a single one of those companies use timesheets and they make so much money it is silly. They all know who their top performers are, their best project managers, and their worse ones. What do you really think you are counting in 6-minute increments? It is like you are counting my pores to prove I have skin!
Here is what I am getting at: Your 2 step process is correct, so I want to give you credit for that, but the conclusions you are drawing from part 2 that are way off and counter to how the real world operates. Question 1 is properly 1) How much is this worth (and how can we design the services to be worth the most) to the client, and 2) What is the RESERVE price. You are correct that in a fixed-price world profits depend on lowest cost delivery. Where you made an error was taking the leap from understanding costing impacts profits to "we have to measure time in advance in order to understand how profitable we can be." Time is only one small part of costing and as our services begin to involve far more than just time, such as service costs, etc, to please the client, or a car service to pick up clients who do not want to drive into the city, you can see that the fascination with counting time is misleading at best.
First, pricing based on value requires that #2 have no impact on price. What you are trying to get at with understanding costing (NOT JUST TIME) to get to an ACCEPT/REJECT Price. This means you will go back to you intellectual "engineers" and see how efficiently they can use firm resources to accomplished the outcome outlined in the SCOPE section of your fixed-price agreement. Only good project managers will know how to do this well. The point is not to maximize profit with this exercise or even to estimate how long you "think" it will take, the point is to identify the lowest-cost-delivery" that would result in an acceptable profit. By doing this, you will know the lowest price that you will accept to do the work. If the value is 3x that price, you have a winner, if it is below the reserve price, you should REJECT the client.
On a side note, here is another problem with time: Most professionals don't understand their business well enough to use time estimates to understand cost. They are used to multiplying by Billable rates, not actual cost per day for the use of a resource. They also do not understand project management enough to realize how to use low-cost resources (NOTE: this is different from low-billable resources) to accomplish an end. Costing as an exercise should be fully-loaded and include more than time in order to be accurate.
"There is a reason that the Big 4 (very scalable, profitable and successful businesses) still use timesheets even when using value pricing. "
First, lawyers who say this do so to rationalize continuing a billing practice that started as an accident and everyone hates. The Big 4 is not value pricing for one, and yes there is a reason (which is neither good nor compelling as a reason for you): That is the way they have always done it!!
As the firm grows my personal involvement and knowledge of project profitability becomes further removed. Without timesheets how do you determine:1) Which jobs are least profitable and need to be re-priced or eliminated?2) Which resources are the most efficient and therefore should received bigger raises?3) How many engagements (and therefore how much revenue) an efficiently functioning delivery team can service at full capacity?"
GREAT QUESTIONS!!!! I could write a book about these! I will try not to, but here you go:
Let me first begin by challenging you here. You preface questions 1-3 with the statement "without timesheets how do you". My problem with that is this: You are assuming there is a relationship between timesheets and the answers to your questions. Prove it, you ask? Again, look at every single profitable company in this economy. . . they have fixed price products and services, no timesheets, and yet they know their price points, costs, which resources are most efficient, who performs best and they understand capacity limitations, etc. I really should write a separate blog about each of these topics, but put simply, the entire world economy works like this and proves that it works. Now, let's explore this in a professional services firm context: However, I will not, in answering your question, acknowledge that there is a relationship between ditching the timesheet as you know it and the questions you ask.
1) Part 1: Profitable JOBS is not you goal as a business. Profitable Clients is your goal: Distinguish between profitable jobs and profitable client. Timesheets distort reality and make for bad decisions. So what if a job is not profitable? What if you have a very profitable client and you decide to do it as a loss-leader? A look at the data might tell you that you need to raise your price, but simple business logic tells you that you did the right thing to "throw em a bone". So, don't lost the forest in the trees: Most lawyers are so afraid to be less profitable in 6-minute increments that they win the battle and lose the war: Higher profitability on a project, but less on average per client
Part 2: There is no such thing as re-pricing a job. It is either within the SCOPE or outside the SCOPE and requires a change order!
