Do you know anyone who was motivated going into, or coming out of, their annual performance appraisal? Most organizations and employees are dissatisfied with the performance appraisal process, so it remains a curiosity why this methodology continues to exist. Performance appraisals don’t improve performance and they don’t drive careers; they are an incidental effect of other dynamic systems. In essence, appraisals are the paper-shuffling ritual that sanctifies decisions already made. Ed and Ron will discuss several companies that have ditched this anachronistic practice for processes that actually improve performance.
This week, Ron and Ed profiled Frédéric Bastiat, a French economist and author who was a prominent member of the French Liberal School. He introduced the Parable of the Broken Window. He was also a Freemason, and member of the French National Assembly.
As a strong advocate of classical liberalism and the economics of Adam Smith, his views favoring free trade and opposing protectionism provided a basis for libertarian capitalism and the Austrian School.
The focus of our conversation will be around the works published in the free eBook entitled, The Essential Bastiat, published by the Foundation for Economic Education. Click on the link to get your copy.
“Frédéric Bastiat was the most brilliant economic journalist who ever lived.” –Joseph Schumpeter (1954)
Bastiat was an indefatigable advocate free trade, laissez-faire policies, unrelenting debater and statesman. He’s often compared to Voltaire and Benjamin Franklin, integrity, purity, and elegance.
He was unrivaled in exposing fallacies, using reductio ad absurdum.
He attacked statism of all kinds—socialism, communism, utopianism, and mercantilism, labor theory of value, exploitation theories.
Born June 29, 1801 in Bayonne, the south of France and tragically died young on December 24, 1850. He had poor health and weak lungs his whole life.
Son of a landowner and merchant in Spanish trade. His mother died when he was seven, father when he was nine, raised by his aunt and grandfather. Strong believer in the Catholic faith.
Heavily influenced by Jean-Baptise Say and Adam Smith.
In 1846, he moved to Paris, writing on free trade and in 1848 the peasants in France rebelled against the French monarchy, and their rallying cry was socialism.
Bastiat wrote of the rebellion: “We have tried so many things; when shall we try the simplest of all: freedom?”
He elected to the National Assembly in 1848, and was vice president of the finance committee. He sat on the left side, where the liberals and radicals sat.
Henry Hazlitt (1894-1993), author of Economics in One Lesson, 1946, has often been called a modern-day Bastiat. We will profile Hazlitt in a future Memorable Mentors show.
In 1843 Karl Marx moved to Paris to become editor of a monthly German magazine. He met Friedrich Engels in Paris, who became his life long collaborator.
Marx labeled Bastiat: the most “superficial apologist of the vulgar economy.”
We discussed the five essays included in the free FEE book, mentioned in the introduction above. Here are some excerpts.
The Youth of France
Are men’s interests, when left to themselves, harmonious or antagonistic?
Socialists love for society they dreamed up; actual society cannot be destroyed soon enough.
Socialism, like astrology and alchemy, proceeds by way of imagination.
Political economy, like astronomy and chemistry, proceeds by way of observation.
Deny evil! Deny pain! Who could? We are talking about mankind.
For the laws of Providence to be harmonious, it’s not necessary they exclude evil.
Since man is free, he can choose; since he can choose, he can err; since he can err, he can suffer.
What are the things men have right to impose upon another by force? I know of only one, and that’s justice.
What Is Seen and What Is Not Seen
The difference between good and bad economist, whole difference: the bad one takes account of the visible effect; the good takes account both of the effects which are seen, and also those which are necessary to foresee.
It almost always happens when immediate consequence is favorable, the ultimate consequences are fatal, and the converse.
We learn this lesson from two masters: experience and foresight. Experience teaches effectually, but brutally.
Society loses the value of things which are uselessly destroyed.
How much trade would gain by the burning of Paris?
If the nation profits from the Army, then we should enroll the entire male population.
If we disapprove of State support, we are supposed to disapprove of the thing itself, like the arts, education, health, environment, public works, etc.
Section VIII. Machinery
A curse on machines, is to curse the spirit of humanity!
If true, there is no activity, prosperity, wealth, or happiness possible for any people, except those who are stupid and inert, and to whom God has not granted the fatal gift of knowing how to think, to combine, invent.
All men seek to obtain the greatest amount of gratification with the smallest possible amount of labor.
If a machine discharges a workman: the seen is there’s an unemployed worker but there’s also a capitalist with an unemployed franc.
What is saved by one, profits all.
Probably Bastiat’s most famous writing: “A Petition: From the Manufacturers of Candles, Tapers, Lanterns, sticks, Street Lamps, Snuffers, and Extinguishers, and from Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting.”
We are suffering from unfair competition at a fantastically low price: the sun.
Please pass a law ordering the closing of all windows, skylights, shutters, curtains, and blinds.
A Negative Railroad
Should there be a break in the tracks at Bordeaux on hte railroad from Paris to Spain? It would be profitable for boatmen, porters, hotels, taverns, etc.
Then we shall end by having a railroad composed of a whole series of breaks in the tracks, i.e., a negative railroad.
Life, liberty, and property do not exist because men have made laws. On the contrary, it was the fact that life, liberty, and property existed beforehand that caused men to make laws in the first place.
Law has been perverted by the influence of two different causes: stupid greed and false philanthropy.
Labor is pain, so history shows man will resort to plunder.
Look at the USA . There’s no country in the world where the law is kept more within its proper domain: the protection of every person’s liberty and property.
But, there are two issues that have always endangered the public peace.
Slavery is a violation, by law, of liberty. Tariff, by law, of property.
Socialists rely on the law; they practice legal plunder, not illegal plunder.
Other Bastiat Wit
If exports are good, and imports are bad, then we should sink the ships at sea.
The Right Hand and the Left (a Report to the King). This is one of Ron’s favorite of Bastiat, and we believe it applies to hourly billing (see Ron’s article from a Harcourt Brace Newsletter, from October 1997, posted on the VeraSage site). Here is the crux of the argument.
Deep study of the protectionist system has revealed to us this syllogism:
- The more one works, the richer one is.
- The more difficulties one has to overcome, the more one works.
- Ergo, the more difficulties one has to overcome, the richer one is.
- We propose that you forbid your loyal subjects to use their right hands.
No longer permissible to work except with the foot. As a last resort, we should take recourse to the limitless possibilities of amputation.
George Orwell wrote, “Each joke is a tiny revolution.”
Bastiat killed protectionism and socialism with ridicule.
Consumption is the end of all economic activity, production merely the means.
To sacrifice the consumer’s interest to that of the producer is the sacrifice of the end to the means. The interest of the consumer is identical to mankind.
People insist, it’s not enough to tear down; you must offer something constructive. I, for my part, think that to tear down an error is to build up the truth that stands opposed to it.
No solitary man would break his own tools to occupy his labor.
To maintain that the time will every come when human labor will lack employment, it would be necessary to prove that mankind will cease to encounter obstacles.
Only two ways to preserve life: production or plunder.
Libertas book, The Tuttle Twins Learn About the Law
We were thrilled to interview Gary and Jim Boomer, the father/son team at the head of Boomer Consulting. Both are recognized as among the most influential people in the accounting profession.
L. Gary Boomer is the Visionary & Strategist of Boomer Consulting, Inc., an organization that provides consulting services and peer communities to leading accounting firms. BCI's vision is to make you more successful and future ready. The areas of focus are: Planning, People and Processes with technology as the accelerator.
Jim Boomer is the CEO at Boomer Consulting, Inc. He is a;so the director of the Boomer Technology Circles, The Producer Circle, The CIO Advantage and an expert on managing technology within an accounting firm. He also serves as a strategic planning and technology consultant and firm adviser to CPA firms across the country.
Segment One Questions
Gary, how many years in a row have you made the Top 100 Most Influential People in Accounting list? (Gary: “It’s based on frequent flyer miles.”).
Tell us about your backgrounds?
Jim, you worked at Arthur Andersen. What was it like, during the Enron scandal, to think you were part of a firm with ethical lapses, especially from a leadership perspective?
Gary, you say the difference between the good and great firms is leadership. What does that mean to you?
Why aren’t CPA firms as focused as, say, Apple?
Segment Two Questions
Joe Woodard refers to Gary as the “pied piper of the top 100 firms.” What do you both think are the major trends, along with biggest challenges and opportunities facing the accounting profession?
Do you see a bold enough vision coming from CPA firm leaders? They love to talk about increasing realization by 4%, but is the vision inspiring?
We’ve been hearing for decades about how important it is for the CPA profession to move from compliance to advisory services. Do you see a lot of movement in advisory services within the larger firms?
If it’s about skill-set, tool-set and mind-set, will firms have to expand the labor pool from which they draw, and not just hire people with technical accounting education?
