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More Praise for Implementing Value Pricing: A RadicalBusinessModelforProfessionalFirms

“This is THE book I have been hoping Baker would write for the last 10 years. Value pricing as a concept is quite well known but not very well understood. Despite pricing being the most important determinant of enterprise profit it is given relatively little attention in the literature compared to other elements of the so-called marketing mix. At last we have a book that nicely blends elegant theory with a robust practical solution for implementing VP. I consider this book to be required reading for anyone interested in developing a business model that is based on the simple, but timehonored, idea that we should be paid what we’re worth. For that to happen we need to focus on creating more value AND then implementing a system for capturing our fair share of that value. This book answers both these issues.”

—Ric Payne, Chairman of the Principa Group of Companies, www.principa.net

“Implementing Value Pricing not only produces more evidence that the historical cost-based system of pricing professional services is wrong-headed, Ron Baker shows the way to execute win/win pricing that both customers and professional firms will value.”

—David G. Littlefield, President and CEO, Littlefield Brand Development, www.littlefield.us

“As a reader of all of Ron Baker’s previous works, I can state unequivocally that this is by far his most thorough and enjoyable read to date. He not only builds upon the ideas about which he has previously written, he integrates them into a new and fully fleshed-out business model. If his Professional’sGuidetoValuePricingwas the Old Testament, ImplementingValuePricingwould be the New.”

—Ed Kless, Senior Director, Partner Development and Strategy, Sage

“Once again, Ron’s work turned an endless flight into an intense reading experience. Unease about the task of moving beyond the billable hour was mixed with excitement about the tools, experiences, and intellectual ammunition that Ron provides to make it happen. It is far from certain that effort-based pricing will disappear, but it is more likely because of this book. Ron has not just shown the way; he has paved the path. Now, we shall walk or we will fail—our profession, our purpose, and, ultimately, our place in society.”

—Friedrich Blase, Director of Strategic Initiatives, Holland & Knight

“I wish I had been able to access this book five years ago when I started moving my business from the ‘old model’ to pricing up front. For those accountants and lawyers out there seeking a ‘how-to’ on design and implementation of value pricing, this is the bible. This book should be required reading for any person who owns, runs, manages, or works in a professional knowledge business. What they do with it then comes down to courage. Be courageous and learn from Ron’s experience. A brilliant read and seminal text.”

—Matthew Tol, FCA, Principal, mta optima, www.mtaoptima.com.au

“Every professional must read this book. Be brave and trust that Ron Baker knows what he’s talking about. You’ll find comfort in reading the amazing real-life examples of the innovators that took the leap. You’ll want to slap yourself for not believing in change sooner!”

—Brandy Amidon, CPA, Brains On Fire, Greenville, South Carolina

“Ron Baker is already regarded by most professionals who understand the impending implosion of a time billing business model as the pricing guru. In Implementing Value Pricing, Baker manages to further cement his reputation by comprehensively answering the ‘elephant in the room’

Implementing Value Pricing

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LibraryofCongressCataloging-in-Publication Data:

Baker, Ronald J.

Implementing value pricing : a radical business model for professional firms Ronald J. Baker.

p. cm. — (Wiley professional advisory services ; 8)

Includes bibliographical references and index.

ISBN 978-0-470-58461-3 (hardback); ISBN 978-0-47092955-1 (ebk); ISBN 978-0-470-92956-8 (ebk); ISBN 978-0470-92957-5 (ebk)

1. Pricing. 2. Value. 3. Fairness. 4. Professional corporations—Prices. I. Title. HF5416.5.B34 2010 658.8′16—dc22

Tomymotherandfather,forgeneticallyencodingmeto challengetheconventionalwisdom,andprovidingthemost immeasurableofallblessings:theirloveandunwavering supportineverythingIdo.

“At every crossway on the road that leads to the future each progressive spirit is opposed by a thousand men appointed to guard the past.”

—MauriceMaeterlinck(1862–1949),BelgianNobelLaureate inliterature,1911

“It does not take a majority to prevail, but rather an irate, tireless minority keen on setting brushfires of freedom in the minds of men.”

