Episode #259 Preview: Lawyering Up — Value Pricing Down Under

Ed and Ron are honored to have our three VeraSage colleagues, and Australian lawyers, on the show for the second time: John Chisholm, Matthew Burgess, and David Wells. We will discuss what's happening with Value Pricing in Australia, and peel back the curtain on this November's VeraSage DownUnder Symposium.

A 3rd generation recovering lawyer, for well over a decade now John has been urging lawyers to not only stop billing their services by time but also to burn their timesheets. He works with lawyers & other professionals assisting them with both a mindset change, and the practical implementation of moving towards value based pricing principles to become Firms of the Future instead of firms of the past. John is a Senior Fellow of the VeraSage Institute, Adjunct Professor of Law at La Trobe Law School Fellow of the College of Legal Practice Management and Distinguished Fellow Centre For Legal Innovation. He has written numerous articles, papers and blogs on value based pricing and has presented and spoken to thousands of professionals on the topic in Australasia, USA,UK and Latin America. In 2017 John co founded The Innovim Group with fellow lawyers Liz Harris and David Wells to run Aligned Pricing Programs and assist professionals with their practice and
pricing transformation.

Matthew Burgess founded specialist timeless Australian law firm View in 2014 (see www.viewlegal.com.au). For the previous 17 years, he was a lawyer and partner of one of Australia’s leading independent law firms and in 2002 was one of the firm’s youngest ever partner appointments. In part leveraging off the skills gained from advising a range of successful businesses, Matthew Burgess has been the catalyst in developing a number of innovative legal solutions; including establishing what is widely regarded as Australia’s first virtual law firm. Matthew last filled in a timesheet in 2013, and has been a passionate and vocal advocate for professional service firms to abandon the heritage inputs based time billing business model. In 2017, Matthew’s vision of an integrated fintech and legal solution based on membership pricing (ie subscription) was realised with the joint venture between NowInfinity (see: www.nowinfinity.com.au) and View Legal.

As Managing Partner of Moores Legal, David led the firm's transformation to a value pricing practice, implementing Moores Agreed Pricing (MAP) - negotiating an up front price with clients. MAP is not simply a new pricing model. It represents a whole new business model. This transformation involved renewing or replacing several key systems including Knowledge Management, Performance Management, Project Management and Business Development as well as budgets and reports. Beware! Ditching hourly rates and time recording will necessitate that. There is always risk associated with significant change. Sometimes there are risks that you can't afford not to take. For the outstanding team at Moores with a vision for the goal of long term relationships with clients who are the right fit, this was one such risk.

Join us this Friday at 4pm ET / 1pm PT.

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As always, please check our website for upcoming and previous show notes and recordings, use Twitter to find the show at @AskTSOE or find us on Facebook.

Our wonderful hosts Ed and Ron are on Twitter at @edkless and @ronaldbaker, respectively (and obviously).

Episode #258: Interview with Accounting Thought Leader Joe Woodard

We are thrilled to have have Joe Woodard back on the show!

joe woodard.png

As an author, consultant, business coach, and national speaker, Joe has trained over 100,000 accounting and business professionals in areas of practice development, changing technology trends, strategic consulting, and how to maximize the use of accounting software in their practices.

We are providing the FULL TRANSCRIPT of the interview for everyone to enjoy.

Ron Baker
We're doing our second interview with accounting thought leader Joe Woodard. Hey Ed, how's it going?

Ed Kless
It's tough. It's a tiring week, Ron that a tiring week had a little travel. I've done like three webinars and recorded like eight podcasts, including for earlier today. So I'm like talked down. So I'm gonna let you just run with this.

Ron Baker
What Why did you put a bunch of sage podcasts in the can?

Ed Kless
I did. Yeah, yeah.

Ron Baker
Yeah, even though they're short. That's, that's a lot of work.

Ed Kless
Yeah, no, it's talking to a lot of people, though. And one was an extended version that we're doing so that’s cool.

Ron Baker
Okay. All right. Well, let me introduce Joe Woodard here before I bring him in. And because he's got an incredible bio as an author, consultant, business coach and national speaker. Joe is trained over 100,000 accounting and business professionals in areas of practice development, changing technology trends, strategic consulting, and how to maximize the use of account software in their practices, has been named on accounting today's top 100 most influential people at least six times. And in 2008, he was recognized by CPA practice advisor is one of the top 40 up and coming thought leaders under the age of 40, which drives me crazy. Joe is the CEO of what are the events LLC, which includes education, coaching resources, and a community for small business advisors and small business owners within the accounting industry. Welcome, Joe.

Joe Woodard
It's good to be here. Good to be here.

Ron Baker
Welcome back. I should say I only say thought leaders under the age of 40 drives me crazy, because you know, once you once you're over the age of 40, your innovation curve is dead. You do know that? Right? Yeah.

Joe Woodard
Well, if you're doing the math, I got that award about 12 years ago. So that kind of

Ron Baker
okay.

So bad, but barely. Okay, so that's your equivalent of the high school photo on the website. Okay. Yeah, there you go. Gotcha. Well, listen, I, you have a great vision on your website. And I know that you worked on this at a place that we both had the honor of attending. And I'll let you tell that story. But I just want to read your vision, because I do think it's powerful. It's to transform small business, through small business advisors. And I just love that, how'd you come up with that?

Joe Woodard

Well, I came up with that through a journey through the Disney Institute. And the Disney Institute said that your vision, not your vision statement, your vision is the intersection of three things who you are, the higher principle you follow, and the change that you want to see in the world. So then they sent us through this exploration of those three things, and we would come back with something and it would be weak, and it would be thin, or it would be too wordy, and then they would send us back in. Until finally, what emerged was not what you just read, what emerged was about a 15 word version of that, that I slowly down over the course of the a couple of years to as essential elements. And it always strikes me when I hear it read back to me how simple it sounds to transform small business or small business advisor sound like something I should have been able to write in the back of a taxi cab between appointments in New York City. But in truth, it was forged out of a multi year process that is the fusion of my personal and business ambition.

Ron Baker

Right? Yeah, it's interesting, isn't it, how our whys or our purpose, whatever you want to call it taps into that part of our brain that can't process language. So coming up with this is really difficult.

Joe Woodard

It is it is especially if you're going to treat it as a compass point, C, and that was one of the guidelines that would come back. And they would say if you're going to dedicate your entire life to this, never arriving at it, but always marching toward this direction. Are you going to be fulfilled? Are you going to have purpose? And then Oh, no. So let's go back. And let's start writing again. And I think that's the most important thing, the biggest misunderstanding with vision is people think you can accomplish one, or that you're supposed to accomplish one. Now, some visions have actually been accomplished, and in which case, those are herculean moments in human history, but more times than not, or even you could say by its very design, a vision statement is supposed to be a magnetic north. And not when I'm teaching this always say, you know, have you ever traveled to magnetic north? Is it? Is it a destination, a place where you want to go hang out with your family on a summer vacation? No. But until the age of GPS, it was the most important single place on the planet. Because it was it was that point by which everybody steered their journey. So I always test. Say, for example, we're an event company, we do a lot of training. If General Motors were to come to me tomorrow and say, we're doing a big gala for the brand new Corvette. And here's the $300,000 throw the gala for us, you know how to throw a party? I would have to say no, because it has nothing to do with transforming small business through small business advisors. Now, if it's a middle aged small business advisor, male in mid age crisis, maybe it can transform them, but that's about the closest you're going to get to my vision Not gonna happen. Or maybe Batman, it could transform Batman, but

Ron Baker

I love it. It's aspirational. Yeah. Something

Joe Woodard

or it's not. And one of my favorite teacher says that opportunity does not equal obligation. And the only way to discern between opportunity and obligation is the vision.

Ron Baker

What Disney Institute course Did you take Do you remember,

Joe Woodard

I took the one on branding. And at first I felt like it was a bait and switch because I thought they were going to help me create a logo. Tell me tell me what branding actually is. and branding is a story. A story with integrity. That is born out of the intersection of the higher principle you follow the change you want to see in the world, and who you are. And so that so when it's when it's none of those things, when it's not a story, when it's not a pervasive story, when it's not a story that is true to who you are as a person that begins to show people can actually spot it on the surface of that they don't know why it lacks integrity or depth. But they instantly see that and it doesn't resonate.

Ron Baker

Sure, sure. Did when you attended Disney Institute. Was that was that down in Florida? Yeah, I went down to Florida. Yeah, me too. I attended their customer loyalty program that Disney way back in 97. And I tell people, and I think it's really true. It's it's some of the best education I've ever had literally. Yeah. Yeah, it is really good stuff. So I wanted to ask you just some macro issues about the profession. But this all so ties into what you've been talking about a lot. Your theme about you talk about the Rise of the Machines. And we've we've had you on, we talked about the future of the professions book by Daniel and Richard Susskind, and AI, deep learning bots, all of that the automation of the profession. But you talk about the answer to the Rise of the Machines is the rise of the advisor.

Joe Woodard

That's correct, or the rise of the human. Right, right, exactly either way. What I tend to take a very positive outlook on the Rise of the Machines, I don't tie in to the more Terminator kind of approach. Or even in the alien series, you know, where, where the human being becomes denigrated to somehow the service of the machine. Of course, there are bazillion Star Trek episodes about this, this whole idea of have we diminished, we diminish when the robots begin to overtake us it intelligence or capabilities. And the Star Trek saga, the the next generation did a great job. juxtaposing data with the humans that with which, with whom data interacted he was smarter than they all are stronger than they all were, he eventually even began to understand the emotions that they all felt then feel the emotions that they all felt. But somehow he never did achieve certain things that his crew mates had, and I thought was masterfully told. But it's also a parable for us that the machines are there to enhance us. Okay, and the what is the US that is enhanced look like? I think it's a more liberated us, I think it's an us that can focus more on the the, rather than the survival elements of economy, we can focus on the creative elements of the economy, more than on the the grunt work of client relationships, we can focus on the growth areas and the consultation of areas of client relationships. So if the machines can take care of the things that are lower in value, it liberates us. So I tend to think in the in the optimistic view, that the Rise of the Machines is going to usher in an age of creativity, extreme economic rival, and if that's such a word, Jason bloomer would say it is, and, and a renaissance of art and creativity.

Ron Baker

Yeah, yeah, we like to call that magic work rather than logic work. Yes. And and that's great. And you also talk a lot about relationship workers as part of the transformative advisor, the human advisor, this idea of, you know, we're relationship workers. And to get really specific, how do you measure the efficacy of a relationship worker?

Joe Woodard

Yeah, so relationships are measured in mutual benefit. And, you know, we greater somehow than the sum of our parts, right, or two friends stronger than if they were by themselves, or they two interdependent people as covey would say, that are interacting in some way that is a win win, always win, and accomplishing something they couldn't do by themselves. Relationships suffer, we're going to get to the business application of this in a minute when it's to what it's not two independent people who are interacting with each other. So you have a codependent relationship, or you have someone who is always predominantly doing the giving, the other person is predominantly doing the taking, that creates an enablement that allows them to live through life. And I would just refer everybody to the the Seven Habits of Highly Effective People for for the study of that. But in a business relationship, it comes down to the increase in wealth. If, if I am a religious successful relationship worker, I leave my client or I wouldn't say leave, because I may be coming alongside for the whole of a journey, right. But by interacting with my client, my client is wealthier than if I did not interact with them. But catch or caveat, that wealth may or may not be financial, right? It could be infrastructural, it could be cultural, it could be a social, it, it could be in terms of their ability to scale, it could be in the valuation of the company, rather than the cash position of the company. It could be a long term trajectory toward wealth, rather than an immediate return of wealth. However, its measured as long as the client perceives it, then the client will pay for it. But not there wasn't when they're not when they're paying for is ultimately not an outcome, but they're paying for is ultimately the relationship.

Ron Baker

Right. I love that. Because, you know, we talked last week when we had George Gilder on about the idea of the customer doesn't care how much time we spend on something, what really matters. And we should make the customer do a timesheet, because what one of the things we can do to enhance our wealth is increase the time may have to pursue what they want to do when they want to do it. And that's a form of wealth. It's not necessarily quantifiable, but its massive.

Joe Woodard

Can I tell a duck story?

Ron Baker

Right, so we got one minute, but go ahead. This

Joe Woodard

is a one minute duck story. All right. Oh, I went to the county fair. And there was this guy. These make these wonderful, beautiful little handmade, handmade ducks. And he put him down in this little battle water. And they dumped in the bob Didn't they did all you know, it's just the cutest little thing, wind him up, let him go. I'd never seen a little duck like that. Because he invented it was his design. It was differentiated. I also had an immediate need, we were going to a birthday party. For a small child, they needed the duck couldn't find anything like this anywhere in the world. I asked how much he said $20 I pulled out $40 said give me two ducks. While the money's in my hand, he starts going through why the ducks are worth $20. And everything he describes is how much time it takes how long the varnish has to set, how long he has to you dry the wood? How long? And I mean, he's already made the sale. And he's trying to resell me based on the effort that I could not care less if it took him five seconds to make the duck. I just wanted the duck.

Ron Baker

Right, right. What was great, great illustration of the labor theory of value and why it's wrong. Exactly why we focus on the wrong things. Well, Joe, this is great. I know Ed wants to pick up and ask you a bunch of questions with folks. In the meantime, I'd like to remind you if you want to contact that or myself, send us an email to ask tsp at various age calm, go out to iTunes and give us a rating that helps the currency of the show and helps us get guests like Joe. And now we want to hear from our sponsors.