When you look at Top 100 firms’ revenue that comes from consulting, it’s usually higher than for the firms below the Top 100. Would you agree with that?
Segment Three Questions
What are the implications of Blockchain, triple entry accounting, and Bitcoin for the accounting profession?
With Amazon’s Echo (“Alexa”), can you see a day where someone could ask, “Hey, Alexa, what’s the name of the nearest CPA firm that can handle X?” Or even, Alexa answering a question that normally would be asked of the CPA?
Segment Four Questions
In specific firms, there are a lot of initiatives—from reforming annual performance appraisals, adopting knowledge management, cloud accounting, value pricing, etc.—that require change management. Do you see much innovation in management philosophy among the large firms?
What’s going on with Value Pricing within the Top 100 firms? Is the leadership really ready to embrace it?
Ron and Ed discussed memorable guests and show topics they had on during 2016.
It’s nearly impossible to choose favorite guests, since they are all good! But we asked each other, so here are our choices for 2016, which encompass shows #74 through #122, including the link to the archived show:
- Daniel Susskind (#74)—because of the chain reaction his book kicked off, The Future of the Professions.
- Colonel Rick Searfoss, #91, Astronaut
- Steven Landsburg, #106, economist
- David Friedman, #117, economist
- Dr. Reginald Lee, #112, author of Lies, Damned Lies, and Cost Accounting
- Baruch Lev, #101, author of The End of Accounting
- Daniel Susskind, (#74)— because of the chain reaction his book kicked off, The Future of the Professions.
- Mark Koziel, (#75), VP of Firm Services & Global Alliances at the AICPA, with his reaction to the Susskind’s book, and the state of the accounting profession.
- Paul Kennedy, VeraSage Institute colleague, told his compelling OBK story (#84).
- Rabbi Lapin (#86), our first two-time guest returned in 2016.
- Doug Sleeter, (#96) + (#99), for being Bitcoin and Blockchain obsessed.
- Gregory LaFollette, (#104), for his views on technology and the future of the accounting profession.
- We also did our #100th show.
Favorite Show Topics
Ron: Trashing the Timesheet, #109
Ed: A Check for Everyone? The Basic Income Idea, (#95)
Thank You to Our Audience!
Thank you, thank you, thank you, to our Audience! You are the reason we are here, and we will strive to continue to add value by bringing you leading edge guests and ideas.
Our Latest iTunes Review
LizCPAWriter on December 19, 2016 writes: “Always Though Provoking - I Always learn something new on this podcast. Ron and Ed bring in fascinating guests with interesting points of view. Yes, they are opinionated, but they are firmly committed to the survival of accounting and business advisory work as viable careers. The world is changing and so must we if we are to continue providing value.”
Thank you, Liz.
Segment Two: Favorite Books from 2016
- The Scandal of Money: Why Wall Street Recovers but the Economy Never Does, George Gilder
- Precision, Timothy Chou
- The Scandal of Money: Why Wall Street Recovers but the Economy Never Does, George Gilder
- John Tamny, Who Needs the Fed?
- Blockchain Revolution: How the Technology Behind Bitcoin is Changing Money, Business, and the World, Don and Alex Tapscott
- The End of Accounting, Baruch Lev, Feng Gu
- Lies, Damned Lies, and Cost Accounting: How Capacity Management Enables Improved Cost and Cash Flow Management, Dr. Reginald Lee
- A Torch Kept Lit: Great Lives of the 20th Century, James Rosen, editor. A compendium of William F. Buckley, Jr.’s eulogies. Beautifully written about interesting historical figures of the 20th century.
Ron’s Best Book of 2016
The Kingdom of Speech, Tom Wolfe. Here’s some thought-provoking excerpts:
- “The most fundamental questions about the origins and evolution of our linguistic capacity remain as mysterious as ever”
- “Speech is not one of man’s several unique attributes—speech is the attribute of all attributes!”
- “One hundred and fifty years since the Theory of Evolution was announced, and they had learned…nothing…in that same century and a half, Einstein discovered the speed of light and the relativity of speed, time, and distance…Pasteur discovered that microorganisms, DNA, 150 years’ worth of linguists, biologists, anthropologists, discovered…nothing…about language.”
- “Darwin had an even bigger problem: a huge gap in evidence when it came to language, which set humans far apart from any animal ancestors.”
- “He couldn’t find one shred of solid evidence that human speech had evolved from animals…seemed to have just popped up into the mouths of human beings from out of nowhere.”
- “Darwin had fallen into the trap of cosmogonism—the compulsion to find the ever-elusive Theory of Everything…”
Ed mentioned research being done on evolution and consciousness, video interview with Donald Hoffman
Insert video interview with Donald Hoffman
Also, a speech by George Gilder at the 25th anniversary of the founding of the Discovery Institute: “Leap Before You Look: Reflections on the Mission and “Evolution” of Discovery Institute,” from December 2, 2016.
Segment Three: R.I.P.
- First Lady Nancy Reagan
- John Glenn
- Harper Lee, author of To Kill a Mockingbird, from Monroeville, Alabama
- Supreme Court Justice Antonin Scalia
- Thomas Hayden, 60s radical and former husband of Jane Fonda
- Janet Reno
- Arnold Palmer
- Boxing champ Muhammad Ali
- Florence Henderson
- Robert Vaughn
- Doris Roberts
- Gene Wilder
- Patty Duke
- Abe Vigoda
- Carrie Fisher
- Debbie Reynolds
- Garry Shandling , he was 66 (not in his 50s as Ron said)
- George Michaels
- David Bowie
- Merle Haggard
- Songwriters Leonard Cohen and Leon Russell
Article by economist Steven Horwitz predicting that we will see an acceleration of death of famous people, as the Baby Boom generation starts to age.
Fidel Castro, whose funeral car had to be pushed. There were some great Tweets about this, such as, “Even Hell is rejecting him,” and “Who says the embargo didn’t work.”
Ron mentioned a quote from the Talmud, but got it backwards. It is actually a celebration of those who have passed. Here it is:
In a harbor, two ships sailed: one setting forth on a voyage, the other coming home to port. Everyone cheered the ship going out, but the ship sailing in was scarcely noticed. To this, a wise man said: “Do not rejoice over a ship setting out to sea, for you cannot know what terrible storms it may encounter and what fearful dangers it may have to endure. Rejoice rather over the ship that has safely reached port and brings its passengers home in peace.
And this is the way of the world: When a child is born, all rejoice; when someone dies, all weep. We should do the opposite. For no one can tell what trials and travails await a newborn child, but when a mortal dies in peace, we should rejoice, for he has completed a long journey, and there is no greater boon than to leave this world with the imperishable crown of a good name.
Segment Four: Miscellaneous
Hat tip to John Chisholm (our VeraSage colleague) and listener Bryce for passing along this excellent article from December 21, 2016, in The Guardian: “Why time management is ruining our lives,” by Oliver Burkeman.
Here are some interesting tidbits from the article, which we highly recommend:
- Merlin Mann of “Inbox Zero” fame, which the New Yorker said was “halfway between Scientology and Zen,’ while the NY Post called it “Bullshit,” is discussed.
- The better you get at time management, the less time you feel you have.
- The article lays waste to Frederick Taylor, the founder of “Scientific Management,” which was also the theme of our very first show on The Soul of Enterprise.
- Creativity requires more slack, says Tom DeMarco.
- Time management and efficiency is really nothing more than the fear of death: to die with the sense of nothing left undone: it’s nothing less than the promise of immortality by other means.
- But a gift of being alive is never to be done.
The new Star Wars movie, Rogue One, has a controversy. Peter Cushing has been dead since 1994, but another actor plays him, with Cushing’s face CGI’d on him, so who gets the royalty?
Pot > Starbucks?
Three-fifths of the United States population live in states that allow cannabis (some 28 states allow some form of use, either recreational or medical).
32 million Americans use cannabis, a $6 billion industry in 2015, expected to triple by 2020.
Bigger firms may have edge (Coca-Cola licensing bottlers), interstate bans, regulations, etc. Tobacco companies might come into the industry and cause consolidation.
Colorado now has more cannabis stores than Starbucks outlets!
Are you in the top one percent?
According to the Global Wealth Report by the Credit Suisse Research Institute:
- Survey counts household assets, not income
- $2,222 in net worth makes you wealthier than half the world’s population
- $71,560 puts you in the top tenth
- $744,400, you are in the global 1%
- World’s wealth = $256 trillion (3.4x world’s GDP)
- This wealth divided equally = $52,819/person
- Actual, top 10% own (created) 89% of it
- Over 40% of Americans belong to the top tenth
- 18M to top 1%
- 21 million have debts that exceed assets
Are our pets in the top one percent?
