Episode #179: The Value Guarantee

Many firms think it counterintuitive to offer incentives for their customers to complain, worrying they would be inundated with angry customers; or if they did not respond effectively, they might lose the customer. These fears are unwarranted, however. The advantages of offering a value guarantee are many. It demonstrates to customers that your firm is serious about customer service and providing an exceptional experience for them. It puts your money where your mouth is. It is one thing for a firm to tell customers how good they are, quite another to show them with a value guarantee. It gives your entire organization the impetus to exceed the customer’s expectations, since now your money is on the line. This focuses the firm on the only true profit center it has: a customer’s check that does not bounce. But there’s even a bigger reason to offer a value guarantee, which Ed and Ron disclosed on the show.

The Value Guarantee

The original language is from Christopher Hart via David Maister's book True Professionalism:

Our work is guaranteed to the complete satisfaction of the client. If the client is not completely satisfied with our services, we will, at the client’s option either waive professional fees, or accept a portion of those fees that reflects the clients level of satisfaction.

Ed and Ron suggest the following modifications to bring it more into alignment with the concepts of the VeraSage Institute.

Our work is guaranteed to the complete delight of the customer. If you are not completely delighted with the work performed by us, we will, at the option of XYZ Company, either refund the price or accept a portion of said price that reflects XYZ’s level of value received. Upon payment of each of your scheduled payments, we will judge you have been satisfied.

Many firms think it counterintuitive to offer incentives for their customers to complain, worrying they would be inundated with angry customers; or if they did not respond effectively, they might lose the customer. These fears are unwarranted, however.

The late marketing professor Theodore Levitt made this observation with respect to asking for customer complaints: “One of the surest signs of a bad or declining relationship with a customer is the absence of complaints. Nobody is ever that satisfied, especially not over an extended period of time. The customer is either not being candid or not being contacted.”

Christopher W.L. Hart’s enlightening book Extraordinary Guarantees: Achieving Breakthrough Gains in Quality and Customer Satisfaction asks a very valid question: Why force people to pay for things that, in the end, they don’t value? He documents the case of the Bugs Burger Bug Killer Company (based in Miami, Florida and run by Al Burger), a pest control company specializing in the hospitality industry.

Al knew most customers did not want to control pests, but to wipe them out, so he developed an extraordinary guarantee to ensure his customers he could do the job:

You don’t owe one penny until all pests on your premises have been totally eradicated. If a guest spots a pest on your premises, BBBK will pay for the guest’s meal or room, send a letter of apology, and pay for a future meal or stay.

If you are ever dissatisfied with BBBK’s service, you will receive a full refund of the company’s services plus fees for another exterminator of your choice for the next year.

If your facility is closed down due to the presence of roaches or rodents, BBBK will pay any fines, as well as any lost profits, plus $5,000.

Would you pay a premium for the services of BBBK, given the above guarantee?

The Advantages of Offering a Value Guarantee

According to the U.S. Office of Consumer Affairs, 37 to 45 percent of all service customers are dissatisfied with some aspect of the service they receive, but do not complain. This risk of customer defection can be ameliorated by offering a money-back value guarantee.

The advantages of this policy are many. It demonstrates to customers that your firm is serious about customer service and providing an exceptional experience for them.

It puts your money where your mouth is. It is one thing for a firm to tell customers how good they are, quite another to show them with a value guarantee. It gives your entire organization the impetus to exceed the customer’s expectations, since now your money is on the line. This focuses the firm on the only true profit center it has: a customer’s check that does not bounce.

The value guarantee establishes a competitive differentiation and helps to sway the marginal customer to select your firm (especially important in Request for Proposal [RFP] work). Because having a guarantee requires a higher level of trust, the firm will do a more diligent job of prequalifying all of its new customers and will document the expectations of each party much more thoroughly.

A service with a guarantee is more valuable in the marketplace than a service without a guarantee—because it dramatically decreases the customer’s risk—and this alone enables the firm to command a premium price over its competition (think of FedEx, Nordstrom, Disney, Amazon, and BBBK). Experience shows firms can command a 15-25% price premium over their strongest competitor if they offer a guarantee.

It provides word-of-mouth advertising for your firm, because customers appreciate this policy and will be more enthusiastic about referring new customers.

It provides the customer an incentive to complain, which as we have learned, is more valuable than the alternative, because it gives the firm an opportunity to fix the service defect, preventing the same mistake being made with another customer. It is a constant trial—with the customer as judge and jury—and forces the firm to update and improve system delivery processes.

With all of that said, there is even a more substantial reason you should offer a service guarantee to all of your customers: You already do. If any of your customers were to complain loudly enough, you would make adjustments to their account, according to their wishes. Or, you would ask the customer to pay only what he or she thinks is fair. Unfortunately, this is done after the fact, when you will receive no benefit from it.

In effect, you have a covert value guarantee; I suggest you make it overt in order to gain a marketing and competitive advantage over your competition—one that you trumpet in the marketplace.

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Fred Smith, when he started FedEx, painted it on the side of his airplanes and delivery trucks: “Absolutely. Positively. Overnight.” If FedEx doesn’t deliver you don’t pay—an excuseless culture.

The best source for developing a value guarantee is the front-line team members who have the most interaction with the customer. They understand where the breakdowns, inconsistencies, reworks, mistakes, and variations occur in the service delivery chain. They also understand what is possible to deliver, and can formulate a value guarantee they will have ownership and pride in.

Will some customers take advantage of a guarantee policy? Probably. But consider Nordstrom, legendary for taking back merchandise not even purchased from its stores. It estimates that 2 to 3 percent of its customers take advantage of this policy, yet 97 to 98 percent appreciate the policy and are more loyal—and pay a premium price—as a result.

Do not let the tail wag the dog. If any one customer were to abuse your service guarantee, he would actually be doing you a favor by self-identifying himself as a problem customer. Gladly refund his money and fire that person from your firm.

Please do not misconstrue anything I have said here as meaning “The customer is always right.” That is patent nonsense. Even e-Satisfy.com has shown through its research that up to 40 percent of expressed dissatisfaction is caused by the customer’s own mistakes or unreasonable expectations.

Yet while the customer is not always right, it is no use to argue with him, since I have rarely seen anyone win an argument with a customer. The fact is, customers are entitled to their feelings and will act upon them, even if intellectually they are wrong. Sometimes the only course of action is to fire them.

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There is nothing worse for your firm’s morale than to continue to serve customers who do not understand or appreciate the value you provide. Given a choice between continuing a relationship with a toxic customer and the effect it might have on the morale of your team members, observe who former CEO of Southwest Airlines, Herb Kelleher, sided with, as this story from Nuts! Southwest Airlines Crazy Recipe for Business and Personal Success humorously illustrates:

. . . [a] woman who frequently flew on Southwest, but was disappointed with every aspect of the company’s operation. In fact, she became known as the “Pen Pal” because after every flight she wrote in with a complaint. It was quickly becoming a volume until they bumped it up to Herb [Kelleher’s] desk, with a note: “This one’s yours.” In sixty seconds, Kelleher wrote back and said, “Dear Mrs. Crabapple, We will miss you. Love, Herb.”

And this is a company who computes that only five customers per flight account for their entire profit. So why would Kelleher so nonchalantly fire a customer? Because he stands up for his people and puts them first. Once his response was published in the Southwest newsletter, what do you think happened to team member morale?

If it comes down to a choice between your team members and an unreasonable customer, side with the team members, even at the expense of short-term profits. The team members will make up for the lost revenue, but you can hardly ever recapture the loss of dignity and respect team members suffer by forcing them to work with rude and unreasonable customers.

Even better, let your team members decide which customers to fire—you will be surprised how diligently they perform this task and then how motivated they are to make up the lost revenue.

Conclusion

It is extremely rare to be “wowed” by a service experience today, a rather sad state of affairs. Yes, it is difficult for firms to continuously raise the bar of service standards, and exceed their customer’s expectations, but most do not even appear to be trying. There are, no doubt, many reasons for this service apathy, from too much focus on what happens inside of a firm, internal initiatives more concerned with the workflow and time measures rather than the customer, to compensation structures and cultures that no longer support superior service.

If you were to examine all of the great sources of wealth creation throughout the history of the world, you would notice this profoundly important truth: In every era, the businesses that succeeded and achieved excellence took a clear stand for the customer. Indeed, the central purpose of a business is to create and serve a customer.

By providing a value guarantee, your firm will offer a superior value proposition to its customers, allowing you to charge a premium price, one commensurate with the value you are creating. A good idea whose time is now.

Other sample gurantees

Graniterock

Your satisfaction is guaranteed through our unique Short Pay Policy that states, "If you are not satisfied… don’t pay us. We will contact you immediately to resolve the problem."

Moores

Can we give you a 100% guaranteed final price?

Most of the time yes, but no-one has a crystal ball. Things change, goal posts shift. Litigation, for example, can be very unpredictable.

However, what we will do is:

  • explain all the possible scenarios and their likely cost
  • agree on a fixed price for each stage
  • guarantee our service

Service Guarantee - we can’t guarantee outcomes but like price, the quality of our service is another thing we can guarantee up front. If you think the quality of our service didn’t match what was agreed, let us know and tell us how you think that should be reflected in the price you pay.

Fedex

You can count on FedEx reliability. We have a remarkable on-time delivery record, and we back FedEx Express® shipments, FedEx Ground® shipments within the U.S. and to Canada, and FedEx Freight®shipments with a money-back guarantee.

Nordstroms

We handle returns on a case-by-case basis with the ultimate objective of making our customers happy. We stand behind our goods and services and want customers to be satisfied with them. We'll always do our best to take care of customers—our philosophy is to deal with them fairly and reasonably. We have long believed that when we treat our customers fairly, they in turn are fair with us. We do apply returns to the tender it was purchased with. If we choose to provide a refund and no record of sale is available, we will ask for personal identification and a return will be provided at current price on a Nordstrom Gift Card.

Other resources

LL Bean dropping its unlimited returns policy, CNBC.com, February 9, 2018

'Loyal' LL Bean customer sues company for changing legendary returns policy, USAToday, February 14, 2018

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #178: Bad Medicine

For 2,400 years patients believed doctors were doing good; for 2,300 years they were wrong. Until the invention of antibiotics in the 1940s doctors, in general, did their patients more harm than good. Why do bad ideas die hard?

Ed and Ron discussed two important books that illustrate the need for us to constantly challenge our core assumptions about the way world works: Bad Medicine: Doctors Doing Harm Since Hippocrates, by David Wootton, and The Butchering Art: Joseph Lister’s Quest to Transform the Grisly World of Victorian Medicine, by Lindsey Fitzharris.

The Butchering Art

Joseph Lister, April 5, 1827 – Feb 1912 (84).

Testing ether during surgery in London, 1843, known as the “Yankee dodge” (discovered 1275!), first used in USA 1842.

One surgeon could amputate a leg in 30 seconds (once, testicles too).

Between 1843-1859, 41 medical students died from fatal infections.

Lister almost quit medicine after his brother died, and become a preacher.

The microscope played a big role in Lister’s work, but most doctors thought it was a toy.

Lister’s germ theory was rejected byThe Lancet, the leading medical journal.

He created disciples: Listerians, who saw his methods work in hospitals.

People who never doubted Lister’s work: survivors!

Doctors in the USA remain unconvinced, up until the mid-1870s. Massachussets General was the first hospital to use Lister’s methods, in 1877.

Listerine was invented and marketed by Dr. Joseph Joshua Lawrence in 1879, PA; Johnson & Johnson was also formed, first selling sterile dressings and sutures.

“New Opinions are always suspected, and usually opposed, without any other reason but because they are not already common.” - John Locke

One of Lister’s assistants said, “A new and great scientific discovery is always apt to leave in its trail many casualties among the reputations of those who have been champions of an older method. It is hard for them to forgive the man whose work has rendered their own of no account.”

“When a distinguished but elderly scientist states that something is possible, he is almost certainly right. When he states that something is impossible, he is almost certainly wrong.” –Arthur C. Clarke

Bad Medicine: Doctors Doing Harm Since Hippocrates

“We know how to write histories of discovery and progress, but not how to write histories of stasis, of delay, of digression. We know how to write about the delight of discovery, but not about attachment to the old and resistance to the new.”