Josh

All right, good.

Ed Kless

Night. Cool.

Ron Baker

Good stuff, Joe. I don't think I ever asked you which Disney course you took. I didn't realize they had one on branding.

Joe Woodard

I think they're all kind of the same course underneath.

Ron Baker

Could be

Joe Woodard

different rapper.

Ed Kless

Somewhat someone say that, that, that Ron, and my material has really the same course under, you know, that they're there perhaps was a day when that was the case. But um, alright, cool. So I'll I'll uh, I'll pick up on this, Joe. And I mean, you've got me intrigued, of course, I want to find out what you've changed your mind on. So I'm just going to go there first to sort of to get that get that done. It did. I don't know front. But we do have Daniel Susskind coming back on. And he's got another book coming out. So we're pretty excited about that.

Joe Woodard

Oh, fantastic.

Ron Baker

Yeah, it's called the end of work. And he's very pessimistic. He's not he doesn't. Yeah, does not share our attitude that AI is compliment. He thinks they're substitutes to humans. Right. I have a big problem with but Oh, wow.

Ed Kless

Oh, and just a quick reminder that our bonus episodes that we put on our Patreon site, Joe are part part of it is this conversation. So thank you. So just Just so you know, there's a limited number of people who will hear it, but other people will hear this conversation. So I would first like

Ron Baker

to remind anybody, you know, don't say anything that you wouldn't want public.

Ed Kless

As my as my rule with it all the time. Yeah.

That's right, it's a good way to assume that your email will be sent to everyone at Everyone calm.

Josh

We're coming back.

Announcer

You are tuned into the soul of enterprise with Ron Baker and Ed class. To find out more about our show, visit us on the web at the soul of enterprise.com. You can also chat with us on Twitter using hashtag ask TSOE. Now back to the soul of enterprise.

Ed Kless

Our guest today on the soul of enterprise is Joe, wouldn't he Joe is lead I like to call a recidivist guest, your recidivist, Joe, this is your second offender. And, and what and what I wanted to talk to you about you've got me intrigued because before before we started recording the show, Ron said, you know Joe has changed his mind on a couple of things since he's been on our show last, and I went back in the last year on the show in December of 2016. So it's little less than three years. And Ron and I subsequently have done a show on changing our mind. And one of the things that we we talked about in that show is that changing one's mind does not does not happen overnight, right that if your mind is changed by me talking to you for five minutes, your mind isn't very strong in the first place. Right? You're very easily fallen under the influence of somebody. But I think enough time has elapsed that you have changed your mind on a couple things. So I want to know what what is it that you've changed your mind on?

Joe Woodard

Well, they're really two sides of the same coin. But when I was I was back on it in 2016. I said you should not bill for time, but you should track time because time is a good internal measurement of productivity of whether or not you're on track on budget with, with your work with the job and so forth. And I remember you were so kind you said, Well, we will agree to disagree. And, and you you actually didn't say anything beyond that you can fight the elder or anything like that just move along. And then um, but what's changed is I've ceased to see that as net value. Now I'm not going to say that in certain reports, it might not be fun. Okay, it might not be an interesting little graph to place up how much time it took versus how much money but but here's the problem. At first, there's limited value and any graph that you would place up that way. But what you lose was the focus on what really measuring what really matters. So as I was tracking time, in order to determine how much time it took for somebody to generate X amount of revenue or X amount of outcome, everything became time obsessed. So did I remember to start or stop the time clock? Did I start or stop it when I went to the bathroom? Do I burden it with time that is out of the office if the person is sick, and it takes a longer time in terms of duration on a project? How do we track that against the amount of actual time they worked the project. And and first time the variables were many seconds, they were often irrelevant to the outcome. And third, it took way too much time to track them, which means they were a massive distraction. And so I simply stopped doing that all together and told my team, get the job done, get a jump to get it done well, and we're going to measure the quality of the outcome of what you've done. And then, you know, was that the deliverable to the client? Do we over deliver under deliver? Or do we deliver right on track? And often that can be determined by if they buck you on the price that you quoted to them or not. And then whenever I started teaching this to accountants, the most common The most common objection I would get is, if I don't track time, how do I know which clients are are the troublesome clients? How do I know which clients I need to let go so that I can make greater profits and i and i can service more clients better. And I told them, and I can't remember if it was one of the two of you that said this or if it was somebody else I was listening to once but I said let them fire two clients per year. And they will tell you which clients they will fire the two clients that they know are the biggest problems. You don't even have to measure that. They live on the ground they see it.

So there you go. That's changed my mind number one.

Ed Kless

Okay, well, let's let's just explore that for another little bit. Maybe we can even push you further down the down the road on this. But But yes, you're you you've you've come into alignment with a lot of the thinking that that Ron and I have done over the years on this. And you're exactly right. We one of the exercises that we have have had people do in our classes is go through the the this what is the cost of tracking time? What is the cost of the time and billing system of pushing these transactions through your system? And in every place? We've done it What does it run somewhere between five and 10%? is where this comes out with. So we're like, oh, you want to increase profit by 5%. Get rid of your time sheets are pretty simple. Right? That would just we'll just remove that right away. But the probably the even more important thing that you've discovered, and this is where we get into, you know, Peter Drucker logic, you know, Peter Drucker, he would, and Ron and I are fine if you want to track your own individual time, because it's a value to you to decide whether you're spending much time with your kids or whatever you're doing, by all means, right? If you want to do that, but it does it matters not a lick to anybody else. But you.

Joe Woodard

Yeah. And I would say even for me, I would much rather measure still the outcomes, does my daughter feel loved? Does my wife feel loved. And I'm not going to go back to my wife whenever she says, I really just don't feel loved and pull out of time sheet. And not quite first is not going to help seconds probably gonna hurt. And so I you know, so it comes down to, I've been putting a lot of emphasis lately on the value of attention. And then I've looked at what people have been saying, when they say time, and realizing they really mean attention. You know, I want more of your time as a spouse. Okay, I've been sitting on the couch right next to you for the last four hours reading a book, you've had me here, you've had my time know, what I want is your attention. Okay? And what the client wants is our attention. And sometimes attention can be as simple as I'm in their Slack channel or a number of Microsoft Teams. Or I could just shoot them an email or something and say, okay, we talked about these four things last week, how are they going, that that takes 1015 seconds to do we get they have my attention. And while remaining real and while remaining personal. You can even program some of those things. The solutions like HubSpot are key or whatever, as long as it doesn't become mechanical, right? To follow up with them. And let them know that you're getting your they're getting some of your attention, as long as it's highly personalized. So you know, you guys say if somebody says thank you for your time, you guys were taught back, no thing. No, say thank you for your knowledge. Um, I have a similar one. If somebody says thank you for your time, I'll say no, no, thank me for my attention. Because maybe at that moment, I didn't disseminate any knowledge. Maybe I was the receptor of their knowledge. But I gave them my attention. And I've got a funny little anecdote for this too. I was I was presenting on this in New York City. And and anything could happen in New York City. I love teaching in New York. And so I said, your time doesn't matter. And I just, I dropped that out in Ohio. Drop that out in Silicon Valley and Silicon Valley, if anybody does that get offended. They're guilty, because they shouldn't get offended. And then, you know, and then over here in Georgia, they're just like, you know, whatever. This lady in New York, was ready to come out of her chair, when I could see that she was ready to come out of her chair, kind of like how dare you thing you know, I'm not valuable. And and so when she started, she raised her hand, she was actually halfway she had, she had one, but she added the cheer. And I said, I said, I said, Ma'am, I understand that you're having a strong reaction to this, let me tell you what I'm not saying. I am not saying you are not valuable. You are valuable. I'm saying that the phrase your time is valuable, is an inane phrase, it's like saying your square cube is really round, it makes no sense. Because you can't have time. You time is a force of nature. It's like saying, I'm going to go to the gym, I'm going to control my gravity, I'm going to, I'm going to manipulate my gravity, okay? So never your gravity, it's a force of nature that you happen to be leveraging in order to make your muscles get bigger. But Einstein even said that time and space are the same thing. So now you want to say that I'm going to manage time means I'm going to manage all of time and space so that I can own all of time and space. So when we get to the right question, only then can we get to the right answer? And what is extremely valuable, is your attention.

Ed Kless

Yeah, it's funny, I think I, I either did a blog post or I envisioned myself doing a blog post a number of years ago, on on on this, the notion of all of the different metaphors that we use with time, save time, make time, right, invest time, and they're all really crazy, then when you actually try to try to parse them out, because my, the phrase that I use that you said eloquently, as well as time is straight. It's not a resource, right? Because it's it just is it's a it's an Gilder put it, it's a measuring stick, and the measuring stick doesn't change, the foot doesn't change the yard doesn't change, it's it's the measuring stick. And it's the constraint under which we all live, right? So it's not anything that can be created. We can't create time we can't make time right up and and you're right i like that i like that notion of of attention as well. That's it, that's a that's a really good way to phrase it. So I'm gonna, I'm gonna steal that and incorporate that in into my

Joe Woodard

Pat and I would add to it that we can't manage time either. So so that begs the question, what can we manage, we can only manage a task. And in the management of tasks, the first line of business is prioritization. And as a consultant we prioritize those things that will increase our clients wealth.

Ed Kless

Yep, yep, manage the work not the people as the the folks from row says, but we're up against our next break. Want to remind you that you can contact Ron or me by sending an email to ask TSOE at various ages calm. The website is of course, the soul of enterprise where you can go out and get show notes as well as previous to upcoming shows. Our archive page, which is where you can find all previous 250 some odd shows including Episode 119, which is our first interview with accounting thought leader Joe Woodard, but right now a word from our sponsors.

Josh

All right, you're clear.

Ed Kless

So I sue. I could do I had the next segment to ask what the second thing was? Yes, sure.

Joe Woodard

I guess that's a foreign question. So I'll

Ron Baker

let Ed do it. I'll let

Ed Kless

this be Mrs. turning into a very easy interview

Joe Woodard

sides of the same coin. It really is. Is it important? Is it important, the other side

Ron Baker

not really go down a different road and so you can you can bring it back to the second thing. Okay, good. I'll mention it. I'll mention it.

Ed Kless

Okay. And then Joe, you got to read just just finished the case against reality. Oh, by Donald Hoffman. Did you read my review? Ron?

Ron Baker

Yes. It gave me a headache. So I don't know.

Ed Kless

Space Time is Doom Joe space time is is Does It Really?

Joe Woodard

Yeah. Okay.

It's good to know.

So where we can exist?

Ed Kless

consciousness?

Joe Woodard

Interesting.

Ed Kless

It's absolutely fascinating. This guy the

Joe Woodard

quantum realm is it isn't general. No. No

Ed Kless

DEP. Donald Hofmann the first time. Yeah. case against reality. Basically, the short short answer is he uses he uses the theory of evolution. To to prove that there is no, there is no space.

Josh

Come back. Yes.

Announcer

You are tuned into the soul of enterprise with Ron Baker and Ed class. To find out more about our show, visit us on the web at the soul of enterprise.com. You can also chat with us on Twitter using hashtag ask TSOE. Now back to the soul of enterprise.

Ron Baker

Well, Welcome back, everybody. We're here with accounting thought leader Joe Woodard. And I really enjoyed that discussion, Joe with Ed about the measurement aspect and the whole time is money. viewpoint. You know, Oscar Wilde famously said time isn't money, time is a waste of money. But always, always like that line. But on the measurements sticking with that. I heard you on a recent podcast and you were discussing Apple as an example. And specifically the Apple iPhone, you said take a look at what Apple measures with respect to the iPhone. It's certainly not how long it takes them to produce said. It's other things and what explain that. And then what lessons what lessons for accounting firms, bookkeeping firms that holds?

Joe Woodard

Yeah, well, so so when Apple is measuring the iPhone, they're measuring the quality of the product as it is perceived by the consumer. And not as not as it is perceived by the apple engineers. But as it is perceived by the consumer. The consumers thought one of the old Apple Macintosh is look like Betty Jetsons microwave oven. Right that so that was the perception, I think we all know which one we're talking about. And so that perception meant that it had a very short life. So when you're when you're measuring what matters, you're measuring a product. If you're under the delusion, that time is your product, then that is what you will hyper measure. So one of the one of the interview with accounting today, I pointed to one of the staples of all professional service measurements and metrics, it's billable versus non billable time. And from that you get a realization rate. Okay, well, that's, that's irrelevant. That's an irrelevant measurement when it comes to quality, because you're not even measuring the product. And then that starts to kind of like I talked about the first thing that you started to hyper dissect that, well, how can we get your ratio of billable non billable time? How can we get that better? Well, then are you know, then we start asking the really inane questions. Are you turning off the time when you go to the bathroom? Should you turn off the time when you go to the bathroom? What's the ethical implications of that? If it doesn't cross the five minute mark? If you do go the bathroom too much? Because maybe you ate too much Mexican for lunch? Did you work 15 more minutes during the day, in order to count the count for all the bathroom breaks in order to get the realize bill rate up? How do you factor in PTO? How do you factor in vacation? What do you do whenever there's a write down is that a realization of billable versus non billable, and the whole thing will make your head explode or make you throw up or maybe same time. While the client is out there think about now what we're really trying to do. And this gets us back to the transformative advisor. Joe's lawn mower shop is out there trying their best to make lawn mowers and survive. They've got some sort of a, sorry, they've got some sort of a problem that they're trying to solve. They're trying to get the lending that they need. They're trying to get the they're trying to get the supply chain for their parts worked out. They've got real problems that they needed an advisor to work with them on. And we've got our heads down, focusing on how much time last month we spent preparing that person's financial statements. Wouldn't the time be better spent measuring the financial statements, or maybe maybe making a cash flow prediction because if we could have done that, they wouldn't be in a cash crisis right now trying to scramble with the bank in order to make the next payroll. So if we can turn lift our heads up, get our heads out of the time sheets and focus on the client pain solve the client pain, price it right. And I know that the pricing right this key, then we're all taken care of in the equation.