San Francisco and Seattle have more owned dogs than children. Americans spent $400+ million on Halloween costumes for its pets. The Pet food industry grew by 40%, a $43 billion industry. Rover and DogVacay, new startups that offer kennels away from home - $30/night paid to the sitter (20% goes to the company). GPS tracking allows owner to see how far the dog was walked.
What is the collective noun for a group of economists? A gloom, a regression, an assumption. How about just, "Wrong."
Brexit was predicted to be a disaster for the UK, but:
- Apple is consolidating 8 offices, 1400 employees, could double in coming years
- Goolge is building a new HQ alongside King’s Cross station, creating 3,000 new jobs by 2020
- Facebook is expanding by ½, to 1,500, in a new London office to open 2017
- IBM is building four new data centers, tripling capacity, creating hundreds of jobs
The tech is one of the UK’s best sectors: it’s grown 32% faster from 2010-14 than the rest of the economy. Britain issues 200 visas to non-EU tech works (Exceptional Talent scheme).
GE wants “FastWorks,” not Six-Sigma
Siemens is half as profitable as GE. GE is reinventing itself, while Siemens is staying close to roots.
Internet of Things, $11 trillion in economic value annually, according to McKinsey Global Institute. One-third could be in manufacturing.
GE’s platform is Predix, an Android for machines to manage clusters it builds, from wind turbines to locomotives, and jet airplanes.
Siemens platform is Mindsphere, which is more vertical, and a closed system.
GE used to be obsessed with Six Sigma and incremental improvements. Now it wants to take a page from startups and start making mistakes—they call it “FastWorks.”
Create a minimum viable product, discard it quickly if it fails.
Visit to the Las Vegas Neon Museum. It was a walk through the history of Las Vegas condensed into 90 minutes.
- Name derived from Spanish word for shoe
- F.A.C.E. (Folks who Answer CEO Email) Team
- PEC—Personal Emotional Connections
Pope Francis, equating media interest to coprophilia [arousal from excrement].
Interview on Sage Podcast with Gret Glyer, founder of DonorSee (website and App).
Kirk Bowman’s Biography
If you really want to talk shop, Kirk brings over 15 years of experience developing FileMaker databases and web applications as well as systems integration. As the principal of MightyData, Kirk heads an elite team of FileMaker Certified Developers and Authorized Trainers. He is a renowned speaker at the FileMaker Developer Conference and PauseOnError un-conference. Anyone who knows Kirk realizes that to become the Visionary of Value means walking the walk and talking the talk. To that end, Kirk is a Practicing Fellow at the VeraSage Institute and a proud graduate of EntreLeadership.
His podcast, which is excellent: ArtofValue.
Segment One—Ed’s Questions
Ed and Kirk live five minutes apart and both attended the Allen Father Daughter Ball.
You used to be a naysayer with respect to hourly billing. Tell us your story of conversion, and transition to Value Pricing.
What big one or two mistakes did you make during the transition?
What were some of things that surprised you—including internally—of the transition?
Do you think you’ve gotten better at the value conversation?
Are there particular questions that you use to open the value conversation?
Where did you find more resistance in your transition, internal or from your customers?
Why were existing customers harder to convert than new ones?
Segment Two—Ron’s Questions
There are so many new podcasts coming out, and we hear so much about pricing. What do you think is the future of Value Pricing?
I have heard you say that hourly billing requires a calculator, but VP requires courage. Can you prove that statement?
My new mantra has been that value is a feeling, not a number. Professional’s don’t have a high tolerance for ambiguity; we rather be precisely wrong rather than approximately right. How do you deal with that when you help people transition?
In your transition, you started with new customers. I started, in 1989, with current customers first. If new customers like it, why wouldn’t current customers? Have you seen firms start with current customers?
Why do you think hourly billing sticks around and is endemic, and ubiquitous, as it is?
Are people just satisficing (satisfy + suffice)? In other, hourly billing is good enough?
With Value Pricing you learn from your successes and mistakes. Would you agree?
Do you think by offering options you are more focuses on the outcomes rather than delivering a series of tasks?
Segment Three—Ed’s Questions
Tell us about the creation and evolution of your podcast, The Art of Value.
An unfair question: Any particular guests, or particular moment that jumps out at you, from your show. Kirk replied:
- Joni Newkirk, former pricer at Disney who converted the pricing at Walt Disney World.
- Interview Rabbi Daniel Lapin
Have you recorded any shows that you didn’t publish?
What advice would you give to someone interested in starting a podcast?
Tell us about your Value Pricing consulting.
Segment Four—Ron’s Questions
What about the timesheet?
I think it inhibits good pricing because it never breaks that fundamental nexus between effort and value. Do you agree?
Ed says he can see a future where project management dies. Do think it could die?
You talk a lot on your show about the Value Lifestyle. Unpack what you mean by that term.
You’re a tech guy. What’s your take on Richard and Daniel Susskind book The Future of the Professions? Are you a pessimist or an optimist with respect to the future?
What one piece of advice would you give to firms with respect to pricing?
Ed’s LinkedIn Post
- Profit is not an adequate foundation for a strategy
- We do not want for answers; we suffer from an inability to ask new and better questions
- The Mother of All strategic Questions does not come back to revenue
- Strategic planning is more creative than analytical
- Strategy is about effectiveness, not efficiency
Summary of The Rise and Fall of Strategic Planning, by Henry Mintzberg, 1994
Planning is future thinking, or controlling the future.
Planning = Latin = planum “meaning flat surface.” The word entered English language 17th century, referring principally to forms, such as maps or blueprints drawn on flat surfaces.
The squirrel plans (stores nuts): are they more sophisticated or is planning less so?
If only you dumbbells executed better!
If you so smart, why didn’t you take into account we are dumbbells?
To Michael Porter, strategy = position.
To Peter Drucker, strategy = perspective (the theory of thebusiness).
Fundamental fallacies of planning
- Predetermination (predicting the future)
- Detachment (from operations/managers
All three = The Grand Fallacy: that analysis can produce synthesis.
Analysis ≠ Synthesis, and strategic planning is not strategy formulation, so the term is an oxymoron.
Strategic planning (SP) is less about creativity and more about rearranging established categories; stability over adaptability, or institutionalized incrementalism.
It’s more extrapolation than invention.
The quantification of SP is not much more than quantification of goals as a means of control.
Jack Welch dismantled GE’s SP; he wanted more judgment not data.
PPBS = Planning-Programming-Budgeting System. Robert McNamara, Secretary of Defense under President Johnson. Vietnam was USA’s most humiliating military defeat, ever. PPBS has failed everywhere and at all times.
But the planners will say, “Any plan is better than none at all. It’s the process that counts (SP is not Utopia, only the road to it).
But SP is a rain dance, and the process improves the dancing not the weather.
SP assumes there’s “the one best way” to formulate and implement strategy, inspired by Frederick W. Taylor.
SP is not defended for what it accomplishes but for what it symbolizes—rationality.
Henry Kissinger referred to planning as “a sop to administrative theory.”
Pseudo-scientific knowledge can be more dangerous than plain ignorance or common sense.
Americans get off on strategy like French get off on good food.
How do you make God laugh? Tell him your plans.
Ed and I were honored to have Joe Woodard on the show.
As an author, consultant, Intuit contractor and national speaker, Joe has trained over 75,000 accounting professionals in the areas of practice development, changing technology trends, and how to maximize the use of QuickBooks in their accounting practices.
In 2012, 2014 and 2015, Joe was recognized by Accounting Today as one of the Top 100 Influencers within the Accounting Profession. In 2008, Joe was recognized by CPA Practice Advisor as one of the top 40 up and coming thought leaders under the age of 40.
Woodard has adopted a powerful vision: “To transform small business through small business advisors.”
Woodard’s purpose is an extension of its vision – a single statement that shapes every task Woodard performs to achieve its vision: “We empower small business advisors.”
What Woodard Does
As part of a larger purpose to empower small business advisors, Woodard fosters networking relationships among small business advisors, conducts the highest quality learning experiences for small business advisors, and builds relevant, powerful resources for small business advisors.
Questions We Asked Joe
- Explain your Vision Statement
- Why focus on small business as opposed to medium or large business?
- Why accountants, and not lawyers, or others who serve small businesses?
- What’s your view on the Efficiency vs. Effectiveness (Eff’ing) debate?
- What are the major challenges and opportunities you see facing the accounting profession? (Joe thinks Automation for both).
- Do you agree with the strategy of giving away compliance work for free in order to get the advisory services? After all, I’ve been hearing about the death of compliance services since I’ve been in the accounting profession. Do you really see compliance work going away?
- When you look out at the vast majority of the accounting profession, do you really think it’s possible for them to make the transition to advisory services?
