Episode #239: FRF — Millionaires, Marxists, and Minimum Wage

What a great Free-Rider Friday! This show moved fast and we covered a lot of ground.

Here are Ron’s topics from the show:

 …and here are Ed’s topics: 

 We had a listener question addressed during the show as well: 

We received a great question from Mark Stiving, Ph.D., Chief Pricing Educator, Impact Pricing LLC, and author of Impact Pricing: Your Blueprint for Driving Profits, and host of the Impact Pricing Podcast.

Mark will be our guest on the June 14th, 2019 episode of The Soul of Enterprise.

Here’s his question: 

Your TSOE episode on the death of the timesheet was very thought provoking.  I’m 99% with you on the idea of killing hourly billing, and could be with you on killing timesheets except I don’t know how to answer one question.  How does a company determine Willingness to Accept (WTA)?  

In every negotiation, the buyer has a Willingness to Pay (WTP) and the seller has a WTA.  This is easiest to understand in products.  If a seller has an ongoing business and can buy a product for $100, their WTA is almost certainly some number above $100.  Usually they have a margin floor, say 20%, so their WTA would be $120.  If the buyer’s WTP is $300, there will likely be a transaction, hopefully at a price significantly higher than $120.  However, if the buyer’s WTP is less than $120, no transaction will occur.  

In accounting or similar service type businesses, how do you know your WTA?  It seems you need an estimate of time, (even though you would pay that accountant’s salary even if you didn’t land that job).  If you need to estimate time, wouldn’t having timesheets to track actual vs estimated in after action reviews be helpful?  As you point out, they are probably not accurate, but is there a better way?  I’m looking forward to your answer.  Feel free to answer on the air if you’d like, perhaps on free rider Friday?  

Cheers,

Mark

Episode #238: The Million-Dollar TIP — Using a TIP Clause

It’s All About Baseball…

To start the show off, Ed just had to reference baseball and we - the audience - would expect nothing less. Enjoy! https://www.baseball-reference.com/postseason/1960_WS.shtml

So What Was The Show Really About…

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One of the most innovative pricing strategies that should be in every firm’s pricing stack is the TIP clause. Most feedback that firms receive on pricing is negative (“Your price was too high”). Or it is ambivalent: “Your price was just right.”

No customer ever discloses how much money your firm left on the table. Innovative pricing strategies, such as the TIP clause, are outward focused and attempt to capture more of the value created for customers, in extraordinary engagements. Having more accurate cost accounting or better project management won’t help you capture this level of value, which is why pricing is the main driver of profitability.


Making the Wrong Mistakes

In 1997, Tim was the managing partner of top accounting firm, and his best, long-term customer (of 20 years) had come to him wanting to sell his $250 million closely held business. He told Tim (and I am paraphrasing here), “You’ve been my CPA for 20 years and I trust you with my life. It is time for me to sell my business and enjoy my golden years. Here is what I want you to do:

  • Update our business valuation to maximize the sales price.

  • Fly with me anywhere we have to go to meet with potential buyers.

  • Be actively involved at every stage of the sales negotiation.

  • Perform the due diligence, along with the attorneys, of the qualified buyers.

  • Work with the attorneys on the sales contract to make sure my interests are protected.

  • Perform tax planning and structure the deal in such a manner as to maximize my wealth retention.

When Ron asked Tim how he priced this engagement, he proudly proclaimed that every hour charged to this project was at his highest consulting rate of $400 per hour, indicating, right from the start, Tim knew there was more value on this project than he would ever be able to pad on a timesheet.

As a result of Tim’s work, the customer received (and saved in taxes) an additional $15,000,000, and acknowledged Tim was directly responsible for this outcome. In Tim’s own words, the customer was “elated.”

Tim then told how he priced the engagement. He reviewed all of the hours from the work-in-progress time and billing system, believed it did not adequately reflect the value he provided, and marked it up an additional 25 percent over the $400 hourly rate.

He then sent out an invoice for $38,000, which the customer promptly—and happily—paid. He believed he was value pricing. He was not—he was value guessing, since the customer had absolutely no input into the price up front, and only a customer can determine value.

When Ron asked Tim what he thought the customer would have paid if he had utilized a TIP clause (also referred to as the retrospective price, or success price), such as the following:

In the event that we are able to satisfy your needs in a timely and professional manner, you have agreed to review the situation and decide whether, in the sole discretion of XYZ [company], some additional payment to ABC [CPAs] is appropriate in view of your overall satisfaction with the services rendered by ABC.

The TIP is being based on the “overall satisfaction with the services rendered,” and not any financial contingency, which is the origin of the acronym TIP—to insure performance.

This TIP clause would be discussed with the customer before any work began. If needed, you could put a minimum price on the engagement (such as $40,000) to cover immediate firm capacity. But in this case, given the 20-year relationship with the customer, even a price solely determined by a TIP would have been acceptable, since the customer was not likely to take advantage of Tim after the services he rendered and the long-term relationship they had. 

In answer to my question, Tim said his customer would most likely have paid him $500,000, a sum I believe to this day is below the real number—but at least better than the $38,000 he finally charged. Nevertheless, since Tim knows the customer better than I do, let us take his number as correct.

Ron informed Tim he had made the Ultimate Accounting Entry:

Tim was providing extraordinary value to this customer—he was at the top of the Value Curve—yet his cost-plus pricing theory prevented him from capturing a fair portion of it. Are we not ruled by our theories? This is why it is imperative to extinguish the cost-plus mentality from your firm.

No one in any seminar we have shared this story with believed Tim would have received less than $38,000 for his services on this engagement. In effect, Tim paid a reverse risk premium—he was assured he would not go below his hourly rate, but in return he gave up the added value the customer already believed he had created. This is not a risk worth taking if you want to maximize your firm’s profitability.

The deleterious effects of this are deeper than just being deprived the value from the work you provided on any one engagement. The problem lies at the very core of a firm’s measurement system and points out how it does not offer the opportunity to learn from lost pricing opportunities, or pricing mistakes.

In his inimitable way, Yogi Berra explains this situation with his quip, “We made too many wrong mistakes.”

When it comes to pricing, the wisdom from Yogi is profound. Tim made the wrong mistake, and here is why: He will not learn anything from it because the firm’s primary assessment is billable hours—once again the billable hour is the incorrect measuring device for value. When the partners review the realization report on this engagement, they will see 125 percent, which is excellent when you consider most firms realize between 50 and 95 percent overall on each hour.

No knowledge was gained by the firm on how to price the next similar engagement in accordance with value—it will simply perpetuate the same mistake, over and over. Being a more accurate activity-based cost-accountant, or even excellent project manager, would also not have helped Tim to capture the value.

This is not meant to imply with value pricing you will never make mistakes. You certainly will. The difference is they will be the right mistakes, because with value pricing, as opposed to cost-plus pricing, you are forced to receive input from the customer as to your value, and have in place pricing strategies that will capture more of that value (like the TIP clause). If you engage in After Action Reviews (AARs), which perform value assessments on each engagement, and elicit feedback from your customers, you will learn from your mistakes and become better at pricing in the future.

Most feedback firms receive on pricing is negative: “Your price was too high.” Or it is ambivalent: “Your price was just right.” No customer ever discloses how much money your firm left on the table.

Innovative pricing strategies, such as the TIP clause, that are outward focused and attempt to measure value have allowed more and more firms around the world to capture more of the value they provide.


Case Study: The Million Dollar TIP

This story comes from Gus Stearns, a partner in an accounting firm, whom I [Ron] met on September 25, 2000 at a conference in Las Vegas. Gus tracked me down at the dinner party, walked me over to the bar, and over a glass of wine told me his amazing TIP story. Here are the two e-mails I received from Gus explaining his success, the first one prior to our meeting in Las Vegas and the second one after:

April 20, 2000

Hello Ron,

I hope the tax season finds you well. I was fortunate enough to be at the Atlanta conference [January 2000] when you spoke and picked up an autographed copy of your book [Professional’s Guide to Value Pricing], which I devoured on the plane trip back.

The engagement which I refer to ($180,000 price) had already started a month or two before and I had used the old standard rate-time-hours routine and billed about $2,000 at a standard rate of $180/hour. After listening to you and reading the book, I was determined to reevaluate the price structure and simply went back to my customer and said, “Guys, this is what I am bringing to the table. It brings a lot of value which is etc., etc. I don’t believe hourly rates based upon time is appropriate. I am unable to place a value on this. I need your help. You tell me what the value of all this is to you. You are the customer and only you can truly establish the value. I know I’ll be happy with what ever you come up with.” This is almost an exact quote.

I left it at that two months ago. I was handed a check for the first installment of $50,000 on the way out at the end of the engagement. I guess this is what you call “outside-in pricing.” I like it.

Gus Stearns, CPA

It gets better, since this engagement was in two phases. Here is the follow-up e-mail from Gus explaining the final result after the job was done:

Hello Ron,

Basically the large engagement was for a previous client that I had hired a controller for. He took over the tax work, at my suggestion, as he was a CPA. The engagement was an exit and management succession strategy, which involved some fairly hefty income tax savings as well. The total time expended was about 100 hours, although a lot of the time was on unrelated things that I did not want to charge for due to the magnitude of the price (we quit using timesheets some time ago).

I used a flip chart in the presentation, pointing out the value of what they were getting. At the end of the presentation, I asked how much they thought it was worth, and suggested $300,000, $500,000, a million? I wanted them to think in big numbers. The CEO was rather excited and said a million. Knowing that this would be difficult to obtain in one fell swoop I suggested $400,000 down and a retainer of $4,000 per month. They agreed but asked that I serve on the board of directors and attend quarterly meetings through 2008, when the note to the previous owners would be paid off. They were also kind enough to put me on salary so I could participate in their pension plan, which is a 25 percent direct contribution from the company. This all adds up to a little bit over $1 million.

Never once was the word “time” used or referred to by myself, or my client. They could have cared less about time. In all of our engagements, I never use the word. By concentrating on value and encouraging the client to participate in the valuation of the engagement our prices have skyrocketed. You were absolutely on-target when you said that accountants are terrible at valuing our services (myself included).

Keep up the wonderful work,

Gus


These types of engagements are certainly not the rule in any firm, they are the exception. Nonetheless, they do arise, and when they do it is critical to recognize the value you are creating, and to utilize innovative pricing strategies to capture it. This also demonstrates why pricing is the most potent lever you have in terms of increasing your firm’s profitability, much more than cutting costs or increasing efficiency. 

We include these stories not because I believe you will earn a $1 million TIP, but rather to illustrate how the cost-plus pricing mentality has placed a self-imposed artificial ceiling over the heads of firms. Never in his wildest dreams would Gus have placed a $1 million value on his work; but the customer did. Does he not deserve it? 

Baldridge Award–winning firm Graniterock instituted such a policy, calling it “short pay.” This provides, in essence, a line-item veto to customers and allows them to deduct any amount of the invoice in accordance with their subjective value of the service provided.

It is not a refund or discount policy; it is a pure service guarantee, because the customer is not required to return the merchandise. Here is how owner Bruce Woolpert explained the advantages of this guarantee:

You can get a lot of information from customer surveys, but there are always ways of explaining away the data. With short pay, you absolutely have to pay attention to the data. You often don’t know that a customer is upset until you lose that customer entirely. Short pay acts as an early warning system that forces you to adjust quickly, long before we would lose that customer.

Will some customers take advantage of Woolpert’s 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 company.


Case Study: Mission Impossible

Santa Monica Freeway

The January 1994 Northridge, California earthquake devastated the Santa Monica Freeway, leaving 350,000 daily commuters no access to Los Angeles. Early estimates predicted at least 12 months to rebuild, at a public cost of $1 million for each day the freeway was shut down.

Innovative constructor C.C. Myers saw it differently. He saw it as a 4.5 month project. Staking his wealth and reputation, C.C. Myers signed a $14.7 million contract with the city, which allowed a maximum completion time of 140 calendar days, with a penalty for late completion of $205,000 per calendar day and an incentive of $200,000 per day for early completion and opening the freeway to traffic.

Mission: Impossible

Approach: Change everything.