Ron Baker

Yeah, I love that. I love that analogy. It's it's really spot on. It really makes people think about what the customer the customer is ignored with hourly billing and the timesheet measurement. And on that I mean, I know you've been at scaling new heights, your your company, your flagship conference every year. You've had me and you've had Kirk Bowman and you've had Mark workers come in, there's been a lot of emphasis on value pricing. Where do you see that movement? Is it diffusing?

Joe Woodard

I think the value pricing is become tired as a content concept only because it's been taught so much. But it's it's tired while being grossly under adopted. And that's a tragedy if it is under adopted because people don't know how to sell so the books I'm reading right now are books on how to sell books on how to negotiate. I'm reading a book called Getting to Yes, reading a book called never split the difference. I'm going back and visiting a lot of the covey principles where he where we heard when when so many times it becomes trite. But covey actually breaks it down and dissect what a win win looks like. And then one of the other books that I'm reading by Patrick Lyndsey on ER, I've read and I'm rereading is a the the book called getting naked, because in that book, that book should really be called the relationship worker. First, it's easier to Google without getting in trouble. And second, it'd be more appropriately titled, because in that book, he in a narrative way as Patrick Flynn cod's want to do, he talks he described out in a storyline what a relationship worker really looks like. And what amazes me every time is how little time he actually spends with the client. He'll but he's physically present. He'll walk in, he'll look at something like a piece of artwork or a marketing messaging, or he'll look at something that's happening in a business plan, he will call it the problem. He'll say, you've got to change this, he won't even wait for much of a response. And then a walk out the door, almost like a fractional CEO would do. This is not a matter of a question, this is a matter of a dictate change this or it's going to go bad and out the door. He goes. And he's built such trust, that they will listen to what he has to say they'll do it and 99 times out of 100, it's going to generate more wealth for them. But he's doing all of that in a relationship, not driven by how much time is there? Right, in the fear of what they're going to think and all of the other psychologies that come into play, and definitely with his head up.

Ron Baker

That book never split. The difference is that the former FBI negotiator

Joe Woodard

it works because sometimes when you're trying to value price, you feel like that,

Ron Baker

isn't that that's a great book, because there's so much counterintuitive advice in that book. And I just, I just love it. And I love some of the stories to the hostage situations. But on that, okay, so value pricing is, you know, tired, but under under adopted, as you say, what about time sheets? What about are people still clinging to their time, she's like a security blanket.

Joe Woodard

I unfortunately, I think the rank and file are now some of the folks that come to scaling new heights of the gun to back off of those. But what I'm finding is that they do hold on to them, they hold on to them for this set, like these five kinds of engagements, we're going to track time bill by the time these over here, we're not some of the ones I'm hearing that they focus on tax returns note, not so much bookkeeping, no, not so much. But if they get a brand new client, and they're trying to do client file cleanup, then that's Pandora's box. And anytime they feel like they're opening up Pandora's box, they run to the safety of a time sheet to protect themselves. And, you know, I can't blame them there, they need some form of protection. We don't know what's in Pandora's box, right. And it's it's impossible to spec that are very difficult to spec that. But that is actually my response, create a flat fee specifications, engagement, open the box, don't change anything, don't fix anything, just write down what's in the box and what it's going to take to fix it. Now you've got a project, now you can plan against it. Now you can price it,

Ron Baker

right, you can put it into as I've, I've really gotten more bold on this. But you know, we talk a lot about risk and profits come from risk, that's their only origin. So when I see an engagement that's got risk or uncertainty in it, I want to run towards it, because that's where you can make real profit, we can't make profit by reverting back to the hour, leave a nice, safe hourly rate. When there's uncertainty and risk, we have to run towards the risk.

Joe Woodard

Man, I know that's really the clients gonna run out of money or run out of value perception, they're going to try to shut it down, or they're going to try to talk you down. And so the whole thing ends up having the same little trap. It's just, you know, what point do you fall through the whole, I couldn't agree with you more, you know, embrace the danger, run into the risk. And with that can come tremendous reward. Maybe sometimes you'll spend a little more time than you planned. But But you know, what does that really mean? it and you'll learn a lot in the process you you've earned the trust of the client in the process. And then the only other thing I would say is when you can form a specification, be extremely specific about the specification, and the the slightest deviation, pull out a change order. Because Because it's not about how much time and this is where time can become another form of a trap, it's only going to take me about 10 minutes to do this different thing that they're asking for. Folks, I'm just going to throw it in. All right, that's the other side of the time trap little time, therefore irrelevant, no big relevant, hugely relevant psychologically, as well as sometimes in terms of value. So I, you know, pop the change order out is going to be $50 going to be $100, it's gonna be $300, whatever the value of that thing they're wanting you to do for the 10 minutes may be and then it will also set the guidelines for the relationship that you go off spec, you pay more money.

Ron Baker

Right. And with all whether you phase it or do that tight scoping and use change requests diligently, you're managing the client expectations, you're doing that constant communication. And that's what what's important, no matter what, because we fall into all sorts of traps through just lousy communications with with the customer.

Joe Woodard

I get I get asked all the time, how do I get started, and I've got an example of this is very fresh, I've got a client, their software developer, I'm doing some consulting with them on a product launch. And neither of us really knows what the relationships going to be like, they just know they need some guidance, and they want me to be there. They want me to be in the room part of the team. So on the call without any kind of specifications work that was to to a theory for that I said 1500 dollars a month. And then they said, Okay, great. What does that get me us? It gets you me. But meet your slack. You know, throw me on send an invite, I'll jump into some comment. I'll jump into a meeting, how many meetings see they're trying to they're trying to know, five meetings, 10 meetings, 15 meetings, whenever you need me to be in a meeting, throw me into a meeting? Shoot me something in a slack? I'll I'll answer it Yeah, asked me to take a look at something, I'll review it. But this is the key. But at some point in the future, you're going to feel like you're getting too much of me for 1500 dollars a month. And when that time comes? Why don't you change the price?

Unknown Speaker

Right? Our discretion

Joe Woodard

at their discretion. Now if they wait too long, I might hint, right. But that's the nature of a relationship relationship is to interdependent people with their own sets of very well established boundaries, defining the nature and the terms of the relationship. If I ever feel like they're either by distraction, or by intention, taking advantage of me, I'm going to come back and say, Yeah, well, I think we're at 3000 a month now 4000 months now, whatever it is, but at that point, I have a chance to look back at some of the successes, you know, as you can see, I accomplished this with you or headed off the past that you, you know, save saves you a big run into a brick wall over here. And justify the increase in price.

Ron Baker

Right, you're back to the quality of the outcome for

Joe Woodard

rather than, yeah, I can actually win some win some outcomes and and and establish my value so that we can then price something we get out of that chicken and egg problem.

Ron Baker

Right? I love Ed calls that selling your brain. And that's what you're doing there. You're not selling a pair of hands or a series of tasks or scope of work, you're selling access to your brain, whatever they need. And that scares the heck scares the heck out of a lot of professionals because they think it's so open ended because they're stuck in that time mentality. But it's just amazing how much value you can add in a short period of time sometimes?

Joe Woodard

Well, and I'll tell you one thing to that makes it and this is why it should be appropriately called relationship work. I actually like hanging around with these people. So you know, when they call I don't went I don't think oh my gosh, I got I've got to deal with them. I'm delighted. I can't wait to get into a meeting. They have an amazing culture. And so I'm having fun. They're paying for me to have fun. I don't see a downside.

Ron Baker

Yeah, that's that that those are the best relationships because nobody's a supplicant. There, you're you're both equals your colleagues at that point. I heard you once a job that you recommend your you see the day where we could get to where the compliance work is just done as part of the advisory services being, you know, engaged.

Joe Woodard

I mean, automated.

Ron Baker

Yeah, yeah, I realized that relies on automation. But do you kind of hold that view that the compliance work should just be kind of thrown in? As long as they're in the advisory work?

Joe Woodard

Yes. As matter of fact, I was asked on the podcast once if I could give any advice, any single piece of advice to the entire accounting industry, this was a global podcast, what would it be? And I said, stop selling accounting services. And boy did I get reamed on social about that. But because I did not say though, stop doing accounting services. But I said it stop selling it. Because to sell it means that you immediately attach yourself to a price anchor of price anchor that is constantly getting lower and lower and lower. As more and more of the scale bookkeeping models and monetize bookkeeping models pile on. So instead, what I say is sell results. So outcome salary, increases in wealth, all that stuff we call advisory work, but advisories another word that's gotten really, really tired, right. So that's why I call it transformative advisory, instead of trusted advisor, trusted, trusted can be passive, we all trust our CPA, we trust, they're not going to go you know, put ours our tax returns out on Twitter, or that's a passive trust. An active trust means that if you give me advice, I'm going to change something in my life is as a result of what you have said, that's active trust. And an active trusted advisor. If they're providing good advice, transforms, you transforms your business. And then we have to define what transformation is, I am a better human being is a stronger business. And then you can start drilling down and all the aspects of that. So if we're, if we're focused on all of that, if I say my job here is to make your business stronger, better, more profitable, more scalable, more valuable and ready for succession, which everybody should start thinking about from day one. And to come alongside you for the whole of the journey, a phrase I use a lot, which is summarized in the Greek word parrot cleat. That's my job, then everything else becomes a means to that greater end, having accurate, timely financial information. That's a means not an answer.

Ron Baker

Yeah, excellent.

Joe Woodard

Yeah. So whenever they say, Well, I can go over here and I can get it for X Prize. So you're not going to be my price. My price is free. I don't charge for bookkeeping, as long as you are my advisory client. But for advisory, we start at $4,000 a month.

Ron Baker

I love it. I'm sure Ed's going to ask you about that Greek word that you threw out. He's also going to ask you about the second thing you changed your mind on but unfortunately, we're actually overtime for our break. And folks like to remind you, if you want to contact Ed or myself, you can send us an email to ask DSOE at bare sage.com check out the Patreon site at patreon slash TSOE. And now we want to hear from our sponsor sage.

Ed Kless

All right, you're clear.

Ron Baker

ran over on that, Ed? Sorry.

Ed Kless

No, no worries.

Ron Baker

can be a short segment. Joe? Six minutes or so? Yeah.

Ed Kless

Yeah. Because we have to be out by 57. So if your timing on this, just

Ron Baker

just so you know.

Ed Kless

And so yeah. And next week, run we're learning up. We're gonna be talking about all things very Sage down under that.

Ron Baker

Okay. All things legal. And

Ed Kless

then, what, 57 we'll wrap it up. And that's from Ron and I will just do a little banter to wrap through. So gotcha.

Unknown Speaker

All good, though.

Ron Baker

Yeah, he dropped that Greek work on me this Greek word on me this morning. So maybe maybe as you can get the Latin word for it? Well, no, it's all about the Yiddish word.

Ed Kless

Yeah. Apparently is is one of the names for the Holy Spirit to

Joe Woodard

yes, you do know that? Yes, I was actually appropriated by the Christians and, and, but it predated them. It actually goes back to Stephanie's. But it just means one who comes alongside of for the whole of a journey, which is applicable to the Holy Spirit? Yes, I can see.

Ed Kless

The Christians are really good at appropriating lots of things. That's what we got Christmas and Easter and Easter eggs. And we like that. What was it? Well, you know, when you think about it, you know, especially when they were talking to people who were doing human sacrifice, and you're like, No, you don't have to do that anymore. Oh, all right. Back,

Announcer

you are tuned into the soul of enterprise with Ron Baker and Ed class. To find out more about our show, visit us on the web at the soul of enterprise.com. You can also chat with us on Twitter using hashtag ask TSOE. Now back to the soul of enterprise.

Ed Kless

His vision is to transform small businesses through small business advisors. And we have with us on our last segment of the show today, Joe Woodard and Joe, I had the opportunity to ask you about the first thing that you changed your mind on and then we went a little bit long on that. So what's the second thing that you've changed your mind on

Joe Woodard

was the other side of the same coin, I was living in hypocrisy, I was saying that you know what, but it doesn't matter. I don't sell hours to my client, I sell results to sell outcomes. But then I was paying my employees by the hour. And I thought that I had myself inoculated from that because everybody was salaried. I had no hourly employees. So I was telling myself, Well, I'm not really paying by the hour, I'm salary salary to everybody, until I got the 500th said, Okay, if I leave an hour early today, I'm going to go to the shopping center cannot take a long lunch. And I realized that the mindset of my employees is that they're trading hours for dollars. I took that entire mindset away by saying, I don't care. If you want to go on a 10 hour shopping spree five days a week, I don't care. All right, what I care about are two things, get the job done, and be here for your teammates. As long as you guys have that worked out, you can bring to me any issues and escalate them to me as necessary. I'm good to go. And part of that, of course, is at least somebody has to be here to pick up the phone or respond to the chat bot. But cover the company, make sure the customers are happy. And then do whatever you want to with your time. Because time is not relevant to the outcome. It is simply the air we breathe.