- Do you see a lot of firms moving to Value PricingWhat is your opinion on timesheets? And why do consultants to the profession advocate for them?
- We’re all fans of the Susskind book, The Future of the Professions. Tell us about your “Rise of the Machines” webinars and work.
- The competition that kills you doesn’t look like you. What will disrupt the profession?
- Have you use Amy, the AI that helps you schedule meetings?
- Are you in alignment with Ray Kurzweil on the arrival of the Singularity by 2029?
- What advice would you give a young CPA about to launch his career?
Theo Epstein broke the curse of both the Red Sox and the Cubs. Ed thinks he destined for the Baseball Hall of Fame.
The prediction markets, Nate Silver, and the polls got the election wrong. They all reinforced each other and it was a classic example of an echo chamber.
Only three polls got the results right, and one private pollster: Investors Business Daily, Los Angeles Times, and Trafalgar. The private pollster was working for the Trump campaign, John Mclauglin of the Hoover Institution.
Is the election result similar to the 1961 World Series, when the Pirates beat the Yankees in four games, even though the Yankees outscored them overall?
If we scrapped the Electoral College, it’s a static analysis to argue that Hillary would have won. The election dynamics would have been different, with the candidates spending time differently in different states.
Did Trump receive a mandate?
Have the Democrats been reduced to a bi-coastal party?
The plurality of Americans voted for no one, which has always been the case.
Either way, voting is a flawed way to make decisions.
Imagine making decisions on whom to marry, what car to buy, where to live, your job, by popular vote.
Ed explained Approval Voting and N/3 Analysis as a way for organizations to make better decisions than simply majority or plurality voting.
Author of The Last Campaign: How Presidents Rewrite History, Run for Posterity & Enshrine Their Legacies, Anthony Clark appeared in this segment to discuss the Obama Presidential Library.
The Obama Presidential Library site has been selected: Historical Jackson Park, Chicago, Illinois, expected to open in 2021.
However, the records will be out in 2121—it takes 100 years for the National Archives to process and release all the records. More emphasis is placed on opening the museum to promote the legacy rather than hiring archivists to process records.
The Reagan Library opened in 1991 and they still haven’t processed 75% of the records yet.
“I’d like to die on Mars. Just not on impact.”
On September 27, Musk outlined his plans to colonize Mars within 10 years:
100 passengers @ $200K each
The journey will take 6 months
It’s a hedge against Earth-bound extinction. Stephen Hawking, among others, believes we are all sitting ducks for a supervirus, malevolent AI, nuclear war, etc.
The Economist called this view “Claptrap.”
Living on Mars would be difficult: Need pressurized buildings, communication with Earth would be tedious, you’d have to recycle nutrients and waste, etc. Biosphere 2 in the 1990s was quickly abandoned as impractical for some of these reasons.
Musk also said the government would have to open its checkbook.
Musk might be more impressive to show results here on Earth first, perhaps by turning a profit in one of his three enterprises.
$1.3B Tesla subsidies
Export/Import Bank subsidized payloads for SpaceX launches
$4.9B in total subsidies over the past 10 years, according to the Heritage Foundation (approximately 50% of Musk’s wealth).
“Quick and Dirty,” The Economist, October 8, 2016
Short-Termism is a problem?
The average holding period of shares is 200 days
Managers are perceived to be harried to meet targets in one year or less
This is not a helpful lens: the same system that’s poured capital into Tesla, Uber, Twitter, Amazon, etc., is accused of short-termism.
America is the most hyperactive market with the best-performing economy, and with dominant firms.
S&P has a new index, and it claims to track firms with a long-term focus.
Three out of ten of its largest holdings are cigarette firms, which may outlive their customers for all the wrong reasons.
The tension between short-term vs. long-term is what makes capitalism tick.
About Our Guest
Ron and Ed are thrilled to have as a Guest this week, the self described anarchist-anachronist-economist David Friedman.
David is an American economist, physicist, legal scholar, and libertarian theorist. He is known for his writings in market anarchist theory, which is the subject of his most popular book, The Machinery of Freedom.
He has an active blog at which he opines about everything from medieval recipes to global warming.
Segment One: Ed’s Questions
What are your thoughts on the election?
Would President Obama pardon Hillary Clinton, even though she hasn’t been convicted of anything? Is there precedent in any legal system for a pre-emptive pardon?
Should we transfer the pardon power to Congress?
Segment Two: Ron’s Questions
In Hidden Order: The Economics of Everyday Life, 1996, you discuss the assumption of rationality. It’s false, but useful. It describes our actions, not our thoughts.
Why do economists hold on to the assumption of rationality?
You haven’t seen any major advances because of behavioral economics?
Price discrimination. What are the welfare benefits of price discrimination?
Segment Three: Ed’s Questions
The market is often blamed for inequality, but you point out that often times it is government that is more unequal to the poor. Could you give us an example or two?
You’ve written on public-key encryption, is blockchain and Bitcoin a manifestation of that?
Question from Jay, one of our listeners: Who or what led you to your anarchism?
Segment Four: Ron’s Questions
In Law’s Order, you point out that the death penalty is irreversible, but so is prison time. And since prison has to be imposed at a higher probability to get same deterrent effect, there will be proportionally more mistakes with imprisonment than the death penalty.
You have a PhD in physics. What’s your view of Global Warming?
Are you concerned about the declining population in some countries, such as Europe, Japan, etc.?
Three times as many disagreements each year among eBay traders are resolved using its online dispute resolution system than there are lawsuits filed in the entire US court system. Might this be an example of some of the ideas in The Machinery of Freedom being implemented?
Illustrated Summary of Machinery of Freedom
More Books by David D. Friedman
- Price Theory: an intermediate text, 1990
- Hidden Order: The Economics of Everyday Life, 1996
- Law’s Order: What Economics Has to Do with Law and Why it Matters, 2000
- Future Imperfect: Technology and Freedom in an Uncertain World, 2008
- The Machinery of Freedom: Guide to a Radical Capitalism, 3rd edition, 2014
Dr. Tim J. Smith is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University, and the author of Pricing Done Right and Pricing Strategy, and founder of Wiglaf Pricing. He has been a keynote speaker and workshop leader on a variety of pricing topics to professional audiences across the globe. Smith began his career as a research scientist in quantum mechanics. He’s an Academic Advisor to the Professional Pricing Society’s Certified Pricing Professional program, a member of the American Marketing Association, Business Marketing Association, and American Physical Society.
He holds a BS in Physics and Chemistry from Southern Methodist University, a BA in Mathematics from Southern Methodist University, a PhD in Physical Chemistry from the University of Chicago, and an MBA with high honors in Strategy and Marketing from the University of Chicago Booth School of Business.
Segment One—Ron’s Questions and Summary of Answers
You have a PhD in physical chemistry. How did you get into pricing?
I fell into it! Became an entrepreneur in technology and sales and discovered that value-based selling was basically the same as value-based pricing. Selling and math make a pricing professional.
Your first book was Hawks, Seagulls and Mice, (2006), what was it about?
It looks at the structure of sales and marketing across different industries, and how they vary.
In Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures, 2012, you write:
The science of pricing refers to the act of gathering information, conducting quantitative analysis, and revealing an accurate understanding of the range of prices likely to yield positive results.
The art of pricing refers to the ability to influence consumer price acceptance, adapt structures, and align pricing strategy.
Is pricing more art or science, or conceptual? You write it’s not an engineering challenge, but a strategic challenge?
It’s a strategic science, which puts it closer to an art.
You wrote in your latest book, Pricing Done Right
Although price not a competitive advantage, pricing may be.” Rethinking the unit in pricing, and change your industry, such as hourly to fixed prices, Zipcar, iTunes and music, etc.
You can imitate a price, but it’s march harder to imitate a pricing structure, which can be a competitive advantage.
Why does cost-plus pricing continue to be endemic?
Because it’s simple, common, mechanical. It’s a form a satisficing (satisfy + suffice). It’s precisely wrong, rather than approximately right.
The shift from setting prices to communicating value is really a business model change, isn’t it?
Clayton Christensen’s new book, Competing Against Luck, argues that the job the customer is doing with your product or service needs to be understood.
It goes back to Ted Levitt, nothing new, really.
Segment Two—Ed’s Questions and Summary of Answers
Why Wiglaf Pricing?
Wiglaf is a character in the Anglo-Saxon epic poem Beowulf. He is the son of Weohstan, a Swede of the Wægmunding clan who had entered the service of Beowulf, king of the Geats. Wiglaf was Beowulf’s advisor, and helped him slay his dragon.
You have a mantra, three questions: What’s my alternative? Are you better or worse? And why should I care? [these are the questions customer’s ask themselves].