Results: Spectacular

Contract time commenced on February 5 with materials and equipment moving to the jobsite that same day and through the weekend, even the final construction plans were not available until February 26. C.C. Myers immediately went to work on a 24/7 schedule with up to 400 workmen on the job. On-site inspectors were used to eliminate delay and rework. Workers were running on the job. Special quick-setting concrete was used. Subcontract bids and awards were made on a daily basis. Work flowed.

Sixty-six days after the contract was signed, the Santa Monica Freeway was opened to traffic, 74 days ahead of schedule.

Source: The Elegant Solution, Matthew E. May, 2006, pg. 135.

 

Episode #237: Interview with ADP's Chief Behavioral Economist Jordan Birnbaum

Another Great Show, This One Featuring Jordan Birnbaum of ADP

Here is some background on Jordan…

Jordan Birnbaum has been with ADP since 2015, as VP and Chief Behavioral Economist. He directs the application of behavioral economics principles into new product development in the human capital management market.  Prior to joining ADP, Jordan was the owner / operator of The Vanguard in Los Angeles, a hybrid media production and live music venue, employing more than 150 people for close to a decade.  He was a founding employee and Senior Vice President, Business Development, of Juno Online Services, playing a key role in a successful IPO and then beating analysts’ estimates for six consecutive quarters.  Jordan graduated from Cornell University with a BS, Policy Analysis, and from NYU with an MA in Industrial / Organizational Psychology. 

We asked and Jordan answered…

This is an instance in which no amount of show notes, regardless of how thorough, could capture the energy and excitement of Jordan as a guest. Our questions for him are below but you really should listen to the show (audio is linked above) in order to truly understand how much depth Jordan brought to the show as a guest.

Ron’s Questions…

  • Tell us about The Vanguard?

  • Did you ever meet the South Park creators?

  • Give us the second answer to Ed’s question on the difference between nudging and manipulation.

    • We had on the show Rory Sutherland. He created a Nudge unit inside of Ogilvy in the UK, and when he was president of the IPA in the UK he was saying: “Hundreds of agencies have developed models for ‘how advertising works.’ What’s needed now is for agencies to base their business on how people work.” Basically, that if ad agencies don’t become behavioral economists they are going to become irrelevant. You read about how these Silicon Valley companies employ behavioral economists, such as Airbnb, Uber, etc. Can you share any examples of how you specifically apply these principals at ADP.


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Check out the white paper on Compass a next-gen assessment and coaching development tool to drive leader and team effectiveness with no installation needed at http://Compass.adp.com .


Ed’s Questions…

  • So, you’re hanging out with Bill Maher on the weekends, you have this great club in LA, and now you’re the VP and  chief behavioral economist at a payroll company. You’ve got to make that leap for me?

  • Ron and I are big fans of behavioral economics, and one thing that has puzzled me that I struggle with in my mind is, where do you see the difference between nudging and manipulation?

  • Then the question becomes who decides what is in someone else’s interest, right?

  • We often talk about pricing and proposal construction. I wanted to get your thoughts on three choices being optimal, is that something you’re seeing as well. Also, what about add-on to options, does that become confusing at some point? Where’s the line between complexity and creating effective choices?

  • If you’re creating a business proposal for a relativity complex engagement, is there a difference between three choices and four choices?

  • Throughout the course of the questions, we touched on many of these: https://en.wikipedia.org/wiki/List_of_cognitive_biases

Episode #236: ET HORA LIBELLUM DELENDA EST

What did we talk about in this episode? Glad you asked!

In ancient Rome, during the Punic Wars, Cato the Elder is said to have ended every speech he delivered before the Roman Senate with the phrase, “ET CARTHAGO DELENDA EST” (and Carthage must be destroyed!). He did this without regard to the subject of his speech. It is in this spirit that we present ET HORA LIBELLUM DELENDA EST which, loosely translated, means, “and the timesheet/billable hour must be destroyed!”  

Topics of Discussion:

  • We discuss an article from Accounting Today, which touches off the debate over the necessity of recording time. The article is, “Timekeeping: Stop wasting time!,” by Alan Conway, published March 18, 2019.

  • We also discussed VeraSage senior fellow Tim Williams’ article, Re-Engineering Your Firm Around Value, from March 20, 2019, reproduced below.


Re-Engineering Your Firm Around Value
Published on March 20, 2019

Tim Williams 

We are what we measure. In life and in business, it’s human nature to align our behavior with the metrics by which we are judged. So if the key measurement in our firm is billable time, guess what kind of internal behavior we’ll get?

The incentives that drive behavior in your firm create either a culture of utilization or a culture of accountability. A culture of utilization promotes and rewards “busyness.” A culture of accountability is centered around productiveness. 

In a firm that makes its money by selling hours, the individual incentive is to record as much billable time as possible and the corporate incentive is to bill as much of this time as possible to its clients. In a firm that makes its money by selling solutions to business problems, the motives are to spend time wisely and effectively. The cultural difference between these two business models can be astounding. 

As the business innovator W. Edwards Deming taught, if management sets only quantitative targets and makes people’s jobs depend on meeting them, “They will likely meet the targets — even if they have to destroy the enterprise to do it.” In Deming’s estimation, more than 90 percent of the conditions that affect a company’s performance can’t be easily tracked and measured. Yet managers spend more than 90 percent of their time monitoring and analyzing some form of measures; most notably, time tracking.

A shadow economy in every time-based firm

This approach creates a shadow economy that saps the time, energy and initiative of professional firms. As H. Thomas Johnson and Anders propound in their book Profit Beyond Measure, “It is not an exaggeration to say that in most organizations today, each person whose work eventually serves customers’ needs is 'shadowed' by another person whose job is to keep track of other people’s work.” Extensive time tracking is “shadow" work that adds an incredible amount of wasted cost to the firm. While professionals in the firm are attempting to create value for the firm and its clients, the “time beast” extracts value. 

Johnson and Anders go on to say, “The perception that the world is quantitative and that business is therefore mechanistic has for the past fifty years shaped all the variants of strategic planning, financial analysis, budgeting, cost management, and management accounting that have been taught by graduate business schools and practiced in large organizations. Executives versed in such practices and who believe that reality is defined by quantitative measurements are like the puppies who believe that the fence defines reality.”

The focus in professional firms should be on doing the work, not manipulating quantitative abstractions about the work (time tracking, billable time targets, etc.). 

A tale of two firms

In Firm A, its time and energy are spent: 

-     Asking team members for estimated hours

-    Preparing estimates of hours

-    Logging hours on timesheets

-    Tracking actual hours spent

-    Collecting and policing timesheets

-    Inputting time data in software systems

-    Producing time reports

-    Comparing and reconciling actual time against estimated time

-    Justifying hours to clients

-     Transferring or writing off hours

Firm B, on the other hand, devotes its energies to:

-     Identifying the scope of value (desired outcomes)

-    Clarifying the scope of work

-    Collecting complete information about assignments

-    Developing more complete briefs and briefings

-    Investing more effort in developing effective solutions

-    Pricing the value of the work (instead of just estimating the costs)

-    Pricing and invoicing the work in phases

-    Managing projects based on actual work completed, not hours spent

-    Paying more attention to scope creep

-     Re-pricing work that exceeds scope

Which of these two firms is likely to be most effective? Most profitable? Which would you prefer to lead or work for?

Value-Led vs. Cost-Led

In place of monthly report detailing how their time was spent (which often takes the form of an invoice), value-led firms produce reports of work completed, problems solved, and results produced. Internal discussions revolve around the effectiveness of the work, not the “efficiency” of the team. 

Instead of obsessing about hours spent, value-led firms turn their attention to measuring what really matters: deadlines met, promises kept, work delivered, and results achieved. One of the notable firms that put value first, the marketing firm Anomaly, puts it this way:

“We don’t do timesheets, ever. We believe they are dishonest and incentivizes the wrong behavior. Our view is that the right people will solve a challenge quickly and should be rewarded for the value of that answer to the client. We’ll back ourselves up on that by putting a significant percentage of our fees against the fact that our work will work. The result is that our meetings are only attended by people who are adding value, not billable hours.”

It's time to stop managing your firm as though your inventory is a fleet of rental cars that must be “busy” to be generating revenue. Your inventory is intellectual capital, and what you sell is value created, not time spent.

 Friend of VeraSage Thomas L. Bowden Sr, an attorney, posted this comment on our VeraSage & Friends Facebook page in response to an article defending the importance of recording time to determine cost:

Thomas L. Bowden Sr. So, you take an arbitrary segment of your staff, assign them an arbitrary number of hours to record and/or work each year, then take an arbitrary portion of your overhead and add it to the salaries of the arbitrarily selected staff, add to that an arbitrary figure for your desired profit, and divide by the arbitrarily chosen number of hours, and voila, that’s your ever so precisely determined “cost” per hour. Now measure your actual hours very precisely or all of those completely arbitrary choices will be completely useless. Of course, they’re useless anyway, because no matter how precisely you measure the wrong thing, it’s still wrong.


Videos Mocking Hourly Billing and Timesheets 

 

 

Episode #235: Free-Rider Friday, March 2019

Another GREAT Free-Rider Friday!

Here are the topics we covered. From Ron…

 

From Ed…

Episode #234: How to Fire a Customer

Overview

All firms have a theoretical maximum capacity and a theoretical optimal capacity. From a strategy perspective, it is essential to see how that capacity is being allocated to each customer segment. Ensuring a proper amount of capacity is allocated to various customer segments, while offering a differentiating value proposition within each segment, is an essential element of implementing price discrimination strategies. It also prevents bad customers—those who are not willing to pay for the value you deliver—from crowding out good customers. 

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Customer Grading Criteria

It has become common for firms to grade customers and focus attention on the “A” and “B” customers and even hold out incentives to the “C” customers to upgrade to higher status. Along with your human capital selection, your customer capital criteria are the most important aspect of crafting your firm’s success. The traditional customer grading criteria are most likely familiar to you; they usually include:

  • Amount of annual revenue

  • Prompt payment history

  • Potential for growth

  • Potential for future referrals

  • Actual referrals

  • Profitability of customers

  • Risk of having customer in portfolio

  • Timing of work (fiscal or calendar year)

  • Reasonable expectations

  • Willing to take advice

  • Profitable and not undercapitalized

 
Certainly these are important criteria and should be made part of any firm’s pre-qualifying process. Ric Payne, Chairman and CEO of Principa, advocates the following 12-point criteria for selecting customers:

  • In business for at least three years.

  • Pleasant, outgoing personality.

  • Willing to listen to advice.

  • Positive disposition.

  • Technically competent.

  • Business is profitable.

  • Business is not chronically undercapitalized.

  • Business is not dominated by a small number of customers or suppliers.

  • Clearly established demand for the product or service.

  • Business has a scope for product or service differentiation through innovative marketing.

  • Business has scope for improved productivity through innovative management planning and control.

  • Business has a strategic plan.

 
These are all good criteria to judge potential new customers, as there is no point in working for and with people whom you do not like, or are indifferent about. Paul Dunn, co-author of The Firm of the Future, wrote this about customer selection and de-selection.

 
Case Study: Grading and Firing Customers

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If there was just one phrase that readers should pin up on their walls, it would be Baker’s Law: “Bad customers drive out good ones.” In every gathering of professionals I'm asked to address, I always ask the question: "How many of us have customers we wish we didn't have?” I've never yet seen such a gathering where fewer than 99 out of every 100 raised their hands in the air (most of them held up in what you might call an enthusiastic way, along with another part of their anatomy—their eyes, literally in the top of their heads, as if to say, “Yes, I have them and what a drag it is.")

You know the customers they're thinking of—the ones that don't pay the bills, the ones that sap your energy rather than build it, the ones you simply don't like being with—the list goes on and on.  Or consider this…imagine you could put the work you do into these 3 categories:

  • I really love doing this type of work.

  • I can tolerate it.

  • If I'm brutally honest, I hate it.


How much of your typical week would be in the bottom two? 