Bad Medicine Drives Out Good Medicine

The history of medicine begins with Hippocrates in the fifth century BC. Yet until the invention of antibiotics in the 1940s doctors, in general, did their patients more harm than good.

In other words, for 2400 years patients believed doctors were doing good; for 2300 years they were wrong.

From the 1st century BC to the mid-nineteenth century, the major therapy was bloodletting, performed with a special knife called a lancet.

Interestingly enough, that is the title of today’s prestigious English medical journal, The Lancet. Bad ideas die hard. “The lancet was the magician’s wand of the dark ages of medicine,” according to Oliver Wendell Holmes.

Bloodletting had its opponents of course, but the debate was over where in the body to draw the blood from, not over its effectiveness.

Four treatments were used for 2,000 years: emetics, purgatives, bloodletting and cautery, ¾ remained standard therapies longer than that.

The Case Against Medicine

The author makes three devastating arguments.

First, if medicine is defined as the ability to cure diseases, then there was very little medicine before 1865. Prior to that—a period the author calls Hippocratic medicine—doctors relied on bloodletting, purges, cautery, and emetics, all totally ineffectual, if not positively deleterious (no matter how efficiently they were administered).

The term iatrogenesis describes how doctors do harm while trying to do good. It is estimated that one-third of good medicine is a placebo effect, meaning medicine up to 1865 was less effective than placebos today.

Second, effective medicine could only begin when doctors began to count and compare, such as using clinical trials.

Third, the key development that made modern medicine possible is the germ theory of disease.

This is not to say that advances in knowledge were not made prior to 1860. Unfortunately, those advances had no pay-off in terms of advances in therapy, or what Wootton calls technology—that is, therapies, treatments, and techniques to cure.

So until the 1860s, doctors had knowledge of what was wrong but could only use it to predict who would live and who would die.

Wootton describes how the advances in knowledge did not change therapies, in perhaps the most devastating conclusion in the book:

  • The discovery of the circulation of the blood (1628), of oxygen (1775), of the role of haemoglobin (1862) made no difference; the discoveries were adapted to the therapy [bloodletting] rather than vice versa.
  • ...[I]f you look at therapy, not theory, then ancient medicine survive more or less intact into the middle of the nineteenth century and beyond.
  • Strangely, traditional medical practices—bloodletting, purging, inducing vomiting—had continued even while people’s understanding of how the body worked underwent radical alteration.
  • The new theories were set to work to justify old practices. [Emphasis added].

In a reversal of the scientific method, the therapies guided the theory, not the other way around.

Diffusing a new theory into a population is no easy task, nor is it quick. Wootton describes in captivating detail how various innovations in medicine were rejected by the medical establishment (the following list is much longer):

Examples of delay and resistance

  • Joseph Lister is credited with positing germ theory in 1865, yet there was considerable evidence for this theory dating back to 1546, and certainly by 1700. Prior to this, infections were thought to be caused by stale air and water (even Florence Nightingale believed this).
  • Wootton says 1865 is turning point, not transformation. 1950s medicine started extending life
  • Even though by 1628 it was understood that the heart pumped blood through the arteries, the use of tourniquets in amputations didn’t happen until roughly a century later.
  • The microscope was invented by 1677—simultaneously with the telescope, which lead to new discoveries in astronomy—yet as late as 1820 it had no place in medical research, believed to be nothing more than a toy.
  • Penicillin was first discovered in 1872, not 1941, as popularly believed. Its effectiveness was doubted for nearly 70 years.
  • The theory that bacteria, not stress, causes stomach ulcers was met with considerable resistance for over a decade. This is explained in a fascinating book The Great Ulcer War, by William S. Hughes.
  • Anesthesia was discovered to kill pain by 1795, first used on animals in 1824, then dentists. It wasn’t used by doctors in surgery until 1846, in London, and it was degradedly labeled the “Yankee dodge.”
  • Dentists pioneered anesthesia. One of first painless dentists, Horace Wells, was driven to suicide by the hostility of the medical profession.
  • The thermometer was invented in the 17th century, but was not commonly used until 1850 in Berlin, then New York by 1865.
  • The medical profession resisted the use of statistics and comparative trials for centuries. The first comparative study was conducted in 1575, but it took until 1644 for the next one. Then John Snow’s 1855 account of transmission of cholera in the water was rejected for over a decade. The modern clinical trial dates from 1946.
  • Puerperal fever or childbed fever caused one-half of 6 to 9 women in every 1,000 to die in the 18th and 19th centuries. In May 1847, Ignaz Semmelweis, a Hungarian doctor, advocated doctors wash their hand in between patient—and cadaver— examinations. The incidence of fever fell dramatically, but he didn’t publish his findings until 1860, which by that time he was considered an eccentric, being confined to a lunatic asylum in 1865; two weeks later he died. (Interestingly, even he still believed the disease was caused by stale air).

Why the delay?

Wootton believes the primary obstacle to progress was not practical, nor theoretical, but psychological and cultural—“it lay in doctor’s sense of themselves.” Consider the psychological obstacles:

  • Medicine has often involved doing things to other people that you normally should not do. Think for a moment what surgery was like before the invention of anesthesia in 1842.
  • Imagine amputating the limb of a patient who is screaming and struggling. Imagine training yourself to be indifferent to the patient’s suffering, to be deaf to their screams. Imagine developing the strength to pin down the patient’s thrashing body.
  • Imagine taking pride, above all, in the speed with which you wield the knife, in never having to pause for thought or breath: speed was essential, for the shock of an operation could itself be a major factor in bringing about the patient’s death.
  • To think about progress, you must first understand what stands in the way of progress—in this case, the surgeon’s pride in his work, his professional training, his expertise, his sense of who he is.

The cultural obstacles, Wootton believes, are based on a somewhat counterintuitive observation: institutions have a life of their own.

All actions cannot be said to be performed by individuals; some are performed by institutions. For instance, a committee may reach a decision that was nobody’s first choice.

This is especially true for institutions that are shielded from competition and hermetically sealed in orthodoxy.

In a competitive market, germ theory would have been tested in a competing company, diffusing into the population much faster than it did within the institutions of the medical community.

Germ theory was adopted because the medical profession knew it was in crisis.

Why is this Relevant to the Professions?

The similarities between bad medicine, the billable hour, timesheets, Frederick Taylor’s efficiency metrics, and value pricing are illustrative. Even today the US Centers of Disease Control reports that 2 million people get infections in hospitals, of those 90,000 die. The largest cause? Failure to properly wash hands.

In physics the key barriers to progress are most likely theoretical. In oceanography they might be practical. What are the key barriers to progress in the professional knowledge firm?

My VeraSage colleague Tim Williams remarked on Wootton’s book: “It makes me think about Stephen Covey’s premise [in his book, The Seven Habits of Highly Effective People] that if you want to make incremental changes, work on practices. If you want to make significant changes, work on paradigms.”

The problem is, minds are slower to change than markets, especially in the professions.

If a supposed scientific and evidence-based profession is this slow to change, what chance do lawyers, CPAs, and other professionals have to move away from the discredited labor theory of value—the modern-day equivalent of bloodletting?

Will the professions resist change for as long as doctors did? Are the cultural and institutional legacies that entrenched? Do professionals really want to define themselves by how many hours they log on a timesheet?

We do not know, but the evidence seems to indicate in the positive. Obviously, burying the billable hour and the timesheet is going to be a very long process indeed. It may not be within reach, but it is certainly within sight.

Other Reading

Ron’s article in the CPA Practice Advisor, “The Diffusion of Value Pricing in the Profession.”

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #177: Interview with Barry Melancon

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Barry C. Melancon is the President American Institute of CPAs and CEO, Association of International Certified Professional Accountants, the most influential body of professional accountants in the world with 650,000 members and students.

Formed in 2017, it combines the strengths of The Chartered Institute of Management Accountants (CIMA) and the American Institute of CPAs (AICPA), which Melancon also leads as President & CEO.

Barry joined the AICPA in 1995 when he was 37 years old, and is now the longest serving CEO in the organization’s 129 year history.

Under his tenure, the AICPA has grown to become the largest membership body of CPAs in the world and has spearheaded a number of initiatives to benefit not only the profession, but also investors, business owners, lenders and the general public.

These include audit quality centers; private company reporting standards; eXtensible Business Reporting Language (XBRL); the computerized CPA exam; and two consumer financial literacy education programs.

Topics we discussed with Barry

Take us from a small CPA firm in Louisiana to president of the AICPA—did you aspire to be head of the AICPA?

What’s your “Why”—what motivates you, why do you do what you do?

Enron, etc., was a rough couple of years, but you and the profession persevered, and even grew stronger—is that how you assess it as well?

Actual ad from 2002. Happily the AICPA and the accounting profession have emerged stronger than ever.

Actual ad from 2002. Happily the AICPA and the accounting profession have emerged stronger than ever.

What do you think about Sarbanes-Oxley, has it helped or hurt?

What’s the one issue in the profession that keeps you up at night?

How do you see all this new technology—blockchain, AI, etc.—do you see them displacing, or complements, or substitutes, to existing CPAs?

You don’t have a dystopian view of all this technology; you sound more optimistic about it?

According to Tim Harford’s book, Fifty Inventions That Shaped the Modern Economy, the language of accountancy is an oral tradition. We are getting back to that, those with excellent auditory skills will flourish.

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Wouldn’t be a VeraSage interview if we didn’t discuss timesheets. Is the AICPA looking at changing its peer review standards on timesheets for firms that are moving away from using them?

The challenges of security with the online CPA exam?

Demography is destiny. What are the demographics of the profession?

What advice would you give to a small CPA firm owner?

What one thing would you want someone like me to say to an accounting high school class?

Related Interview

Our interview with the AICPA’s Mark Koziel, Episode #75, from January 15, 2016.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #176: Free-rider Friday - January 2018

Ron’s Topics

This Fancy Restaurant Just Introduced Surge Pricing,” Money, January 11, 2018, Richard Vines/Bloomberg

One of London’s leading restaurants: Bob Bob Ricard, where each table has a call-button for Champagne, has introduced surge pricing. The same menu will now offer:

  • 25% lower prices during off-peak times (Monday Lunch)
  • 15% off mid-peak (Tues/Sun dinner)
  • Sat dinner is full price
bobbobricard-blue-dining-room-03.jpg

The Fairness effect is being handled well: It is not changing the menu, it’s just establishing that certain days will cost less, thereby offering a discount off standard rather than a surcharge for peak times.

We wonder if same size parties will end up spending more at off-peak times, given this discount?

The surge pricing does not apply to wine and champagne.

Not great, again,” The Economist, January 6, 2018

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According to a Center for Disease Control report dated December 21, 2017, life expectancy in the USA fell in 2016 for the second year in a row. The last time this happened was 1962-63. For a three year decline, you have to go back to the Spanish flu pandemic a century ago.

Life expectancy is now 78.6 years, down from 78.9 in 2014 (two years lower than the average in OECD countries), and 78.7 in 2015.

One cause is the epidemic of addiction to opioids, which claimed 63,000 lives in 2016.

The leading cause of death remain heart disease and cancer, which have leveled off, and even declined a little.

The category known as “unintentional injuries”, which includes overdoses, has moved from third to fourth place from 2015.  Six percent of deaths in 2016 were individuals in the prime of their lives, ages 25-34.

Preliminary data for 2017 indicate these deaths will continue to rise.

The Economist then blames president Trump for not appointing a drug tsar appointed, and not spending more money.

Good news: the number of deaths in 2017 on regularly scheduled passenger jets: 0, a decline from 2,429 in 1972 and 761 in 2014.

“Look, Ma, No Driver,” CSAA

Last November, CSAA and Keolis launched a level 4 autonomous minibus in Las Vegas that navigates a three-block circuit in a downtown neighborhood.

Home runs,” The Economist, December 23, 2017: Parcels are delivered an average of 1.5 times in the Nordic region due to worries over “porch-piracy.” Forty percent  avoid online purchases.

Now, wirelessly connected locks, security cameras, and an App ($199) allow delivery people to enter residences to drop off packages.

Amazon is testing this system in 37 American cities, WalMart also, and even Sears for appliance repairs. 

Beyond bitcoin,” The Economist, January 13, 2018

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Dogecoin was launched in 2013 as a joke, and as of January 7 had $2 billion in circulation. Others, such as UFOcoin, Putincoin, Sexcoin, Insanecoin ($7m) have also been launched.

