In his Management: Tasks, Responsibilities, Practices, Peter Drucker wrote, "The final question needed in order to come to grips with business purpose and business mission is: 'What is value to the customer?'"
My VeraSage Institute colleagues and I have had the privilege of posing a similar question - Who's in charge of value in your firm? - to thousands of accountants around the world.
We are usually met with a momentary staring ovation, and then someone will inevitably shout out, "Everyone!"
Really?
I live in California, where I'm told everyone "owns" the Golden Gate Bridge. I would like to sell my portion; unfortunately, I encounter what economists call the "tragedy of the commons." If everyone owns something, no one does. No one has an incentive to protect and maintain the value of the asset in question.
Think public toilets.
Grading your pricers
Engage in this thought experiment: Rank the individuals in your accounting firm on their pricing skill, on a scale ranging from excellent through mediocre all the way to wimpy.
Given that pricing is the No. 1 driver of profitability in a professional service firm, why are people who are mediocre - and wimpy - allowed to price? Just because they are partners? If I'm a lousy auditor, you wouldn't let me near an audit engagement. Why let your sub-optimal pricers continue to handicap the profitability of your firm with bad pricing?
Cost is a fact, but pricing is a policy. Someone needs to own the value and pricing functions, taking responsibility for creating and capturing value. One throat to choke.
Who is in charge of these functions in your firm?
The world's first CVO
If you worked at Ward Wilson, a four-office, 10-partner, 100-member firm in Invercargill, New Zealand, your answer would be Brendon Harrex, who was recently appointed chief value officer, responsible for creating and capturing value across the entire firm.
Brendon, at age 31, is the youngest partner in the firm, and is an amazing visionary, bringing leadership not only to his firm, but to our entire profession. He understands the historical significance of his appointment, and realizes that it will change the way accountants think of value and pricing for posterity.
A recent McKinsey study demonstrated that a 1 percent improvement in pricing results in a nearly 12 percent increase in net income, dwarfing what can be achieved with a similar 1 percent improvement in reducing fixed or variable costs, or increasing volume. You can excel at rainmaking, but if you bring in that additional work at the wrong price, you are simply adding layers of mediocrity to your firm.
Other studies put this increase in the bottom line at between 20 percent to 50 percent, depending on the industry. In other words, value and pricing deserve a promotion, as this is a strategic function.
The Fortune 500 companies already understand this, as nearly all of them have a director of pricing who oversees a pricing department. UPS has approximately 200 pricers, while Honeywell has 150. Why are these organizations investing such an enormous amount of human capital in the pricing function?
Because they realize they can only cut costs, re-engineer, implement Total Quality Management and Six-Sigma programs to a certain point, and diminishing returns have already arrived. By focusing on creating value, and then capturing it through pricing more intelligently, they are realizing large returns for their investment.
More value, no timesheets
Meet Jayme Schneider, an accountant with Easdown Partners in Wagga Wagga, New South Wales, Australia. This five-partner, 24-member firm recently appointed Jayme as CVO, making her the first CVO in an accounting firm in Australia, and the first female, non-partner CVO in the world. Jayme is 27 years old, and will now have the same responsibilities, and accountability, that her counterpart Brendon has across the Tasman Sea.
Both Jayme and Brendon will now be responsible for implementing a value pricing culture in their respective firms. Hourly billing is dead, and no longer will either of these firms establish, quote or use hourly pricing with their customers.
Furthermore, Easdown Partners will eliminate timesheets as of July 1, 2005, while Ward Wilson will eliminate them on Nov. 1, 2005, joining some 300 other pioneering firms around the world that have trashed this antiquated measurement device, and blazing the trail for the rest of the profession.
Hourly rates and timesheets are internal-looking metrics that have absolutely nothing to do with the external value created for the customer. They don't measure things that are important to the customer (do you care how long it took for General Motors to build your car?), nor do they judge knowledge workers on the most important characteristics of being a true professional.
While the consultants to the profession are mired in the mentality that firms must measure every hour (witness their incessant benchmarking studies), no doubt these pioneering firms are going to take the arrows of incredulity, ridicule and scorn.
So be it, since not having timesheets will allow these firms to attract top talent much more easily than firms that intrinsically don't trust their people and hence make them account for every six minutes of their working. As finding and retaining human capital is the No. 1 issue that accounting firms around the world are confronting, imagine the competitive advantage that firms without timesheets will have in attracting talent.
We get what we measure
If this is true, isn't it time we measure what we want to become? No accountant entered the profession to bill the most hours. Who in your firm is measuring value?
An old proverb says, "Trees die from the top," and unless someone in your firm owns the value function, it will not get the proper executive attention, respect and resources it deserves.
Brendon and Jayme - as the world's first firm CVOs - provide light at the end of our tunnel vision. If you are competing against a firm with a CVO - either for customers or talent - you will be at a severe competitive disadvantage.
The Roman god Janus had two sets of eyes, one to see what lay behind and the other to see what lay ahead. A CVO is an outward-looking position, with duties carried out in a world of risk, uncertainty, innovation, and faith in the future, where value is solely determined by the customers that your firm is privileged to serve. If the only set of eyes you possess look behind you - at historical costs, efforts and hours billed - you are destined for a perilous future.
So, who's in charge of value in your firm?
Ron Baker is the founder of the VeraSage Institute, and the author of Professional's Guide to Value Pricing, Sixth Edition (CCH Inc.) and The Firm of the Future: A Guide for Accountants, Lawyers and Other Professional Services (John Wiley & Sons). Reach him at (707) 769-0965 or ron@verasage.com.