It may come as no surprise for you to read that, for many professionals, the number in those bottom two categories is frequently around 80 percent. Or, to put it another way, they're only loving what they do 20 per cent of the time. Yet they smile through it because they're getting paid. As David Maister points out in his book True Professionalism, there is another "profession" that says, "Pay me the money and I'll fake it.”  Some call it the oldest profession in the world.

So why does the profession prostitute itself so frequently? Maybe it's because many (most?) in the profession have been, as one practitioner in the United Kingdom put it to me, "indiscriminate" about the customers they work with. To put that more bluntly, if it looks like the customers have a checkbook, they take them on. Some don't. 

Take Tom Weddell of the Newburgh- and Poughkeepsie-based practice, Vanacore, DeBenedictus, DiGovanni & Weddell (try answering the phone there!). Weddell, forty-two years old [at the time] and the youngest of the partners, had been appointed managing partner just six weeks before he attended a four-day program I presented in Chicago. Weddell really got the message. On the way home from the program, he said this to his partners, “Clearly, there’s so much for us to do to implement this material. I want to know right now if you’re with me.”

It was a completely general question with no implied reference to “re-organizing” the firm’s customer list. "Well, yes, of course Tom," they replied. “Are you certain?” Weddell asked. “Yes, we’re really with you Tom.”

So the next day, Tom went into his office early. He got a full list of the firm’s customers and copied it 27 times (the number of team members he had at that time). He gave it to each member with the instruction, "Circle everyone's name on this list who you don't like dealing with and give it back to me by 11:00 a.m., please." That was his only criterion. The other partners had no idea he’d done this at the time (Weddell presumably was taking them at their word that they were “with him”).

That afternoon, Weddell took every customer whose name was circled and fired them (nicely). He even recommended another accountant they might like to try, who would welcome them with open arms. By 4:00 p.m., the job was done. Weddell had gotten rid of the customers—along with $64,000 worth of revenue.

When Weddell told the team what he'd done, they cheered! At 4:15, the other partners, who by now realized what had happened, called a meeting. In essence, the message was, "We're not sure we're with you, Tom!" But three months later, the partners were absolutely sure.

Weddell showed me his financials and pointed to the additional $300,000 worth of revenue the practice had generated in the period. And he made this wonderfully simple point: “We couldn’t have gotten that unless we’d created $64,000 worth of space.”

empty space.jpg

Do you have any customers taking up space? Many firms are trying to be all things to all people. Yet they’re advising their clients to be “selective” when those clients choose customer segments. The answer really does come back to that earlier comment about professionals choosing their clients “indiscriminately.” Want to prove it? Take out your latest firm brochure (if you’re still one of the people who believe in brochures) and mark anywhere on it where it specifically says something like, “You’ve got to be special to be one of our clients.” I doubt you’ll find it. Even your brochure or your website probably implies that all customers have to do is breathe and you’ll take them on.

After years of “preaching” this message, I’ve never known any firm to regret that they took action in the way that Tom Weddell did. You won’t either. Bad customers drive out good ones.


When a firm accepts a new customer, it is not merely closing a sale; it is beginning a lifelong relationship. We select our spouses, friends, and other important relationships very carefully, why would we not perform a proper amount of due diligence before selecting a customer? If the customer is worth having, he or she is worth investing some time and resources in determining if she is a good fit for your firm. 

Reed Holden has a wonderful saying: The price isn’t wrong, the customer is! The essence of strategy is choosing what not to do. Saying no to a new customer is not necessarily easy, but it is vital if you want to accept only those customers who are pleasant to work with, have interesting work, and enhance your firm’s intellectual capital.

Complexity kills a business and by accepting any customer—especially those that do not fit your purpose, strategy, and value proposition—you are adding a layer of bureaucracy that will starve your best customers and put them at risk of going elsewhere. To manage this inevitable effect, let us now explore the Adaptive Capacity Model for professional firms.


The Adaptive Capacity Model

Think of your firm as a Boeing 777 airplane. When United Airlines places a Boeing 777 in service, it adds a certain capacity to its fleet. However, it goes one step further, by dividing up that marginal capacity into five segments (the percentages shown are suggested capacity allocations for a professional firm):

  • A. First class (5 to 8 percent)

  • B. Business class (15 to 24 percent)

  • C. Full fare coach (30 to 50 percent)

  • D. Coach (15 to 35 percent)

  • F. Discount/Priceline.com (10 to 20 percent)


Your firm has a theoretical maximum capacity and a theoretical optimal capacity, and it is essential to see how that capacity is being allocated to each customer segment. Your maximum capacity is the total number of customers your firm can adequately service (not how many hours you have), while the optimal capacity is the point where customers can be served adequately and crowding out does not affect customer behavior. Usually, for most professional firms, optimal capacity is between 60 and 80 percent of maximum capacity.  

Too many firms will, in fact, add capacity—or reallocate capacity from higher-valued customers—to serve low-valued customers. Furthermore, firms will turn away high-value, last-minute work for its best customers because it is operating near maximum capacity and usually at the low-end of the value curve for price-sensitive customers. This is common during peak seasons, where high value projects will arise from customers, but the firm is at maximum capacity and cannot handle the marginal work. The lost profit opportunities because of this are incalculable.

Firms worry about running below optimal capacity and cut their prices to attract work, especially in the off-season. This strategy is fine, but you must understand the trade-off you are making. Usually, that capacity could be better utilized selling more valued services to your first-class and business-class customers. This way, the firm does not degrade its pricing integrity to attract price-sensitive customers. According to most pricing consultants, one of the leading causes of pricing mistakes is the result of misallocating capacity to low-value customers due to the fear of not running at optimal (or maximum) capacity.

Remember, the objective of pricing is not to fill the plane; it is to maximize the profit over a given time period. If that can be done at 60 percent capacity, so much the better, as the excess capacity can be invested elsewhere.


How to Fire a Customer

What happens when your plane becomes filled with too many “C,” “D,” and “F” customers? Many consultants to firms estimate that the average firm contains between 10 and 40 percent of “F” customers. It is never easy, but it is necessary, to remove these customers from your firm. Start with those customers whose personalities clash with the culture of your firm, or whose character is in question. Once that is completed, then you can focus on removing other low-valued customers (such as the “Cs” and “Ds”). These customers are usually the ones who complain most vociferously about your price; and the debilitating effect is that we tend to listen to them the most and this effects how we price our “A” and “B” customers. One caveat: Be sure you have done everything within your power to turn a low-value customer into a high-value customer. The fact of the matter is, your customers are not going to get better until you do.

All that said, how should you fire a customer? There are many strategies, some more effective than others. Many firms in the early days of implementing this strategy would simply raise their prices by a factor of two or four, and to their surprise, a super-majority of the customers remained with the firm (an indicator of just how much money professional firms leave on the table through suboptimal hourly billing).

Nevertheless, it is strongly advised that you not utilize this strategy. The goal is to remove the customers, not simply increase their price. Getting two or four times more from an “F” customer does not make him a “C,” “B,” or “A” customer (this is the ethic of the world’s oldest profession, not of true professionals).

A phone call or a meeting is the best—and most dignified—strategy. You may line up other professionals as potential referral sources (one of your “D” or “F” customers could be his “A” or “B” customer); or, some firms have even sold off these customers to other firms. Here is an example from a CPA firm of a possible conversation you might have:

“Mary, we need to talk about how well we’re working together. We need to be sure that the range of services we offer matches your needs. Here in the firm we want to work with people where we can add significant value to their business, rather than just crunching some numbers and filling in some tax returns for them.

“This means we are reducing the number of clients we work with and increasing the range of services we provide for them. We’re working with them on growing their businesses by offering consultative services. Naturally, this means that our price levels are increasing, too. Many of our clients are comfortable with that extra investment because of the value we are providing them in return.

“Mary, unless I’m very mistaken we simply can’t provide you with that value. It seems to me that your needs would be better served by an accountant who just wants to stick to the numbers.  How do you feel about that?”


The Forced Churn

In the mid-1990s, Lake Tahoe began a major renovation, where many older motels, stores, and other buildings were bulldozed down by the lake, just on the California side of the state line. A local newspaper article claimed that for every new room added, somewhere between two and three would be lost. Obviously, the developers were shifting up the value curve by constructing higher-end hotels, time-shares, condominiums, and so forth. Why shouldn’t (some) firms remove somewhere between one and four customers for every new one added? This led to the concept of what we have since labeled the forced churn.

As a way to upgrade your firm’s customer base from “C,” “D,” and “F” customers, each time a new customer is obtained, you would fire somewhere between one to four old customers. Of course, the exact ratio would depend on how many “C,” “D,” and “F” customers your firm has and what factor the leaders are comfortable with.

Not only would this free up capacity to serve new customers, it would shift the firm up the value curve, allowing your plane to add more full-fare coach, business-class, and first-class seats. By implementing this strategy gradually, many firms feel more comfortable upgrading their customer base, and their sense of security is not jeopardized by firing a large number of customers all at once.

Tom Peters is fond of making this point: “It’s axiomatic: You’re as good—or as bad—as the character of your Customer List. In a very real sense, you are your Customer List.”

Our colleague Tim Williams likes to say that a firm is defined by the customers it doesn’t have. The most successful firms in the world today turn away more customers than they accept because they have a rigorous prequalifying process and they understand that, ultimately, bad customers drive out good customers.


Tools to Help You Get There

During our live show (the recording is linked at the top of this post), we referenced several tools to help you get to a better understanding of your customer mix.

The Customer Likability Score

Click for a larger version

Click for a larger version 

Episode #233: Pricing at Starbucks

Pricing at Starbucks and Six Tactics You Should Know About 

In this show, Ed and Ron discussed the following post: 

6 psychological tactics behind the Starbucks menu,” Kent Hendricks, March 20, 2018

So What Are The Tactics?

  1. Why you like the drinks at the center of the menu

  2. Why you’re most likely to select the Grande size

  3. Why looking at three columns of prices makes you spend more

  4. How Starbucks uses the attraction effect to frame your choice between a Grande and a Venti size

  5. Why the Starbucks menu doesn’t include a dollar sign

  6. Why Starbucks prices end in .95 instead of .99 

…And What Are The Behavioral Effects Behind Each Tactic?

  1. The Center Stage effect

  2. The Comprise effect

  3. Lower price on left (first): We spend more

  4. The Attraction effect frame Grande and Venti

  5. No Dollar Sign

  6. Prices end in .95 instead of .99

Let’s talk in more detail about number 5. Currency symbols get you to think about money which makes you less likely to spend said money. $20 and 20 and twenty are all semantically the same thing but there is a big difference in salience. The $ symbol is a symbol of cost and it reframes your thinking. The $ symbol represents what you are losing, not getting.

Number 6 poses an interesting tactic as well. The 99 in .99 signals a low cost but the 95 in .95 signals high quality. For Starbucks, the .04 loss (1.33% per transaction) more than makes up for the high quality perception and the positive effect on their brand.

Parting Thoughts 

“Summaries of human behavior explain a great deal but predict very little,” Robert Sapolsky.

We can observe behavior in aggregate, then seek to explain that behavior. However, we cannot do the reverse. We can’t use an explanation of behavior in aggregate to predict how any single individual will act. 

Episode #232: Free-Rider Friday, March 2019

What a great Free-Rider Friday! Check out the links and summaries below…

Ed’s Topics:

An Apple a day can be taken away…
Apple is closing two stores in Collin County, Texas to avoid patent trolls. See story in The Verge, February 22, 2019, and an editorial in The Dallas Morning News, February 24, 2019.

Giveth and Taketh…
According to an interview in Forbes with Grace Slick from February 21, 2019, Chick-fil-A ran a commercial during the Oscars that used a song written by Slick. The CEO of Chick-fil-A has donated to marriage laws that state that marriage is between one man and one woman. Grace used the royalty money to support LGBT charities. A great example of free-market capitalism: both parties to a transaction win, even with divergent political views.