Around 40 coins have a market value exceeding $1 billion.

On January 9th Kodak launched a coin that allows photographers to charge for their work.

Telegram, a messaging service with 180 million users, will launch Gram to pay for range of services from online storage to virtual private networks.

Reportedly, Facebook is looking into creating a digital coin. Would Bitcoin’s days be numbered?

Taming the titans,” The Economist, January 20, 2018

Google, Facebook, Amazon, Apple are all BAAD: Too big, anti-competitive, addictive, destructive to democracy.

Anti-competitive - Facebook and Google control 80% of news referral traffic; Google has an 80% market share in search, while Amazon controls 40% of online commerce. They all have a huge advantage due to network effects.

Addictive - Teens who use social media extensively are less happy than peers. Depression and suicides have risen. Apple CEO Tim Cook told his nephew to lay off social media.

Damaging democracy - People now get their news in filter bubbles, strengthening confirmation bias, and fake news is on the rise.

Proposed actions - “Hipster antitrust.”

  1. Break them up!
  2. Utility regulation - Mark Zuckerberg, you’ll rue the day you referred to Facebook as a utility, as ubiquitous as electricity. It’s hard to regulate prices when they are $0, so more likely regulators would cap profits.
  3. Prevent new acquisitions
  4. Data portability and interoperability. Customer data binds users to you and data gives them a huge competitive advantage. Let customers move their data elsewhere, and force companies to share the data with other firms.

Like sexual harassment scandals, M for monopolist, is today’s scarlet letter.

Content liability—your blanket protection won’t last. Germany can now impose fines if extremist content is not taken down within 24 hours.

Ed’s Topics

Alexander C.R. Hammond, “The Ice Box Cometh

  • In 1919, a refrigerator cost $11,000 in today's money
  • Tasks that needed servants or, later on, expensive equipment, are now cheap for all
  • Most people have a cheap fridge three times the size of the earliest models

Stop Calling it an Opioid Crisis,” CATO, January 9, 2018

The "crisis" talk is cause some people in very serious pain to avoid any and all opioids for fear of getting addicted. While that is possible, proper usage makes it unlikely. 

The Greatest Showman movie, on P.T. Barnum

Ed gives it a thumbs up and recommends people see it and look for the entrepreneurial angle. 

See TSOE Episode #55 where we profiled P.T. Barnum

Paying More at the Pump Will Not Fix California’s Roads if Politicians Keep Raiding the Gas-Tax Fund,” William F. Shugart II, Kristian Fors, January 5, 2018, Independent Institute

By July, Californians will be paying 65.7 cents per gallon in tax alone. Worse still the money, which is supposed to go to fix the roads, isn't.

Tax reform has done what the $15 minimum wage could not. See our TSOE Episode #88: Do Corporations Pay Taxes?

Partial list of companies raising the base wage to $15 per hour are:

  • American Savings Bank, 1,100 employees
  • Americollect, 250 employees
  • Aquesta Financial Holdings, 95 employees
  • Associated Bank
  • Bank of Hawaii, 2,074 employees
  • Bank of James
  • Bank of the Ozarks, 2,300 employees
  • Central Pacific Bank, 850 employees
  • Comerica Bank, 4,500 “non-officer” employees
  • First Hawaiian Bank, 2,264 employees
  • HarborOne Bank, 600 employees
  • INB Bank, 200 employees
  • Regions Financial Corp.
  • SunTrust Banks, 24,000 employees
  • Territorial Savings Bank, 247 employees
Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #175: The Laws of Systems Thinking

An extremely brief summary of Systems Thinking

We discussed the 11 Laws of Systems Thinking as laid out in the book: The Fifth Discipline: The Art & Practice of The Learning Organization, Peter M. Senge, 1990.

Our organizations work the way they do because of how we think and how we interact.

We don’t have mental models: we are our mental models.

W. Edwards Deming said: “No theory, no learning.” If we can’t express our assumptions in ways others can build upon, there can be no testing and building of public knowledge.

The book laid out give new “component technologies” converging to innovate learning organizations:

  1. Systems Thinking
  2. Personal Mastery—orgs learn only through ind who learn
  3. Mental Models—are theories determine what we measure (Normally, our thoughts have us rather than we having them)
  4. Building Shared Vision—future we want to create; creating leaders is like effective parenting
  5. Team Learning

Russell L. Ackoff, 1919 – 2009, former Anheuser-Busch Professor Emeritus of Management Science at The Wharton School, University of Pennsylvania, was also a seminal thinker in the field of Systems and Design Thinking, and his seminal work is: Creating the Corporate Future, 1981.

Ackoff preferred the term: Theory of purposeful systems, the idea being you have to understand the whole in order to understand the parts. It’s a discipline for seeing wholes.

A system is a whole that cannot be divided into independent parts. Its properties and behavior derive from the interactions of its parts, not their actions considered separately.

A disassembled auto cannot carry people.

The 11 Laws of Systems Thinking

1. Today’s problems come from yesterday’s solutions. There are no solutions, only tradeoffs. A company might be using dozens of disparate spreadsheets which cause poor decisions to be made. Clearly, that is a problem, but at one point each of those spreadsheets was itself, a solution to a problem. 

2. The harder you push, the harder the system pushes back. Otherwise known as compensating feedback, this is best illustrated by the story of Boxer the horse in George Orwell's Animal Farm.

3. Behavior grows better before it grows worse. Treating the symptom, not the cure? The "old" system always appears to have been better in retrospect and people will question the change, even if they had complained about the old system previously. 

4. The easy way out usually leads back in. If you have a hammer, everything is a nail. Comfort zone challenge; Satisficing. Senge shares the old yarn of the drunk who is looking for his apartment keys under a streetlamp. When another patron offers assistance the drunk admits the keys were lost in bar, but the the light is better out under the streetlamp.

5. The cure can be worse than the disease. Iatrogenic illness (the doctor causes the disease); first, do no harm. The cure becomes addictive. Sadly many professionals outside medicine are guilty of cause iatrogenic harm as well. 

6. Faster is slower. The story of the tortoise and the hare. A fast fix can equal a slow cure. Every system has an optimal speed.

7. Cause and effect are not closely related in time and space. Pushing the elevator button; adjusting the cold water in shower; and, of course ROI!

8. Small changes can produce big results—but the areas of highest leverage are often the least obvious. The real leverage is in understanding dynamic complexity, not detail complexity. The 4Ps of marketing are a dynamic problem. To control insects in greenhouses, wasps were introduced—brilliant, effective, counterintuitive.

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9. You can have your cake and eat it too—but not at once. Tradeoffs are key. You cannot increase the quality of a product AND simultaneously decrease the cost. Over time, higher quality CAN lead to decreasing costs. Either/or vs. both/and thinking.

10. Dividing an elephant in half does not produce two small elephants. No, it is does not. It produces and ugly, bloody mess. Getting nine women pregnant doesn’t produce a baby in one month.

11. There is no blame. Deming looked to the system, not people for the "blame."

Other Resources

Ed’s picture of water pitcher system

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Goodwill Hunting clip

Blog post: “The 11 Laws of Systems Thinking and Stakeholder Engagement,” by Jamie Billingham

 

 

 

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #174: Best Business Books for 2017

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“I think we ought to read only the kind of books that wound and stab us. If the book we are reading doesn’t wake us up with a blow on the head, what are we reading it for.” --Franz Kafka

Ron and Ed’s Best Business Books Read in 2017

Deep Thinking: Where Machine Intelligence Ends and Human Creativity Begins, Garry Kasparov

  • “Deep Blue was intelligent the way your programmable alarm clock is intelligent. Not that losing to a $10 million alarm clock made me feel any better.”
  • “It was a human achievement, after all, so while a human lost the match, humans also won.”
  • “Being remembered as the first world champion to lose a match to a computer cannot be worse than being remembered as the first world champion to run away from a computer.”

The Grid: The Decision-Making Tool for Every Business (Including Yours), Matt Watkinson

  • “Essentially, all models are wrong, but some are useful.” --George E. P. Box, mathematician
  • A good model that illustrates that organizations are interdependent, and you can’t change or optimize one aspect of a firm without changing—sometimes for the worse—other areas.

Fifty Inventions That Shaped the Modern Economy, Tim Harford

"The Luddites didn’t smash machine looms because they wrongly feared that machines would make England poorer. They smashed the looms because they rightly feared that machines would make them poorer."

The Gramophone

"The top 1 percent of musical artists take more than five times more money from concerts than the bottom 95 percent put together."

The Welfare State (and passports)

"These two massive government endeavors—the welfare state and passport control—go hand in hand, but often in a clunky way. We need to design our welfare states to fit snugly with our border controls, but we usually don’t. "

Passports were designed more to keep people IN by not allowing them out!

The Dynamo

"Until around 1910, plenty of entrepreneurs looked at the old steam-engine system, and the new electrical drive system, and opted for good old-fashioned steam. Why? The answer was that to take advantage of electricity, factory owners had to think in a very different way."

"What explained the difference? Why did computers help some companies but not others? It was a puzzle. Brynjolfsson and Hitt revealed their solution: What mattered, they argued, was whether the companies had also been willing to reorganize as they installed the new computers, taking advantage of their potential."

Double Entry Bookkeeping

"Someone would be charged to take care of a particular part of the estate and would give a verbal “account” of how things were going and what expenses had been incurred. This account would be heard by witnesses—the “auditors,” literally “those who hear.” In English the very language of accountancy harks back to a purely oral tradition.
So what, a century later, did the much-lauded Luca Pacioli add to the discipline of bookkeeping? Quite simply, in 1494, he wrote the book.10 And what a book it was: Summa de arithmetica, geometria, proportioni et proportionalita was an enormous survey of everything that was known about mathematics—615 large and densely typeset pages. Amid this colossal textbook, Pacioli included twenty-seven pages that are regarded by many as the most influential work in the history of capitalism. It was the first description of double-entry bookkeeping to be set out clearly, in detail, and with plenty of examples."

Microslices: The Death Of Consulting And What It Means For Executives, John M. Dillard

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John M. Dillard started his career at the Central Intelligence Agency (CIA) and has dedicated every working hour since to helping organizations, private and public, uncover secrets to stay ahead of future threats— whether those threats are competitive, operational, or security related. His 15-year career in management consulting has benefited everyone from large players such as Deloitte Consulting to smaller companies such as the one he cofounded, Big Sky Associates. His consulting experience runs the gamut: from commercial strategy to government security operations and large scale IT, from banking administrative flows to analyzing operations at the 9/ 11 recovery site at New York City’s Ground Zero.

  • Huge proponent if value-led pricing. Mentions Alan Weiss.
  • Mentions “knowledge workers” ten times!
  • Ed started creating a list of sentences that could have been written by Ron Baker, but I stopped after I the first dozen of so.
  • The new model is a shift away from David Maister’s Trusted Advisor model.

Microslices Defined: The accelerating specialization, compression, and automation of consulting activities. Fully realized it will be the dominant business model of professional services.

Makes major points about big data and data science:

  • Collecting lots of data is mostly useless without the ability to design techniques, predictive analytics, machine learning tools, and visualization techniques that provide insight into what it means.
  • Data science and technology are not the same thing. Technology enables advanced data science, but data science is not hardware. In some cases, data science is enabled by software, but data science will not be performed by the IT guy in your company.
  • Data scientists are not another flavor of computer scientist or technology consultant.
  • Data science is just as concerned with masterful inquiry as it is with technical mastery. The art of asking incredible questions, testing hypotheses, validating results, and using the scientific method is at the heart of data science.
  • Data science is more about creating the right questions to ask the data than about the technology of how to access the data.

Why is it important:

  • First, data science facilitates faster delivery of professional services.
  • Second, data science allows deeper specialization of professional service providers.
  • Finally, data science is going to provide the basis for the automation of consulting tasks.

From Dillard's Company Manefesto

  1. Time and value are not equivalent. We will provide maximum value in as little time as possible. The old model of charging on the basis of time is broken. We will never take longer than necessary to deliver a result. 
  2. Work is something you do, not a place you go. Our work culture rejects “presentee-ism” (a belief system based on people being physically present) in favor of presenting killer results. 
  3. Do unto ourselves as we would have our clients do unto us. Big Sky’s relationship with its employees should mirror our relationship with our clients. In other words, we expect our clients to respect us and focus on results, so we should do the same to each other. 
  4. Greatness isn’t for everyone. Some executives really want to pay to see someone sitting in a cube at their facility, no matter how good or bad the work is. Some executives really want to pay to direct the details of how the work is done instead of for a specific result, which requires them to be charged by the hour. We believe that we should prove that our way is better—but that requires clients who accept proof.