—SamuelAdams

Foreword

This book should come with a warning label: Reading this book may cause a Ron Baker Headache.

Now, before you put the book down, let me explain: I’m not talking about a headache in a bad, migraine-y kind of way. Think of it more like what you get when you have an ice cream on a hot day, or drink a milkshake too fast. When you read Ron Baker, and even more so when you talk with him about value pricing, you get a feeling that your head is going to explode because you suddenly have too many thoughts and ideas in it. In other words, it’s a good kind of headache. A Ron Baker Headache.

I run a Boston law firm called Shepherd Law Group (shepherdlawgroup.com), which helps companies make easier workplaces. When employers get into situations where they need a lawyer, they often feel like they’re losing control. My job as a lawyer is to help them get some of that control back. But the problem is that most of the time, dealing with lawyers makes the employers feel like they’re losing even more control. This is because lawyers never tell them how much it’s all going to cost, so the employers don’t know what they’re getting into.

The main cause of this problem is, of course, hourly billing. So when I founded my firm a dozen years ago, I started looking into how I could kill the billable hour and get rid of timesheets. I read everything I could find on the topic, which was of little use. There was no one I could consult to learn how to fix prices in an employment-litigation law firm.

And then I found Ron.

The first Ron Baker book I came across was TheFirmofthe Future,which he coauthored with Paul Dunn. And I promptly got my first Ron Baker Headache. In a good way. My head

filled up with thoughts and ideas and questions. I was no longer alone in my quest to make a better law firm. I found someone who shared the ideas I had stumbled upon, but who then took them much further than I ever could.

I tore through Ron’s other books (more headaches!), and then a few years ago, I had the opportunity to meet Ron. From that first conversation over dinner, through our many chats over the past couple of years, I’ve always felt, “Here is someone who just plain thinks differently.” I’ve said it many times: Ron Baker is the smartest person I’ve ever spoken with, in any industry or walk of life.

How fortunate we are then that Ron has chosen to use that powerful intellect to make the world of professional firms a better place, both for professionals and for customers. And as you will see in this book, his intellect is completely accessible. Ron is equally comfortable quoting F. A. Hayek and Homer Simpson.

Thanks in no small part to Ron’s wisdom, my law firm successfully abandoned hourly billing and the tyranny of timesheets. Our profit has risen dramatically as a direct result. But so too has our customers’ value. As you will learn, hourly billing creates great waste and inefficiency. With value pricing, both professionals and customers win. This isn’t just a theory; firms like mine are actually doing it. And trust me: it is better than the old business model that relegates professionals to merely “selling time.”

When Ron asked me to write this foreword, he warned me that as a reader of his other works, I might not learn anything new in this book. As if. For example, I was reviewing Chapter 16 and got to the part where Ron reveals how hourly billing got its start in the legal profession almost a hundred years ago—in 1919. Suddenly I had a new weapon to use in my fight against the billable hour: that it was an antiquated, Industrial Age concept.

This book is the culmination of a personal odyssey for me. In June 1989, I attended a four-day seminar titled “Increasing CPA Firm Profitability.” In the tranquil setting of Lake Tahoe, Nevada, I learned three major strategies on how to increase my CPA firm’s profitability:

1. Raise my hourly billing rate by at least $10.

2. Grade my customers “A,” “B,” and “C,” and fire all the “Cs.”

3. Offer my customers “fixed fee agreements” on all services, with an appropriate “weasel clause” to cover any scope changes.

Inspired, I immediately shared all of these ideas, and more, with my new partner, Justin H. Barnett. We talked about becoming a “winning firm,” the term the instructor used throughout the seminar, which meant, by today’s vernacular, going from good to great. The course provided me with the tools I needed to put some of these ideas into practice immediately. In other words, it taught me howto do it.

What it did not teach me is why I should do it. It was all case studies and examples, but had absolutely no theory. So when I returned to my firm I had a hammer—the tool I needed to implement some of these new concepts—and I started furiously hitting things. I raised my hourly rate but did not simultaneously convince my customers that my value rose commensurately with that increase. I began grading my customers, and ridding the firm of the “Cs,” but it was not until I began researching the ideas behind Total Quality Service that I learned that my customers were not going to get better until I did. Without a solid theoretical foundation of why I was doing these things, I failed miserably.