From The National Popular Vote Website:
The National Popular Vote bill would guarantee the Presidency to the candidate who receives the most popular votes in all 50 states and the District of Columbia. Explanation It has been enacted into law in 12 states with 172 electoral votes (CACTDCHIILMAMDNJNYRIVTWA). Map showing status in states. The bill will take effect when enacted by states with 98 more electoral votes. It has passed at least one house in 11 additional states with 89 electoral votes (ARAZCODEMEMINCNMNVOKOR) and has been approved unanimously by committee votes in two additional states with 26 electoral votes (GAMO). The bill has recently been passed by a 40–16 vote in the Republican-controlled Arizona House, 28–18 in Republican-controlled Oklahoma Senate, 57–4 in Republican-controlled New York Senate, 34-23 in Democratic-controlled Oregon House, and 26-16 in the New Mexico Senate. For a legal argument against, see “Why the National Popular Vote Compact is Unconstitutional,” by Norman R. Williams from the BYU Law Review.

Subscriptions Abound…
Since we’ve been discussing the subscription business model lately, I saw two advertisements this week that are subscription based: One from Trade: “the Netflix of coffee,” and Shoprunner, teaming up with UPS, is offering free two-day delivery for over 100 retailers.

Now for Ron’s Topics:

Apple make-a da money…
We are at Peak smartphone, according to The Economist, from January 12, 2019. Apple has a 13% worldwide market share in smartphones, but captures nearly 100% of the industry’s profits (and it might even be more). 

edited.jpg

Goodbye friend…
Herb Kelleher passed away on January 3, 2019, aged 87. Herb was one of Ron’s favorite CEOs and Founders. See the obituary in The Economist.

Cape Fear…
A new book, The Fearless Organization, by Amy Edmondson, a professor at Harvard Business School argues that a corporate culture based on fear and intimidation, it might appear targets are being met in the short term. But the long run effect is likely to be counterproductive. Fear inhibits learning. Scared workers find ways of covering up or getting around inefficient practices. What better way to implement an atmosphere of “psychological safety” than implementing After Action Review. See The Economist, “Permission to speak,” January 12, 2019.

Control this…
From FEE, February 28, 2019, “Oregon Just Became the First State to Impose Rent Control,” by Hans Bader.

Episode #231: LIVE from the Meeting of the Minds

Ron and Ed were jazzed to be doing the show live from the 90 Minds annual conference, The Meeting of the Minds in San Diego. The Meeting of The Minds brings a membership of consultants, resellers, and software providers together to celebrate our powerful community.

For two-plus days, these consultants shared, listened, learned, and challenged perceptions. Every year, they celebrate expanding their community through the renewal of relationships and building new alliances. The investment grows all year through online collaboration supported by their members, webinars from partners, and sharing of knowledge and experience with each other. 

The returns are greater than any one mind.”

Ron and Ed primarily took questions from the amazing live audience. Here is quick summary of those questions:

  • Historical in the subscription world, we were taught that there were like, three measures that you should have customer lifetime value, customer acquisition costs and retention rates. So if customer lifetime value is higher than retention is good rate because you don't want to lose these customers. What would you say the key measurements are for a business owner to be looking at in this new subscription model? (Editors Note: The VC firm, Andreessen Horowitz, has a list of 16 startup metrics that are a great place to look when trying to answer this question. Here is the link.)

  • How would you recommend that smaller firms balance the need to maintain relationships with all of these customers who are now on a subscription?

  • How do we go about thinking about this in a way that we don't get scared off or some customers going to rip us off line we're going to end up consuming all of our spending all of our effort on these guys and ignoring the other people?

  • When you're in a subscription model, do you still go to that three pricing method?

  • Do you have any other examples of maybe two companies that joined together to provide a value and then price it in in one of these subscription models?

  • How do you explain this to customers?

Slides from Ed’s Keynote

Episode #230: Interview with Tien Tzuo

Biography

Tien Tzuo is a Taiwan-born American tech entrepreneur. He is the founder, chairman, and CEO of Zuora, and prior to that was chief strategy officer of Salesforce. Tzuo was born in Taiwan, and when he was 3 years old his family moved to the Flatbush section of Brooklyn. His parents were psychology professors, and his father also worked as an importer-exporter and in real estate.

In 2007, Tzuo left Salesforce to launch Zuora as its founding CEO. The California-based enterprise software company creates and provides subscription management software to help other companies with their subscription-based services. Within a few weeks of its initial public offering on April 12, 2018, Zuora was valued at over $2 billion, and Tzuo's 10% stake in the company was worth an estimated $193 million.

Tzuo's book Subscribed: Why the Subscription Model Will Be Your Company's Future - and What to Do About It, written with Gabe Weisert, was published by Portfolio on June 5, 2018.


The Most Significant Impact On Your Business

With an entire chapter in his book, Subscribed, dedicated to the income statement and the changes that can be made to account for a subscription business, we didn’t have near enough time to dig into this topic. Here are a few important points to consider along with an example of a “subscription” income statement.

Click for a larger version

 How GAAP and the Income Statement Changes

  • The traditional income statement doesn’t differentiate between recurring and nonrecurring dollars

  • Sales and marketing are matched to past goods sold

  • It is a backward looking picture, not forward looking


Collection of Interview Questions

These questions and detailed responses from Tien Tzuo are all available in the audio of the show.  

  • Early on in the book, you write:

    • We prefer outcomes over ownership, we prefer customization not standardization, we want constant improvement not planned obsolescence, we want a new way to engage with businesses, we want services not products.

    • By the end of ownership you don’t mean some utopia where there’s no property, right? Talk about the end of ownership.

  • Ron and I have been having a lot of fun applying your concepts to professional firms. We’ve talked about how most firms now sell a rival asset—the billable hour—to selling a nonrival asset, such as knowledge. What are your thoughts around applying the subscription model to nonrival assets?

  • Do you make a distinction between an “outcome” and an “output”?

  • One of things we hear over and over is “I see how architects, lawyers, etc. could do this…I see how any other business beside me could do this.” Are there some exercises or questions you like to plant to get people thinking differently around the topic of Subscribed?

  • There’s a concept you talk about in the book, swallowing the fish, which is when my revenue curve dips temporarily below the operating expenses curve as people transition to subscriptions. In your work with professional firms, does this apply more, less, or the same than those that sell traditional product?

  • What can we learn from the lessons from some of the oldest subscription companies—The Financial Times, The New York Times, Wall Street Journal, The Economist, all made the transition from the physical to online. What can we in professional services learn from this, since they were going from subscription to subscription (physical to online)?

  • Does Zuora have professional firms in its customer portfolio?

  • I want to run this analogy by you. I look at the medical profession, some of which are transitioning to a Concierge model—similar to a boutique—or a Direct Primary Care model, which has more volume. Does Zuora have medical practices in your customer base at Zuora?

  • What intriguing about this model is your selling insurance, so customers are paying for access, which puts you more in an actuarial pricing model, and perhaps 10% of your customers might use your resources 80%, and the rest are happy to pay for access whether they use you or not, which is the interesting psychology of selling insurance. Does that play a factor in how you sell this model?

  • You talked about Deloitte in Australia and New Zealand, so let’s climb Mt. Everest and try to apply this to a Big 4 accounting firm, or a top 100 law firm. Would you see it across the entire group of services, or just some services with other services priced on some other type of model?

  • You wrote something in the book that I just love: “Focus on margin and efficiency come at the cost of the relationship between the seller and customer.” So many firms only look at the math of the moment rather than the lifetime value of the customer.

  • The idea that we can subscribe to an automobile is fascinating, but you also talked about airlines and how 200 million frequent fliers are up for grabs. How do you see the major carriers adopting a subscription model, at least for their top fliers.

  • When you list all the advantages of this model, the one that hit home is how it breaks down silos. Many firms speak of being “one firm” but it’s not the case. This model really does break down the silos, doesn’t it?

  • I would imagine you see much more innovation from the companies that have adopted this model [because they are more customer-centric]?

  • You talk about three different customer metrics, Recency (last visit), Frequency (how often do they visit), and Volume (how many articles read), in addition, are there other predictive indicators that you’ve ferreted out from your customer base of what predicts a customer won’t churn, or will keep engaging and remain loyal?

  • I loved how you took GAAP to task for not being able to report on this model, and some of the new wording you presented. What’s been the feedback from CFOs on this new income statement and its presentation? [See example of this new income statement below].

  • What does Zuora do, what do you offer?

  • Are you applying any Artificial Intelligence to your offerings?

  • Do you offer consulting to help firms with the change management to help them make this transition?


In Summary

Don’t dismiss the subscription business model because you don’t think it would work for your business. Tien shared several examples from industries that might not feel like a good fit. It is worth exploring. If nothing else, read the book which made both Ron and Ed’s “best of 2018” lists.

Episode #229: Incumbents Hate Competition (But Customers Love It)

Overview

All business people live the ultimate contradiction. They pray at night for supernormal profits and spend their days driving down those profits by competitively supplying customers with more of what they want. As the Austria economist Joseph Schumpeter so poetically phrased it, entrepreneurial innovations make up the “perennial gale of creative destruction,” whereby entire industries have been eliminated due to this dynamism of free markets.

Buggy whip manufacturers didn’t invent the automobile and slide rule manufacturers did not invent the calculator. Both of these innovations, and a plethora of others, rose up and decimated existing stocks of infrastructure and propelled our economy forward.


Be the Ball, Danny…

Businesses are the ultimate change agents in society, ushering in new products, services and ways of conducting our affairs. This role of business is often ignored in the debate over the jobs destroyed in the process, which is the wrong metric: the creativity is more important than the destruction.

For example, Intuit announced assisting bookkeeping at $200/month in addition to its QBO subscription, at the following price points: $210, $217, $230, $260 (self-employed, Freelancer option is $205).

But why would Intuit invest in a dying industry? If anything, this validates the market for bookkeeping, and the human relationship that is required.


Where do we go from here?

Economists like a wide range of price/value points. Markets serve both the rich and poor, and everyone in between — think of the price points available with hotel rooms, cars, restaurants, etc. This puts a premium on positioning.

  • Does the $200 price anchor at too low a price? It could be too high a price for true DIY customers.


The Subscription Economy…Again!

The other overlooked reality of this is it validates the subscription business model. Customers in a free market are free to choose. Does anyone feel guilty using Veem, or buying prescription drugs from Amazon (when they enter that market)? Capitalism is not a “system of competition.” Competition is ubiquitous, no matter the system. Capitalism is a system of voluntary cooperation. Competition does not give rise to voluntary exchange, scarcity does. Competition is a feature, but not the defining feature of capitalism.

The Golden Rule of capitalism: The good fortune of others is also one’s own. It’s not zero-sum.

The impact on jobs is the wrong way to measure the health of a sector. It’s determined by outputs, not jobs. Nobody is nostalgic for bowling pin setter jobs or telephone operators.


So What is YOUR Strategic Response?

Firms need to niche (specialize) as more and more providers enter the market, especially at the low end. Our VeraSage colleague Tim Williams distinguishes between Magic Work and Logic Work. Firms could simply provide bookkeeping for free, along with other advisory (Magic) services.

Focus on customer transformations, which means you are taking responsibility for an outcome, rather than performing tasks. With a transformation, the customer is the product.

Tim has talked about Magic vs Logic before and one of his videos is below. It’s well worth watching. 

Episode #228: Memorable Mentors - Richard P. Feynman

On the show this week, we had a discussion about Richard Feynman and why he is a memorable mentor. Here’s some background to get you started…

Biography

According to Wikipedia, Richard Feynman [May 11, 1918 – February 15, 1988] was an American theoretical physicist, known for his work in the path integral formulation of quantum mechanics, the theory of quantum electrodynamics, and the physics of the superfluidity of supercooled liquid helium, as well as in particle physics for which he proposed the parton model. For his contributions to the development of quantum electrodynamics, Feynman, jointly with Julian Schwinger and Shin'ichirō Tomonaga, received the Nobel Prize in Physics in 1965. In a 1999 poll of 130 leading physicists worldwide by the British journal Physics World he was ranked as one of the ten greatest physicists of all time. He assisted in the development of the atomic bomb during World War II and became known to a wide public in the 1980s as a member of the Rogers Commission, the panel that investigated the Space Shuttle Challenger disaster.