Ed Kless

Yeah, another another thing that's way underrepresented in the in the world today. And that is the real movement, the results only work environment. I mentioned that earlier, Jody Thompson has been on the show and her great phrase, manage the work, not the people what's got to get done, the work has got to get done. That's what's got to get done. So we manage the work. And I don't care if you follow what's left of the Grateful Dead around as long as the work gets done. We're good with it.

Joe Woodard

But you know, I've seen some thumbs up some incredible things happen and that we just put this in about a month and a half ago. And already I'm seeing that a mom in our company was at her kids school play at three o'clock in the afternoon is that elementary play thing. And then I saw that her kid was in our conference room, just doing his homework, which I thought was kind of cold to some point, she went and picked him up. She didn't have she didn't have to ask me, can I go pick him up, she knew the conference room was available, she stuck her kid in there. It wasn't available space, she didn't have to ask me. But I saw that same mom on Saturday, working to make sure that all of her tasks got done. So as long as you trust your people to get the tasks done, and as long as you measure the outcomes, so I've started sounding like a broken record, if people come to me anymore, and they say, can I have so and so off? I don't know where you had on your tasks. And sometimes they'll cut a heads down and they'll realize that they can't give themselves that day off. Or the best their choice. But I never say yes. I never say no, I always return that with a question. Are you on track with your tasks? Are you going to hit your deadlines? Where yet for this milestone? Are you going to slow your team members down? Do we have somebody answering the phones? Is somebody managing the cases? How backlogged is our caseload? If depending on the answers to that, and I don't even want you to give me those answers, I want you to go look, and I want you to make a grown up decision as to whether or not you can take it to our lunch go. Yep,

Ed Kless

yep. Great stuff. So Joe, rotten Brown was asking about value pricing. And we've only got about 90 seconds left. But I wanted to get your thoughts on, how do you see what we're calling value pricing two point O, that and that is, of course, subscription based pricing. And the mantra that we've been offering for this is, instead of what we talked about for years, which was price, the customer not the work, we're saying price, the portfolio, not even the customer.

Joe Woodard

Yeah, when that's kind of what I did with this client for us is 1500 dollars a month, right. And so so before I had even really absorbed this whole idea, subscription based pricing, I just instinctively knew I had a strong relationship with the client, they trusted me, they just wanted me on the team, we set a price per month, there we go. I did the same thing with another client up to $3,000 a month because the value prop was more established coming in the front door. Right? So these things may go up, they may go down. But I think it's I think it is the future of value pricing. Because of the fact that we can get started, we can set a term, let's reevaluate in four months. All right, anybody can do anything for four months. And then when we reevaluate, we have a track record. How much value do we generate? What is the trajectory for future value we're going to add? Where do we want to set the price for the next term? It's a great, that's a great way to do it.

Ed Kless

Yeah, no, it really, really is. And we've, we've spent a lot of time there spent that metaphor again, spent a lot of time

Ron Baker

wasted a lot

Ed Kless

of attention. We've given a lot of attention. Thank you to this notion. And yeah, we're on the same page here with regard to this. The future of this is more subscription across the board. All right, Ron. Well, Joe, want to thank you for being a great guest again, and we'll love to have you back. And you know, maybe we'll put a cadence of three years it'd be a cyclical thing or like a physical count inventory or something. I don't know. Well, let me make that all work. Ron, what do we got coming up next week?

Ron Baker

Well, next weekend, we're going to lawyer up with three Australian lawyers, john Chisholm, Matthew Burgess, and David wells all happened to be various age fellows, by the way, and we're going to be discussing what's going on in the legal marketplace down under, and also our Paris age down under symposium. We'll talk a little bit about that, and what what events are planned and the agenda. So I'm really looking forward to

Ed Kless

Wow, I can't wait. That's going to be a great conversation. I'll see you in 167 hours.

Episode #257: Third Interview with George Gilder

What a show! George Gilder continues to be a great thinker and we were honored to have him on our show for the third time.

Given George is such a phenomenal guest, we wanted to be sure you had the full transcript as opposed to the cliff notes. This conversation covers concepts the George shared in his books The Israel Test and Life After Google and his AIER article, The Huawei Test.


Ronald Reagan  0:06 

Like a chrysalis were emerging from the economy of the Industrial Revolution and economy confined to unlimited by the Earth's physical resources into the economy in mind, in which there are no bounds from human imagination. And the freedom to create is the most precious, natural resource.

Ed Kless  0:38 

Welcome to The Soul of Enterprise: Business in the knowledge economy, sponsored by Sage, energizing business builders around the world to the imagination of our people and the power of technology. I'm Ed Kless, with my friend and co-host, Ron Baker, and on today's show, we are honored to have our third interview with George Gilder.

George Gilder is one of the leading economic and technological thinkers for the past 40 years and he is the author of 19 books including: The Israel Test and Life after Google, which was the subject of our interview with him last time in August of 2018. George is a senior resident fellow at the American Institute for Economic Research where his recent post which was entitled The Huawei test broke the internet at the beginning of June. He is a founding fellow of the Discovery Institute where he began his study of information theory. George, welcome back to The Soul of Enterprise.

George Gilder  1:33 

The organization is AIER not AEI, it is near me in the Berkshires, but my real affiliation is the Discovery Institute. I'm a co-founder and...

Ed Kless  2:00 

Sure, sorry, right.

George Gilder  2:04 

AIER is affiliation I have in the Berkshires, but it's not my chief role.

Ed Kless  2:13 

Okay, fair enough. George, thanks.

When we had you on as I said about a year ago and we were talking about Life after Google. And I wanted to ask you about life after Life after Google. How do you think the book and its ideas have been received?

George Gilder  2:31 

Well, phenomenally in China. For a while is was the #2 book in China and it was voted the most the best social science book by a group in China, so it, it really was a hit over there. It was the number 1 crypto book on Amazon for about a year. Most of the time, almost all the time. So really a success around the world. There's a version in Japan and in China I did 40 appearances and nine days. I've visited all the major universities in China. This is a global phenomenon, this book.

Ed Kless  3:40 

Yes, it truly is. And we're thrilled to have read it and talked about it with you last year. But in the years since it's been published, do you think that this the signs are still moving in the direction that you've predicted? I whenever I see a story that’s related, I think Well, I think there's another chink in the Google chain? Did you still see those signs happening?

George Gilder  4:04 

Well, I do, I think however, I do not support this full court press attack on our technology economy by the government. I think this is really just suicidal for us. I mean, these companies are not monopolies, they face devastating competition from Chinese companies, many of which are better business models than our companies do. And the impact of the government intervention has been devastating. Facebook is becoming a manipulative maze that you can hardly enter anymore. It's really in the process of being destroyed by government regulation. They can't be a merge of fake news and hate speech. And 2 billion customers. I mean, it's just if the internet and face this kind of regulation, when it started, it never would have happened. If the phone network never good face this kind of scrutiny, we'd still be using Pony Express. [Unclear.] And Google isn't even allowed to hire computer scientists anymore. Google is being sued for sex discrimination of all weird charges. You know, they're full of women all over the place but somehow the quotas don't match up with some models of the Equal Employment Opportunity Commission. So, Google's being sued for sex discrimination. I mean, we really are in some kind of bizarre, self-destructive mode with regard to our technology and with regard to our economic leadership.

Ed Kless  6:21 

Yeah, I have a friend, a college friend who made let's call it oodles of money in Silicon Valley. And in a recent conversation with him, he said, "They seem to be Silicon Valley as long on capital, but short on execution." Do you agree with his assessment?

George Gilder  6:36 

I am afraid you broke up during that question?

Ed Kless  6:45 

Okay. So, my friend says that Silicon Valley is long on capital, but short on execution. Do you think that that's true?

George Gilder  6:57 

Well, I really think that what's happened is that the government, the US government, is mounted an attack on our technology companies on the assumption that how they're manipulating the news or accommodating Russians or making too much money or something and the combination of these measures has been to gravely impede their interest. They have, I admit that their execution has been at fault. But it's really hard to deal with a full court press from the government making bizarre charges, that you're somehow manipulating your services all the time to favor ideological causes. And it is agreed that the mainstream media, the United States is dominantly leftist then Google as a search service based on the most the PageRanks model the most vote sources get the highest rating, then, of course, Google search is going to reflect bias the media. That's not Google's fault. That's, that's the mainstream media and, and the mainstream academy and, and I just, I just think that we're in a amazing irresponsible phase, today with regard to our technology companies. We're proud of them, but at the same time, we’re paranoid of them. And, and at the same time, we're paranoid about China. And the combination of all these fears, the nervousness that runs from Silicon Valley through the Federal Trade Commission, which falsely believes these companies are monopolies, the European Union that's paranoid about privacy and all these charges and visions I think are inconsistent with national interest and the future of our economy.

Ed Kless  9:56 

Yeah, it's been an interesting ride that led the last couple years...

George Gilder  10:02 

You know, what's going on here. I think we should do this. You know, this is not a good enough connection to handle zoom. I've got to go somewhere where I can get a better connection this this is not working. Well. I mean, I know you your jerky and I can't really hear you in this. Can you hear me? Fine? Fine.

Ed Kless  10:28 

It's sort of tough George. I think what we'll do is let's take our break now. And what we'll do is we'll get you on a phone line and we'll take it from there. I think that's probably the best choice so now a word from our sponsors.

Announcer  13:05 

You are tuned into The Soul of Enterprise with Ron Baker and Ed Kless. To find out more about our show, visit us on the web at TheSoulOfEnterprise.com. You can also chat with us on Twitter using #ASKTSOE. Now back to The Soul of Enterprise.

Ron Baker  13:23 

Well, Welcome back, everybody. We're back with my 38-year, mentor George Gilder. It's such an honor to have you back on George. And I wanted to ask you about an article that you wrote, because Ed and I posted this on our social media and boy, did it generate a lot of controversy and comments, but it was your article, the Huawei test. I guess it was first published in the American Institute for Economic Research back in June on June 3. And you start the article by quoting Peter Drucker's famous line, we say this all the time, "Don't solve problems pursue opportunities," because problems are about the past opportunities and entrepreneurship about the future. George, what is the Huawei test?

George Gilder  14:08 

Well, Huawei was what great capitalist ventures in China was started by Ren Zhengfei, who was the son of a capitalist Schroeder, and he briefly served as an engineer in the Chinese army. But the idea that he's was permanently rendered a communist apparatchik by that experience, as the US government seems to believe, is simply preposterous. If you know the guy, if you know his history is amazing success and creating a telephone equipment company that is in 170 different countries and has now leads the world in technology for 5g, the next generation of wireless technology. You just can't do this as some kind of instrument of the Communist Party. I know that's just an absurdity. Huawei a great capitalist company. And they've been more effective and marketing their technology and in developing new technology over the last five years than their American competitors. And they should, their presence in the American market would be positive and accelerate our movement to 5g. And I just think this is a protectionist move. It's simply a protectionist move. The claims of a national security threat is just implausible. We had a billion internet hacks last year of all telecom equipment. If Huawei's routers and switches are open to communist hacking, so we're all other routers and switches all through the US telecom system. And I believe we need a new architecture for the internet.

And I think the blockchain supplies such an architecture. And Huawei actually very interested in researching solutions that actually do restore some degree of security to networks around the globe. And to kick him out of the United States, because I'm just really technically preposterous grounds is it just a great mistake. And it's protectionism. That's what it is, and we should stop it.

Ron Baker  17:34 

Is there any... you point out in the article that the, you know, the litigation over the so-called theft of intellectual property has been settled? Is there any evidence for them stealing intellectual property?

George Gilder  17:51 

Yeah. You know, all, all companies are charged, frequently intellectual property. Particularly, ascendant companies that challenge an incumbent establishment, when that when the United States was emerging as the world's leading industrial power, all of Europe, you know, in England, and, you know, to auto in Germany claim that we were that Carnegie was stealing their steel fabrication gear that Edison was stealing electrical capabilities, that Ford was stealing the internal combustion engine invented in Germany. We have our constant charges back and forth among American companies that they're stealing from each other. And the Chinese play a relatively small role in these litigations in the United States, 6% of all the charges involved China. I just, and now China's in the lead. So, all these claims are just irrelevant.

Their past, they're gone. Entrepreneurship is about the future. And the future depends upon being the smartest marketing in the world, the most vibrant capitalist market at the moment. It won't be in the future, maybe Xi Jinping is going to impose a communist totalitarian Regiment in China, but he hasn't done it yet. And they have three times more IPOs than we do. They got twice as many business startups, they've got millions more engineers, they can build cities faster than we can fill in potholes and the United States.

It is just silly for us to sit over here grousing that they've stolen from us when they've been manufactured... we wanted them to manufacture all our stuff. We joined a climate change cult that wanted to suppress manufacturing anywhere it could find it. We joined a litigation cult that bankrupted 36 of our major chemical companies with spurious asbestos claims, it where we just didn't want to have manufacturing. And so, the Chinese did it for us. And in the process, they got a lot of our technology. Is that a big surprise? We are not being serious about China.

Ron Baker  21:21 

You know, John Tandy wrote an article and he and he quotes you about your trips to China and how you'd never really met a communist. And he points out that Huawei has 80,000 employees in R&D and they spent $15 billion dollars in 2018. He says, anybody who believes that innovation is done through corporate espionage doesn't understand business, because most ideas fail. So I think your point is very well taken about that, that they're an upstart, that this seems... well not an upstart, but they're threatening the status quo.