Other good ideas:

  • "Professional services executives, like executives in previously disrupted industries, make claims that they are “different,” that their model is based on trust, or that their hundred-year-old brand is impregnable. In law, consulting, accounting, and similar businesses that have traditionally been dominated by brand and reputation, executives may claim that too many functions could never be commoditized. They are wrong."
  • Every company is becoming a tech company; some just haven’t realized it yet.
  • "In my own company, we have moved away from enterprise systems that “do everything” to a collection of connected, niche products like Slack (for communications), Google Drive (for storage), Hubspot (for marketing), Asana (for project management), and Harvest (for expenses). Professional services is evolving in a similar pattern. Instead of hiring a behemoth firm to do everything, you’ll have a “user interface layer” that may be a firm or a tool. And the specialized work—from organizational structure analysis, to strategy, to pricing, to demand forecasting, to process optimization—will be completed by a network of niche specialists delivering together."
  • "By using the term “millennial attitude” I am not referring to a specific age range but about cultural norms typified by an age range."
  • "Don’t ask general counsel for permission. They’re good people, really. But they are heavily incentivized to insulate you from new ideas."

There are risks and costs to a program of actions. But they are far less than the long range risks and costs of comfortable inaction. —John F. Kennedy

Creativity, Inc.: Overcoming the Unseen Forces That Stand in the Way of True Inspiration, Ed Catmull

  • “What makes Pixar special is that we acknowledge we will always have problems, many of them hidden from our view…we work hard to uncover these problems, even if doing so means making ourselves uncomfortable.”
  • “My goal is to create a culture at Pixar that will outlast its founding leading—Steve Jobs, John Lasseter, and me.”
  • “We start from the presumption our people are talented and want to contribute. …our company is stifling that talent in myriad unseen ways.”
  • If you give a good idea to a mediocre team, they will screw it up. If you give a mediocre idea to a brilliant team, they will either fix it or throw it away and come up with something better.
  •  People trump process!
  •  [Chefs say: Technique trumps ingredients].
  •  “Process and efficiency are not the goals. Making something great is the goal.”

Shoe Dog: A Memoir by the Creator of Nike, Phil Knight

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  • A shoe dog is someone devoted to making, selling, buying, or designing of shoes.
  • His Dad asked him: “Buck, how long do you think you’re going to keep jackassing around with these shoes?” “I don’t know, Dad.”
  • “The world is made up of crazy ideas. History is one long processional of crazy ideas. The things I loved most—books, sports, democracy, free enterprise—started as crazy ideas.”
  • One point of disagreement: Knight writes that “business is war without bullets.” We couldn’t disagree more with this analogy. Business is not war!

Other Resources Mentioned

Basics of Theory of Constraints, by Dr. Eliyahu M. Goldratt, author of The Goal. He criticizes cost accounting in the lecture, with compelling logic.

Russ Roberts, host of EconTalk, interviews Tim Harford on his book, Fifty Inventions That Shaped the Modern Economy

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #173: 2017 - Year in Review

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2017 R.I.P.

  • Roger Moore
  • Adam West
  • Glenn Campbell
  • Fats Domino
  • Jim Nabors
  • Erin Moran (Joanie, Happy Days)
  • David Cassidy
  • Martin Landau
  • Mel Tillis
  • Tom Petty
  • Stephen Furst (Kent Dorfman in Animal House)
  • Hugh Hefner
  • Chuck Berry
  • Roger Ailes
  • Joseph Wapner (People’s Court)
  • Chuck Barris—The Gong Show
  • Don Rickles—check out his autobiography, Rickle’s Book: A Memoir
  • Jerry Lewis
  • Mary Tyler Moore
  • John Anderson (7% of the vote in 1980 presidential election). As a Congressman, he proposed a Constitutional amendment to acknowledge “the law and authority of Jesus Christ.” It went nowhere.
  • Charles Manson, 83
  • Ron’s dog, Winston, December 22, 2017, R.I.P.

Follow-up to our show: Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays

From The Economist: “Have yourself a dismal Christmas,” December 23, 2017

Listen to the original show: Episode #22

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Top 3 TSOE Shows

Favorite Shows, as ranked by our listeners

Special mention: Our #1 Ranked Show with guest was Episode #124: Interview with Gary and Jim Boomer.

Ron’s Favorites

Listener Email—HSD: High Satisfaction Day

Ed and Ron received this HSD email the day after Christmas. The author wishes to remain anonymous, but has given us permission to post. 

It's a bit long, but contains lots of great lessons for anyone who is still hesitant about no timesheets. Much gets written on the impact of technology and how it will change the billable hour model. Much less attention is given to the impact on smart people having to account for every six minutes of their day. I still believe talent is a big reason why timesheets have to go, not just technology.

You can't change a business model unless you also change what is measured--that's a historical fact. Here's the email:

Gentlemen – I hope you both had a wonderful Christmas.

I don’t normally give gifts personally, instead I subcontract that work out to my wife. However, I wanted to send something to the two of you that I know you will appreciate. (This may actually be re-gifting, since you directly played a part).

Effective Jan 1, 2018, our firm will cease tracking time for client work. Although the “6 minute daily diary” it is a tradition that spans the near-40 year history of our firm, it is no more.

Just a little background – for our area, we are a mid-sized firm. We provide audit, tax and accounting services, and also investment advisory services through a separate LLC. In the past couple years, we’ve had quite a bit of partner and employee turnover, health issues, and the slow-moving retirement of a still-active founder.

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It’s been hard to focus on the working “on“ instead of “in” the business. However, I’ve known for a while that we could get to a place of killing the timesheet. Just thought it would take longer. But, last month, I attended QB Connect and sat in on a few of the sessions with Ron and others. On the way back home, I formulated my plan to move from 6 minutes to 15 minute increments for 2018, then end timesheets in 2019. However, once we started discussing the possibility, it became evident that prolonging the agony served no real purpose, other than to appear superficially cautious and thoughtful. (How, exactly, does one say “Honey, I will stay faithfully committed to you until Dec 31, 2018, then we are getting a divorce”???)

We have, for quite some time, been largely a “fixed price” firm, so the revenue piece was not the barrier. 90% of next years’ revenue is already destiny, as the “hourly rate” is not what it charged out. It really came down using it as a management piece. There was still the lingering feeling that timesheets were some indication of employee value. Your podcasts helped change our mindset, dispel that notion, and accelerate the change.

In the last couple weeks as I had conversations with my people, 2 things stood out to me. 

  • First, my audit manager, who I’ve worked with for over a dozen years, said “Oh, I’ve always wanted to work in a firm without timesheets”. I was actually worried that this change might make her feel uneasy, but in fact she clicked her heels and did the “no place like home” thing…To be fair, I never asked, but if that was unknown to me, how many partners in firms really know what is going on in the minds of their most experienced people?
  • Second, we have an intern that just graduated from college a couple weeks ago and is transitioning to full time. When I talked with her, I realized how little is taught in college about the actual business of a CPA firm. The whole “billable hour” concept is basically non-existent to her. She’s growing into a solid team member, strong values and good work ethic, and I don’t think that it’s overly dramatic to think that avoiding a year of documenting her worth 1/10th of an hour at a time may keep her in the profession. Being part of the value conversation will be something that will accelerate her growth here, or take with her if she decides not to stay with the firm. 

Our challenge, for the upcoming year, is to do the hard work of implementing options in pricing and perfecting our value conversations with clients that have been with us for 10, 20, 30 years. The tax law change is actually perfectly timed, and will help winnow out the clients that don’t really need us, and those that do. To that end, I placed an order on Amazon last night for a few copies of the TSOE book and “Implementing Value Pricing.”

As we head into a tax season: we are down one person from where we would like to be, Congress just went full Mad-Lib with tax code, technology is always solving the last problem but creating another one, and the “pay employees in bitcoin” gambit didn’t go well. Yep, I’ve got 99 problems, but timesheets ain’t one…..my only regret is that it has taken this long.

Thank you for the work you do!

Ask TSOE: Listener Question

Greg LaFollette, two-time guest on TSOE, asks the following: Inquiring minds want to know: Bitcoin Cash or Bitcoin (Core)?

There’s a fantastic debate on the Tom Woods Show: Ep. 1064 The Debate Within Bitcoin: Jameson Lopp vs. Roger Ver on Bitcoin and Bitcoin Cash.

82 Reasons Why 2017 was an Amazing Year

Fantastic article: “2017 Was a Year of Amazing Advances for Humanity,” by Marian L. Tupy, December 26, 2017.

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Ed's top five

  1. February 18: Smartphones to become pocket doctors after scientists discover camera flash and microphone can be used to diagnose illness.
  2. March 3: Terminal cancer patients go into complete remission after groundbreaking gene therapy.
  3. April 2: Plastic-eating fungus may solve garbage problem.
  4. September 12: U.S. middle-class incomes reached highest-ever level in 2016, Census Bureau says.
  5. December 7: Bumper crops boost global cereal supplies in 2017/18.

Biggest Loser and Winner

Ed says: Statisticians/pollsters (losers); and Donald Trump, both winner and loser.

Ron says biggest loser: Mainstream media, Hollywood, the NFL, and universities. Biggest winner: the administration, for achieving:

  • Corporate tax reform
  • Appointment of justices
  • Repeal of Obamacare mandate
  • ANWAR drilling
  • Keystone Pipeline approved
  • Regulations rollbacked
  • EPA regulations rollback
  • Net Neutrality ended
  • Education Title IX rescinded—sex assault cases, due process
  • Paris Accord withdrawal
  • DOW at 25,000
Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #172: Free-rider Friday - December 2017

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Ron’s Topics

Buddha in The C-Suite,” Kevin D. Williamson, National Review, December 18, 2017

Move over Briggs-Myer, Buddha’s coming, a $1 billion industry. Mindfulness  is Buddhism without Buddha.

CMO—Chief Mindfulness Officer, Aetna. Google, Goldman Sachs, Intel, General Mills all offer it, and 20% of companies surveyed offer it, while 21% are planning to.

Executives claim an additional 62 minutes per week of productivity, and 80% of executives reported improved decision-making skills.

Scientifically, mindfulness is right up there with acupuncture, homeopathy, personality profiling.

There is a lack of replicable results, design problems, lack of control groups (less than 1 in 10 have control groups), no placebo effect, and other design flaws.

No Hands, Full Speed Ahead,” Michael Hendrix, National Review, December 18, 2017

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Chandler, AZ hosts Waymo (a subsidiary of Alphabet), as of August 2016. In November, the CEO announced test vehicles will operate with no human driver, achieving Level 4 autonomy (Tesla is at Level 2).

A robo-taxi fleet is coming (600 cars operating in Chandler now).

Business friendly Mayor and Governor, ADOT regulation, required no new legislation; it was done via Executive Order. Permissionless innovation

According to The Economist, General Motors will begin testing autonomous cars in lower Manhattan. 

The Open Road,” Charles C.W. Cooke, National Review, December 18, 2017

The government is sure to seek to ban driving sometime in the future.

But what about liberty? Cooke writes, “As usual, the opponents of prohibition will be correct. “Please sir, may I move?”

He proposes a legal prophylactic, now: amend the Constitution. The genius of the Bill of Rights is that it protects broad categories of human conduct. This is not so much about driving, but rather movement.

“Congress shall make no law restricting adults from driving licensed vehicles.”

Creating Wealth Does More Good than Giving it Back,” Paul H. Rubin, FEE, December 20, 2017

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The initial creation of wealth always greatly exceeds the giving back portion.

Henry Ford, who was a vicious anti-Semite, created wealth that benefited the Jewish people, but when he gave back by publishing the Dearborn Independent, an anti-Semitic newspaper that Hitler borrowed heavily from.

See our Episode #38 for a discussion of Henry Ford.

The Koch brothers and George Soros: Impossible for them both to be contributing to the social good since they are diametrically opposed.