If a customer isn’t profitable, they aren’t a customer—they are a leech. It’s all about servicing customer needs... profitably. Not every customer is your customer, or your target customer.
What are some of the biggest mistakes organizations make regarding their pricing strategies?
Treating price as an outcome; what price do we need to make this sale. Pricing is a verb, not a noun—it’s a process.
Do you think discounts are needed in some industries?
They are in some industries, but they need to be managed dynamically, and planned, over time. Unplanned discounts are ripe for better planning. Key question to ask: how will this discount improve the relationship with this customer.
Tim's latest book is Pricing Done Right: The Pricing Framework Proven Successful by the World’s Most Profitable Companies, 2016, he lays out five key decisions of a Value-Based Pricing Framework:
- Business Strategy
- Pricing strategy
- Market pricing
- Price variance policy
- Price execution
Also, four pricing strategy issues:
- Price positioning
- Price segmentation
- Competitive price reaction strategy
- Pricing capability
Should pricing be centralized or decentralized?
The extreme of both have failed in most firms. I advocate cross-functional teams (marketing, sales, finance and pricing). It’s an enabler, not a replacer—it can’t be alone. Is pricing too important to leave to the pricers?
It’s fascinating research coming out of Germany, demonstrating most profitable firms are those that don’t have complete centralized or decentralized decisions. There’s no way a centralized pricing group has the same tacit knowledge of the sales force in the field. You have to marry that tacit knowledge with the explicit knowledge of the pricers.
This is the approach of Target Costing at Toyota, Nissan, IKEA, etc.
You write neutral pricing is default strategy (least likely to have price wars), and that penetration pricing cannot generally be defended from a strategic viewpoint (failures are greater than success, e.g., Amazon).
GoPro failed with it as well. Just because you have a lower price doesn’t mean people want it.
What industry does the best job at pricing?
Some have the algorithms down well (airlines, hotels), but no one industry has the strategy down. Some individual firms do, such as Eastman Chemical, and Peugeot with its Vespa sales into India.
Sports, music, and other event based industries are dynamically priced. We still don’t have a perfect model, but things are changing.
Is there really such a thing as price gouging?
Price gouging is a legal term. It’s illegal. Outside of that, it’s buyer beware.
Value a feeling?
You write: “Beyond economic benefits, there are behavioral, emotional, hedonistic, and psychological benefits. Though calculating the impact of these benefits may be difficult, their impact on customer choices often outweighs purely economic arguments alone.” Is value a feeling more than a number?
It goes along with it, but I wouldn’t have used the same words.
Pricing legend Robert Cross posited that people with musical ability make good pricers. Do you have any theories on what makes a good pricer?
I’d put diplomacy as number one.
The pricing profession has grown dramatically in the past 15 years or so, do you think professional pricers have lessened, or increased, price wars?
I would like to say yes, but look at the current price wars in airlines, hence they are unprofitable. Freedom includes the freedom to be stupid. Amazon and Wal-Mart were trying to show how low they could sell a book, even below cost.
What advice would you give to someone who wants to get into pricing?
Read my books, join the Professional Pricing Society, understand your business.
Warning and Ed's Note: This show got overly wonky (even for us) and is overly focused on issues related to the Presidential Election in the United States. We will resume our regular commentary next month.
Poverty on the decline
There are fewer people in absolute poverty today the there were in 1820. While this does not mean the problem of poverty can be ignored, it does mean we should celebrate more our human accomplishments over the last two centuries.
Ron added statistics from The Economist, October 8, 2016, How the other tenth lives.
The laws against taking a selfie with your voting ballot. No really there are! Article: In these states, taking a selfie with your ballot could get you arrested
Joe Buck’s dumb-ass commentary
The worse part of watching the World Series is having to endure the droning on of Joe Buck. Article: Joe Buck's 15 Lamest On-Air Moments
Here are some samples of things he said thus far during the Series:
- "Good swing by Soler, he'd like to have that back."
- "If he gets that down, you can't defense it..........uh, there's no defense against that play."
- "That will make Tomlin have to swing that bat. And he shows right there he knows how to do that." As Indians pitcher swings way late on the first pitch he sees. He went on to whiff on three pitches.
Gamblers getting old
Casinos customers are aging, and they are having a difficult time attracting the millennial generation, as explained in Putting it all on grey, from The Economist, Oct 8, 2016.
TSOE Guest Rabbi Lapin on self-driving cars
Rabbi Daniel Lapin’s thought-provoking Thought Tools edition, Strike Them Down.
Lapin discusses the ethics of the self-driving car, and how as an orthodox rabbi he would never buy a car that was programmed to make ethical decisions.
In the comments section, he also discusses the morality of governments invading other countries to feed or protect its people, and the Just War doctrine.
A tirade from Nassim Nicholas Taleb, author of The Black Swan and AntiFragile, entitled The Intellectual Yet Idiot, September 16, 2016.
More on driverless cars
Is Apple teaming up with McLaren, a British maker of sports cars and Formula 1 racing team? Ford announces it will launch a fully autonomous car in 2021, without steering wheel or pedals, for car-sharing schemes.
Ed and Ron reflected on the lessons from the two-day workshop, The Post-Professional Society, they led in Niagara Falls for Strategic Leadership Association. If you are interested in joining this organization check them out.
We discussed the Question Formulation Technique exercise, developed by The Right Question Institute, and how powerful it is to think in questions rather than brainstorming ideas.
There’s much less anxiety; good questions can come from anyone; and everyone tends to agree on what a great question is, as opposed to an idea that can be challenged.
Here is a copy of the slide deck we used with the topics discussed above.
We received the following email from Mark, who suggests a topic we will address in a future show:
I'm working here in my office today listening to you and Ed in the background.Just finished your conversation with Thomas Sowell--wow, outstanding.
As a CFO, my biggest frustration is the 25 flavors of strategic planning. Too much, too many connect-the-dots, too unproductive. So the brainstorm is to have a show about building off-site planning (if any) about what the customer values most. One of my clients is going through Verne Harnish's Scaling Up. One is going through Wickman's E.O.S. But the focus is on internal factors, not what matters to the customer.
I would love to hear your perspective on planning (short, mid, long-term). And just for fun, pick up Stacy Barr's book on Performance Measurement as an example of how these strategy planning processes are too extreme.
Thankfully, Dan Sullivan of the Strategic Coach (I'm in year 4) gets this right through his lingo - Front Stage, Back Stage. So he's making sure our planning is always with the customer and what they value at top of mind.
One last comment. I read the Firm of the Future back in 2004 thanks to a recommendation by Gary Boomer. It ranks right up there with The Goal. Keep writing!! You guys rock. Mark
Thanks, Mark, we think you and all our listeners ROCK!
About Dr. Timothy Chou
Timothy Chou has been lucky enough to have a career spanning academia, successful (and not so successful) startups and large corporations. He was one of only a few people to hold the President title at Oracle. As President of Oracle On Demand he grew the cloud business from it’s very beginning. Today that business is over $2B. He wrote about the move of applications to the cloud in 2004 in his first book, “The End of Software”. Today he serves on the board of Blackbaud, a nearly $700M vertical application cloud service company.
He most recent book is Precision: Principles, Practices and Solutions for the Internet of Things to introduce the basics of the Industrial Internet of Things (IoT). You may not be sure why your coffee pot should talk to your toaster, but precision technology powering an Internet of Things has the potential to reshape the planet.
Interview Notes and Questions
What was it like working for Larry Ellison?
Tim's Three fundamental differences between things and people
- A lot more things than people
- Things can be were people are not
- Things can “talk” constantly
AI has been around for years, why is it gaining more traction lately?
Are you optimistic or pessimistic about the AI transformation? Why?
What about Stuxnet? Are IoT devices secure?
Ed just saw the movie Sully, the drama in the movie was about the NTSB and their simulations that said they could get back to LGA, but when human decision factor was added (35 seconds) they could not. Would it be a good idea to give computers the final say? One the one hand, there is no creativity. On the other there is no “human factor” or delay. Thoughts?
Tim's IoT Framework
And, of course, Tim's new book
Dr. Reginald Tomas Lee is an advisor and researcher in the areas of cash flow, capacity management, and profitability. Using a deep background in engineering and math, he has created tools and models that have helped executives in businesses of all types improve the management of cash flow and other financial data.
Professionally, Reginald has worked in industry, academia, and consulting including leading global companies such as EY, GM, IBM, and Oracle.
He has advised many marquee names such as Bristol Myers Squibb, Disney, DuPont, Home Depot, Lockheed, Office Depot, Raytheon, Toyota, and United Healthcare.