Here is the symptom that prompts the question and my diagnosis:
SYMPTOM-- Job 1 is taking too much time and we are losing money on this one
Problem 1
DIAGNOSIS 1
a) Poorly Defined Scope -- Whose fault is this? YOURS! If you Scoped the job properly, you would not have this problem. You should certainly not blame the client and raise the price. You should not fire them either. Remember, you are VALUE pricing. Just because you added $50k in value for $20k in price, remember that they still feel the value you add. WOW them at a loss and capture that value on the next job. Use it as an opportunity to show them what you can do.
b) Clear Scope, work is creeping outside of scope (Scope Creep)
Sometimes the people delivering the service are so far removed from the partners who sold the work and scoped it out that companies experience Scope Creep. Good communication and teamwork goes a long way here. Make sure the team understands boundaries and communicates to the relationship partner that they need to have another conversation with the client about a Change Order.
c) Clear Scope, Project Manager sucks
Again, some project managers will just suck. It is not the client's fault, right? It may cause you to think you underpriced a job but remember: If you actually price on value you simply CANNOT underprice a job. . . you may have taken in when you should not have, but sometimes people will project manage the job so terribly that you lose your shirt. Make sure you get them off the deal. . . . fast! Do not increase the price to the client, LOWER THEIR SALARY INSTEAD!!! Value price your people. You will get to pay your best more in the end!
d) Clear Scope, Error in Accept/Reject Process
Sometimes you scope the job right and every once in awhile realize that you should have rejected the client. If you want to make a lot of money you cannot be afraid to eat one every once in awhile! There is such a thing as a Risk/Reward Relationship in business!!!
e) Client is high maintenance and consuming more resources than expected:
2 choices. . . . 1) What would Donald Trump say ("yer fired!") OR 2) double the price
on the next job. Those clients know they are a pain in the butt and will pay for
someone to put up with them.
Your second Question:
2) Which resources are the most efficient and therefore should received bigger raises?
This has nothing to do with timesheets at all. I know who our most efficient workers and least efficient workers are. Most managers know this without any time accounting at all. How: You give them a bunch of work and see how much they put out and at what rate and quality. I never needed a timesheets Here is what we do: We bonus our project managers for managing profitably. It is their job to delegate internally to get the job done at lowest-cost delivery. Watch this: If someone is not pulling their weight what do you think will happen? Our project managers will not use them for a project because it will impact their bonus. OK . . . so how do you know your weakest players are who are not productive? They are the ones sitting around because none of our project managers want to give them work? What about our best ones? They are busy as hell and in high demand. NO TIMESHEETS REQUIRED! It is a beautiful thing! The best and worse ones self-identify through this system.
TIP: Identify a healthy profit and split the difference that your project managers can achieve above that amount. (remember: do this at a client level, not per-job. There are very compelling business motivations for doing a job or two at a loss. Walgreens happily sells potato chips and batteries at a loss knowing that you will come in and spend $10 more on other things.
Your last question I will leave to a future blog so I don't end up writing a book here.
The point here is this: Timesheets are toilet paper to a normal business. Time-accounting is NOT costing. It is a component of cost, and is becoming less and less as technology, benefits, and other value-added services enter the equation. Accounting for one's time to understand cost, at best, need not be done by minute or hour but instead at a very high level. You might ask your people what percentage of their time went to each of the top 5 accounts they worked on this month and you would get the information you need in order to add time in the rest of your costing calculation.
"Do you use timesheets internally?I am having trouble letting go of timesheets for internal firm management and am not sure if I should even be trying to. Externally we fixed-price our services, but if I really think about it we arrive at our pricing by asking ourselves 1) what is a client willing to pay and 2)will it be profitable enough for it to make sense for us to service it. It is that second part that requires the measurement of time. Although the time we spend on a project does not dictate the value we create, it does dictate how profitable the firm can be."