John Stossel, “Thankful for Property,” November 22, 2017

Pilgrims nearly starved because they farmed collectively, what economists call the tragedy of the Commons.

He did a video on this experiment:

See our Episode #76 for Lessons from the Trading Game for a similar demonstration of the free-market principles of trade.

Net Neutrality

The FCC never had legal authority to enact net neutrality (NN) when Congress declined to do so. The FTC still regulates anti-competitive behavior.

iPhone couldn’t have happened with NN (ATT exclusive). TimWu, Columbia Law Professor, called it at the time “iPhony,” because Apple should allow customer to pick the carrier of their choice.

That exclusivity didn’t prevent Android from being world’s largest smartphone operating platform.

George Carlin taught us that FCC regulates content, so if you’re worried about this, the FCC is wrong body to have regulate the Internet.

Article at Stratechery.com?

Father of The Internet Skewers FCC: ‘You Don’t Understand How The Internet Works’”

Thomas W. Hazlett: Economist, Clemson University, has written two fantastic books on this topic:

According to Hazlett: “A truly open Internet allows consumers, investors, and entrepreneurs to choose among many models…The FCC mistakes the benefits of market processes for a planned industrial structure, imposing new rules to protect what evolved without it.”

Marea (Spanish for tide) cable being laid between Virginia and Spain, thin garden hose. Funded by: Microsoft, Facebook, and Telxius.

160 Terabits per minute!

 

Ed’s Topics

Dropping Traffic signs would make us safer from Jeffrey Tucker in a FEE article, November 27, 2017

In response to a snarky Facebook post in which the commenter said, "Right, let's get rid of traffic lights," I encountered the above article from Jeffrey Tucker. 

Even the folks at VOX seem to agree. Here is a short film link on people driving slower, “Edge friction”

List of self-driving milestones

from www.XKCD.com, December 6, 2017

from www.XKCD.com, December 6, 2017

Tax Bill: Reform or Not?

Ed says it’s not real reform.

Ron says yes it is, but only on the corporate side, not the personal side (though the repeal of the Obama Care mandate is major reform). The corporate reform is mostly due to full expensing—which does expire after 10 years—but also changing to a territorial system, which is a big change.

Also, what about government spending? See Kevin Williamson’s article in National Review on “A Dessert-First Tax Bill.”

What’s going on with Bitcoin?

Are people cashing out at year end? Bitcoin futures market began. First Bitcoin joke: A son asks his father for $10 in Bitcoin. Father replies, “$9.41, what do you need $13.21 for?”

Neat piece from Mark E Leftovic on why BitCoin IS different.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #171: Interview with Johan Norberg

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Ron and Ed are thrilled and honored to be interviewing Johan Norberg. Johan is a senior fellow at the Cato Institute and a writer who focuses on globalization, entrepreneurship, and individual liberty. Norberg is the author and editor of several books exploring liberal themes, including the one will will discuss in depth today - Progress: Ten Reasons to Look Forward to the Future. He studied at Stockholm University from 1992 to 1999 and earned a M.A. with a major in the history of ideas. He is also a member of the international Mont Pelerin Society.

Questions by Segment for Johan

Segment One

Would you explain your transition from leftist anarchist to classical liberal?

Life used to be "nasty, brutish, and short," but you point out that a child born today is more likely to reach retirement than his or her forebears were to live to age five.

We shouldn’t romanticize short working hours in the past: people didn’t have enough caloric intake to work long enough hours to produce a surplus of food.

Who is Norman Borlaug? And, why should we know about him?

Your book is very balanced, always pointing out the negative side effects of the progress made. Please comment on that. 

Segment Two

Your book, Progress: Ten Reasons to Look Forward to the Future (2016, 2017) is a treatise of factual optimism. You point out we’ve made more progress over the last 100 years than in first 100,000! In the last 50 years, poverty fallen more than preceding 500 years.

You deal with 10 major areas:

  1. Food
  2. Sanitation
  3. Life expectancy
  4. Poverty
  5. Violence
  6. The environment
  7. Literacy
  8. Freedom
  9. Equality
  10. The next generation

With respect to food, would you discuss the virtual disappearance of famines, and how the almost never take place in a democracy?

With respect to life expectancy, you write that before 1800, not a single country had a life expectancy above 40 years. Today it is 71, while the population from 1950 to 2011 increased from 2.5 billion to 7 billion. But life expectancy increased “not because people bred like rabbits but because they stopped dying like flies.” How did that happen?

Infant mortality declined from 154 to 35 per thousand between1960 and 20156, even in Haiti. This is an untold story.

Segment Three

Would you discuss the myth that the native Americans lived in a utopia, here and in Canada, until the Europeans came along?

Your chapter on violence talks about causes of war can be relatively petty. What do you think of the current dispute in the NFL of players not standing for the national anthem and respecting the flag? Would that have caused a war in the past?

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You write about the importance of creativity, which is the theme of this show, and the opening quote from Ronald Reagan. You say that “humans are pleasantly reproducible.”

Even though the end of world poverty might not be within reach, do you believe it is within sight?

Segment Four

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In your Next Generation chapter you discuss the decline of child labor and tell the story of a 12 year-old girl’s hands from an Indian village. Would you tell that story, because it is incredibly poignant.

In the Epilogue, you point out that humans tend to be naturally pessimistic, and that most people fail questions regarding the progress you so well document in the book. You give an interesting explanation: things that happen in an instant are mostly bad! But reducing poverty, increasing life expectancy, etc., happens slowly over very long periods of time, which tend to go unnoticed.

Your book is not Pollyannaish. Do you see trends that could derail this progress? Are you optimistic?

We loved the quote from Franklin Pierce Adams: “Nothing is more responsible for the good old days than a bad memory.”

Comment /Source

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #170: Customer Transformations

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In The Experience Economy, B. Joseph II and James H. Gilmore, (2011, 1999) lay out the Progression of economic value:

  • 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)

Buying experiences makes people happier than just buying products—the best things in life are not things! A common mistake is thinking experiences are mere entertainment. It’s really about engaging customers.

Any shift up to a new, higher-value offering entails giving away the old, lower-value offering. The authors give the example of a birthday cake:

  • Mom makes it from scratch in the 1920-30s: .10¢
  • Betty Crocker cake mix in the 40-60s, $2
  • Bakery slate cake in the 70s and 80s, $10-20
  • Chuck E. Cheese, $100-$250 party, the cake is free

 The Easiest way to turn service into an experience: provide poor service! Go from: “How’d we do,” to “What do you remember.” For instance, 90% of car buyers say they are satisfied, yet, only 40% buy next car from same manufacture.

Transformations

Three industries are ripe: Those that focus on making us healthy, wealthy, and wise.

The customer is the product. When you customize an experience you get a Transformation. While Experiences are personal, Transformations are Individual.

Examples: Fitness coaches, psychiatrists, plastic surgeons, CPAs, lawyers, religious excursions, Promise Keepers, GSK Committed Quitters program (50% greater likelihood you’ll quit smoking).

The London Business School: we’re not in education business. We’re in the transformation business. All other economic offerings have no lasting consequence beyond their consumption.

We want to transform ourselves to become different (A New You), which is why Pine and Gilmore call such buyers ASPIRANTS.

There are three separate phases in offering transformations:

  1. Diagnosing aspirations (from-to statements—flabby to fit, sick to well, single to married, grief to normal living)
  2. Staging transforming experiences
  3. Following through (AA)

At end of day: You are what you charge for.

What do you want to be?

What is beyond transformations? Here’s how Pine and Gilmore answer:

“According to our own worldview, there can be no sixth economic offering because perfecting people falls not in the domain of human business but under the province of God.”

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #169: Free-rider Friday - November 2017

Ron’s Topics

“Scam or substance?” The Economist, November 11, 2017

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Bitcoin has risen 700% this year.

ICOs—Initial Coin Offerings have attracted $3.2 billion this year, approaching internet startups Venture Capital funds. Investors expect to be at the birth of another Bitcoin.

The SEC brought first charges against an ICO, and China and South Korea banned them.

The Dotcom boom brought us Amazon and eBay, and ICOs could bring new form of firm, such as crypto co-operatives with lower transaction costs, aggregation of capital, and a decentralized structure.

The Economist writes it’s wrong for regulators to ban ICOs, citing how Quebec invites ICOs into a regulatory sandbox with less strict rules.

What Most Americans Don’t Know about Extreme Poverty,” FEE, Jeremy Horpehahl, September 18, 2017

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766,010,000 people live in extreme poverty today, defined as $2 per day, or less.

That means 6,412,820,000 are not living in extreme poverty.

In 1981, 88% of China, or 878 million lived in poverty. Over time:

  • 61% in 1987
  • 41% in 1999
  • 15% in 2008
  • 1.85% in 2013

Damage Control,” The Economist, October 14, 2017

Trauma hospitals are war zones. The new KPI: “critical mortality,” the share of those admitted to hospital with life-threatening injuries who die. It’s more meaningful than the ratio of fatalities to injuries.

Between 2001-2017: after terrorist attack this KPI was 15-37%.

On June 3rd  in the UK London Bridge attack, eight died at scene, but all 52 who were admitted to a hospital survived. None died in the hospital after the Boston terrorist attack in 2013.

In the Las Vegas mass shooting, out of 104 admissions, only four died.

In World War II 30% wounded died; in Korean and Vietnam wars it was 20%, and in Iraq and Afghanistan it was less than 10%.

They debrief and capture Lessons Learned. It is critical for Drs to admit their mistakes!

Cuban Doctors Revolt: ‘You Get Tired of Being a Slave’”, Ernesto Londono, September 29, 2017, The New York Times

Thousands Cuban doctors work abroad, and are Cuba’s most valuable export. Brazil pays Cuba millions every month, with the doctors receiving approximately 25%.

Brazil pays Cuba $3620 per doctor per month, for around 8,600 doctors. The doctors receive $908/monoth, which is greater than the $30/month they’d earn in Cuba.

150 doctors filed suit Brazilian courts (some won, some lost).

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This article made Ed recall one of his favorite Bible passage, Luke 12:13:14, which is the preamble to the parable the rich fool:

Someone in the crowd said to him, “Teacher, tell my brother to divide the family inheritance with me.” But he said to him, “Friend, who set me to be a judge or arbitrator over you?” - Luke 12: 13-14

I believe our Lord wants us to help the poor and indigent. However, the question is, should the government be the "judge or arbitrator" of how this is done?

From the Catechism of the Catholic Church:

Socialization also presents dangers. Excessive intervention by the state can threaten personal freedom and initiative. The teaching of the Church has elaborated the principle of subsidiarity, according to which "a community of a higher order should not interfere in the internal life of a community of a lower order, depriving the latter of its functions, but rather should support it in case of need and help to coordinate its activity with the activities of the rest of society, always with a view to the common good. CCC-1883

Sadly, the "lower orders" have been all but abandoned, especially in the United States.

What is time?

Listener Todd asks Ed: Time referred to as a commodity, but is it a resource? Here is Ed's reply.

Autonomous vehicles at Wal-Mart, scrubs the floors.

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Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #168: Interview with Howard Hansen on Healing Leadership

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"One thing is clear about today's leadership model. It's NOT working!" So says, Howard Hansen, cofounder of Healing Leaders.

Howard chose “Healing” in his company name to describe a new kind of leadership that he proposes. He sees the present problems in organizations and civilization at large, to be rooted in the destructive "story" we are now living. In the story of humankind, he believe we have moved from living in harmony with the world to having complete control over the world. 

Hierarchical leadership has caused great damage and even threatens the very existence of our species. If we are to change the story we are living from one of conquest to one of harmony, a call for a new kind of leadership is required. Healing Leaders embody that call.

Additional Resources

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #167: LIVE from the VeraSage Symposium

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As you may know Ron Baker is a founder of the VeraSage Institute, a think tank for professional firms; and that Ed Kless is a senior fellow.

The Institute holds a biennial conference during which the fellows and some friends are invited to gather share their knowledge in a symposium atmosphere. 