So Many Quotes 

Some people are just “quotable”…that is, their words lend themselves either purposefully or naturally to being easily quoted. Richard Feynman is most certainly one of these individuals. The following quotes were excerpted from the book, The Pleasure of Finding Thing Out: The Best Short Works of Richard P. Feynman, published in 1999 by Richard’s family.

In physics, unlike chess, when you discover new things, it looks more simple.”

 

“The kick in the discovery,” the sudden feeling grasped a wonderful new idea, that there was something new in the world.”

 

He did physics for the fun of it—for the pleasure of finding out how the world works. When he received the pre-dawn call informing him he won Nobel prize, he replied: “You could have told me that in the morning.”

 

He won the Nobel prize for work he did in 1947, at the age of 29.

 

“Why knowing merely the name of something is the same as not knowing anything about it.”

 

“Social science is not a science—it’s a pseudoscience [Hayek called it scientism].

 

“I’d rather have questions I can’t answer than answers I can’t question”

 

“The question of doubt and uncertainty is what is necessary to begin; for if you already know the answer there is no need to gather any evidence about it.”

 

“The question is not whether it’s true or false, but rather how likely it is to be true or false.”

“Without doubt there is no progress, no learning.”

 

“And there’s no learning without posing a question, and a question requires doubt. People search for certainty, but there is no certainty.”

 

Don’t know a problem: ignorant
Have a hunch: uncertain
Pretty sure of result: some doubt

 

“The English call it “muddling through”, it’s the most scientific way of progressing—one must leave the door to the unknown ajar.”

 

“The power of government should be limited; that governments ought not to be empowered to decide the validity of scientific theories, that that is a ridiculous thing for them to try to do.”

 

“A friend of mine, Albert R. Hibbs suggested very wild idea: it would be interesting in surgery if you could swallow the surgeon.”

 

On the Challenger disaster: [we should not] “encourage ordinary citizens to fly in such a dangerous machine, as if it had attained the safety of an ordinary airliner. For a successful technology, reality must take precedence over public relations, for nature cannot be fooled.”

 

“Learn from science that you must doubt the experts. As a matter of fact, I can also define science another way: Science is the belief in the ignorance of experts.”

 

“I’ve learned how to live without knowing. I think my life is fuller because I realize that I don’t know what I’m doing. I’m delighted with the width of the world!”

 

In a chapter titled the “Relation of Science and Religion,” he writes: “I do not believe that science can disprove the existence of God; I think that is impossible. Moral questions are outside the scientific realm.”

Science is the belief in the ignorance of experts.

Hell, if I could explain it to the average person, it wouldn't have been worth the Nobel prize.

Adjectival sciences, aren’t. - Attributed.


Some additional quotes…not necessarily from the same book as referenced above:

There are 1011 stars in the galaxy. That used to be a huge number. But it's only a hundred billion. It's less than the national deficit! We used to call them astronomical numbers. Now we should call them economical numbers.

The real problem in speech is not precise language. The problem is clear language. The desire is to have the idea clearly communicated to the other person. It is only necessary to be precise when there is some doubt as to the meaning of a phrase, and then the precision should be put in the place where the doubt exists. It is really quite impossible to say anything with absolute precision, unless that thing is so abstracted from the real world as to not represent any real thing.

No government has the right to decide on the truth of scientific principles, nor to prescribe in any way the character of the questions investigated. Neither may a government determine the aesthetic value of artistic creations, nor limit the forms of literary or artistic expression. Nor should it pronounce on the validity of economic, historic, religious, or philosophical doctrines. Instead it has a duty to its citizens to maintain the freedom, to let those citizens contribute to the further adventure and the development of the human race.

The real question of government versus private enterprise is argued on too philosophical and abstract a basis. Theoretically, planning may be good. But nobody has ever figured out the cause of government stupidity — and until they do (and find the cure), all ideal plans will fall into quicksand.

Do you seriously entertain the idea that without the observer there is no reality? Which observer? Any observer? Is a fly an observer? Is a star an observer? Was there no reality in the universe before 109 B.C. when life began? Or are you the observer? Then there is no reality to the world after you are dead? I know a number of otherwise respectable physicists who have bought life insurance.

If we suppress all discussion, all criticism, proclaiming "This is the answer, my friends; man is saved!" we will doom humanity for a long time to the chains of authority, confined to the limits of our present imagination. It has been done so many times before.

Related to and of Feynman

We didn’t spend the entire show reading Richard Feynman quotes (although we did find a Twitter account that effectively does that). There were a few other topics worth calling out during our discussion this past week.

Episode #227: Free-Rider Friday, January 2019

Ron Thinks ASMR Is Super Bowl Big…

Autonomous Meridian Sensory Response - or ASMR - is an effective tactic in advertising. Case in point from the SuperBowl: “Zoe Kravitz Does ASMR, Whispers About Michelob Ultra’s Pure Gold Organic Beer in Super Bowl Spot,” AdWeek, Kristina Monllos, January 28, 2019

 Here is some more information from Wikipedia to get you started on the subject of ASMR.

Colin-Quinn.jpg

 What do comedy, Trump, and Broadway have in common?

…more than you might think. Colin Quinn’s one-man off-Broadway show is real talk. He tackles some tough subjects and shows guts. Some might even call it counter culture. More here: “The Comedy Counter-Counterculture,” Kyle Smith, National Review, January 29, 2019

Don’t make me craugh. I might spit out my milk. Or cry in despair…

From FEE this past week, we had a great article on the North Korean constitution and a new word for everyone to file away. More here: “North Korea’s Constitution Makes Me Craugh,” FEE, Lawrence W. Reed, January 30, 2019 

Craugh: The temptation to cry and laugh at the same time (Reed conjured up this word while reading North Korea’s constitution)

At one point, we all thought Bezos was just a little crazy…

In hindsight, many of Jeff Bezos’ letters to Amazon shareholders have been great reads. Even years later. This one in particular is from 1997. So get in your Wayback Machine (maybe a Motorola in your pocket and definitely a CRT monitor on your desk) and take a look at this one: “Investor Letters: Jeff Bezos’ 1997 Letter to Amazon Shareholders

From this letter, we have Bezos’ four tenants:

  1. Be obsessed with the customer

  2. Focus on results over process [hat tip to House, M.D.]

  3. Make high quality decisions quickly

  4. Embrace external trends quickly

When Bezos was asked by an employee what Day 2 at Amazon will look like, he said Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death.

For a contrary view on Day 2, see Debbie Madden’s column in Inc.: “Jeff Bezos Says It’s Always Day 1 at Amazon. Here’s the Big Problem With That Philosophy

A Huge Hat Tip to Tim Williams…once again 

Don’t Change Your Practices, Change Your Mind,” Tim Williams, Ignition Consulting Group, January 15, 2019

Speaking of Tim Williams. Do yourself a favor and follow him on LinkedIn. He’s a LinkedIn influencer and every piece he writes is worth reading.

So what did Ed want to talk about this week? Texas.

If Texas were its own country, it would be the third largest oil producer in the world. Heck, if Texas were its own country, by many measures it would be the third largest country in the world too. (Wikipedia link for data points)

Larry Lessig still fights for the commons…

In 1922, Robert Frost wrote a poem. Until now, you had to pay a royalty to use it. Robert Frost poem enters the public domain as of January 1, 2019.

From the Be Careful What You Ask For department… 

Let’s get Caesar involved! (written by Allan Patterson) Go ahead, click the link. You’ll laugh. You might even craugh.

Let’s Get Deep For A Moment…

So what does Jesus have to say about the welfare state? Mr. England has a few thoughts in his article: “Jesus on the redistribution of wealth,” Randy England, Liberty.me, January 15, 2019

Creating An Emotional Connection With Your Dish Detergent…

Something that happens time and time again. That brand WANTS you to love it. That brand WANTS you to feel an emotional connection. But it’s dish detergent so are we expecting too much? Probably. And that’s why “Brand purpose is a lie,” …from Fast Company, January 17, 2019

Episode #226: A Priest and a Rabbi...

Folks, we have the Judeo-Christian tradition on the show! Ed and Ron were honored to have back on the show for the third time, and at the same time, Father Robert Sirico and Rabbi Daniel Lapin. Join us for another fascinating conversation with these two mentors, covering issues from economics, liberty, freedom, truth, and a host of other topics.

Rev. Robert A. Sirico received his Master of Divinity degree from the Catholic University of America following undergraduate study at the University of Southern California and the University of London. During his studies and early ministry, he experienced a growing concern over the lack of training religious studies students receive in fundamental economic principles, leaving them poorly equipped to understand and address today's social problems. As a result of these concerns, Fr. Sirico co-founded the Acton Institute with Kris Alan Mauren in 1990. His writings are published in a variety of journals, including: the New York Times, the Wall Street JournalForbes, the London Financial Times, the Washington Times, and National Review. He is a member of the prestigious Mont Pèlerin Society, the American Academy of Religion, and the Philadelphia Society. He is the Pastor of Sacred Heart of Jesus parish in Grand Rapids, Michigan. Father Sirico holds dual Italian and American citizenship.

Rabbi Daniel Lapin was born into a prestigious Torah family. He was a student of his father, Rabbi A.H. Lapin, who served the Jewish communities in Johannesburg and Cape Town, South Africa, eventually immigrating to America with his wife where they established the Am Echad synagogue in San Jose, CA. He learned in yeshivas (Torah schools) in England and Israel as well as studying physics, engineering and mathematics in S. Africa. Rabbi Daniel immigrated to the U.S. where, along with Michael Medved, he founded the Pacific Jewish Center in California. In 1992, he and his family relocated to Washington State where he began his work strengthening the Judeo-Christian roots of this country by writing, speaking and standing shoulder to shoulder with prominent Christian leaders, leading to the establishment of the American Alliance of Jews and Christians. In 2002, Rabbi Lapin wrote his bestselling book Thou Shall Prosper: The Ten Commandments for Making Money.

Ed’s Questions

Father Sirico, you wrote in your book Defending the Free Market: Freedom is not a goal or virtue in itself. Ultimately, the aim of freedom must be the truth. You value the truth more than your freedom. Can you explain that, and then we’ll get Rabbi Lapin’s reaction.

Peter Block, a consultant and previous guest of the show [Episode #183], defines liberty as the absence of oppression, freedom is the act of commitment (a choice to have an intention to create a certain kind of world).

Father, what is your favorite story, part, or concept from the Old Testament? And Rabbi, what is your favorite story, part, or concept from the New Testament? Do you have favorite concept from the Old Testament?

We humans are said to be a tribal species, but it seems nowadays that tribalism has gotten completely out of hand, and is running amuck, with people running to quick judgment. Would you address this notion that being tribal is ok, but tribalism really seems to be a problem?

Ron’s Questions

Rabbi Lapin, on your recent podcast, you laid out a principle: The Bible is the source of morality. But the Bible’s morality applies to individuals, not to nations. Can you explain what you mean, and then we’ll get Father Sirico’s reaction.

Why do we tend confuse poverty with virtue (or piety)? Father I’ll start with you. [Rabbi Lapin wrote in Business Secrets of the Bible: “The opposite of wealth is evil. If wealth isn’t being created, then evil is being done.” And if wasn’t for the Bible, we wouldn’t have the word “poor”.

Prior Shows with Father Robert Sirico and Rabbi Daniel Lapin

Books by Father Robert Sirico and Rabbi Daniel Lapin

Episode #225: The Real Monopolies: Occupational Licensure

In 1950, one out twenty occupations required some type of licensure. Today, it is almost one out of three. There are three levels of occupational licensure:

  1. Registration

  2. Certification

  3. Licensure

Political organization is a far better predictor of licensure than the danger the profession poses to the public (measured by liability premiums).

Some Suggested Reading:

One book that really changed Ron’s mind on this topic is The Rule of Experts: Occupational Licensing in America , S. David Young, 1987 (CATO).

President Obama was likely the first president to ever discuss occupational licensing in a public speech (speech before national Governors’ Assn), and his Council of Economic Advisors issued a report, which included 80 pages that are highly critical of occupational licensure.