George Gilder  21:57 

Now, well, they, they've done it... and... and we have... China has flaws. However, they have, by whatever means, pretty much created an economy that's 24 times bigger than it was when Nixon and Kissinger were opening up to China. And, and they now are essentially equal us, their technology in many cases is superior, they got a smaller government as a share of GDP because of the amazing growth of their private sector. They are in a kind of reactionary period, now, through Xi. And it may be that, that their capitalist growth will be halted. But in the last year, they've opened a couple more stock markets, they've opened up their bond markets to foreign investors, they're, in general, seem to be still opening up to a great degree, even while Xi is cracking down on on any of the dissident speech or democracy movements and their economy remains capitalist.

Ron Baker  23:32 

Right. And I mean...

George Gilder  23:33 

More than more than ours, I would say.

Ron Baker  23:37 

Wow.

George Gilder  23:38 

But it's sad, but it's true. So, I mean, that's, that's just and, like, and Trump is trying to fight against it. But he's destroying the effect of his policies, by adopting socialism internationally, wants to socialize trade, and since much of the global economy grows through the expansion of trade. Mercantilism of America is a is a drastic mistake.

Ron Baker  24:22 

Yeah, it seems like he wants to take us back to the mercantilism that Adam Smith. So easily destroyed. George, how do you reconcile because I mean, nope, I know, you've been anti-communist your entire life. And I nobody has been more eloquent for the defense of capitalism and liberty and the moral case for the human flourishing, that's a result. When you look at China, and you see these incredible achievements, do you think it would be even better if they were to democratize and an open up more Liberty? Is does it illustrate the power of markets that it they've been able to accomplish what they have?

George Gilder  25:06 

It does, and it does illustrate the power of markets and, and if they really abandon their progress and opening up their economy, it could be a tragedy for the world system. And that's why I think that our current approach is so negative, I mean, we're causing a kind of divorce between these two great economies. And, and it's, it's, it's a historic mistake, that they... You know, after World War II, the British faced, what I believe is the similar [unclear] the British had to give up their empire, they had to recognize that the US was ascendant, and they sought a special relationship with the US. Now we find that China, which is four times bigger population than us, and is ascendant and they're they they're not politically correct, they defy all the [broken up] and, anti-industrial Ludditism the dominates our universities. Their... And as a result, they are now really dominant, at least in Asia. And for us to think that we can retain the same kind of position we had before when they 1/24 is powerful, as they always just quixotic it's not a realistic stance, and countries that go on to base their policies on fantasies and grievance or of historic privilege are likely to fail.

Ron Baker  27:27 

Right. Yeah, we have to take a break, George. But when you wrote in The Huawei Test article, you said, "I hate to say it, but without the help of Chinese capitalism are pretty much over as a global power, and economy." Wow those are strong words, and perhaps Ed will pick this up with you on the other side. But folks, we'd like to remind you, if you want to get a hold of Ed or myself, send us an email to asktsoe@VeraSage.com. And now we want to hear from our sponsors.

Josh  27:57 

Alright, you're clear. All right.

Ron Baker  27:59 

Great stuff. George. Love it. Love the article. It was really thought provoking.

Ed Kless  28:11 

George, I'm going to pick up a little bit on Huawei as well. And I did you see that there was a on August 30. That now Huawei released a press release that the US Department of Justice is now you know, causing Huawei harm?

George Gilder  28:33 

Yeah, I saw I saw the announcement.

Ed Kless  28:39 

So I'm just going to ask you to comment on that

Ron Baker  28:41 

And the FBI is menacing their employees?

George Gilder  28:44 

Or is it just more the same? I'm, I mean, we're really trying to banish this world leading company in telecom equipment and AI and increasingly in chip design, as well, from our economy, and their company that buys 11 billion bucks a year of US chips, mostly from Intel and Broadcom and Qualcomm and then pay a billion dollars to Qualcomm for intellectual property. And, and there have been banished and, and contracts that they've made with US companies back are being suspended by the government.

Ed Kless  29:39 

Okay.

George Gilder  29:39 

Imagine...

Ed Kless  29:41  

Coming back.

Announcer  29:42 

...Ron Baker and Ed Kless to find out more about our show, visit us on the web at thesoulofenterprise.com. You can also chat with us on Twitter using #ASKTSOE. Now back to The Soul of Enterprise.

Ed Kless  29:57 

And we are back on The Soul of Enterprise with the great George Gilder. George, I know that you saw this article, but and just not I guess we're beating a dead horse a little bit here. But I just wanted to get your commentary on this. But on August 31, The Wall Street Journal, or the Huawei issued a press release about that it is finding that that certain things are happening in the United States. And there's a big long litany of stuff, I'll read a couple of them, instructing law enforcement to threaten Huawei employees unlawfully searching and detaining what Well, well, while way employees sending FBI agents to their home, and this is what YY is now accusing the United States government of, you know, there's crazy claims that, you know, CIA says that that Huawei has been funded by military intelligence, what's going on here? Why is our government so obsessed with it? Is it is it just this jealousy that that that somebody is, is outperforming us?

George Gilder  30:54 

That's... I do believe that's the heart of it. Also, based on a real incomprehension of technology. They're... they really do believe that technology is something you can steal, and something that Huawei could become a global Colossus as a kind of socialist arm of the Chinese government, and that's just a delusional, and that's... and it's... and there may be, you know, it is that...

There is a lot of spying going on between both countries, and the Chinese have done a lot of hacking and American networks. And, and there's been a lot and the NSA is also famously aggressive in... in its cyber programs. It's... I believe that if we banish all companies, from countries that do cyber hacking, we can't have a world economy. I mean, the world economy is dependent on taking for granted that the defense and... and intelligence branches of governments are constantly maneuvering against one another and testing out various technologies and intrusive tools. And and I just... We're doing it. The Chinese may be doing it more for all I know, I were certainly, but but it's not the way to stop it... It isn't just to kick out Chinese companies from America that hurts us more than it hurts China. China actually is one of the few countries in world that's big enough to actually pursue autarky successfully, that is they can actually do without a lot of foreign trade if they have to.

Well, while, we can, and I were smaller. And we've deliberately chosen to devote our colleges to an environmental cult that is against manufacturing, against industry. It really against the future. We believe that that population growth is a burden on the planet. I mean, these beliefs have consequences. I think the most important breakthrough in economics, and the last decade is really a Martian Mars, Marian Tupy and Gale Pooley, who have... They're two economist: one from St. Andrews in Scotland and one from Brigham Young in Hawaii. And together they have taken what is in essence, my time theory of money, and shown that using time prices, the world economy is growing four times as fast as ordinary GDP measures calculate, and that and, and this changes the whole view.

I mean, if we believe that some our middle class has been victimized by, by China, however, since 1986, as Tupy and Pooley calculate the time price of a Thanksgiving dinner has dropped for an ordinary blue collar worker from 32 hours of work, I mean, 32 minutes of work, excuse me, 32 minutes in 1986 to earn money to buy a Thanksgiving dinner, elaborate Thanksgiving dinner is calculated by the Farm Bureau to 9.2 minutes in 2018 and other words, something like say a 60%, drop in the hours, which had to be expended to purchase a major compliment of foods and drink and all what you need to sustain life. And this is part of a study that covers hundreds of, of commodities.

So globalization has been wonderful for the American worker, and the American middle class. And I didn't know this myself. This is a real finding of economic science, a great breakthrough, which dismisses says all a CPI is confused. Consumer Price Index, GDP deflaters, purchasing power parity guess work all these estimates that some show that capitalism hasn't been working because of Chinese depredations. The fact is capitalism has been working better than ever. And the rise to venture technology has resulted in a global productivity boom in all capitalist countries.

Ed Kless  37:23 

Yes, I've seen that study as well. And I've actually heard Marion Tupy interviewed on a couple of podcasts that I listened to. And it's absolutely fascinating. And we'll put a link up to that in our show notes. George, I wanted to ask you a little bit about the situation in Hong Kong having just visited China and I don't think you went to Hong Kong but do you in last week, the main Mainland China seems to be backing off a little bit on first of all their demand for extradition, do you think that situation will work itself out?

George Gilder  37:55 

I hope so I spent a lot of time in China and Hong Kong and too bad if freedom was extinguished in Hong Kong. I just... We'll just see, I do believe that if you're in China, and you're part of China, the rule is you don't you don't criticize the government. That's it's not a good rule, but in exchange for it, they have a massively emancipated the Chinese economy. Now they're retrenching on their freedoms. And I think it's a mistake, but it's helped by the United States. I mean, the United States is punishing their capitalist companies. I mean, it's just an art and punishing our capitalist companies. It's, it's, it's really a tragedy in in progress. And I, I hope that the sanity is recovered.

You know, to get an idea of what's going on in China. I... I've visited Shenzhen, a lot, which is sort of the center of global industry today. Al of the phones... most of the smartphones are made there. Huawei is there, and the biggest company, the biggest tower in the middle of Shenzhen is An Ping which is an insurance company... a Chinese insurance company that has reduced the time to settle insurance claims after an automobile accident to 10 minutes. You get you get out of the car, presuming that you haven't been seriously hurt. And you take photographs on your smartphone of the damage. And they compare it against the data base of 25 million auto components, they have you described the accident to your cell phone. Their artificial intelligence tells them whether you're telling the truth or not. And in 10 minutes, you both have your money and your WeChat wallet, and you have appointment with local garage that is best to do this specific repair that's needed. And they're also doing this kind of thing in medical care. This is capitalist creativity, that is really moving beyond what our insurance companies can do. I mean, just massively beyond.

Ed Kless  41:28 

Yeah, incredible stuff. I agree, lots of terrific technologies that are coming up. And I remain hopeful that and faithful that capitalism is going to be is going to be able to outrun government intervention both here and in China. That's my belief. I've got a solid on the future. But anyway, we are we are up against our last break here, I want to remind you that you can get ahold of Ron or me by sending an email to ASKTSOE@VeraSage.com. The website is TheSoulOfEnterprise.com, where we will post show notes to this show with and our interviews with George Gilder in the past, you can listen to those as well on our archive page. But right now, a word from our sponsor and my employer, Sage.

Josh  42:08 

All right, you're clear.

Ed Kless  42:13 

Great, great stuff. Thanks, George. And on behalf of myself, because Ron is going to take you the rest of the way. Thank you, again for appearing. We so enjoy our conversations with you.

George Gilder  42:26 

Thank you so much.

Ron Baker  42:30 

George, in the last segment, and it will be our shortest one. I just want to talk to you about The Israel Test, because we didn't get a chance to talk to you on that book on the last couple shows. I just because I think it's a good interesting bridge to The Huawei Test. But it's The Israel Test was incredibly profound. So, I want to ask you some questions about that. And if we have time, I'll ask you what you think of Brexit. But what do you think Brexit? Were you? Were you for it?

George Gilder  43:06 

I kind of was, I got persuaded by Matt Ridley, who is a brilliant libertarian. And sigh and analysis of analyst of science says that the Euro bureaucrats just become more costly and intrusive than they were worth. And so, they got thrown out. And it will be up to the Brits to address the new opportunities that open up as a result, but it is part of a fragmentation of the global economy that's coming back really results.

Announcer  43:55 

... Ron Baker and Ed Kless. To find out more about our show, visit us on the web at TheSoulOfEnterprise.com. You can also chat with us on Twitter using #ASKTSOE. Now back to The Soul of Enterprise.

Ron Baker  44:10 

Welcome back, everybody. We're here with my mentor George Gilder, and George in 2009. You published a book called The Israel Test. And you wrote in there that the Israel test is a moral challenge. What is The Israel Test?

George Gilder  44:28 

How do you respond to people who excel above you in creativity, ingenuity, invention and wealth? Do you admire them? Do you emulate them? And try to exceed them? Or do you envy them and try to tear them down. And I call this The Israel Test. Israel has led the world in inventiveness and creativity and in wealth creation over the last decade or so. They become the startup nation. They've created an Iron Dome that is needed by many cities, and which has protected their people from attacks from all around the region.

And but many people hate Israel, and it's a new form of antisemitism, I think it comes from envy and resentment of people who outperform. It's a hostility to excellence is what it is because Israel by any ordinary standards is perhaps the world's most successful country for its size. And it's a world leader, and it's been attacked by enemies all around it and somehow leftists in the United States support Israel's enemies against Israel. And that strikes me as the Democratic Party pathetically failing. It's Israel Test.

Ron Baker  46:29 

But I love how you wrote that. I love how you said in that book that America's technology emblem should read, "Israel Inside" because like you said they do such a high rate of innovation per capita. And George, you also pointed out that in the 1990s and 2000s, Israel started to embrace supply side economics. And prior to that, they failed The Israel Test, didn't they?

George Gilder  46:57 

Yeah, it was terrible, they almost went bust and the 1980s they had 1000 they were on the track for 1,000% inflation. And they contrived a unity government, and eventually began emancipating their country from the socialist traditions that they inherited from the Ben-Gurion and local labor movement. And... and Netanyahu really is the principal figure and let and liberating Israel and he's a kind of Churchillian leader in Israel. And, and again, the hostility to excellence has made Netanyahu the object of incredible hostility on the left in the United States, but he is... I think he is the greatest leader of this era.

Ron Baker  48:10 

Wow. I love how you articulated the golden rule of capitalism that - The good fortune of others is also one's own. And I mean, if that's true, yeah, if that's true, and the Jewish population is something like three tenths of 1%. And yet you look at their disproportionate amount of accomplishments, whether it's innovation or Nobel Prize, or entrepreneurship, it's it really does make your argument I think that you you've always made, the inequality is actually the answer, not the problem.