The event took place in Ed's hometown of Allen, TX. This episode is a live broadcast from the Symposium and featured Guest conversations from other VeraSage Fellows:

  • Michelle Golden
  • Greg Kyte
  • Kirk Bowman
  • John Chisholm
  • Adrian Simmons
  • Paul Kennedy
  • Tim Williams
  • And special Guest appearance by Ron's Dad, Sam Baker
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We hope you enjoy this peak into the gathering.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #166: Interview with Chris “Elroy” Stricklin, Colonel (Ret), USAF

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Chris “Elroy” Stricklin is a combat-proven Air Force Leader, and executive consultant at Afterburner. His unique range of experience combines service as a USAF Thunderbird, multiple N.A.T.O. assignments, White House and DARPA fellowships, and command-experience in the United States Air Force. He brings rich experience in leading, management, negotiations, continuous improvement and positive change. In addition, Stricklin’s military tenure includes Pentagon-level management of critical Air Force resources valued at $840B, Stricklin is also a Certified Manager with degrees in Economics, Financial Planning, Strategic Studies and Operational Art and Science.

“Elroy” was his call sign in the Air Force, named after his resemblance to Elroy on The Jetsons.

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Chris ejected from his Thunderbird plane (F-16) during an air show at Mountain Home, Idaho, with 85,000 people in attendance. He was 40 feet above the ground, one-half second from impact, landing in the fireball on his feet. The entire flight was a total of 25.5 seconds long, and as a result of the ejection, his spine was compressed by 2.5 inches. Because of temporal distortion that 25 seconds felt over three hours long.

Chris credits being alive to his training; especially the Debrief process.

The Debrief and Lessons Learned

Leaders are characterized by focused energy, effective action and benevolent compassion. The true measure of a leader is not just measured by success of their organization, but by the measure of leaders they influence and develop to follow in their footsteps. -Chris R. Stricklin

The Debrief is the most amazing thing we do, ensuring we grow tomorrow from today. Not just lessons experienced, but lessons learned (and shared). It’s a learning device, not a personal blame game.

Only 33% of organizational objectives are achieved, an incredible waste of effort, resources, etc. “We learn from the school of hard knocks,” which results in improvement of less than 5%.

However, if you go through even an unstructured Debrief, you improve performance by 28%. With a structured Debrief, it goes to 38%. With a competent facilitator, performance can increase by 300%!

Jim Murphy wrote Flawless Execution in 1988. Here is the Air Force’s Debrief acronym STEALTH:

  • Set the time of the Debrief
  • Tone—nameless and rankles, start with inside/outside criticism
  • Execution vs. objectives—Did we meet or objectives? Yes or no.
  • Analyze—ask why, why, why?
  • Lessons Learned—Capturing root causes of what went right and wrong
  • Transfer the lessons learned to the organization, and its knowledge bank
  • High note—always finish on a high note

A Debrief after a Thunderbird air show (approximately 28 to 32 minutes long) could be two hours.

For businesses, Chris recommends a Debrief be conducted within one week of an engagement.

It’s all about building a culture of improvement.

Advantages of Debriefs 

  • Closes the loop on the project; draws the line between past and future project; and puts the path behind us
  • Effective learning, improving future performance, and developing people
  • Catalyst for change and innovation
  • Cause vs. root cause
  • Generates specific and actionable lessons learned
  • Develops a culture and learning
  • Leadership development

Chris’s tips for your first few Debriefs

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  • Start with why, why, why?
  • You have to have objectives; a brief on who does what, when.
  • Don’t debrief a failure; debrief a win.
  • “It’s not just debriefing, it’s a culture of debriefing”—a way of thinking. It’s not who’s right, it’s what’s right.

 

Chris’s LinkedIn Blog Posts

The Debrief Secret of a High-Speed Fighter Pilot

An epiphany at 50,000 feet: The secret to success is Lessons Learned!

How does the military take a young college graduate and turn them into a fighter pilot? Using the Debrief and the resulting lessons learned, an experiential learning accelerator

Teams that Debrief outperform those that don’t by 25%.

5 Principles of Success…The Thunderbird Way

There’s been 325 Thunderbirds, serving two-year tours, and 50% of the team is new each year. It takes four months of training to become a skilled Thunderbird. Most companies have teams that have been together for years, and can’t reach the same level of performance.

Thunderbird way:

  1. Skill
  2. Training
  3. Discipline
  4. Focus
  5. Teamwork

The Value of a Consultant

VUCA = Volatility, uncertainty, complexity, and ambiguity

Improving Workplace Morale is Easy With These Two Simple Words

Spoiler alert: Communication + Value

Other Resources

Episode #15: The Best Learning Method Ever Devised: After Action Reviews

Ron and Ed's Free CPAAcademy webcast on AARs

Ed’s interview with Chris on the Sage Advice Podcast

 

 

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #165: Free-Rider Friday - October 2017

Ron’s Topics

Mind over matter,” The Economist, September 23, 2017

Can Entrepreneurship be taught? Researchers at the World Bank, National University of Singapore and Leuphana University in Germany conducted a Randomized Controlled Trial (RCT) for 2 ½ years from 2014 to find out.

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They selected 1,500 businesspeople in Togo, West Africa. A typical firm had 3 employees and profits of $173/month. Interestingly, only 1/3 of them kept books.

Three groups of 500 were divided into:

  1. Control group, nothing done
  2. This group got conventional business education in accounting, financial management, marketing, HR, etc.
  3. This group got courses inspired by psychological research, such as setting goals, dealing with feedback, persistence in the face of setbacks, etc.

After 2.5 years, sales in the 3rd group were up 17% (and profits were up 30%) over the control group. Also, the 3rd group had more innovations.

There was no effect in the second group.

The Economist concludes that aspiring entrepreneurs should skip the business shelf and head over to the psychology section.

Pay-per-risk,” The Economist, September 23, 2017

174,000 commercial drones were sold around the world last year. 2.8 million consumer drones were sold.

Insurance4drones, a British specialist, offers a $1,000/year insurance policy on the DJI Phantom, the best-selling drone.

October Flock, a London start-up, insures flight-by-flight at £5/hour. It considers the topography, whether hospitals, schools, airports, nearby, traffic levels on roads, etc.

Verifly, a USA start-up offers insurance on drones as well.

Selling insurance on annual basis is too inflexible. Offering insurance on-demand, in real time can better forecast risk.

Dark Humor from the socialist hellhole of Venezuela,” Daniel J. Mitchell, FEE, September 26, 2017 and “The war on cuteness,” The Economist, September 23, 2017

In Venezuela, 11,000 babies died last year and infant mortality is up 30%. 11.4% of children under age 5 are suffering moderate to severe malnutrition. ¾ of adults have lost an average of 19 pounds on the “Maduro diet.”

The number of women working in brothels has doubled, and the ages have dropped to 12 and 13.

One joke circulating that you don’t need toilet paper if there ain’t no food.

Groceries have been rationed by day of the week, based on your social security number.

So the government has declared, “Let them eat rabbits.” The problem is, kids are treating them like pets, putting bows on them and even taking them to bed.

The Economist calls it a “hair-brained” scheme.

If it’s broken, you can’t fix it,” The Economist, September 30, 2017

If you can’t open it, you don’t own it. The battle cry of a movement that decries the fact that you can longer easily fix that which you own, such as an iPhone, or John Deere tractor.

About a dozen states are considering “right to repair” laws. These laws would require firms to provide consumers and independent repair shops with same documentation and parts available to authorized service providers.

Tesla, for example, forbids its owners from using the car to offer Uber, Lyft, for example. This is because Tesla wants to start its own ride-sharing service, Tesla Network. This prohibition has yet to be legally challenged.

Joe Biden is Right about Universal Basic Income,” Daniel J. Mitchell, FEE, September 25, 2017

See our show on the Universal Basic income (Episode #95).

The skeptics of UBI don’t believe meaning and purpose can come from a handout. Biden says it’s the job that is important, not just the income.

Ed's blog post arguing that Joe Biden was right on another topic. 

Ed’s Topics

FEE article “Schooling is for the industrial era” by Kerry McDonald

Pull quote: "Enclosing children in increasingly restrictive schooling environments for most of their formative years, and drilling them with a standardized, test-driven curriculum is woefully inadequate for the Imagination Age. In her book, Now You See It, Cathy Davidson says that 65 percent of children now entering elementary school will work at jobs in the future that have not yet been invented. She writes: 'In this time of massive change, we’re giving our kids the tests and lesson plans designed for their great-great-grandparents.'"

Huffington Post, Facebook is now the FEC

Pull quote: "Zuckerberg’s address to his nation, carried on Facebook Live, showed a corporate CEO announcing decisions that will govern an important aspect of public elections, including campaign finance, spending and election integrity issues. The new policies have been crafted by a private company with no public input and no democratic mechanism for discussion. Facebook has essentially taken on part of the role of the Federal Election Commission through self-regulation ― which worries some people."

99Bitcoins.com

This site tracks the number of times Bitcoin has been reported to be dead. Hat tip to listener Hector Garcia.

Daily Mail article, A fight broke out in empathy tent in Berkeley, CA

SMH

This week with Ed

  1. My wife and I, for our anniversary Monday, got Apple watches. Expect to hear more on this soon.
  2. I had the opportunity to Lunch with TSOE listener BJ from Germany who was visiting family here in north Texas.
  3. For birthday, did a Facebook fundraising goal of $500 for the Acton Institute, reaching already $250. Cool stuff!
  4. Began meditating, based on FEE article, “Why knowledge workers should meditate.” There’s an App called Headspace that helps you.

Shout out to Richard Thaler for winning the Nobel Prize in economics.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #164: Antitrust Law and Price Signaling

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After the Civil War, corporations grew to unprecedented size. The public was suspicious of this concentration of economic power, and politicians responded in 1890 by passing the first antitrust law, the Sherman Antitrust Act. Over the years, antitrust policy has evolved through further legislative acts and amendments, regulatory guidelines and judicial interpretation, which have implications for pricing strategies. Join Ed and Ron as they discuss some of these laws, as well as the economics of price signaling to competitors, which is not a violation of antitrust laws.

The following are excerpts from Ron’s book, Pricing on Purpose: Creating and Capturing Value

Antitrust Law

Monopoly had become as popular a subject in economics as sin has been in religion. There is a characteristic difference: Economists are paid better to attack monopoly than the clergy are to wrestle with sin. —George J. Stigler, Memoirs of an Unregulated Economist

After the Civil War, with the development of better transportation systems that integrated a host of local markets into a national market, business corporations grew to unprecedented size in order to take advantage of economies of scale. As this process unfolded, many small and undercapitalized businesses went bankrupt or were purchased by larger concerns, and the term robber baron gained currency.

The public was suspicious of this concentration of economic power, and politicians responded in 1890 by passing the first antitrust law, the Sherman Antitrust Act. The act was thought the perfect remedy to stop any business from monopolizing its market and to restore efficient competition to the economy.

Over the years, antitrust policy has evolved through further legislative acts and amendments, regulatory guidelines and judicial interpretation, which obviously have implications for various pricing decisions. Although services are not subject to certain provisions of these laws—for instance, price discrimination—many businesses are affected, and the laws need to be taken into account when formulating pricing strategy.

Sherman Antitrust Act, 1890: Made acts in restraint of trade illegal.

Standard Oil and American Tobacco Cases, 1911: Broke up both firms (each of which accounted for more than 90% of their industry) into smaller companies.

The Federal Trade Commission Act (FTC Act), 1914: Established to investigate unfair practices and issue orders to “cease and desist.” In addition, it established the Federal Trade Commission.

Clayton Act, 1914: Outlawed unfair trade practices. Restricted mergers that would substantially reduce competition.

Robinson-Patman Act, 1936: Strengthened provisions of the Clayton Act, outlawing price discrimination.

The Sherman Antitrust Act, 1890

Sections I and II of the Sherman Antitrust Act read, in part:

Section I

Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal . . .

Section II

Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty . . .

A 1974 amendment to the Sherman Act made violations felonies rather than a misdemeanor as in the original law.

The Justice Department initiated a number of legal actions against large corporate holdings, none of which were as important as the one filed in a St. Louis Federal Court on November 15, 1906, against the Standard Oil Company of New Jersey.

By 1880, John D. Rockefeller was the king of the industry, with his Standard Oil Company holding the dominant market share, which grew between 1870 and 1879 from 4 to 90 percent. How did he achieve such a dominant market position?

“Between 1870 and 1885, the price of refined kerosene dropped from 26 cents to 8 cents per gallon. In the same period, the Standard Oil Company reduced average costs per gallon from almost 3 cents in 1870 to 0.452 cents in 1885.”