Great question! The answer is NO WAY! Time sheets are like toilet paper in a normal business. Forget about professional service firms for a moment and think about the companies that are far more profitable and own billions of dollars in assets. Ask yourself this: Does their profitability depend on the COST of making and delivering their product? Hell yes it does!! News flash: Not a single one of those companies use timesheets and they make so much money it is silly. They all know who their top performers are, their best project managers, and their worse ones. What do you really think you are counting in 6-minute increments? It is like you are counting my pores to prove I have skin!
Here is what I am getting at: Your 2 step process is correct, so I want to give you credit for that, but the conclusions you are drawing from part 2 that are way off and counter to how the real world operates. Question 1 is properly 1) How much is this worth (and how can we design the services to be worth the most) to the client, and 2) What is the RESERVE price. You are correct that in a fixed-price world profits depend on lowest cost delivery. Where you made an error was taking the leap from understanding costing impacts profits to "we have to measure time in advance in order to understand how profitable we can be." Time is only one small part of costing and as our services begin to involve far more than just time, such as service costs, etc, to please the client, or a car service to pick up clients who do not want to drive into the city, you can see that the fascination with counting time is misleading at best.
First, pricing based on value requires that #2 have no impact on price. What you are trying to get at with understanding costing (NOT JUST TIME) to get to an ACCEPT/REJECT Price. This means you will go back to you intellectual "engineers" and see how efficiently they can use firm resources to accomplished the outcome outlined in the SCOPE section of your fixed-price agreement. Only good project managers will know how to do this well. The point is not to maximize profit with this exercise or even to estimate how long you "think" it will take, the point is to identify the lowest-cost-delivery" that would result in an acceptable profit. By doing this, you will know the lowest price that you will accept to do the work. If the value is 3x that price, you have a winner, if it is below the reserve price, you should REJECT the client.
On a side note, here is another problem with time: Most professionals don't understand their business well enough to use time estimates to understand cost. They are used to multiplying by Billable rates, not actual cost per day for the use of a resource. They also do not understand project management enough to realize how to use low-cost resources (NOTE: this is different from low-billable resources) to accomplish an end. Costing as an exercise should be fully-loaded and include more than time in order to be accurate.
"There is a reason that the Big 4 (very scalable, profitable and successful businesses) still use timesheets even when using value pricing. "
First, lawyers who say this do so to rationalize continuing a billing practice that started as an accident and everyone hates. The Big 4 is not value pricing for one, and yes there is a reason (which is neither good nor compelling as a reason for you): That is the way they have always done it!!
As the firm grows my personal involvement and knowledge of project profitability becomes further removed. Without timesheets how do you determine:1) Which jobs are least profitable and need to be re-priced or eliminated?2) Which resources are the most efficient and therefore should received bigger raises?3) How many engagements (and therefore how much revenue) an efficiently functioning delivery team can service at full capacity?"
GREAT QUESTIONS!!!! I could write a book about these! I will try not to, but here you go:
Let me first begin by challenging you here. You preface questions 1-3 with the statement "without timesheets how do you". My problem with that is this: You are assuming there is a relationship between timesheets and the answers to your questions. Prove it, you ask? Again, look at every single profitable company in this economy. . . they have fixed price products and services, no timesheets, and yet they know their price points, costs, which resources are most efficient, who performs best and they understand capacity limitations, etc. I really should write a separate blog about each of these topics, but put simply, the entire world economy works like this and proves that it works. Now, let's explore this in a professional services firm context: However, I will not, in answering your question, acknowledge that there is a relationship between ditching the timesheet as you know it and the questions you ask.