This is one of the most glaring weaknesses in most business books and management ideas: They are all practice with no theory. Most do little else than propound

platitudes and compose common sense into endless checklists and seven-step programs. Yet, all learning begins with theory. There is nothing as sterile as a fact not illuminated by a theory; we may as well read the telephone book.

Theories are powerful because they seek to do at least one of three things: explain, predict, or prescribe. Yet when one reads a typical business book today, the author will usually begin by saying something to the effect that “this book is not based on some ‘ivory tower,’ theoretical model, but based on practical, real-world experience and examples.”

Beware when you read such a qualifier, because as Dr. W. Edwards Deming used to say, “Without theory, experience has no meaning. No one has questions to ask. Hence without theory, there is no learning. Theory leads to prediction. Without prediction, experience and examples teach nothing” (Deming 1994: 103). In a business environment, whether we admit it or not, we are guided to a large degree by theoretical constructs that have evolved to simplify—and thus explain, predict, or control—our various behaviors. Theories build buildings and bridges, fly airplanes, and put men on the moon. There is nothing more practical than a good theory.

I have tried to avoid this defect by having the theories presented herein drive the ideas, not the other way around. Therefore, the book you are about to read contains more theory than you may be used to if you are a regular reader of business books, or attend business seminars. I make no apologies for this, because there is nothing more practical than a good theory. I wish I had one back in 1989.

About This Book

As Herman Melville wrote in Moby Dick, “To produce a mighty book, you must choose a mighty theme.” There are

chapter is included to discuss each replacement in either Part IV or Part V.

Part V contains a new eight-step model to assist firms in implementing value pricing. One major addition is the inclusion of project management written by VeraSage Institute Senior Fellow, and project management expert, Ed Kless. A new chapter also contains two frameworks for scoping complex engagements, such as litigation, IT installations, and other engagements where the scope is very difficult to define upfront. Developing different options to offer the customer is also presented.

Throughout the book there are several case studies from firms that have implemented the specific ideas and the consequences of doing so.

As with all of my prior books, an extensive bibliography is included to make it easier for those who wish to find the original source discussed in the book, and further their knowledge.

About the Web Site

There are seven Appendixes available for download as a companion to the book, available at www.wiley.com/go/valuepricing (password: baker).

The Appendixes include a summary checklist containing strategies firm leaders need to discuss and implement; strategies with respect to Request for Proposals (RFPs); an Appendix for each of the professional sectors—advertising agencies, CPA, IT, and law firms—containing specific issues, case studies, and checklists for each.

I would encourage you to read the Appendixes outside of your profession, since much pricing skill can be learned and applied from other professional sectors.

Acknowledgments

Someone once wrote that acknowledgments are the equivalent of tipping, but with Monopoly money. I hope those mentioned herein forgive my frugality—but I give my deepest and profound thanks to the following individuals.

Too many economists to mention taught me price theory, in which this book is grounded. The most significant are David Friedman, Steven Landsburg, Deirdre McCloskey, and Mark Skousen. I thank them all for their wisdom.

George Gilder is the most profound thinker I have ever encountered, and his insights of how an economy creates wealth permeate this book. Every century needs an Adam Smith, and Gilder is ours for the twentieth and twenty-first.

The late Peter Drucker deserves special thanks for always focusing on doing the right things, why an organization exists, and knowledge workers, all the while teaching me that business is really a branch of the humanities because you have to deal with real people, not efficient machines.

My mentor Reed Holden continues to teach me pricing skills, and much else. Thank you, Reed, for always supporting my work.

Another mentor is Sheila Kessler, who has imparted much wisdom to me over the years in a calming, yet insightful, manner. Thank you for everything Sheila.

Tom Finneran of the 4A’s has been an indefatigable supporter of our work, as well as having the patience to teach a neophyte about the advertising world. His gracious permission to publish the 4A’s Compensation Dialogue Process will greatly assist any advertising agency—indeed, any professional firm—serious about pricing for value. Thanks Tom.