Legend has it this was predatory pricing: the act of deliberately underselling competitors in certain markets in order to drive them out of business. Once they are gone, the monopolist raises the price in the absence of competition. History books have immortalized this view of Standard Oil, and predatory pricing has been a major concern of government antitrust lawyers, politicians, and the general public then and now.

However, like most conventional wisdom, this theory is more conventional than wisdom, as explained by Dominick T. Armentano in his indictment of antitrust laws, Antitrust and Monopoly: Anatomy of a Policy Failure:

Unfortunately for lovers of legends, this one has been laid theoretically and empirically prostrate. In a now classic article, John S. McGee theorized that Standard Oil did not employ predatory practices because it would have been economically foolish to have done so. In the first place, McGee argued, such practices are very costly for the large firm; it always stands relatively more to lose since it, by definition, does the most business.

Second, the uncertainty of the length of the forthcoming battle, and thus its indeterminate expense, must surely make firms wary of initiating a price war.

Third, competitors can simply close down and wait for the price to return to profitable levels; or new owners might purchase bankrupt facilities and ready them to compete with the predator.

Fourth, such wars inevitably spread to surrounding markets, endangering the predator’s profits in his “safe” areas.

And last, predatory practices already assume a “war chest” of monopoly profits to see the firm through the costly battles; firms apparently cannot initiate predatory practices unless they already possess monopoly power. But if this is true, firms cannot gain initial monopoly positions through predatory practices.

It is important to note that most antitrust cases are filed by one business against another (customers have no standing to sue). The treble damage provisions also provide an incentive for harmed competitors to call attention to the government of violations.

Even though the government won its case against Standard Oil, and tobacco trusts, supporters of antitrust, were still not satisfied with the narrow interpretations by the court, Congress began work on two additional legislative initiatives designed to prevent further anticompetitive business practices.

The Federal Trade Commission Act, 1914

The Federal Trade Commission was established in order to enforce the provisions of the Sherman Antitrust Act in a more rapid manner than could be achieved by judicial law.

The first sentence of the FTC Act reads, “Unfair methods of competition in commerce are hereby declared unlawful.” Section 5 of the FTC Act reads, “The Commission is hereby empowered and directed to prevent persons, partnerships, or corporations . . . from using unfair methods of competition in commerce.” The FTC could ban a business practice merely because of the suspicion that it promoted unfair competition, without the permission of a court.

Also, the FTC has the authority to subject pricing practices to administrative review, not in order to punish past wrongdoing, but to make new law. The FTC is empowered to order a business to cease and desist from any practice it deems unfair, even if that practice would not necessarily be deemed unfair or anticompetitive in a court of law.

The Clayton Act, 1914

The Clayton Act was passed to correct various defects and omissions of the Sherman Act. Specifically, it prohibits anticompetitive mergers, tying arrangements, exclusive dealing agreements, interlocking directorates, and the acquisition of stock in competitor companies. The antimerger provisions were further strengthened in 1950 when Congress passed the Caller-Kefauver Antimerger Act. Also, Section 2(a), as amended by the Robinson-Patman Act, prohibits predatory price discrimination, but only in tangible products (it does not cover real estate, services, technology licenses, lease of facilities, or contract rights and privileges).

The Robinson-Patman Act of 1936

After the passage of the Clayton Act in 1914, chain stores grew rapidly and increased their buying power, and this type of price discrimination was thought to threaten the survival of independent wholesalers and retailers. Therefore, in 1936, Congress passed the Robinson-Patman Act in order to strengthen the Clayton Act.

This was in the middle of the New Deal, and protecting small businesses was viewed as a legitimate goal of antitrust policy. During the Great Depression, government policymakers were averse to price competition, believing it to be a major cause of the economic stagnation of the 1930s. Small business interest groups, in fact, were the impetus behind the passage of the Act, which was actually drafted by the U.S. Wholesale Grocers’ Association.

The foregoing acts are the major foundation of antitrust policy today. They have been amended many times by later legislative acts and special exemptions have been granted to various interest groups, such as labor unions, insurance companies, and farm cooperatives.

Criticisms of Antitrust Policy

Here is how Stigler summed up his opposition to the Robinson-Patman Act in 1969, before the Subcommittee on Small Business and the Robinson-Patman Act of the House Select Committee on Small Business:

. . . The Robinson-Patman Act is opposed by virtually all economists. I hope the Subcommittee will reflect upon the fact that if all the prominent economists in favor of the Robinson-Patman Act were put in a Volkswagen, there would still be room for a portly chauffeur.

Even Adam Smith was suspicious of any law advocated by groups of businessmen. Despite conventional wisdom, Adam Smith was no apologist for business people. In fact, he did not have many nice things to say about them, always calling into question the motives of their behavior. Smith was apprehensive of any meeting among businessmen, writing in Wealth of Nations:

People of the same trade seldom meet together, even for merriments and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

Seminal management thinker Peter Drucker also contributes to the antitrust debate:

Antitrust is an obsession of American lawyers, but I have no use for it. Any monopoly holds an umbrella over the newcomers, to be sure, but I am not afraid of monopolies because they eventually collapse. Thucydides wrote years ago that hegemony kills itself. A power that has hegemony always becomes arrogant. Always becomes overweening. . . . It becomes defensive, arrogant, and a defender of yesterday. It destroys itself.

Indeed, studying the history of antitrust cases and policy, one is left with the conclusion that almost any type of pricing behavior by a company is in violation of the law. If a company raises its prices above its competitors, it must be a monopoly. If a company lowers its prices below that of its competitors, it is obviously engaging in predatory behavior. If a company maintains its prices for any period of time, it must be colluding with its competitors to fix prices.

The Problem with Antitrust Laws—The Wrong Theory

Any first-year microeconomics student is taught the perfect competition model, which rests on many assumptions as delineated in this microeconomics textbook, including:

  1. Firms and individuals take market prices as given—each is small relative to the market so that their decisions do not affect the market price.
  2. Individuals and firms have perfect information about the quality and availability of goods, and about the prices of all goods.
  3. Actions by an individual or firm do not directly affect other individuals or firms except through prices.
  4. Goods are things that only the buyer can enjoy—if I buy and eat a slice of pizza, it is no longer available for you to eat; if you buy a bike, we both cannot use it at the same time.

There are several problems with this model. In a world of perfect competition there would be no need for advertising; yet Proctor & Gamble alone spends $5 billion on advertising its products, and we surely cannot make the argument that Proctor & Gamble is irrational.

The perfectly competitive model that posits all sellers are price takers would be, in reality, a world of no competition, no innovation, no market power, and no dynamism. It is emphatically a market no developed country’s people would want to live in.

Yet, it is the ideal model used by antitrust economists and lawyers to benchmark anticompetitive behavior, and it is contrary to how the real world works. Competition, by its very nature, is not a level playing field. All businesses are striving for monopoly profits, but even when attained they are not long sustained.

No market reflects the assumptions of the competitive model, which is why the majority of economists agree that the extreme cases of monopoly (no competition) and perfect competition (where no firm has any effect on market prices) are rare. Most markets are characterized by imperfect competition.

George Gilder wrote the following eloquent indictment of the beloved perfect competition model in Wealth and Poverty:

Because there is no demand for new and unknown goods, no demand for the unforeseeable fruits of innovation and genius, preoccupation with demand fosters stagnation.
The notion of perfect competition—a prime image of classical theory—is extremely useful in depicting the behavior of particular markets for existing goods. But it has little to do with the central activity of capitalism, which is the turbulent process of launching new enterprise. As has been often observed in academic analyses, perfect competition actually comes to mean no competition at all: an equilibrium in which all participants have perfect information and in which companies can change neither prices nor products and can essentially affect neither supply nor demand.
Perfect competition thus excludes most supply-side behavior: all the acquisition and manipulation of knowledge that is the main activity of real entrepreneurs. Free men and creative enterprise—all the secrets and surprises of actual competition—are banished in favor of a mechanism by which savings are automatically invested, supplies and demands are simultaneously reconciled, and the entrepreneurial role could be best performed by modern computers.

Antitrust has a rich and fascinating history, rooted firmly in the development of economic theory as well as the emotional appeal among the public, politicians, and the media. The robber barons have an infamous reputation among American culture, even though many would argue it is a misapplied name for entrepreneurs who brought needed goods and services—at constantly lower prices—to the masses.

In any event, executives in charge of pricing need to be cognizant of the law and its implications for devising pricing strategies and tactics. And although the laws do not apply to services, if your company is engaged in manufacturing, or deals with distributors and suppliers, then appropriate legal advice needs to be obtained to ensure you are complying with all applicable federal and state antitrust laws.

Price Signaling

What should pricers do when they are confronted with naïve competitors attempting to engage in a price war? Begin by attempting to ascertain—through gathering of competitive intelligence—why they are dropping prices; it may not be to start a price war but rather to simply clear out inventory or utilize excess capacity.

Successful companies tend not to spoil the market, the ones offering inferior value propositions do, and thus have the most to gain from initiating price wars. If you find yourself in the unfortunate position of having to offer a price discount, do not announce it publicly, as this will provide a signal to your competition and they may intensify the war. The risk in lowering prices is to signal to customers that you have been overcharging them in the past, while giving legitimacy to your competitor’s offerings.

Examine ways to offer more value at the same price—quicker deliveries or lead times—rather than match the price discount. Offer more favorable payment terms, or longer contracts. Rather than discounting planned price increases, delay them. If you are going to provide a discount to match a competitor, consider doing it only on incremental volume. Consider offering other value-added benefits—co-op advertising, loyalty programs, and so forth—that will maintain the integrity of your “list price” and shift the discounts off-invoice.

Pricers need to consider the total cost of engaging in a price war, not just one battle. You may gain marginal market share by undercutting your competition, but the risk is that you will lower prices throughout the entire industry, which are very difficult to return to prewar levels. Customers, like elephants, have excellent memories, especially at remembering the lowest price they ever paid, which is why grandpa constantly regaled you with stories of how candy used to cost five cents in his day. Price wars can desensitize customers to value, making them focus more on price.

If the competitor should return to more rational behavior with a price increase, immediately follow, so as to reward smart pricing. It is always better to let competitors maintain an advantage based on a higher price than a lower one, since this makes it more costly for them to cut prices in the future.

Do not fall prey to what economists call coordination failure—a situation in which each firm is reluctant to be the first in its industry to announce a price change. This industry-wide hesitation produces price stickiness.

Imitating competitors’ prices is known as conscious parallelism, which is lawful in the United States and the European Union as long as there is not explicit agreement among the companies. Of course, as with all antitrust laws, there is an enormous gray area between illegal collusion and lawful conscious parallelism, and it is always wise to engage legal counsel for guidance.

Also weigh the benefits and costs of offering a price match guarantee to your customers, a way to engage in tacit price collusion among competitors. This strategy can result in less competition and higher prices, although this effect is not assured.

Executives need to constantly speak and write about the importance of value and the perils of price wars in industry and trade publications. Be sure not to engage in speculative pricing declarations, since you can only announce what your company actually intends to do with prices in the future.

In the final analysis, the best way to avoid price wars is to avoid the commodity trap by offering more value to your customers; but if you are caught in one, these strategies can help to ameliorate the effects and shorten the length of these self-destructive practices.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode 163: Innovation Beyond Technology

This show was dedicated to the possibility that innovation goesbeyond just technological developments. Technology is important, but it is only a small part of innovation.

For innovation to be more fully complete we must look at other areas including the internal processes of the organization and most importantly the very language we use.

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Innovating like this is hard work and not for everyone because it requires deeper thinking than usual. If you believe you can attain this level of thinking, you are invited to listen to this show.

Ed's Slides 

 

Other Resources and Books Mentioned

The Grid: The Decision-Making Tool for Every Business (Including Yours), by Matt Watkinson, 2017.

“The Grid provides you with a simple way to look at the complex system which is your business. With the possible exception of Warren Buffett, everyone needs to read this book.” - Rory Sutherland, Vice-chairman, Oglivy Group
“Matt Watkinson distills strategic know-how into nine ingenious perspectives and, with the use of clever examples, shows us how to apply this technique of thinking to any business problem or market opportunity. An extraordinarily powerful book.” - Dr.Jules Goddard, author Uncommon Sense, Common Nonsense

Innovation and Entrepreneurship, Peter F. Drucker, 1985

Only the Paranoid Survive, Andy Grove, 1999

Deirdre McCloskey’s trilogy: The Bourgeois Virtues, 2007; Bourgeois Dignity, 2010; and Bourgeois Equality, 2016.