George Gilder  48:47 

Yeah, That's right. Funny, however, I do believe that some of the inequality is the result of what I call hypertrophy of finance. That is $5.1 trillion of currency trading every day, every 24 hours, the world's leading industry is currency shuffling, and it doesn't even stay stable at 25 times all global GDP. And it doesn't even provide stable values that prevent monetary conflicts and trade wars and general suspicion about monetary policy and trade policy around the world.

And I believe that the cryptocosm, the rise of Bitcoin and Bitcoin’s derivatives, because Bitcoin itself is flawed. That the rise of these crypto currencies provides a remedy for this pathetic breakdown of the world economy that we're currently experiencing. And so I call it the cryptocosm, I think it will both provide a new architecture for the internet, a security architecture for the internet that stop some of this paranoid fear of foreign chips and our telecom systems and, and also provide the platform for a new global money that can repeat the success of the gold standard. And my hope for the future, I'm very optimistic because I see a whole new generation of technology emerging, I see a way to measure innovation through time prices. That is a major break, which allows us to answer some charges about the effects of inequality.

Ron Baker  51:12 

George, just I know you dealt with this in Life After Google and you just made the point. Why is Bitcoin flawed as a monetary standard?

George Gilder  51:24 

Because it's tapped. There’s only a total of 21 million ever to be minted. And this means that has the kind of deflationary bias, a monetary deflation, not the positive deflation that results from ever expanding productivity is measured in time prices, but a kind of monetary speculative factor that is destructive for Bitcoin as a replacement for gold. That's what Satoshi wanted to do. He was trying to create a replacement for gold. He imagined that gold was running out, he spent too much time in universities. And he thought gold was running out, but the fact is, we're now mining gold, the oceans from slag heaps and thinking of mining gold on the moon or from meteors, you know, gold, all the gold that's ever been mined, is still available. And, and it's not running out. And that's the reason what remains scarce when everything else becomes abundant is time and, and time as the basis of value. Money is really time I explain it in and in Life After Google and other books, and I'll be explaining it more in the future but and the time prices of Tupy and Pooley really vindicate this insight of mine that money is central as it translates the scarcity of time, which is the fundamental reality of our lives into economic activity.

Ron Baker  53:38 

Right, right. Well, you did a great job explaining the flaws in Bitcoin in in Life After Google. And folks, that's a highly recommended book. George, thank you so much for appearing on The Soul of Enterprise. Unfortunately, we fit the time wall ourselves. So, Ed what's on store for next week?

Ed Kless  53:55 

Next week, Ron we're going to have our second interview with Joe Woodard.

Ron Baker  53:58 

All right, I look forward to seeing you in 167 hours.

Ed Kless  54:13 

This has been The Soul of Enterprise, business in the knowledge economy, sponsored by Sage, energizing business builders around the world through the imagination of our people and the power of technology. Join us next week on Friday at 4pm Eastern, that's 1pm Pacific. In the meantime, please do visit us at www.TheSoulOfEnterprise.com

Josh  54:42 

All right, gentlemen, you're clear.

Ed Kless  54:44 

Alright, thanks so much. Thank you, George.

Ron Baker  54:48 

Oh, he dropped Okay. Thanks, Josh.

Episode #256: Free-Rider Friday, August 2019

This was another great Free-Rider Friday. From Porsche to quotes from Steve Jobs to the Monopoly Socialism game, have a listen!

Here are Ron’s topics

 Here are Ed’s topics

Bonus Episode Links

Did you know that each week after our live show, Ron and Ed take to the microphone for a bonus show? Typically, this bonus show is an extension of the live show topic (sometimes even with the same guest) and a few other pieces of news, current events, or things that have caught our attention.

Here are some links from our bonus show this week. The show, all bonus links, and additional bonus material are available to our Patreon subscribers. Click the “FANATIC” image to learn more about pricing and member benefits. 

Ron’s BONUS Topics

Ed’s BONUS Topics

 

Episode #255: The Soul of Silicon

In May 1997, George Gilder delivered "The Soul of Silicon" to the Vatican, at a conference arranged and coordinated by the Acton Institute.

Ron, who is a devotee of all of Gilder's writings, believes that this is one of the most profound pieces George has ever written. We discussed the entire speech during this episode.

  • You can access The Soul of Silicon speech here.

  • You can access the encyclical Rerum Novarum here.

  • You can access the encyclical Centesimus Annus here.

Strap in for this episode! As follow up, George Gilder’s book, Men and Marriage, expands on the idea that parenthood is the ultimate entrepreneurial act, including many other topics. For an alternative perspective, Ayn Rand’s last public speech, The Age of Mediocrity, is where she criticizes Gilder’s defense of capitalism.

Bonus Show Updates

Did you know that each week after our live show, Ron and Ed take to the microphone for a bonus show? Typically, this bonus show is an extension of the live show topic (sometimes even with the same guest) and a few other pieces of news, current events, or things that have caught our attention.

Here are a few links from our bonus show this week. The show, all bonus links, and bonus material are available to our Patreon subscribers. Click the “FANATIC” image to learn more about pricing and member benefits. 

Episode #254: Imagine the Audience in Their Underwear…Not! Public Speaking Skills

Would you like to be a better public speaker?

American journalist Roscoe Drummond said: “The mind is wonderful thing. It starts working the minute you’re born and never stops until you get up to speak in public.” Is it really true that people fear public speaking more than they fear death?

Here are Ron’s Rules for Better Public Speaking

  1. Don’t pain the listener

  2. Never talk down to your audience. Risk talking over their heads! That’s what makes the great books great, why they are constantly re-read: they are over our heads.

  3. Intimately know your material

  4. Don’t be afraid of repetition — the audience can’t go back and listen again

  5. Q&A is your chance to learn — Otherwise you’ve learned nothing listening to yourself

  6. You’ll never be able to please everyone — don’t cast pearls to swine. My brother Ken used to say: “One-third of the audience thinks you look like their Ex and will be pre-disposed not to like you no matter what you say.”

  7. Don’t point at the audience

  8. If there’s a stage, use it! It magnifies your presence.

  9. It’s about them; not you — humility is your friend

 Ed’s Rules Are Equally As Important

  1.  The only way to get better at public speaking is to speak in public

  2. Connection before content

  3. Begin with a story or quote. Actually, just begin with anything other than your name.

  4. Be Bertolt Brecht

  5. If you can, get introduced by someone else

  6. Don't be afraid to take a chance

  7. Steal from the best, but develop your own style

  8. Use the stage, but don’t be afraid to get off at certain point

During this show, we discussed a few books that can help you as well. 

Simply Speaking [hardcover edition], Peggy Noonan, 1998, On Speaking Well [paperback edition]

From these books, there are three things to keep in mind about your speech:

  • It doesn’t need to last longer than 20 minutes — because Ronald Reagan said so. The Gettysburg address and Sermon on the Mount were 3 minutes. The more important the message, the less time required to say it. The language of love is simple because it is big: It’s a boy; it’s over; he’s dead. 

            “For a speech to be immortal it need not be interminable” 

  • Yes, you should write out the text

  • Humor is essential

Peggy says most important component is logic when you look at Ethos, Pathos, and Logos:

  • Ethos—a person’s character (honesty, goodwill, etc.)

  • Pathos—arousing the passions of listeners, emotions

  • Logos—marshaling of reason

Where there is no substance, style will perish; you can’t be eloquent about nothing. Coco Chanel used to say if a women walks into a room and people say “What a dress!” she failed. She wants folks to say, “Oh, you look fabulous.” That’s success. After your speech, you want people to say, “She’s very intelligent, and made some interesting points.” Not, “Oh, what an interesting speech.”


How to Speak, How to Listen, Mortimer J. Adler, 1983

In this book we learn that reading and writing can be solitary and are easier to teach than speaking and listening, which are social. Technically, you can’t give a “talk” but you can have one. You can only deliver a speech with an audience. Listening, like reading, is an activity of the mind, not the ear or eye. If the mind is not engaged, you are hearing, not listening.


Strictly Speaking, Reid Buckley, 1999

This author is William F. Buckley’s younger brother who passed away in 2014. He ran The Buckley School of Public Speaking in Camden, SC. The premise of the book is that, crudely stated, public speaking = persuasion = selling.

Episode #253: Rory-Rider Friday

Once again, unfortunately, Rory didn’t make it on the show this week, so Ed and Ron improvised with a “Rory-Rider Friday.” Rory did make it onto our bonus episode, so if you’re a Patreon subscriber to TSOE you’ll get over one hour of Rory discussing his new book, Alchemy, and much more.

Here are the topics we discussed on Rory-Rider Friday.

Ed’s Topics…

  • Ed’s been playing the board game, Power Grid, available at Amazon.

  • Frank Beard (Half Size Me Podcast) spent 30 days eating nothing but gas station food, lost weight, and ate healthy. Read about it here.

  • Jennifer Warawa announced this week she is leaving Sage.

  • Read The Wall Street Journal article on Father Robert Sirico from August 3, 2019. You can access through the WSJ (paywall). As an alternative to the WSJ paywall, you can you can read the article via the Acton Institute in exchange for an email address.

Ron’s Topics…

  • TSOE listener Geir from Norway sent us an annual subscription offering from Circle K for hot beverages, all you want, for NOK 299, cup included (USD $30). When will Starbucks offer something similar?

  • Elon Musk explains how Tesla’s competitors make many cars with “no soul.” Bob Lutz, former GM Vice Chairman, made the same case in his book, Car Guys vs. Bean Counters. Read Ron’s review of this book here.

  • Reflections of a business guru,” The Economist, July 27, 2019, Bartleby’s interview with Charles Handy discussing the curse of efficiency.

  • Happy 89th Birthday, Dr. Thomas Sowell, who appeared on Episode #25. Read Mark J. Perry’s tribute to Dr. Sowell along with some of his favorite quotes here.

Episode #252: On Rory Sutherland's Book - Alchemy

Unfortunately, Rory didn’t make it on the show this week, so Ed and Ron discussed his latest book: Alchemy. The discussion was centered around Rory’s (eleven) Rules of Alchemy.

Rory’s Rules of Alchemy

  1. The opposite of a good idea can also be a  good idea.

  2. Don’t design for average.

  3. It doesn’t pay to be logical if everyone else is being logical.

  4. The nature of our attention affects the nature of our experience.

  5. A flower is simply a weed with an advertising budget.

  6. The problem with logic is that it kills off magic.

  7. A good guess which stands up to observation is still science. So is a lucky accident.

  8. Test counterintuitive things only because no one else will.

  9. Solving problems using rationality is like playing golf with only one club.

  10. Dare to be trivial.

  11. If there were a logical answer, we would have found it.

We are working on rescheduling Rory—stay tuned!

Episode #251: Free-Rider Friday, July 2019

What a GREAT Free-Rider Friday! Ed and Ron cruised through the most interesting news and topics that caught their attention this past week.

Here are Ed’s Topics…

And Here are Ron’s Topics…

  • Uber is testing an all-in-one subscription for rides, food delivery, bikes, and scooters,” The Verge, July 23, 2019, by Andrew J. Hawkins.

  • Unintended, uh, whatever, man,” The Economist, July 13, 2019.

  • New ways of selling books clash with France’s old pricing rules,” The Economist, July 6, 2019.

  • Ball-game theory, The Economist, July 13, 2019.

  • The AICPA’s PCPS 2018 Survey of 1,910 CPA firms reports a declining use of hourly pricing and an “increasing use of value pricing and “value billing” [whatever that is?] and fixed pricing.” Depending on size, the percentage of firms report anywhere from 15-50% of revenue is now derived from value pricing or “value billing.” Hourly billing is between 59-80%, so we still have a long way to go. Fixed pricing is from 20-30%. Take these surveys with a grain of salt, since they are non-random and contain errors in reporting, interpretation of meaning, etc. But they do give us a vector of what is happening, and it is clear that hourly billing is waning.

Episode #250: INFLUXUS RECIPROCI FALSUM

INFLUXUS RECIPROCI FALSUM - “The Correlation False”

statistics maybe.png

The idea for this show started when we ran across the book Spurious Correlations by Tyler Vigen at the San Jose Tech Museum. Ed and Ron both picked it up and immediately loved it. And a show was born! So what’s up with the show title??? Literally translated, it means “the correlation false” and if you’ve been listening to the show for any period of time you probably picked up on the fact that Ed understands a thing or two about Latin.

Now that you’ve read this far, Episode 250 of The Soul of Enterprise was — predictably — about the confusion between correlation and causation. Folks - some of these examples are hilarious! 

Let’s get a few key things out of the way before diving into the examples.

  • Correlation: two things vary together. Ron likes the example that wet streets cause rain.

  • Graph Paper Diaries has an excellent description of correlation/causation confusion along with six examples:

    • Thing A caused Thing B (causality)

    • Thing B caused Thing A (reversed causality)

    • Thing A causes Thing B which then makes Thing A worse (bidirectional causality)

    • Thing A causes Thing X causes Thing Y which ends up causing Thing B (indirect causality)

    • Some other Thing C is causing both A and B (common cause)

    • It’s due to chance (spurious or coincidental)

  • Data dredging: Provided enough data, it is possible to find things that correlate even when they shouldn’t. The world of big data and big correlations. Statistical significance increases as sample size increases. Every one of the correlations in Tyler Vigen’s book was discovered by a computer. 