Reginald has a PhD in mechanical engineering from the University of Dayton, and is the author of three books and over 40 published articles and white papers. He is a feature writer for Journal of Corporate Accounting & Finance and a contributor to the Cincinnati Business Courier.
Resources by and about Dr. Lee
Article: Making technology pay
Three reasons cost accounting is a bad practice
- Creates and forces math and relationships that don’t exist
- You lose touch with operations
- Creates meaningless numbers that people consider gospel
Accounting reports financial performance, they doesn’t model cash flow
- Cash flow is most important
- Accounting not good proxy for managing cash flow
- Idea and importance of capacity
Capacity = Largest Expenditure
- Hotels, Airlines, Cruise ships, don’t do cost accounting
- They invest in yield management—value/pricing side
You can calculate different costs from same data, and it has nothing to do with cash
- Standard, ABC, Lean, Full-Absorption, Marginal costing, all lead to different results
- Yet all methods are sanctioned by GAAP
- Segal’s Law: a man with a watch knows what time it is. A man with two watches has no idea.
- A single representation of an artificial reality
Companies are spending a lot of money managing costs that have nothing to do with money
- Dr. Lee distinguishes between: Cost C (cash) and Costs NC (non-cash)
- Cost is an opinion; cash is a fact!
Costing and cost accounting create false relationships and inappropriate use of math
- No relationship to buying time and what you do with it
- Cheaper to make 20 pens than 5? How?
- Economies of scale?
Capacity modeling: unifying concepts of finance, accounting, and operations
- Contribution margin analysis won’t predict need for additional capacity
- Overstate ROI because of Costs NC—hospital example
In his seminal book, Profit Beyond Measure: Extraordinary Results through Attention to Work and People, H. Thomas Johnson revels how Toyota doesn’t use standard cost accounting.
The Goal: A Process of Ongoing Improvement, by Eliyahu M. Goldratt. He is another critic of cost accounting, as seen in this Youtube video:
Ed and Ron recorded this show live before an audience at the Institute of Professional Bookkeepers of Canada 2016 Ignite Conference in Richmond, BC, Canada.
Wells Fargo Gets What it Measures
Some 5,300 Wells Fargo Bank (WFB) employees opened a couple of million fake accounts, since their compensation system was designed around opening up accounts. This created an incentive for otherwise ethical people to perform an unethical act. It’s hard to be a good citizen in a bad country.
The Best Critique I’ve ever Received
“This presenter, should he be brought back for a session in the future, should be dressed appropriately, and that is, as Clarabelle would appear at a children’s birthday party complete with red bulbous nose and horn, remaining silent otherwise.”
Watson Creates a Movie Trailer
Uber goes to 1.8x during NY Bombing
Did they price gouge? Hell, NO! What would happen if Uber were ruled to be illegal. It creates $6.8 billion in “social value,” roughly $20 per person per year.
If you have tickets to Louis CK’s show, don’t scalp them! I love Louis CK, but he is a terrible pricer and even a worse economist. Charge more and give the money away!
Department of Transportation Policy on Driverless Cars
EU to Apple: Pay $14.5 billion in Taxes to Ireland
EU accuses Ireland or “providing illegal state aid” to Apple, and says the company owes $14.5 billion in back taxes to Ireland. Tim Cook, CEO of Apple, said the Commission can have taxes or they can have jobs, but they can’t have both. Ireland claims there was no “special deal” with Apple, and the tax rates were always statute-based.
It’s hard to have employees without successful employers. It’s time to take the corporate tax to zero, since corporations don’t pay taxes—only people do!
Another asinine regulation from the EU, this one on American winemakers: They must relabel their bottles for export because they list alcohol content to one decimal point more than the EU deems permissible.
Don’t Buff it up
Warren Buffet loves to talk about the rich not paying their “fair share” of taxes. But his company, Berkshire, pays the equivalent of 13% of its pre-tax profits, making it one of the lightest taxpayers among big firms.
More Bootleggers and Baptists
Alcohol and pharmaceutical companies are funding the fight against legalized pot.
In Plain Words
In analyzing more than 135 years of speeches in the Congressional Record, in 1990, the probability of correctly guessing a lawmaker’s party from a one-minute speech was 55%. By 2008, the probability jumps to 83%. We’ve become more partisan, a linguistic divide.
Leaked Email from DNC
From Bernie Sanders to former DNC head Debbie Wasserman Schultz, "I hear from people you are planning to attack me and say I do not believe in an all-wise, benevolent creator with a glorious beard and a love for all humanity. If so you are vile and this is beneath you. I do believe in Marx."
(Thanks to James Lileks, who writes the “Athwart” column for National Review.)
Vancouver’s Ghost Neighborhoods
Many Chinese are buying up condos and not living in them. This creates a reverse “tragedy of the commons,” as cities depend on people actually living in them. Same thing is happening in Israel. These countries are going to start taxing non-resident buyers. Does government have a right to do this? Rabbi Daniel Lapin thinks so, because businesses in these cities depend on populations living there.
Because economies are governed by thoughts, they reflect not the laws of matter but the laws of mind. One crucial law of mind is that belief precedes knowledge. New knowledge does not come without a leap of hypothesis, a projection by the intuitive sense. The logic of creativity is leap before you look.
You cannot fully see anything new from an old place. . . . It is the leap, not the look, that generates the crucial information; the leap through time and space, beyond the swarm of observable fact, that opens up the vista of discovery.
—George Gilder, Wealth and Poverty, 1993
We have all heard the famous saying, often referred to as the McKinsey Maxim, named after the famed consulting firm: “What you can measure you can manage.”
This bromide has become such a cliché in the business world that it is either specious or meaningless.
Specious since companies have been counting and measuring things ever since accounting was invented, and meaningless because it does not tell us what ought to be measured.
Besides, has the effectiveness of management itself ever been measured? How about the performance of measurement?
Measurement for measurement sake’s is senseless, as quality pioneer Philip Crosby understood when he uttered, “Building a better scale doesn’t change your weight.”
The Triple Crown Criteria
In his book, From Worst to First, Gordon Bethune details how he was able to turn around the failed airline (which had filed for Chapter 7 bankruptcy twice in the preceding decade) between February 1994 and 1997, turning it into one of the best and most profitable airlines in the sky.
It is a remarkable story, and it illustrates the importance of utilizing leading key predictive indicators (KPIs) to focus the entire organization on its purpose and mission.
Bethune basically tracked three leading Key Predictive Indicators (KPIs), known as the “Triple Crown Criteria” in the airline industry:
- On-time arrival
- Lost luggage
- Customer complaints
What makes these three KPIs leading is that they measure success the same way the customer does. And that is critical because, ultimately, the success of any business is a result of loyal customers who return.
None of the three indicators would ever show up on a financial statement, but, as the airlines have learned over the years—by testing the theory—they have a predictive correlation with profits.
Is there a Triple Crown Criteria for PKFs?
Now that there are well over a thousand firms that have trashed timesheets, VeraSage Institute is proud to announce, based upon empirical evidence, the Triple Crown Criteria for Professional Knowledge Firms.
We are emphatically declaring that the following three KPIs are all your firm ever needs to track to predict future customer loyalty and buying behavior.
Think about it: If an airline can run on three KPIs, why can’t a PKF?
An airline is far more complicated than any PKF, which is what makes KPIs so powerful: they are measurements (or judgments) guided by a theory.
But the theory is the senior partner. It’s not just measurement for the sake of measurement. It’s measuring—and judging—what actually matters, to customers.
It’s defining the success of your firm the same way the customer does, just like with the airline KPIs.
The Three KPIs
Michael Dell likes to refer to the time lag between a customer placing an order and the company assembling and shipping the finished product as velocity.
We believe professional firms should also be diligent about tracking when each project comes in, establishing a desired completion date, and measuring the percentage of on-time delivery.
As Ed always points out, a firm can measure “time spent” or “duration.” The latter is the only thing that matters to the customer, hence that’s what needs to be tracked.
This prevents procrastination, missed deadlines, and projects lingering in the firm while the customer is kept in the dark.
Imagine installing 360-degree webcams everywhere in a firm. Also imagine customers being able to log onto a secure Web site, type in their names and passwords, and the appropriate web camera would find their project and give them a real-time picture of it, probably laying on a manager’s floor or credenza awaiting review.
Would this change the way work moved through a firm? Would this hold the firm accountable for results, not merely efforts?
Customers don’t want to hear about the labor pains—they want to see the baby.
FedEx and UPS do exactly this; and in fact some law firms utilize intranets that provide their customers with real-time access to the work being performed on their behalf.
This one metric would go a long way towards mitigating most of the reasons customers defect from firms (not kept informed, feel ignored, and so on).
This measurement attempts to expose the gap between how much the firm could be yielding from its customers compared to how much it actually is.