George Bernard Shaw: “All professions are a conspiracy against the laity.” Economists have documented the following effects of licensure:

  • Limit consumer choice

  • Raise consumer prices

  • Increase practitioner income

  • Limit practitioner mobility

  • Deprive poor of adequate services (rich drive, poor walk)

  • Restrict job opportunities for minorities, older workers

  • Stifle innovation and creativity—had retailing been subject, supermarkets, big box, Amazon could have never happened

Thomas Edison had little formal education and could not have been licensed as an engineer under today’s guidelines. Frank Lloyd Wright would not qualify to sit for the architect’s certifying exam. Cranks, crackpots, and outsiders bring innovation.

Colonial America Cotton Mather and his fellow clergyman fought to establish inoculation as a cure for small pox: their leading opponents were doctors.

The first law in the USA was in Virginia in 1639, which regulated physicians fees. The second law regulated the quality of physicians service in Massachusetts 10 years later.

The American Medical Association (AMA) was formed 1847, and by 1900 every state had mandatory licensing law.

Most licensure imposes experience requirements—usually an arbitrary length. Until courts stopped it, it took longer to become a master plumber in Illinois than to become a Fellow of the American College of Surgeons.

Citizenship and residency requirements are also part of licensure. Many of these began in the 1930s as European refugees came to the USA.

More Suggested Reading:

Another great book is The Right to Earn a Living: Economic Freedom and the Law , Timothy Sandefur, 2010 (CATO).

A Louisiana law licensed florists. It requires a one-hour written exam and 3-hour performance exam that tests on “harmony” and “effectiveness” of floral arrangements.

Since 2000, fewer than 50% have passed!

One witness testified in court in a case that was challenging the licensure law: “I believe that the retail florist does protect people from injury…We’re very diligent about not having an exposed pick, not having a broken wire, not having a flower that has some type of infection, like, dirt that remained on it when it’s inserted into something they’re going to handle, and I think that because of this training, that prevents the public from having any injury…”

This doesn’t pass the laugh test. However, it did pass the “rational basis test.”

Cause and Effect:

In 2007, psychics in Salem, MA lobbied for licensing as a requirement to protect the public. But it is literally impossible to be a competent psychic.

In 1881, the National Burial Case Association set prices for coffins across the industry. Two years later, the National Funeral Directors Association fixed the price of adult coffins at $15, a large sum in those days. For a wooden box your kid could make in wood shop.

Interior designer license is one of the most difficult to earn. Only three states and Washington, D.C. offer it. It requires 2,190 days of education & experience (6 years)!

They argue that carpets could begin sparking infernos, porous countertops could spread bacteria, mis-chosen jail furnishings can be used as weapons.

In Illinois, barbers and manicurists are licensed, but not electricians, even though shoddy electrical job could burn down your neighborhood, but your hair will grow back.

Let’s Talk Liberty and Freedom:

This is not just a dollars and cents issue, it’s a liberty and freedom issue. One doesn’t have to ask permission to exercise one’s rights. The right to earn a living: marry, travel, have children, (drive), worship, etc.

Even the Magna Carta protected the right of “any man to use any trade thereby to maintain himself and his family.”

This right to earn a living was transformed into a privilege that could be revoked whenever politicians decided that doing so would be a good idea.

In License to Work: A National Study of Burdens from Occupational Licensing , Dick M. Carpenter, Lisa Knepper, et. al., they describe a new occupation: Permit Expediter. In Los Angeles they exist for helping restaurants comply with all of their licensing. In Washington, D.C. former Consumer and Regulatory Affairs bureaucrats help with licensing.

But in Chicago, Permit Expediters are so common, they have their own license!

The book also studied 102 low-income occupations, such as: Interior designer, shampooer, florist, home entertainment installer (8 months), funeral attendant, tree trimmers (1+ year), shoe shiners (Newark).

On average, states license 43 occupations (LA = 71/102, OR = 59; WY = 24 fewest).

CA licenses 177 job categories and Hawaii imposes the most burdensome requirements, while PA has the lightest.

Most of the 102 occupations are practiced somewhere without licensure or widespread harm.

The average cosmetologist requires 372 days training while the average EMT requires 33 days.

One argument made in favor of licensure is asymmetric information, but that is true in a lot of markets (houses, cars, etc.). Information will never be perfect; it’s costly to acquire.

Reputation is stronger than regulation. And of course there is always tort law.

Milton Friedman wrote his PhD thesis with Simon Kuznets, Income from Independent Professional Practice (NBER, 1945). One excuse he constantly heard from the medical profession was: letting too many people in would lower incomes to such an extent that doctors would resort to unethical practices to increase their income.

Friedman replied: “This has always seemed…objectionable on both ethical and factual grounds. It is extraordinary that leaders of medicine should proclaim publicly that they and their colleagues must be paid to be ethical.”

Another excellent book is Bottleneckers: Gaming the Government for Power and Private Profit, by William Mellor and Dick M. Carpenter II.

The Chairman and founding GC of Institute for Justice, and director of strategic research, www.ij.org.

They define Bottlenecker as: A person who advocates for the creation or perpetuation of government regulation, particularly an occupational license, to restrict entry into his or her occupation, thereby accruing an economic advantage without providing a benefit to consumers.

Justice William O. Douglas: “The right to work is the most precious liberty that man possesses.”

Conclusion: these laws really hurt the poor and minorities, exacerbate inequality, and even harm kids (can’t have a lemonade stand).

Episode #224: The Best Books We Read in 2018

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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’s Five Best Books in 2018

5. The Tyranny of Metrics, Jerry Muller

“Juking the stats”—the way in which institutions are perverted, as effort is diverted from its true purpose to meeting the metric targets.

Surgeon avoids tough cases—creaming, avoiding risky instances that might have negative effect impact on metrics.

“While we are bound to live in an age of measurement, we live in an age of mismeasurement, over-measurement, misleading measurement, and counter-productive measurement. The problem is not measurement, but excessive measurement and inappropriate measurement—not metrics, but metric fixation.”

Hospitals penalized % patients fail survive for thirty days beyond surgery, so they kept the patient alive for 31 days.

The Tyranny of Metrics
By Jerry Z. Muller

Metric fixation leads to a diversion of resources away from frontline producers toward managers, admin, and those who gather and manipulate data. Goodhart’s law: Any measure used for control is unreliable.

Metric fixation stifles innovation, risk-taking, and creativity, and creates a short-term vs. long-term outlook. During Vietnam War, Robert McNamara substituted civilian mathematical analysis for military expertise.

In the book, Muller covers:

  • Colleges and Universities

    • Training, oriented to production and survival

    • Education, oriented to making survival meaningful

  • Schools

  • Medicine—diagnosing and treating disease, American medicine is best in world; lifestyle patters beyond control of Drs

  • Policing

  • The Military

  • Business & Finance

  • Philanthropy and Foreign Aid—the snake of accountability eats its own tail

Sunlight best disinfectant, Wikileakism. More often, result is paralysis. Transparency becomes the enemy of performance

You can listen to Jerry Muller being interviewed by Russ Roberts on EconTalk

4. Strategic Cost Transformation, Dr. Reginald Lee

Ron was honored to write the Foreword, where he states:

“Dr. Lee’s distinction between noncash costs and cash costs is brilliant, not to mention essential for understanding how manipulating costs will not alter cash. The goal is to generate cash profit, not accounting profit. Most costs in organizations today are for capacity: Human capital, facilities, and technology. These costs don’t change based on how they are utilized, and yet cost accountants force math relationships that make it appear as if they did, such as cost per hour. The fact is, services and products don’t have costs, organizations do.

Besides, as Dr. Lee makes clear, “You don’t need calculated costs for managerial purposes. The data in the OC domain are precise and unambiguous [measurements]. The AD information is ambiguous and messy [metrics]. OC provides everything AD does without the drama.”

Cost accountants have all sorts of metrics in their toolboxes they claim are the magic bullet for calculating profitability per job, or per product/service. Yet these metrics of margin analysis won’t predict the need for additional capacity, or help you model cash flow, nor do they tell you from a pricing perspective if you’ve left money on the table.

Further, these metrics do not help you improve the future performance of your organization. Cost accountants are collectively plunging a ruler into the oven to determine its temperature—it is the wrong tool.

Listen to our interviews with Dr. Lee: Episode #200 and Episode #112.

3. Factfulness, Hans Rosling

Son, Ola, daughter-in-law, Anna, also co-authored the book.

Hans Rosling, R.I.P. [July 27, 1948 – Feb 7, 2017]

The book begins with a test, here are few of the questions, with the correct answer in bold.

Where does the majority of the world population live? Low income countries (9%)/middle (75%)/high income countries

In last 20 years, proportion of world population living in extreme poverty has… Almost doubled/same/almost halved

On average, 7% get it right (less than 1 in 10), all around the world, all types of professions, including Nobel Prize winners, and medical researchers worst

They did worse than random chance!

Chimps would do better—and their errors would be equally shared between the two wrong answers. The human errors all tended to be in one direction—the world is worse than it really is.

Rosling calls this an “Overdramatic worldview,” and it’s not the media’s, or the school’s fault, etc.

It’s how our brains work: illusions don’t happen in our eyes, they happen in our brains.

One linguistic change he convinced me of: there is no gap between the “developed” and “developing” worlds.

2. In the First Circle, Aleksandr Solzhenitsyn

Shunning the moral relativism that permeates modern thought, Solzhenitsyn unapologetically treats good and evil and the human soul as metaphysical realities.

Four days in a sharashka (slang for a prison research institute), December 24-27, 1949

Polyphonic principle: no single character dominates the novel.

To sum the book up: What does it mean to be a human being?

Solzhenitsyn last words to his fellow countrymen as he departed into exile: “Live Not by Lies!”

“The man from whom you’ve taken everything is no longer in your power; he is free again.”

“Lenin and Trotsky were right: If you couldn’t shoot people without trial, you would never be able to make history at all.”

“Socialism without Stalin was no different from fascism!” (Stalin to himself)

Mrs. Elanor Roosevelt: ask the prisoners whether any of them wished to address a complaint to the UN?

“They unanimously protest against the distressing situation of the blacks in America and ask the UN to look into the matter.”

There are two episodes on EconTalk on this book, with Russian Literature Professor Kevin McKenna. The first one talks about Solzhenitsyn the man, and the second discusses the book [spoiler alert for the second interview]. 

Ed’s Five Best Books in 2018

5. The Vampire Economy, Gunter Reimann

4. Tomorrow 3.0: Transaction Costs and the Sharing Economy, Michael C. Munger

Listen to our show with Mike Munger, Episode #190.

2. Win Bigly, Scott Adams

And… Ron and Ed’s #1 Book for 2018 surprising no one…

1. Life After Google, George Gilder

  • Kurt Godel: “Every logical system necessarily depends on propositions that cannot be proved within the system.” The mathematics of information, led to computers.

  • Computers required what Alan Turing called “oracles” to give them instructions and judge their outputs. Also led to Claude Shannon’s information theory.

  • Gordon Bell coined Bell’s Law: every decade a hundredfold drop in the price of processing power engenders a new computer architecture.

Listen to our interview with George Gilder on Life After Google, Episode #207.

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 #223: 2018 - The Year in Review

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RIP

  • President George Herbert Walker Bush

  • Barbara Bush

  • John McCain

  • Charles Krauthammer

  • Marty Allen, comedian

  • Penny Marshall

  • Stephen Hillenburg, Creator SpongeBob Squarepants, ALS, 57

  • Roy Clark

  • Stan Lee

  • Paul Allen

  • Burt Reynolds

  • Neil Simon

  • Robin Leach

  • David Ogden Stiers, M*A*S*H

  • Aretha Franklin

  • Charlotte Rae (Edna Garret, The Facts of Life)

  • Adrian Cronauer, 79, American airman, radio show was inspiration for Good Morning, Vietnam

  • Joe Jackson, patriarch of Jackson family, 89

  • Anthony Bourdain, 61

  • Kate Spade, 55

  • Dwight Clark, The Catch, ALS, 61

  • Jerry Maren, 98, last surviving munchkin from The Wizard of OZ

  • Verne Troyer, Mini-Me in Austin Powers, 49

  • Tom Wolfe, 87

  • Margot Kidder

  • Larry Harvey, Founder of Burning Man Festival, 70

  • Harry Anderson, Night Court, 65

  • R. Lee Ermey, Full Metal Jacket drill sergeant, 74

  • Linda Brown, center of US Supreme Court Case ended segregation, 75

  • Stephen Hawking, 76

  • Bill Graham, 99

  • John Mahoney, Frazier, played the father, 77

  • Jerry Van Dyke, 86

  • John Young, Astronaut, walk on moon, first space shuttle flight, 87

  • Ken Berry

  • Richard Harrison, The Old Man on Pawn Stars, 77, Parkinson’s

TSOE Shows in 2018

Out of 50 live shows in 2018, we had guests on 23 of them (46%). Big shout out to our show runner, Thomas Casey, for arranging most of the wonderful guests we had on, and thank you to all the wonderful guests for appearing on the show.