In terms of methodology, Vigen used Pearson’s correlation coefficient which is common for expressing linear relationships between variables. You can double-check any statistic in the book, and find many more charts: http://tylervigen.com/sources.

Spurious Correlations documents a statistically significant correlation between many humorous variables, including:

  • Earnings per share of Domino’s Pizza Group and Economic loss due to cybercrime (98%).

  • Undergraduate enrollment at U.S. universities and Injuries related to falling TVs (99.6%).

  • Customer satisfaction with Taco Bell and International oil production (79.9%).

  • Stay-at-home-dads and Walt Disney Company revenue (93.8%).

  • Beef consumption and deaths caused by lightning (87%).

Real stories of correlations ≠ causations

Mark Twain: “The difference between reality and fiction is that fiction has to make sense.”

  • The Economist had an article “Enough is never enough,” that discussed whether or not advertising is good or bad? A survey of 1 million Europeans who self-reported life satisfaction with variation in total advertising spending as a share of GDP and found a significant inverse relationship: a doubling of ad spending = 3% drop in life-satisfaction. So, North Korea should be most satisfied on the planet!??! 

  • Adding one more woman in senior management or to a company’s board, raises its return on assets by 8-13 basis points (hundreds of a percentage point), according to one study. An IMF study shows a higher share of women on bank boards is associated with greater financial resilience, and greater financial stability.

  • The correlation between unemployment and inflation was postulated in 1958 by William Phillips, a London School of Economics professor. Milton Friedman falsified this theory but it still rules at the Federal Reserve Bank.

  • Discussing brushfires in Australia, The Arsonist by Chloe Hooper reports [from a book review in The Economist, “Into the inferno,” June 15, 2019.

    • “People are more inclined to destruction in places where “high youth unemployment, child abuse and neglect, intergenerational welfare dependency and poor public transportation meet the margins of the bush.”

Based on this book, Risk Savvy: How to Make Good Decisions, (Gerd Gigerenzer, 2014), the author believes we live in a risk-illiterate society. There is some truth to that. When meteorologists report a 30% chance of rain tomorrow, what does that mean?

  • Some think, it will rain 30% of the time tomorrow

  • Others, it will rain in 30% of the region

  • Others still, three out of ten meteorologists think it will rain and 7 don’t.

What it actually means: That it will rain on 30 percent of the days for which this announcement is made.

Many of us smile at fortune-tellers, but when they’re armed with computer algorithms rather than tarot cards, we take their predictions seriously and pay for them. One amazing fact Gigerenzer points out in his book is the 5-year survival rates of prescreening for cancer. This is achieved by screening at an earlier age (age 60, say, rather than 67 due to symptoms). Say the patient dies at 70 no matter what. In the first case, the 5-year survival = 100%; in the second case it is 0%.

Statisticians call this the lead time bias. The high survival rates don’t tell us if lives are saved. PSA screening detects both progressive and non-progressive cancers. It can’t distinguish between them. More men die with prostate cancer than from it. As such, Gigerenzer concludes that prostate cancer screening has no proven mortality reduction, only proven harm. It’s the same with mammography.

Gigerenzer First Law: The more the media report on a health risk, the smaller the danger for you.

In the book, The Cult of Statistical Significance: How the Standard Error Costs Us Jobs, Justice, and Lives (Stephen T. Ziliak and Deirdre N. McCloskey), Deirdre points out that statistical significance is not the same thing as a scientific finding. In fact, it can be misleading at best. Also,

“The mainstream in science, as any scientist will tell you, is often wrong. Otherwise, come to think of it, science would be complete.”

Science has stopped asking “How much is the effect? And What difference does the effect make? Fit isn’t the same as importance. W. Edwards Deming used to say: “Statistical significance provides no rational plan of action.”


The VeraSage Symposium

Use this link for more information: VeraSage DownUnder 2019

verasage symposium down under.png

As you may or may not know, VeraSage meets biennially for a VeraSage Symposium [“to drink together,” and for the first time ever the Symposium this year is being held in Australia in November.

In conjunction with Australian Senior Fellow John Chisholm we have put together what we think is a terrific program covering two events—a one day “Transforming Your Firm” workshop in Melbourne on Tuesday, November 12, followed by the two-day VeraSage Symposium commencing Wednesday evening November 13 and running to the 15th, being held in Geelong about 70 miles from Melbourne on the wonderful Bellarine Peninsula.

Ron has visited Melbourne, Geelong, and the Bellarine Peninsula several times now and trust me they are wonderful places to visit and experience some of the best of what Australia has to offer.

In addition to the formal programs the Aussie contingent have put together some wonderful social events, with a special emphasis to showcase the local food and (of course) the wine. If you are at all interested in attending, register online or contact John Chisholm at john@chisconsult.com for further information, or any travel recommendations—especially if this is your first time visiting Australia.

You will see from the website that early bird pricing is available until end of August and attendance will be strictly limited. We look forward to seeing you Downunder in November!

 

Even MORE Examples and Resources for Correlation and Causation

Episode #249: The Adaptive Capacity Model

Do You Know the Real Capacity of Your Firm? 

Ed and Ron went through the Adaptive Capacity model this past week on the radio show. The show notes are below. This was a complex topic covered over the course of an hour. It is definitely worth a listen or two!

Maximum vs. Optimal Capacity

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. Your maximum capacity is the total number of customers you firm can adequately service, while the optimal capacity is the point at which customers can be served adequately while maintaining your competitive advantage and pricing integrity.

Usually, for most professional firms, optimal capacity is between 60 and 80 percent of maximum capacity. 

Insuring 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 value pricing strategies. It also prevents bad customers—those who are not willing to pay for the value you deliver—from crowding out good customers.

The Adaptive Capacity Model

Think of your firm as a Boeing 777 airplane, similar the one below.

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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:

A. First class
B. Business class
C. Full fare coach
D. Coach
F. Leisure, Priceline.com, and Bereavement fares 

The airlines—and hotels, cruise lines, golf courses, car rental agencies, and other industries with fixed capacity—are adept at managing and predicting their adaptive capacity to maximize profitability. 

Lessons from Yield Management

The airlines understand it is the last–minute customer who values the seat the most and hence they reserve a portion of each plane’s capacity for their best customers. They do this even at the risk the plane will take off with some of those high price seats empty—and that revenue can never be recaptured since they cannot inventory seats. 

Why do they take that risk? Because the rewards of reserving capacity for price insensitive customers comprise the majority of their profits.

Airlines allocate only so many seats to coach, leisure, Priceline.com (or bereavement) seats, which they offer well in advance of the flight. However, no airline adds capacity in order to accommodate these customers. 

This point is noteworthy, as too many firms will, in fact, add capacity—or reallocate capacity from higher-valued customers—in order to serve low-valued customers. This is the equivalent of the airlines putting the upper deck in the back of the plane rather than the front.

Furthermore, many companies will turn away high–value, last minute work from its best customers because it is operating near maximum capacity, usually at the low–end of the value curve for price sensitive customers. This is common during peak seasons; the lost profit opportunities are incalculable.

Many worry about running below optimal capacity and cut their prices in order to attract work, especially in downturns or slow cycles. This strategy is fine, but you must understand the tradeoff you’re making. Usually, that capacity could be better utilized selling more valued-added services to your first–class and business-class customers, who are less price sensitive than new customers.

This way, the firm does not cut its price and degrade its pricing integrity in order to attract price sensitive customers, sending a signal into the marketplace it is willing to engage in this strategy and affecting the perception of its value proposition. 

The conventional wisdom is you have to be at maximum capacity—where demand exceeds supply—to raise prices. But since when do you have to wait to be fully booked to demand a premium price? Do not confuse working harder (supply-side capacity) with working smarter (demand side pricing).

Prices are determined by value created for the customer, not the internal capacity constraints of your firm. How much fixed capacity are you allocating to each customer class? What will be the criteria you use to ascertain where in your airplane each customer sits? By viewing your firm as an airplane with a fixed amount of seats, you will begin to adapt your capacity to those customers who appreciate—and are willing to pay for—your value proposition.

Additional Reading 

Episode #207 Reprise: Interview with George Gilder

Did you catch the reprise of Episode #207 while Ed and Ron were on vacation last week? In lieu of show notes, we have opted to post the transcript of our interview with George Gilder about his book, Life After Google: The Fall of Big Data and the Rise of the Blockchain Economy

The transcript can be found here.

If you would like more on this or want to listen commercial free, please consider subscribing to our premium service at Patreon.

Episode #248: Free-Rider Friday, June 2019

We had another great Free-Rider Friday show! 

Here are Ron’s Topics: 

  • Picking up the Bill,” Bartleby, The Economist, May 25, 2019. Great Yogi Berra line: “I’m not going to buy my kids an encyclopedia. Let them walk to school like I did.”

  • Remember the Polar Bears,” National Review, April 22, 2019.

  • Why the UK Suddenly Is Suffering from a Physician Shortage,” FEE, June 1, 2019.

  • Our VeraSage colleague Paul Dunn sent us another example of the subscription business model: Rent the Runway, where you can rent your wardrobe. The company has become a Unicorn (a startup with a $1 billion+ valuation). Urban Outfitters is also launching a subscription service where you’ll be able to rent up to six items a month. This will help curb “wardrobing”—customers returning clothes after wearing them. The online market for renting clothes was worth $1 billion in 2017 and is forecast to double by 2023.

  • A forum in National Review from May 20, 2019, “In Defense of Markets.” Some excellent points from Jonah Goldberg, Marian L. Tupy, Deirdre McCloskey, Scott Lincicome, and Yuval Levin. 

And Here Are Ed’s Topics:

Episode #247: Memorable Mentors — Tom Peters

Do you have a memorable mentor? We do! 

Well, we tried, but we could not land Tom Peters to be a Guest on The Soul of Enterprise. Instead, we decided to do the next best thing - a Memorable Mentors episode.

On this show, Ron and Ed recapped the career and work of the person whom many claim as the father of the business book genre. His classic, In Search of Excellence, co-written with Robert Waterman, launched his career into a near-Earth orbit. His presentation style influenced both Ed and Ron with his wit and willingness to say outrageous "stuff." 

We discussed the following Tom Peter’s books in addition to In Search of Excellence.

We also discussed the antithesis to Tom Peters:
The Management Myth by Matthew Stewart


Check out some of these related resources.

  • Episode #120: Strategic Planning: Efficient, effective, neither, including a discussion on The modified Seven S Model.

  • Ed’s post “On Client vs. Customer”

 

 

Episode #246: Interview with Chief Pricing Educator Mark Stiving

Mark+Stiving.jpg

Mark helps companies discover how buyers perceive value and how to price offerings to capture more of the value they create. For over 25 years he has studied, led and coached businesses through the lens of pricing, a radically different approach from other business experts. He knows that every person inside your company affects the price a buyer is willing to pay. The prices you achieve ultimately indicate how well the entirety of your company operates. Mark has driven a company-wide pricing initiatives worth hundreds of millions of dollars in incremental profit. He started and sold three companies, improving his championship pricing skills in each one.  Mark will change the way you think about pricing and business as a whole.

From 10 years old to his doctorate studies at UC Berkeley, Mark gets RIGHT into the good stuff in this great interview. Check out the full show notes at this link.

Here are some additional links we mentioned during the show:

Episode #245: Interview with Justin Lake

A Special Episode: Interview with Justin Lake

Especially for those who know someone with diabetes, this very special episode features Justin Lake. The full transcript of the interview can be found here. Here are some of the links mentioned in the show:

Justin also wrote this article back in 2016 which drew the connection between his son's experience and his business of mobile technology.

justin lake.jpg

Justin Lake is an owner and principal at Venado Technologies, a digital technology consultancy. As a lifelong mobile tech enthusiast, Justin has dedicated his career to leveraging modern technologies to improve the effectiveness of organizations with highly mobile workforces. He has held roles in companies including wireless carriers, mobile device manufacturers, mobile managed service providers, and software development teams. And while that experience helps drive much of Justin's counsel with his clients, the real fuel is bringing creativity to every new challenge. Through his own ideas, and leveraging his extensive network of industry professionals, Justin and his team are able to bring value to the digital transformations of the most exciting companies in the world.

Episode #244: Free-Rider Friday, May 2019

Another great show is ready for a listen! This past week’s topic was Free-Rider Friday.

Ed’s Topics 

Ron’s Topics 

  • Happiness economics,” The Economist, March 23, 2019. “In total the world’s population looks roughly equally divided between places where happiness and incomes have moved in the same direction over the past ten years, and places where they have diverged.”

  • We have done a show on Generational Astrology (Episode #142). It’s also a bugaboo of Jonah Goldberg’s, as discussed in his article, “The Silliness of the Generation Conflagration,” National Review, May 24, 2015.

  • Volkswagen, the largest car company in the world, has made the biggest commitment to manufacture battery powered cars, larger than any other car company. Yet VW’s profits and productivity remain woeful, with Porsche and Audi accounting for the bulk of its profits. In the past, it’s been all about saving jobs, with labor unions controlling a lot of corporate decisions. But electric vehicles require 30% less effort, so jobs may be lost anyway. “New wave,” The Economist, March 16, 2019.

  • From National Review on libraries, an interesting analogy: “Assembling a library is a physical act, like gardening. One cannot cultivate flowers and vegetables online without a marked diminution in the experience.” 