It is an excellent way to reward cross-selling additional services, increase the lifetime value of the firm to the customer, and gain a larger percentage of the customer’s wallet.
Marriott International uses predictive analytics through its Hotel Optimization program. Marriott has developed a revenue opportunity model, comparing actual revenues as a percentage of optimal prices that could have been charged. It attributes the narrowing of this gap, from 83 to 91 percent, to this metric.
One CPA firm made this calculation part of its partner compensation model. What actions can your firm take to close the value gap?
High Satisfaction Day™
I am indebted to John Heymann, CEO, and his Team at NewLevel Group, a consulting firm located in Napa, California, for this KPI.
When John’s firm held a retreat for the purpose of developing their KPIs, the suggestion of High Satisfaction Day (HSD) was made.
An HSD is one of those days that convinces you, beyond doubt, why you do what you do. It could mean landing a new customer, achieving a breakthrough on an existing project, receiving a heartfelt thank-you from a customer, or any other emotion of exhilaration that makes you happy you got out of bed in the morning.
Sound touchy-feely? John admits it is; but he also says the number of HSDs logged into the firm’s calendar is a leading indicator—and a barometer—of his firm’s morale, culture, and profitability.
Is this too Simplistic?
Compare the above KPIs to what most firms are measuring now—billable hours, utilization, realization, write-downs, write-offs, and other internally-focused metrics that have nothing to do with how the customer defines the success of their firm.
These metrics have zero predictive ability when it comes to future customer behavior. They are lagging indicators, not leading.
Stop measuring things that don’t matter, and focus on what does. The above three KPIs will work in any PKF—period.
Ron and Ed stand by this Triple Crown hypothesis for all PKFs.
Prove us wrong.
We’ll enjoy losing the argument, because it means we’ll learn something new.
Grown-ups love figures. When you tell them that you have made a new friend, they never ask you any questions about essential matters. They never say to you, “What does his voice sound like? What games does he love best? Does he collect butterflies?” Instead they demand: “How old is he? How many brothers has he? How much does he weigh? How much money does his father make?” Only from these figures do they think they have learned anything about him.
Antoine de Saint-Exupéry, The Little Prince, 1943
In general, there are four defenses for maintaining timesheets:
- We need them to price.
- We need them for project management.
- We need them for team member performance evaluations.
- We need them for cost accounting.
VeraSage has proven, without a doubt, that every one of these defenses is incorrect, and that there are superior methods and tools for each of these objectives.
First, prices are set by value, not hours, even within the context of competition. After all, none of us buy the cheapest of everything, which proves there is room in all markets for price searching by sellers to take place.
Second, anyone who spends a day listening to Ed Kless teach project management cannot possibly come away thinking that “time spent” is more important than “duration”—that is, turnaround time—from a project manager’s perspective. Duration is where the bottlenecks occur, not time spent.
Time is not value, it’s not a cost; it’s a constraint.
Third, anyone who has studied nearly every single private business, or a Results-Only Work Environment (ROWE), knows timesheets are not needed to conduct performance evaluations for team members.
Yet, it’s the last defense we really want to bury, once and for all, in this post.
Timesheets are a Cost Allocation Tool - NOT!
Some claim the only way to calculate profitability per customer is with timesheets. Really?
First off, you don’t need timesheets to know your firm’s costs. Look at your income statement. Don’t confuse total costs with cost allocation.
Give me half a day, maybe less, with your income statement, revenue per customer, and allow me to interview your team, and I will allocate your costs over any time period you want, and the result will be customer profitability that’s close enough for horseshoes and hand grenades.
Let’s get over the idea that any cost accounting—be it timesheets, Activity Based Costing, or any other method—requires 100 percent accuracy. The simple truth is, cost accounting is full of arbitrary allocations and errors, and if you don’t understand that, you’ve never been a cost accountant.
Cost accounting just has to be close enough, and the important point is that your costs need to be known before you do the job, not afterwards.
This is why Japanese manufacturing (especially automobile) companies utilize Target Costing, not standard cost accounting. They are about 40 years ahead of American companies with this practice.
This is an enormous difference, since value drives price, and price drives the costs you can incur to earn a profit you can live with. It does no good to know your cost allocation to the penny if the customer doesn’t agree with your value and/or price.
Further, costs are largely fixed in professional firms. This is why airlines, cruise ships, hotels, etc., do not engage in low-value cost accounting, but rather concentrate on yield management—that is, pricing for value, not to cover arbitrarily allocated costs.
Why Your Hourly Rate is Not Cost Accounting
However, I want to dive deeper on this issue, because the above logic doesn’t seem to convince many CPAs.
Your hourly rate is not even an accurate cost allocation method. Here’s why:
- It includes profit. There’s no such thing as allocating profit in cost accounting. That’s profit forecasting, not cost accounting. Opportunity cost has no place in cost accounting either, as that is an economic concept, not a cost accounting concept.
- Even if you remove the profit component from your hourly rate, it still bears no relationship to your firm’s actual costs. Since most firms establish their hourly rates based upon reverse competition—that is, what your competitors charge—the cost component is completely arbitrary. I have yet to encounter more than a handful of firms that tie out their cost per hour to their general ledger.
- With the timesheet, you are attempting to run a Profit & Loss statement on every hour of work logged. This is absurd, since your firm is an interdependent system, and cannot be atomized into a series of recorded hours.
- The hourly cost allocation gives no weight to the lifetime value of the customer—and the lifetime value of the firm to the customer.
These are egregious errors for CPAs to commit, given our supposed fastidiousness when it comes to numbers.
And when you compare this costing method to target costing—or price-led costing—you realize timesheet allocation is suffering from what philosophers call a deteriorating paradigm—the theory gets more and more complex to account for its lack of explanatory power.
This is why many firms will allocate the same dollar of revenue three or four times, based upon different criteria—from origination to realization to cash collections—which is overly complicated and not a great use of limited executive attention.
But Wait, There’s More
Here’s a Gedanken (thought experiment).
Assume you’re a sole proprietorship, and have $100,000 of fixed overhead this year (rent, wages, pencil lead, paper, etc.).
Further, let’s assume you plan to work 3,000 hours, and expect one-half of this to be “billable,” and the other half “nonbillable.”
The first question is do you divide the $100,000 of costs by 1,500 or 3,000 hours? Forget adding your desired profit, as that’s not cost accounting but profit forecasting.
The theory of hourly rates says you’d divide by the number of hours you expect to bill, not work, so that’s $100,000/1,500, or $66.67 per hour of allocated costs per hour worked.
Let’s also assume that you’ve billed 1,500 hours between January and November 30th of the current year, and you’ve completed all of your work, looking forward to your month off (you were able to get all your work done early because you took Ed Kless’s excellent project management boot camp).
Now, on December 1st, a new customer engages you to perform 100 hours of additional work that month.
Your cost allocation now becomes $100,000/1,600, or $62.50.
Therefore, you’ve been over-allocating your costs by $5 per hour for eleven months of the year.
[It’s even more absurd if you originally divided the $100,000 by 3,000 hours worked (not billed), even though you no longer have the $5 per hour over-allocation issue. Why? Because, then, to which customers do you allocate the 1,400 “nonbillable” hours? And how do you determine that allocation? This is why cost accounting is full of arbitrary assumptions].
Multiply that by more and more employees, customers that are constantly being added and subtracted, account for all the lies in timesheets, the eating of time, non-recorded time, and all the other games played, and you have an egregiously incorrect cost allocation scheme that is incredibly elastic, not accurate.
And, to add insult to injury, timesheets are not helping you price better, conduct project management more effectively (or even efficiently, for you Taylorite disciples), qualify your customers better, predict the performance of your team members, or measure what matters to your customers, or improve future performance of your firm, as with After Action Reviews—and, even more absurd, they are lagging indicators that give us the illusion of control.
By definition, once you see something on a timesheet, it can longer be managed.
Moreover, they cost a fortune to maintain—usually the biggest customer in the firm. What’s the ROI from this investment in tracking time? We believe it’s negative.
All this said, what’s the point of timesheets?
As Ed says, “If you suck at what you do, bill by the hour…”
And I would add, given the logic of the above, “…and keep timesheets.”
If you think the above is flawed, please let us know where.
This debate is getting stale, and we should have moved on a long time ago, since there are many more important issues for the professions to deal with rather than wasting time on a deteriorating paradigm.
Additional Resources and Mentions
Jamey Johnson - The Dollar
Ed's post - Your cancer is called a timesheet
For a comprehensive Q&A on timesheets, see the VeraSage post, Ask VeraSage: All About T&A.