Ron’s Five Favorite Shows of 2018 

  1. Bad Medicine, Episode #178

  2. Laws of Systems Thinking, Episode #175

  3. The Subscription Business Model, Parts I & II, Episodes #217 and #221

  4. Top Ten Pricing Lessons, Episode #196

  5. The Value Guarantee, Episode #179

Ed’s Data-driver Top Shows according to YOU

Top 3 interview shows

  1. George Gilder, Episode #207, Life After Google

  2. Stephan Liozu, Episode #203

  3. Russ Roberts, Episode #213

Top 3 topic-driven shows

  1. How to Have a Value Conversation, Episode #182

  2. The Subscription Business Model, Part I, Episodes #217

  3. Top Ten Pricing Lessons, Episode #196

Pull-quotes from our Guests

Mentors and Economists

Ron’s 37-year mentor, George Gilder, Episode #207, Life After Google

  • “We have to act in the darkness of time”

  • “Faith precedes knowledge, faith precedes action, faith precedes meaning”

  • “You can’t have any logical, rational system without faith”

Ed’s long time mentor, Peter Block, Episode #183

  • “Liberty is the absence of coercion; freedom is a choice, a commitment”

  • Ed sang to Peter!

  • Eisenhower asked computer, “Is there a God?” “There is now.”

Thomas Hazlitt, Episode #184, The Political Spectrum

  • The story of naming the SS Minnow from Gilligan’s Island

  • The iPhone wouldn’t have been allowed with net neutrality

Don Boudreaux, Episode #187

  • Public Choice is “Politics without romance.”

  • If mass transit is going to be measured by the number of jobs it creates, then we should have publicly funded Rickshaws, since there is a 1:1 of jobs and passengers

Michael Munger, Episode #190, Tomorrow 3.0

  • Uber is not threat to taxis, but to Amazon (Sears was first Amazon)

  • Triangulation, Transfer, Trust

  • To the customer, all costs are transaction costs

Russ Roberts, Episode #213

  • From Russ’s recent podcast, a Chinese proverb: “No food, one problem. Lots of food, many problems.”

Walter Williams, Episode #216

  • Referring to minimum wage laws: “They don’t even pass the sniff test.”

Other notable guests: a journalist, a former Thunderbird(!), authors, entrepreneurs, etc.

Mark Skousen, Episode #205

John Stossel, Episode #204

Chris “Elroy” Stricklin, Episode #214

Jeffrey Tucker, Episode #201, Right-Wing Collectivism

Barry Melancon, Episode #177, President of the American Institute of CPAs

Blair Enns, Episode #188, Pricing Creativity

Phil Rosenzweig, Episode #191, The Halo Effect

  • “Whenever someone says ‘We have the right strategy, we just need to execute better,’ I make sure to take an extra-close look at the strategy.”

Mary Ruwart, Episode #192, Death by Regulation

  • Ed: “Your book is more horrific than a Stephen King novel, because it’s real.”

  • “At least one-half of Americans who died lost at least a decade off their lives because of the 1962 FDA Amendments”

Reginald Lee, Episode #200, Strategic Cost Transformation, VeraSage Senior Fellow

Warren Myer, Episode #218, Coyote Blog, and Climate-Skeptic

Ron Quaranta and Erik Asgeirsson, Episode #212, Erik is the President and Chief Executive Officer of CPA.com, and Ron is the Founder and Chairman of the Wall Street Blockchain Alliance.

Stephan Liozu, Episode #203, Chief Value Officer of Thales Group, Professional Pricing Society Faculty, author

David Meikle, Episode #206, How to Buy a Gorilla

Ryan Lazanis, Episode #210, Founder of Xen Accounting

Alessandra Lezama, Episode #195, AbacusNext CEO

Jeff Kanter, Episode #197, Co-founder of HealthExcellencePlus.com 

Honors

Michael Palin, Knighted, Sir Palin 

Predictions Made about 2018

2 Comments

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 #222: Free-Rider Friday, December 2018

Episode #222 reminded Ed of the old TV show, Room 222, which ran from 1969-1974 (typical bad 70’s TV).

rm222.jpeg

Ed’s Topics

Warren Myer, Coyote Blog, October 2018, the real scandal in climate science.

Andrew Winston, Harvard Business Review article on pending climate catastrophe.

Ed’s brother’s Christmas joke.

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[On the take down of the 1984 song “Do They Know it’s Christmas” by Band Aid, see our shows with Father Sirico, Episode #134, and Magatte Wade, Episode #160, and the movie they made, Poverty, Inc.].

From Intellectual Takeout, November 25, 2018, Socialists are more materialist than capitalists.

New York Times, December 21, 2018, “What is Glitter?”

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Ron’s Topics

IBM’s rebel yell,” The Economist, November 3, 2018

redhat.jpeg
    • IBM bought Red Hat, $34B, 63% premium

    • Founded 1993, $2.9B revenue

    • For 22 quarters IBM revenue declined

    • Culture clash IBM straight-laced, Red Hat freewheeling

    • Watson: disappointment in AI

    • Red Hat name: 18th-century revolutionaries in American and France wore red caps.

    • Now, open-source looks like the establishment

Coping with the 100-year-life society,” The Economist, November 17, 2018

More than one-half of Japanese babies can expect to live to 100.

Shinzo Abe talks about a model of how to make ultra-long lives fulfilling and affordable (“designing the 100-year-life society”). The Economists thinks Japan needs to: 

  1. Persuade current workers to labor longer

  2. Encourage more women into the labor force

  3. Let in more immigrants

Even though it has made progress on all three, it’s not enough. The Japanese population is declining at almost 400,000 year, and there are 1.6 vacancies for every jobseeker.

Baby bust,” The Economist, November 24, 2018

From 2007 to 2017, America’s fertility rate dropped from 2.12 to 1.77, which is equal to England, but well below France. The teenage birth rate has halved in the past 10 years.

fertility.png

Staying alive,” The Economist, November 24, 2018

Suicide rate in America is up 18% since 2000, largely among white, middle-aged, poorly educated men.

At the global level, suicide is down by 29% since 2000, notable among:

    • Women in China and India

    • Middle-age men in Russia (stage between communism and capitalism: alcoholism)

    • Old people all around world

Why? Greater urbanization; falling poverty; greater employment rates.

515 people survived jumping off the Golden Gate bridge between 1937-1971, 94% were still alive in 1978. 90%+ survivors of suicide don’t try it again.

Suicide is strangely contagious: after Robin Williams committed suicide in 2014, 1,800 more suicides than would otherwise have been expected occurred within the next 4 months.

The Economist thinks doctors should be able to assist. Ron vehemently disagrees with this.

Take a break,” The Economist, November 24, 2018

The average Americans worker in a typical year works 100 hours more than an average Briton, French, and 400 hours more than average German worker.

Average American worker receives 17.2 days of vacation (it was 20.3 1978); around one-half don’t take full allotment.

In the European Union, there are 20 paid holidays per year (in Spain and Sweden, 36). And HBR study in 2016 found that those who took 11+ days off were twice as likely to get a raise.

But the causation could be the opposite: star workers may feel they can afford to take a break.

Extra hours don’t automatically lead to higher productivity. Parkinson’s law: work expands to fill the time available.

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 #221: The Subscription Business Model, Part II

Ed and I continue our exploration of the subscription business model. Check out our first episode in this series from November 9, 2018 (Episode #217).

In this episode, we discussed the book, The Automatic Customer: Creating a Subscription Business in Any Industry, by John Warillow (2015).

The history of the subscription model dates back to the 1500s, when European map publishers subscribed to future editions. Newspapers and magazines began in 17th century Europe. Ron’s first book, The Professional’s Guide to Value Pricing, which was published by Harcourt Brace initially, was sold on a subscription model.

Vijay Ravindran, from Amazon Prime: “It was never about the $79. It was really about changing people’s mentality so they wouldn’t shop anywhere else.” Nothing has been as successful in getting people to shop in new product lines

Nine Subscription Business Models

  1. The Membership Website Model—Wall Street Journal, New York Times, The Economist, Financial Times, etc.

  2. The All-You-Can-Eat Library Model—Spotify, Rdio, Rhapsody, Netflix, etc.

  3. The Private Club Model—Ongoing access to something rare (networking clubs, etc.). Disney’s Club 21 [and Club 33] at Disneyland.

  4. The Front-of-the-Line Model—Priority access to a group of your customers  (turnaround time, etc.).

  5. The Consumables Model—A product that needs replenishing (razors, diapers, socks).

  6. The Surprise Box Model—a curated package of goodies, sometimes samples (wine, cholates, etc.). Requires big supply chain, variety products, etc.

  7. The Simplifier ModelHassle Free Home Services takes care of your home maintenance, $350/month. Bigger jobs are provided, 50% of revenue. Don’t need to bundle all your services, just the ones your customer needs regularly (Q&A, tax, compliance, etc., in professional firms). Check out the Porschepassport.com—you can subscribe to a car company!

  8. The Network Model—Partial access to expensive infrastructure, value increases as more people subscribe (Zipcar, acquired by Avis).

  9. The Peace-of-Mind Model—Insurance against something your customers hope they’ll never need. Tagg is a pet tracking service, or IRS audit representation offered by accounting and law firms, Turnover Insurance, LoJack for laptops and Alzheimer’s sufferers, etc. You earn an underwriting profit, which is equal to the premiums less claims paid, plus the investment of float). Calculating risk biggest challenge, so go slow, only offer to handful of customers, limit your coverage to a dollar amount (# incidents, etc.), reinsure.

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 #220 : Memorable Mentors: Eric Hoffer

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Biography

Eric Hoffer (July 25, 1898 – May 21, 1983) was an American moral and social philosopher. He was the author of ten books and was awarded the Presidential Medal of Freedom in February 1983 (Reagan). His first book, The True Believer (1951), was widely recognized as a classic, receiving critical acclaim from both scholars and laymen, although Hoffer believed that The Ordeal of Change (1963) was his finest work. Hoffer was born in 1898 in The BronxNew York, to Knut and Elsa (Goebel) Hoffer. His parents were immigrants from Alsace, then part of Imperial Germany. When he was five, his mother fell down the stairs with him in her arms. He recalled, "I lost my sight at the age of seven. Two years before, my mother and I fell down a flight of stairs. She didn’t recover and died in that second year after the fall. I lost my sight and, for a time, my memory." His eyesight inexplicably returned when he was 15. Fearing he might lose it again, he seized on the opportunity to read as much as he could.

His recovery proved permanent, but Hoffer never abandoned his reading habit. By age five, Hoffer could already read in both English and his parents' native German. He was raised by a live-in relative or servant, a German immigrant named Martha. Hoffer spoke with a pronounced German accent all his life, and spoke the language fluently. Hoffer was a young man when he also lost his father. The cabinetmaker's union paid for Knut Hoffer's funeral and gave Hoffer about $300 insurance money. He took a bus to Los Angeles and spent the next 10 years on Skid Row, reading, occasionally writing, and working at odd jobs.