Listener Question 

Ron received a great question from Robert Allender in Hong Kong: 

Dear Ron, 

I'm a few episodes behind so just today listened to you telling about your brother.  My condolences. Given what you said about his public speaking prowess, I immediately wondered if there were any videos or audios of him speaking.  I also wondered if you might have in the past penned anything about the specific knowledge he imparted to you on  the subject of public speaking, or if you planned to in the future. Either way, thanks for sharing your memories of Ken with us. 

Robert C Allender  
Managing Director

Episode #243: Team Member Compensation

People have value, not jobs. You price people, not jobs.

So why do people work?

  1. Intrinsic rewards—inherent in the work itself (volunteers)

  2. Opportunity to grow—education, invest in HC

  3. Recognition of accomplishments—storytelling (FedEx Bravo Award)

  4. Economic rewards—Extrinsic, pay, benefits

From Dale Dauten, The Gifted Boss: How to Find, Create, and Keep Great Employees:

Old school is hire someone by offering 20 percent more money. Well, try offering 100 percent more freedom or 100 percent more excitement…Gifted bosses and great employees want the same things from a workplace: 

            Freedom from…management, mediocrity, and morons

            A change

            A chance 


And there are other examples as well:

  • Steve Jobs said Apple was a culture that runs on ideas, not hierarchy (or seniority).

  • Thomas Jefferson: “There is nothing less equal than treating nonequals equally.”

  • Nordstrom: “Your performance is your review.”

In Get Rid of the Performance Review!, Samuel A. Culbert writes that “pay and performance don’t have much to do with each other. Lumping them together is a needlessly stupid, alienating ritual that produces phony posturing, and inhibits straight talk.” 

Here is a summary of Culbert’s theory on what determines pay:

  1. Whether the boss wants to retain the employee

  2. The amount of raise that boss thinks is necessary for doing so

  3. The department’s budget

When a valued employee decides to leave the boss will ask: “What will it take to get you to stay?” There’s no game-playing, or pretense, just the raw truth (of course, people don’t leave companies, they leave managers). 

Ed’s Compensation Model (read more at Ed’s blog post)

  1. Salary

  2. Profit-sharing (team vs. firm)

  3. On-the-spot bonuses

  4. Enhancement of intellectual capital — Knowledge Matrix

There’s an old military saying: “A man wouldn’t sell his life for $1 million, but would gladly risk it for a ribbon or Medal of Honor.” Purpose, probably more than any other factor, drives performance and discretionary effort. If people believe in what the organization stands for, they will pour their heart and soul into their work.


Episode #242: Prices, Profits, and Fairness

Why is an oil or pharmaceutical company condemned for earning windfall profits when market conditions change, while an individual homeowner who realizes a tidy profit off of a hot real estate market is applauded?

Popular movie stars, directors, and entertainment companies can earn above-normal profits without so much as a whisper of public protest. Premium ice creams and chocolates are very expensive and yield profit margins that would have made the “robber barons” of yesterday blush.

Very few of us would continue working at 50 percent of our present salaries. Are we not charging what the market will bear?

Why are individuals and corporations held to different standards? Perhaps it is not so much price that bothers people as it is profits.

Market Competition leads a self-interested person to wake up in the morning, look outside at the earth and produce from its raw materials, not what he wants, but what others want. Not in the quantities he prefers, but in the quantities his neighbors prefer. Not at the price he dreams of charging, but at a price reflecting how much his neighbors value what he has done.
––Friedrich A. von Hayek


Capitalism offers nothing but frustrations and rebuffs to those who wish—because of claimed superiority of intelligence, birth, credentials, or ideals––to get without giving, to take without risking, to profit without sacrifice, to be exalted without humbling themselves to understand others and meet their needs.
––George Gilder


Throughout history the morality of profits and a just price has been debated endlessly, as it should be. The late Father Richard John Neuhaus, in his book Doing Well and Doing Good, explains the ancient debate of a “just” price:

The idea that there is a right amount or a “just” amount always runs up against the question, Compared to what? The conventional answer is that one pays what the market demands, or what the market will bear. From Athens to Elizabethan England to the Great Terror of the French Revolution, societies have experimented with “sumptuary laws” setting limits on people’s income and expenditures. The experiments have never worked out very well, the obvious reason being that it is almost impossible to agree on standards. Few egalitarians, even among the well-to-do, propose a top income limit that is less than what they themselves receive.

 During the Dark Ages merchants could be put to death for exceeding the communal concept of a “just” price (justum pretium, the right price). In A.D. 301, Diocletian, the Roman Emperor, issued an edict fixing prices for nearly 800 items and punishing violators with death. Severe shortages transpired.

In ancient China, India, Rome, and almost everywhere throughout the Middle Ages, all interest charges were called “usury” and were prohibited entirely, making economic progress through lending and risk-taking all but impossible.

Today, so-called “price gougers” are subject to societal condemnation, regulatory harassment, and editorial vitriol. Oil companies are frequently a prime target of public outrage, especially when prices at the pump vary from one city to another.

Pharmaceutical companies are held in special contempt when they charge $5 to $100 (or more) per pill, even if the dosage reduces more costly medical intervention by other means, such as surgery. In May 2000, the late Senator Paul Wellstone claimed, “We have an industry that makes exorbitant profits off sickness, misery, and illness of people, and that is obscene.” So what?

Orthopedists profit from people breaking their leg skiing, just as professors’ profit from students’ ignorance. Farmers profit from our hunger, but in reality they keep us from hunger. Drug companies profit by making us healthy.

The problem with a “just” price is who gets to decide what is just? The free market already provides an answer to this question—whatever someone is willing to pay. There is no objective standard for “fair,” which is why we have free speech rights, not fair speech rights.

Although it sounds heretical, it is not. An old legal maxim teaches: Emptor emit quam minimo potest, venditor vendit quam maximo potest (“The buyer buys for as little as possible; the seller sells for as much as possible”). Ultimately, the customer is sovereign, spending his or her money only when it provides value.

To believe the free market is imperfect with regard to the fairness of prices is to grossly underestimate your own sovereignty as a customer while putting your faith in some anonymous third party—usually a governmental regulatory agency or the courts—to determine what is “fair.”

Yet prices contain a wealth of information that no central agency can possibly possess, which is why wage and price controls have failed everywhere they have been tried (See “A Fair Price Utopia Gone Wrong” Case Study).

If it is immoral for a company to charge premium prices to customers, does it follow it is also immoral for customers to pay low prices? If prices are deemed “unreasonable” why do people pay them? Only unreasonable people pay unreasonable prices.

Case Study: A Fair Price Utopia Gone Wrong

Once upon a time there was a fair price utopia. In it, prices were set according to a theory of fair pricing. The price was based on the average product cost of all firms plus a standard percentage markup. Even if the costs of production for an identical good varied, the price was kept uniform for the customer. Although prices responded dynamically to changing average costs of production, this dynamism was tempered to maintain price stability. There were no unpleasant surprises. Buyers were supposed to enjoy complete transparency and control: by law, they could review the producer’s accounting and participate in determining the price. And the prices of basic staples like bread were subsidized to help the needy.

Beginning to sound familiar? That is because this utopia was the pricing system of the former United Soviet Socialist Republic. It was a pricing system designed to be fair. So what went wrong?

In might have been fair in theory, but not in actuality. Prices did not reflect the value as perceived by the consumer. The determination of value was done by overblown governmental departments based on complex calculations of cost and profit plus distribution costs, as well as consumption value and utility. Consumers had no idea how prices were actually determined. Supply did not respond to demand. Consumer goods were always in short supply no matter how strong the demand.

The system was imposed from above so that consumers had no voice. They consequently felt no compunction about flouting it. The black market flourished. Although in theory all consumers paid the same price, in actuality they did not.

The pricing system was inequitable, unequal, uncontrollable and opaque. The prices were wrong—and that’s not fair.

Excerpted from The Price is Wrong: Understanding What Makes a Price Seem Fair and the True Cost of Unfair Pricing, by Sarah Maxwell, PhD, 2008, page 164.


To believe prices are determined by greed is to believe sellers can establish prices at whatever level they desire, in effect never having to suffer losses or bankruptcy. Homes along the ocean front command high prices, but this does not prove fresh air causes greed. Prices convey information, while allocating resources and distributing income. If sellers are greedy than the counter argument can be made that buyers are also greedy and selfish, since they value seller’s products more than they do their money. Yet only the seller gets blamed. Probably because greed and selfishness do not, at all, explain this behavior.

Perhaps it is not so much price that bothers people as it is profits. Profits have a bad reputation because most people simply do not acknowledge where they come from. Profits come from risk. The entrepreneur gives long before she receives. She pays wages, vendors, landlords, and the other costs of running a business in advance of having anything left over (profits). Very few individuals work for 100 percent stock options, yet business owners, in effect, do exactly this, since profits are only left over after everyone else has been paid.

If it were true that profits caused high prices, then we should witness lower prices in those countries with no profits, such as socialist or communist countries. Yet all of the empirical evidence is to the contrary. Even though profits comprise only 10 percent of national income, they are crucial in allocating the other 90 percent. Of course, since most enterprises do not make an economic profit, perhaps we should say the pursuit of profit is the necessary ingredient. In any event, whenever someone laments a particular industry (or company) is making obscene profits, there is an effective retort: If you believe that, you would be crazy not sell everything you own and buy its stock.

Peter Drucker pointed out, “If archangels instead of businessmen sat in director’s chairs, they would still have to be concerned with profitability, despite their total lack of personal interests in making profits.”

Profits are an indicator that a useful social purpose is being filled and needs are being met. In a free market, no profit could exist without people voluntarily entering into a transaction where each receives more than they give up, what Harvard philosophy professor Robert Nozick cleverly coined “capitalist acts between consenting adults.” This is why George Gilder compares profits to altruism, since in enterprise gift giving precedes voluntary exchange—alter in Latin means “other.” For you to exchange you have to create something to exchange.

The essence of giving is not the absence of an expectation of earning a return, but the absence of a predetermined return. Profits are not guaranteed, and are determined by consumers, not greed. Gilder explains this eloquently:

A profit is the difference between what inputs cost the company and what they are worth to somebody else. It’s the index of the altruism of the process.

The moral code of capitalism is the essential altruism of enterprise. The most successful gifts are the most profitable––that is, gifts that are worth much more to the recipient than to the donor. The most successful givers, therefore, are the most altruistic––the most responsive to the desires of others.

The circle of giving (the profits of the economy) will grow as long as the gifts are consistently valued more by the receivers than by the givers. A gift is defined not by the absence of any return, but by the absence of a predetermined return. Unlike socialist investments, investments under capitalism are analogous to gifts, in that the returns are not preordained and depend for success entirely on understanding the needs of others. Profit thus emerges as an index of the altruism of a product.

 
Economists classify different types of profits as follows: 

Normal profits—The return to the owner, net economic return is zero, where costs include the cost of capital, the market rental rate of capital.

Supernormal profits—Profits in excess of normal profits. Occur when revenues exceed costs, again including the cost of capital. They are often identified with monopoly profits.

Rents—When an agent owns a good that has a special characteristic which, through no effort of the agent, is valuable. Professional athletes or musicians are often given as examples.

Profits from Immoral Activities—Extortion, theft, blackmail, etc.

Windfall profits—When the event causing the profits is a complete surprise to the profit maker. An example is the OPEC oil embargo of 1974.


This view of capitalism being a moral system is certainly not one that is propagated in the mainstream popular culture, where a populist refrain is “People before profits,” and the “bad guy” is portrayed as a businessman twice as much as any other occupation. As if profits and social responsibility are mutually exclusive. They are not.

This view is pernicious and completely out of touch with human behavior. In fact, given the realities of free-market exchanges—where both parties are better off after the exchange—profits are actually an indicator of social value created. Those who believe that earning a profit is morally neutral rather than a morally superior way for a corporation to discharge its responsibility should be asked if they believe deliberately running losses is ethical—particularly if it is with someone else’s money?

Episode #241: Lessons Learned From Our Subscription Economy Workshop

In Memory of Ken Baker

In memoriam Ken Baker

Ron’s brother Ken passed away recently. Ed and Ron spent the first few minutes of the show discussing his impact as Ken’s brother.


Lessons from the Subscription Economy Workshop

UPDATE: “From Fighting Fires to Fire Insurance” - These slides from the subscription economy workshop are now available here.

Ed and Ron recently taught their first workshop in Chicago on the Subscription Economy Business Model. The advantages of this model are many, including:

  • Predictable revenue

  • Not selling services, but creating annuities with a lifetime value that far exceeds whatever you paid to acquire them

  • Collective knowledge of your customers, which is a competitive advantage that cannot be duplicated

  • One-to-one marketing

  • Not pricing a product or service, but rather customer transformation and peace of mind

  • You can predict demand and plan capacity more effectively

  • …and it breaks down silos and creates a true “one-firm” model.

So what did Ron and Ed learn from the attendees? What were the most salient points they took away from this workshop? There are lots of great points in the recorded show audio that you can use and frame for your own business.

On a related note…

Ron will be teaching a Subscription CPE course the CAL CPA Education Foundation on August 8. More information is available here.

A big thank you!!!

TSOE Superfan, Hector Garcia, recorded a great video with Ed and Ron. It’s quick and full of information. Check it out here.

Business For Good?

Learn about B1G1 in about 3 minutes. Check this video out. Then take a deeper dive into the program with these slides.  

Finally…

Some of you may have heard Ed reference his tooth extraction. Well, he’s not going to be able to live this picture down.

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