Our show with Professor Deirdre McCloskey on the Bourgeois trilogy.

Our show on Innovating Your Business Model.

EconTalk Blog with Russ Roberts, interview with Tim O’Reilly on his new book, WTF? What’s the Future and Why It’s Up to Us.

Rory Sutherland’s Zeitgeist talk

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #162: Is Hourly Billing Unethical and Unprofessional?

Is Hourly Billing Ethical?

Ethics—originating from the Greek word ethos, meaning habit—is a branch of philosophy that explores and analyzes moral problems, concerned with questions such as: What kind of moral principles and values should guide our actions? What do we mean by right and wrong? 

Immanuel Kant proposed broad principles to provide a framework for making moral decisions, described as categorical imperatives:

  1. Act only on that maxim by which you can at the same time will that it should become a universal law (e.g., no stealing).
  2. Act so that you treat humanity whether, in your own person or in that of another, always as an end and never as a means only (people are to be respected because they have dignity. Moral agency is what gives humans dignity).
  3. Kingdom of Ends formulation: You should act as if you were a member of an ideal kingdom of ends in which you were both subject and sovereign at the same time.

If you apply this test to hourly billing, you find it fails miserably on all the questions, especially the first and third.

Would you want hourly billing to become universal? Would you want all businesses to utilize it? 

If the Golden Rule is true—treat others as you yourself would want to be treated—how can one defend the morality of hourly billing? Would you accept that method of pricing from a hotel, an airline, or a grocery store?

Aristotle wrote, “It’s not easy to be a good citizen in a bad society.”

Hourly billing creates a bad culture, focused almost exclusively on the convenience of the seller, not the customer.

It is not how you purchase anything else in your life. You would not tolerate it for one minute if any other business tried to price this way. Hence, it is unethical. We think Kant would agree.

Is Hourly Billing Unprofessional?

“A professional is someone who is responsible for achieving a result rather than performing a task.” - Michael Hammer

The billable hour (and timesheets) are unprofessional as they keep the professional focused on the tasks, not the result.

Day laborers are paid for performing tasks. Professionals should create results. Yet the empirical evidence from nearly a century of the billable hour regime proves it has deleterious consequences on professionalism.

William Ross states the following in his book, The Honest Hour:

Most dishonest billing is the perfect crime. Because there is no practical manner of verifying the accuracy of most time records, every attorney who has billed time knows that hourly billing creates tempting opportunities for fraud.

Ross ends his book The Honest Hour by saying, “Despite its potential for abuse, time remains the best means of billing clients. Hourly billing therefore ought to be reformed rather than abandoned.”

Misalignment in interest

The American Bar Association and courts have opted for imposing standards on hourly billing.

Here’s a partial list of where its brainpower is being applied:

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  • Double billing—billing two customers for different work performed at the same time. A lawyer who flies for six hours for one client while working for five hours on behalf of another, has not earned eleven billable hours. A lawyer who is able to reuse old work product has not re-earned the hours previously billed and compensated when the work product was first generated.
  • Recycled work—billing customers by the hour for work that was created at another time for another customer. The ABA Opinion suggests that the lawyer is reaping a windfall from “the      luck of being asked the identical question twice,” just as the attorney who is able to bill two clients for work performed at the same time is receiving an unfair advantage.
  • Overstaffing of lawyers—assigning too many lawyers to a case or project to fulfill billable hour quotas.
  • Excessive research.
  • Attorneys performing clerical and administrative tasks and billing at their hourly rates. Surgeons piercing ears. Michelangelo should not charge Sistine Chapel rates for painting a farmer’s barn.
  • Charging for travel time. Slippery slope: Shower time?
  • Attorney conferences—chitchat on the customer’s dime or valuable timesaving devices?
  • Charging for small units of time—rounding up to the quarter hour or charging for every minute?
  • Overhead expenses—charging (and possibly marking up) general overhead expenses such as copies, faxes, phone calls, secretary time, and overtime.

There is some sanity. The New York State Bar Association had this to say with respect to alternative pricing methods, "Indeed, subject to the economic realities of the situation an attorney’s professional obligations, virtually any billing method that attorney and client can both agree upon and abide by will result, almost by definition, in a fair fee.

Listener Twitter Comments

Chris Marston’s Concentric Circles

Listen to Chris explain his circles, from the Art of Value Podcast.

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See Ron’s blog post on using Chris’s circles.

Other Resources Mentioned 

Moores, a law firm in Melbourne, Australia offers Moore’s Guarantee

We can’t guarantee outcomes but like price, the quality of our service is another thing we can guarantee up front. If you think the quality of our service didn’t match what was agreed, let us know and tell us how you think that should be reflected in the price you pay.

Ed Kless - The Nuclear Option - Blog Post

John Chisholm - Hourly Billing Is Accurate, Transparent, and Ethical

Economist Bart Wilson explaining the concept of fairness

Donald Rumsfeld on Unknown Unknowns

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #161: Free-Rider Friday - September 2017

Ed’s Topics

Price Gouging

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Anti-Price Gouging Laws Make as Much Sense as Anti-High Temperature Laws, Mark J. Perry, American Enterprise Institute

Kevin Williamson, National Review’s economics reporter called price gouging “a public service.”

Robert Wood, TSOE’s Scifi Contributor asked Ron if he’d sell his generator to a rich person offering $10,000—to run his air conditioner—or to a family who needs it to keep a member alive on oxygen?

Free market prices don’t mean that allocations are made to the most worthy cause, otherwise the Kardashians would not be rich.

Self-driving cars update

Magna’s new MAX4 self-driving platform offers autonomy up to Level 4.

AI Lawyers

In an article from Washington Post by Elizabeth Dwoskin, Silicon Valley startup Atrium is looking to replace lawyers with computers. It has raised $10.5 million in capitalization, and it’s not going to bill by the hour!

Decentralized Predication Market

Check out www.augur.net, a decentralized (read can't be shut down) prediction market based on the Etherium blockchain.

Fascist Manifesto

In the 1919 document, Mussolini called for: universal suffrage; proportional representation; formal councils for experts; a minimum wage; reorganization of railway and transport sectors; reduction in retirement age from 65 to 55; a strong progressive tax on capital; outright seizure of 85% of profits on companies manufacturing military goods. Not exactly what you think of when you hear people say someone is a "fascist." 

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Ron’s Topics

“My car’s sexier than yours,” Schumpeter, The Economist, July 8, 2017

Ford and GM are at the bottom of the price-earnings ratio in the S&P index; the walking dead.

Terrifying signal: $18 billion combined profit last year, but a combined market value of $98 billion. Profits will half or worse in coming years.

Uber, Tesla, and Waymo are all worth more, yet all lose money and bring in little revenue.

Detroit execs sniff that Silicon Valley no idea how to make millions of vehicles safely. Tesla’s production is 1% of GM’s.

Both Ford and GM are making investments in the future, GM owns 9% of Lyft and Ford has invested $1 in Argo, AI for autonomous vehicles.

Investors don’t seem to care.

We may be at Peak Auto.

New strategy: ring-fence autonomous divisions, New Ford, New GM, for example, but the income statements won’t be pretty, nor have none of Tesla’s pixie dust (or subsidies). This is a typical incumbent’s dilemma.

Law firms can’t call nonlawyers ‘CEO’ or ‘chief technology officer,’ ethics opinion says

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Listener Jim Borchers, a lawyer in St. Charles, MO sent us this.

From a Texas Bar ethics committee opinion: The word “officer’ indicates the person has the power to control either the entire law firm or significant areas of the firm’s operations.

Nonlawyers cannot direct or control the professional judgment of a lawyer.

Also, you can’t pay bonuses based on revenue or profit targets. Ethical guides ban sharing legal fees with a nonlawyer.

Firms can take revenue and profits into account for bonuses.

American Men, Quit Your Whining,” John Tamny, Foundation for Economic Education, May 23, 2017

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The last people to rate our compassion is men without work.

The rest of the non-English world working feverishly to learn English. American males already know the language.

Is the USA the land without opportunity? “Men without work”?

The per capita income of Shanghai, China’s richest city, $7,000. Aliquippa, PA, over $20,000.

Feminism has neutered men. Right, Tom Brady, Jeff Bezos, Derek Jeter curl up in the fetal position each night. By this logic, men wouldn’t be thriving in professions of all kinds.

This is a certain sign that the USA is so rich it must find problems to invent as opposed to solving real ones.

The book Hillbilly Elegy, J.D. Vance makes the same point about social capital, and argues we need to stop the blame game.

“Human capital: The People’s Champion,” The Economist, August 5, 2017, Six big ideas

Gary Becker and human capital, RIP 2014. 1992 Nobel winner, pushing economics into new spheres of human behavior.

In 2004, a panel of German linguists deemed “human capital” the “most offensive word of the year.”

Why do families in rich countries have fewer children? Because they invest more in each one’s human capital.

Why do companies in poor countries provide meals to workers? To keep them rested, well-fed, makes them more productive.

Why each new generation spent more time in school than one before? Because a longer life expectancy raised profitability and ROI of education.

Why have earnings of highly skilled workers risen even as their numbers have also increased? The increasing returns from human capital.

Human Capital is defined as: the abilities and qualities of people that make them productive.

Economist Arthur Pigou coined the term.

America’s GI Bill, post WW II, is usually believed to be the dawning of the knowledge economy.

Becker did distinguished between specific and general human capital.

¼ rise in per-person incomes from 1929-1982 is due to increases in schooling. Much of the rest is harder to measure.

Two interpretations: government should invest more in education; or 2) returns so big to individuals, they should pay for it themselves.

Becker distinguished between bad inequality and good inequality. Doctors, scientists, programmers, etc., motivated to tackle tougher subjects, thus pushing knowledge forward.

According to The World Bank, human capital is 80% of the developed world consists of human capital.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #160: Interview with Magatte Wade

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Ron and Ed interviewed the dynamic Magatte Wade. Magatte is the founder and CEO of Tiossan, a high-end skin care products line based on indigenous Senegalese recipes and ingredients. Tiossan products are distributed via www.tiossan.com, as well as through selected boutiques and Nordstrom. Tiossan commits at least ten percent of profits to the creation of entrepreneurial schools in Senegal designed to develop the next generation of Senegalese genius. Previously, Magatte founded Adina World Beverages, with African-inspired drinks sold throughout the United States at retailers including Whole Foods and Wegmans. Prior to her departure from Adina, she assembled an executive team featuring a co-Founder of Odwalla, CEO of SoBe, and ex-co-Chairman of PepsiCo. Her latest company is www.SkinIsSkin.com, the purpose of which she explains during the show.

She came to Ron and Ed's attention due to her role in the documentary film, Poverty Inc. We interviewed Father Robert Sirico about the movie on Show #134, March 17, 2017.

Questions We Asked Magatte

Your background, how did you become an entrepreneur?

You upset the president of Senegal in your FEE talk, would you tell that story?

Near the beginning of the movie Poverty, Inc., you took on the 1984 Band-Aid song, “Do They Know it’s Christmas,” performed in response to the famine in Ethiopia. You say:

It perpetuates false image of Africa as barren, and a sentimental image of Africans as helpless and dependent. Africa has no rain, no river, and they don’t know it’s Christmas. One critic said "It was the most self-righteous platform ever in the history of popular music."

You then met Bono at a TED talk. Did you get through to him, because seven years later he admitted commerce and capitalism take more people out of poverty than aid? In the same speech he says, “But, we still need aid! Deny this and you’re brain-dead and heart-dead.”

Do you still believe Bono will leave Poverty industry? He seems to have one foot on each side.

The late Christopher Hitchens said: Mother Theresa was not a friend of the poor, but a friend of poverty. I don’t think he was right about Mother Theresa, but when it comes to the entire poverty industry exposed in the movie—foreign aid, NGOs, social entrepreneurs, celebrities, etc.—it seems to apply nicely. Do you agree?

One my favorite sayings is the German Proverb: If you want equality, visit a cemetery. Do you worry more about inequality or poverty?

The World Bank's list measuring the ease of the ability to do business in each country.

Magatte’s Companies

Magatte on solutions to poverty

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.