In 1931, he considered suicide by drinking a solution of oxalic acid, but he could not bring himself to do it. He left Skid Row and became a migrant worker, following the harvests in California. He acquired a library card where he worked, dividing his time "between the books and the brothels." He also prospected for gold in the mountains. Snowed in for the winter, he read the Essays by Michel de Montaigne. Montaigne impressed Hoffer deeply, and Hoffer often made reference to him. He also developed a respect for America's underclass, which he said was "lumpy with talent."

Eric Hoffer: The Longshoreman Philosopher, Tom Bethell, 2012

Hoover Institution houses Eric Hoffer’s papers.

His early decades are a mystery (DOB: some say 1902, more likely 1898). Grew up in Bronx, blind for 8 years, recovered his sight.

Quite possibly born in Germany and never became a legal resident of the USA. Lili Osborne knew him better than anyone, thought it possible he was born in Germany. His birth certificate has never been found. He had no passport. He spoke with a thick German accent, not American, as most immigrants. His Social Security Application applied on June 10, 1937 shows born in NYC on 7/25/1898. Fellow Dockworkers referred to him as “The one who writes books.” He was turned down by US army in 1942 due to a hernia.

Found himself broke in San Diego in 1934 (he lived on skid row in Los Angeles, then was a migrant worker in California’s Central Valley). His whereabouts from there are well known. He moved to San Francisco permanently after Pearl Harbor and worked as a longshoreman.

He described himself as an atheist (Tom Bethell says his thoughts are too complex to label). He remained very concerned about the fate of the Jews. He became an Adjunct professor at UC Berkeley during the Free Speech movement; President Johnson received him at the White House.

He worried about automation; later, he saw his fears were greatly exaggerated.

“I cannot get excited about anything unless I have a theory about it.”

Murray Rothbard was critical of Hoffer. He wasn’t interested in economics. Though he was a neoconservative.

He did say in the 1970s: “Russia’s day of judgment will come sometime in the 1990s. And when the day comes everyone will wonder that few people foresaw the inevitability of the end.”

Two contemporary writers did impress him: George Gilder, especially an article in Commentary, “In defense of Monogamy,” and Malcolm Muggeridge on Sidney and Beatrice Webb.

Jean Paul Sartre: […intellectuals enjoy the privilege of being] “scandalously asinine without harming their reputations.” Hoffer wondered what would America have been like if only college graduates had been allowed to enter the country?

He wrote that prior to FDR if you failed, blamed yourself; after FDR, you blamed the government and the system. America’s decline began with FDR and it’s absurd to think of him as a great man. He’s buried at Holy Cross in Colma, (as is Ron’s Grandmother).

The True Believer: Thoughts On The Nature of Mass Movements, 1951

Summary: President Eisenhower cited it during one of his earliest TV press conferences (Look profile stated he was Ike’s favorite author). A highly provocative look into the mind of the fanatic and a penetrating study of how an individual becomes one. Mass movements and political fanaticism.

Bethell: True believers are disappointed men—disappointed in their own lives. But instead of recognizing this they seek to reform the world. [Nazi leaders initially had artistic or literary ambitions, failed at them]. Only a handful mentioned in book: Hitler, Stalin, Luther and Gandhi, St. Paul and Jesus.

Richard Pipes: “the masses don’t make revolutions, they make a living.” Revolutions are started by intellectuals. Hoffer originally thought Communism was a mass movement, and highly productive.

Quotes

  • Fear of the future causes us to lean against and cling to the present, while faith in the future renders us receptive to change.

  • A man is likely to mind his own business when it is worth minding. When it is not, he takes his mind off his own meaningless affairs by minding other people’s business.

  • Our frustration is greater when we have much and want more than when we have nothing and want some.

  • Unless a man has the talents to make something of himself, freedom is an irksome burden. …We join a mass movement to escape individual responsibility, or, in the words of the ardent young Nazi, “to be free from freedom.”

  • The genius of a great leader consists in concentrating all hatred on a single foe…We do not usually look for allies when we love. But we always look for allies when we hate.

  • The best and worst is observed in the case of language. The respectable middle section of a nation sticks to the dictionary. Innovations come from the best—statesmen, poets, writers, scientists, specialists—and from the worst—slang makers.

The Ordeal of Change, 1963

The Ordeal of Change
By Eric Hoffer

Summary: Essays on the duality and essentiality of change in man throughout history. In Chapter One, titled Drastic Change, he begins: It is my impression that no one really likes the new. We are afraid of it.

Quotes

  • Intellectuals have been imprisoned and liquidated in Communist countries. What the intellectual craves above all is to be taken seriously, to be treated as a decisive force shaping history. He would rather be persecuted than ignored.

  • There can be no real freedom without the freedom to fail.

  • The intellectual derives his sense of usefulness mainly from directing, instructing, and planning—from minding other people’s business—and is bound to feel superfluous and neglected…in any social order that can function with a minimum of leadership will be anathema to the intellectual.

  • To adopt the role of the pioneer and avant-garde is to place oneself in a situation where ineptness and awkwardness are acceptable and even unavoidable; for experience and know-how count for little in tackling the new, and we expect the wholly new to be ill-shapen and ugly.

  • We know that words cannot move mountains, but they can move the multitude; and men are more ready to fight and die for a word than for anything else. Words shape thought, stir feeling, and beget action; they kill and revive, corrupt and cure. The “men of words”—priests, prophets, intellectuals—have played a more decisive role in history than military leaders, statesman, and businessmen.

Reflections on the Human Condition, 2006

Epigraph: If anybody asks me what I have accomplished, I will say all I have accomplished is that I have written a few good sentences.

Summary: A collection of poignant aphorisms taken from his writings.

Quotes

Nature attains perfection, but man never does.

We hear a lot about the dehumanizing effects of the machine. Actually, the large-scale dehumanization of the Stalin-Hitler era was the work of ideological machines. In Russia the doctrinaire appliances work better than the mechanical.

A concern with right and wrong thinking is the manifestation of a primitive, superstitious mentality.

In a time of drastic change it is the learners who inherit the future. The learned usually find themselves equipped to live in a world that no longer exists.

Noncomformists travel as a rule in bunches. You rarely find a noncomformist who goes it alone.

It almost seems that nobody can hate America as much as native Americans. America needs new immigrants to love and cherish it.

Action is released by emotion, and emotion is stirred by words.

An empty head is not really empty; it is stuffed with rubbish. Hence the difficulty of forcing anything into an empty head. (Ron wonders is this was a prescient quote about AOC.)

When a genuine leader has done his work, his followers will say, “We have done it ourselves,” and feel that they can do great things without great leaders. With the noncreative it is the other way around: in whatever they do they arrange things that they themselves become indispensable.”

Language was invented to ask questions. Answers may be given by grunts and gestures, but questions must be spoken. Humanness came of age when man asked the first question. Social stagnation results not from a lack of answers but from the absence of the impulse to ask questions.

People who bit the hand that feeds them usually lick the boot that kicks them.

There are no chaste minds. Minds copulate where ever they meet.

A man’s worth is what he is divided by what he thinks he is.

More Quotes

It’s disconcerting to realize that businessmen, generals, soldiers, men of action are less corrupted by power than intellectuals...You take a conventional man of action, and he’s satisfied if you obey. But not the intellectual. He doesn’t want you just to obey. He wants you to get down on your knees and praise the one who makes you love what you hate and hate what you love. In other words, whenever the intellectuals are in power, there’s soul-raping going on. –Eric Hoffer

The best education will not immunize a person against corruption by power. The best education does not automatically make people compassionate. We know this more clearly than any preceding generation. Our time has seen the best-educated society, situated in the heart of the most civilized part of the world, give birth to the most murderously vengeful government in history. Forty years ago the philosopher Alfred North Whitehead thought it self-evident that you would get a good government if you took power out of the hands of the acquisitive and gave it to the learned and the cultivated. At present, a child in kindergarten knows better than that. –Eric Hoffer

The monstrous evils of the twentieth century have shown us that the greediest money grubbers are gentle doves compared with money-hating wolves like Lenin, Stalin, and Hitler, who in less than three decades killed or maimed nearly a hundred million men, women, and children and brought untold suffering to a large portion of mankind. –Eric Hoffer

The central task of education is to implant a will and a facility for learning; it should produce not learned but learning people. The truly human society is a learning society, where grandparents, parents, and children are students together. In a time of drastic change it is the learners who inherit the future. The learned usually find themselves equipped to live in a world that no longer exists. –Eric Hoffer

Other Program Notes—Third Segment

Five-Star Review on iTunes from Scott The Locksmith. Thank you Scott and welcome to the TSOE Community!

Email from Liz Farr on New Mexico: One of our 50 is missing, December 1

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Hi Ron and Ed,

Thanks for sharing the piece on the NM resident who had to convince someone that NM is part of the US. 

This happens all the time. For decades, New Mexico Magazine has had a column called “One of our 50 is missing.”  I’ve had experience with this myself. Here are some of my personal experiences:

I’ve been told that my English is very good and that my skin is lighter than they expected. 

Back in the 80s, when I was living in Albuquerque, I sent off to the University of Chicago for information on their graduate program in neuroscience. I received a package plastered in stamps, with “Air Mail” stamped all over. Inside that package was information on the Test of English as a Foreign Language, which I would have to pass before I could enroll.

Also in the 80s, my then-boyfriend applied to grad school at Brown University. He forgot to include a check for $20 for the application fee. He got a letter back, also covered with stamps and also stamped “Air Mail,” that noted they needed his application fee. Since the fee had to be paid in US dollars, they suggested that perhaps he had a friend in the US who might be willing to pay on his behalf. 

No problems with TSA, but I did run into a BC border patrol agent who asked if I had made the NM license plate on my car myself. 

Thanks for the chuckle!

Liz

Email from Tim

Ron,

I am reading your book [Implementing Value Pricing] and have written you once before.

This is a sincere question: I am 57 years old and have had my own marketing firm since 2002. (Pricing and billing by the hour no less).

What do you say to people when they read your implementing value-based pricing book, look to the heavens and cry out in frustration “Why the hell didn’t I swerve into this book and value pricing 20 years ago?”

Is there any sentiment that gives them peace?

Even though I’ve started implementing this thinking in the last six months, I need it.

Thank you, TIM

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Ron’s reply to Tim

Hi Tim,

Thank you so much for your email.

I know it is cliche to say, “I wish I had a nickel…” but it’s true nonetheless.

Yours is a common reaction. We had one guy sit in a course on Value Pricing with his arms crossed and was silent the entire time. We wrote him off as a skeptic with no hope of changing his mind, let alone the behavior in his firm.

We shouldn’t have. He went back and implemented everything, almost immediately, including eliminating timesheets.

When we asked him how he was able to do all this so quickly, he replied (paraphrasing here, but it’s close): “I was so damn mad sitting in your course and computing how much money I had left on the table over my career that I swore I would change.”

So the sentiment that should give you peace is this: it’s never too late to change.

It’s one thing to be wrong; it’s quite another to stay wrong.

You’ve taken the first giant step.

Keep in touch and let me know your progress. Thanks, Tim.

Regards,

Ron

Forbes Article Quotes Ron on Auditor Independence

Hat tip to Liz Farr for letting me know about this Forbes article on auditor independence (spoiler alert: auditors aren't independent, no matter all the lip service paid by the profession to this claim). 

I'm quoted by the author, Mike Whitmire—CEO and Co-Founder of FloQast’s, and leads its corporate vision, strategy and execution—on a proposed remedy: have the stock exchanges select and pay the auditors, and also open up the attest function to competition, such as insurance companies that could offer financial statement insurance, and other firms that could attest to blockchain transactions (one startup already exists to attest to smart contracts on blockchains). 

I first came across the stock market exchange idea from an excellent bookAfter Enron, by William A. Niskanen. It is chocked full of sensible diagnosis and prescriptions on this issue that you won't find in the mainstream accounting media.

Economists don't like monopolies, and there's no reason to have the attest function locked into CPAs only. It stifles innovation and new ways to offer the attest function that would be far more effective, and more truly independent. I've been writing and teaching about this in our ethics course for over 20 years. Great to see Forbes pick up on it.

You can see the 50+ comments on Ron’s LinkedIn blog on this article, with over 16,000 reads.

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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.