1) Part 1: Profitable JOBS is not you goal as a business. Profitable Clients is your goal: Distinguish between profitable jobs and profitable client. Timesheets distort reality and make for bad decisions. So what if a job is not profitable? What if you have a very profitable client and you decide to do it as a loss-leader? A look at the data might tell you that you need to raise your price, but simple business logic tells you that you did the right thing to "throw em a bone". So, don't lost the forest in the trees: Most lawyers are so afraid to be less profitable in 6-minute increments that they win the battle and lose the war: Higher profitability on a project, but less on average per client
Part 2: There is no such thing as re-pricing a job. It is either within the SCOPE or outside the SCOPE and requires a change order!
Here is the symptom that prompts the question and my diagnosis:
SYMPTOM-- Job 1 is taking too much time and we are losing money on this one
Problem 1
DIAGNOSIS 1
a) Poorly Defined Scope -- Whose fault is this? YOURS! If you Scoped the job properly, you would not have this problem. You should certainly not blame the client and raise the price. You should not fire them either. Remember, you are VALUE pricing. Just because you added $50k in value for $20k in price, remember that they still feel the value you add. WOW them at a loss and capture that value on the next job. Use it as an opportunity to show them what you can do.
b) Clear Scope, work is creeping outside of scope (Scope Creep)
Sometimes the people delivering the service are so far removed from the partners who sold the work and scoped it out that companies experience Scope Creep. Good communication and teamwork goes a long way here. Make sure the team understands boundaries and communicates to the relationship partner that they need to have another conversation with the client about a Change Order.
c) Clear Scope, Project Manager sucks
Again, some project managers will just suck. It is not the client's fault, right? It may cause you to think you underpriced a job but remember: If you actually price on value you simply CANNOT underprice a job. . . you may have taken in when you should not have, but sometimes people will project manage the job so terribly that you lose your shirt. Make sure you get them off the deal. . . . fast! Do not increase the price to the client, LOWER THEIR SALARY INSTEAD!!! Value price your people. You will get to pay your best more in the end!
d) Clear Scope, Error in Accept/Reject Process
Sometimes you scope the job right and every once in awhile realize that you should have rejected the client. If you want to make a lot of money you cannot be afraid to eat one every once in awhile! There is such a thing as a Risk/Reward Relationship in business!!!
e) Client is high maintenance and consuming more resources than expected:
2 choices. . . . 1) What would Donald Trump say ("yer fired!") OR 2) double the price
on the next job. Those clients know they are a pain in the butt and will pay for
someone to put up with them.
Your second Question:
2) Which resources are the most efficient and therefore should received bigger raises?
This has nothing to do with timesheets at all. I know who our most efficient workers and least efficient workers are. Most managers know this without any time accounting at all. How: You give them a bunch of work and see how much they put out and at what rate and quality. I never needed a timesheets Here is what we do: We bonus our project managers for managing profitably. It is their job to delegate internally to get the job done at lowest-cost delivery. Watch this: If someone is not pulling their weight what do you think will happen? Our project managers will not use them for a project because it will impact their bonus. OK . . . so how do you know your weakest players are who are not productive? They are the ones sitting around because none of our project managers want to give them work? What about our best ones? They are busy as hell and in high demand. NO TIMESHEETS REQUIRED! It is a beautiful thing! The best and worse ones self-identify through this system.
TIP: Identify a healthy profit and split the difference that your project managers can achieve above that amount. (remember: do this at a client level, not per-job. There are very compelling business motivations for doing a job or two at a loss. Walgreens happily sells potato chips and batteries at a loss knowing that you will come in and spend $10 more on other things.
Your last question I will leave to a future blog so I don't end up writing a book here.
The point here is this: Timesheets are toilet paper to a normal business. Time-accounting is NOT costing. It is a component of cost, and is becoming less and less as technology, benefits, and other value-added services enter the equation. Accounting for one's time to understand cost, at best, need not be done by minute or hour but instead at a very high level. You might ask your people what percentage of their time went to each of the top 5 accounts they worked on this month and you would get the information you need in order to add time in the rest of your costing calculation.
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