Life is not worth living if we exercise our profession only for the sake of material success and do not find in our calling an inner necessity and a meaning which transcends the mere earning of money, a meaning which gives our life dignity and strength. –Michael Novak
We must hold a man amenable to reason for the choice of his daily craft or profession. It is not an excuse any longer for his deeds that they are the custom of his trade. What business has he with an evil trade? Has he not a calling in his character? –Ralph Waldo Emerson
The term profession comes from the Latin noun professio, which is derived from the past participle professus, or the verb profiteri, denoting “to declare publicly, own freely, acknowledge, avow.” Professionals are said to “profess” something, they stand for something. The noun professional didn’t appear in American dictionaries until 1861.
In the 18th and 19th centuries “professions” referred to theology, law, medicine, and education. From the early 17th till the mid-18th century, theology was considered the preeminent profession. Sociologist Bruce Kimball, in his book The “True Professional Ideal” in America, suggests three eras of professionals: religion through the mid-18th century; polity (law) through the mid-19th century; and science through the 1910s. It took until 1925 until the first public opinion survey of vocational status showed that doctors had passed lawyers and ministers (though not professors) in public esteem.
It’s interesting to note that a trip to the doctor didn’t do much good until the 1920s or 1930s with the introduction of antibiotics. Before then, most visits were ineffective and a large number were downright harmful. The Hippocratic principle of primum non nocere (“first, do no harm”) continues to be an essential guideline for all professional conduct.
Scholars have traced regulation of the professions to ancient Babylon and the Code of Hammurabi. Written about 1800 B.C., the Code set predetermined fees for surgeon’s services and imposed penalties for malpractice (including the severing of a surgeon’s hand if the patient died from an operation). The first law to regulate a profession in America was in 1639 in Virginia, where the purpose was to control fees physicians could charge. Ten years later, Massachusetts passed a law regulating the quality of medical care. Under the U.S. Constitution both professional licensing and education are “residual powers” and deemed state prerogatives, which is why occupational licensing is under the jurisdiction of the states.
The Characteristics of a Profession
According to Kimball:
By the beginning of the twentieth century, the term [profession] denoted a dignified vocation with three fundamental characteristics. One topic concerns the body of functional knowledge, or expertise, associated with a profession and involves issues of epistemology, utility, and education. A second topic concerns the profession’s organization into an association and involves such issues as autonomy, exclusion, licensing, and certification. The third fundamental topic is the ethic of professional service.
Needless to say, these three basic topics––expertise, association, service––have often been subdivided by scholars into lists of six, eight, ten, or more characteristics. But such characteristics are often redundant or may easily be aggregated on grounds of parsimony. Meanwhile a good deal of testimony affirms that “there are three ideas involved in a profession: organization, learning...and a spirit of public service.” ...the “collegial, cognitive, and moral,” that is, “autonomy, service, and knowledge”––are characteristics of the “ideal” of a profession (Kimball, 1995: 323-24).
Let us explore these three characteristics as they relate to the CPA profession.
Because professionals possess a specific body of knowledge, obtained through education and on-the-job training, the belief is only those with this knowledge are able to regulate the activity. Also, professionals provide advice and intangible knowledge––as opposed to offering tangible goods––and therefore the technical competence and quality of those offering this advice need to be ensured in order to protect the public.
CPAs obtain this specialized knowledge through formal education in college, and demonstrate their competence by passing the Uniform CPA Examination, and also by on-the-job training and continuing professional education.
It is interesting to note that in June 1898, Christine Ross (a native of Nova Scotia) passed New York CPA exam, but certificate No. 143 was withheld till December 21, 1899, after the Board of Regents decided whether or not a woman should be certified. What this delay had to do with her technical competence and expertise is an interesting question.
Autonomy and Exclusion
Autonomy is from the Greek words for “self governance.” One of the hallmarks of a profession is its ability to self-regulate itself. Because information in professional markets is asymmetrically distributed––that is, sellers know more about the quality of the services rendered than do the consumers––this further enforces the need for professionals to regulate who may enter, and continue to remain, in the profession.
The CPA profession––through the voluntary association of the AICPA, various state societies and the state board of accountancies––engages in self-regulation by: administering the Uniform CPA Examination process and the requirements necessary to qualify for it; granting and administering licenses to practice; promulgating a Code of Professional Conduct; requiring peer review of firms providing attest services; enforcing continuing professional education requirements; carrying out disciplinary actions against members of the profession who violate the Code or laws, or engage in acts discreditable to the profession.
Exclusion––or monopoly status––is granted to the profession through licensing and certification requirements. Society grants monopoly status to a profession in order to protect the public from unlicensed practitioners. The only monopoly status the CPA profession possesses is in the attest function. One must be a CPA in order to render an opinion on a financial statement. The other services CPAs provide––from tax services to management advisory services––are not covered by this monopoly status. Approximately 15% of the CPA profession is engaged in auditing activity, which is why many states have now developed separate avenues to get certified without providing audits.
Monopoly status is not a right of a profession, it is a privilege granted by the state. Theoretically, if society believes the profession is not properly servicing it, monopoly status can be revoked. Also, increased regulation and legal liability are other methods that can be used to ensure a profession is fulfilling its obligations to society. Expansion of legal liability of CPAs and recent legislation such as the Sarbanes-Oxley Act of 2002 is a manifestation of this reality.
It should also be noted that most economists are against monopoly status being granted to any professional, because it reduces innovation, raises prices to consumers, and hinders the dynamism of a free market. The deregulation of the professions that has occurred over the past few decades reflects this view.
The Spirit of Service
Two Latin phrases sum up the ethic of service that is another core value of a profession: Non sibi sed allis, “Not for ourselves but for others” and Pro bono publico, “For the public good.” Because society grants professions monopoly status, it expects members of that profession to put the interests of the public ahead of its own member’s interests.
In fact, the AICPA Code was modified January 12, 1988 and a public interest principle was added, which states that conflicts are to be resolved in favor of the public. Even in the absence of codes and principles promulgated by a professional body, individual members and firms have been known to hold themselves to higher standards.
For instance, George May, a British Chartered Accountant born in 1875, and a senior partner at Price Waterhouse, insisted on financial independence from clients thirty years before the idea occurred to accounting’s professional bodies.
Prior to 1978, some legal and accounting professional ethical codes placed limits on advertising, and soliciting clients––known as afferent ethics, since they deal with relationships among professionals. But since these regulations affect the public, they can also be thought of as efferent ethics, which deal with how the profession shall act in the public interest.
An example of this is the famous 1977 Supreme Court Case Bates & O’Steen v. State Board of Arizona, 433 US 350 (1977), wherein the Court ruled that attorneys could market their legal services. Prior to this landmark case, the AICPA Code of Professional Conduct explicitly proscribed advertising, stating:
Solicitation to obtain clients is prohibited under the Rules of Conduct because it tends to lessen the professional independence towards clients which is essential to the best interests of the public. ...Advertising which is a form of solicitation is prohibited...Promotional practices such as solicitation and advertising, tend to indicate a dominant interest in profit.
Infamous “Bates” Ad
In 1978, the CPA profession responded to the Bates decision by amending this rule to read, "A member shall not seek to obtain clients by advertising or other forms of solicitation in a manner that is false, misleading, or deceptive."
Many economists have argued that advertising has had a salutary effect on professional services by providing more information to consumers, more competition, more choices, new innovative services, better client service, and lower prices. Some members of the profession dispute this and have a tendency to look upon this deregulation as one of the problems causing the alleged compromises to auditor independence, which may have contributed to the recent accounting scandals.
The True Professional
A professional is someone who is responsible for achieving a result rather than performing a task ––Michael Hammer
In The Experience Economy, Joseph Pine and James Gilmore posit a progression of economic value. We believe professionals are poised at the top of their curve: transformations:
If you charge for stuff, you are in the commodity business (fungible)
If you charge for tangible things, you are in the goods business (tangible)
If you charge for the activities you execute, you are in the service business (intangible)
If you charge for the time customers spend with you, you are in the experience business (memorable)
If you charge for outcomes the customer achieves, then you are in the transformation business (effectual—the customer is the product)
Listen to our interview with Joseph Pine from March 6, 2015.
Hi all, Ed here.
Originally, Ron and I planned to air an episode which was an edited version of a video conversation he and I had a few years ago. Sadly, I misremembered the "quality" of the recording from a technical perspective. I muddled through editing and producing about 30 minutes and decided it just was not up to the quality you would normally hear from both us and the great folks at VoiceAmerica.
With Ron visiting Australia, it was too late and too difficult to pull something together, so we have decided to run an encore presentation of our interview with Daniel Susskind, co-author of The Future of the Professions.
If you have not listened to this episode, you are in for a real treat. Daniel is as engaging as he is knowledgeable. If you have heard it before, listen again, I promise you will take some new away with you.