Learn more about How Time Has No Value: Why Value-Based Pricing Is Better Than the Billable Hour
Carl: Welcome to the Connected Enterprise podcast, where our guests discuss how they stay connected and what's important in their business worlds.
I'm your host, Carl Lewis from Vision 33, and my guest is Ron Baker, founder of the VeraSage Institute, co-host of the Soul of Enterprise podcast on Voice of America Radio, and author of seven books.
Ron, it's a privilege to have you on the podcast. Please tell us about yourself, your background, and your daily work.
Ron: Thanks, Carl. I'm thrilled to be here. I’m a recovering CPA. I started in 1984, after I graduated with a big eight accounting firm in San Francisco. I stayed there for two and a half years before opening my own accounting firm.
I quickly learned that the primary way accountants price their services – the billable hour – is a terrible customer experience, so I set out in 1988 to revise that experience and offer fixed pricing, which became value pricing. After I successfully implemented it, I wrote about it and started teaching about it in 1994. I eventually wrote seven books, which put me on the international map.
Today I consult with professional firms and advertising agencies – really, anyone who primarily bills by the hour – and help them change their business model to one that creates and captures value.
Carl: Do you see this concept of moving away from the billable hour to a more value-based consulting company as a trend in the industry?
Ron: It's an enormous trend. The Professional Pricing Society in Atlanta, Georgia, which certifies professional pricers, began in the mid-1980s. I'm a faculty member for them, but they moved the pricing function into the C-suite in a lot of corporations in America and around the world.
In large companies, pricing is very important. You usually find it in the C-suite, but smaller professional firms seem stuck in the hundred-year mindset of the billable hour. But it’s slowly changing, and a lot of firms have adopted it. So yes, it's a massive trend across all professional sectors.
Carl: You mentioned the billable hour model is horrible for customers. Tell us about the experience of the value-based pricing model for the customer and how they respond.
Ron: Customers love it. Can you think of anything you buy, whether it's B2C or B2B, where you don't know the price before you buy it? That’s the problem with billable hours – customers never know the price. And after the fact is a rotten time to find out your customer doesn’t like the price. If you've done the work and used the resources, but the customer doesn't like the price, you're stuck. You're stuck with a write-off and an unhappy customer who defects and tells 40 other people what a crappy experience they had.
We decided to be like every other business on the planet and offer a fixed price. The customers love it. It makes so much sense. Most of us pick a fixed-rate mortgage over a variable-rate mortgage because we like certainty and predictability and are willing to pay a premium for that. That's what makes the billable hour so flawed: it offers no certainty or predictability. It puts the entire risk of the transaction on customers and basically says, "The dumber and slower your professional is, the more you'll pay them."
Carl: I can't imagine going into a Burger King and negotiating the price of my Whopper.
Ron: Or them saying, "This is $60 an hour. It depends on how long it takes the fry cook to make it. Sometimes we have problems with the equipment, or the French fries, or ..." It'd be like an airline charging you $4 a minute. It's ludicrous, but we have the mindset that it's the only way – and it's not. Companies like Bain and McKinsey have eliminated both billable hours and time sheets.
Carl: I can see where this experience is very attractive to customers. What kind of challenges do companies making the transition to value-based pricing face?
Ron: It's an enormous challenge. It's not just tweaking your pricing; it's changing your business model. And two things happen when a company changes its business model. You can look throughout commercial history on this, no matter what the business – Craigslist, Airbnb, eBay, the self-adhesive postage stamp, pizza by the slice, etc. Any time a business model changes, two things happen.
One, pricing changes. With Uber, it was surge pricing. With music, it was paying $20 for a CD to paying $1 per song on iTunes. Now, we subscribe with Spotify and other services. That's a pricing model change. The second thing that changes – and this is less recognized but just as critical – is a company’s dashboard. I guarantee Uber doesn’t look at the same metrics as taxi companies. Airbnb has different metrics than Marriott.
If a firm implements value pricing, it must change its mindset. Rate per hour, realization, utilization, and similar metrics are 100 years old and need to be thrown out. There's no right way to do the wrong thing. Those are the wrong measurements. It's like plunging a ruler in the oven to determine its temperature. It's the wrong measuring device.
Carl: I’ll share that with my wife next time we're cooking a turkey and see what she says. I don't think it will go over well!
You got into this a long time ago. Around 1984. And it sounds like it was a 10-year journey before you hit the road at full speed. Is that true?
Ron: Close. It started in 1988, and we took a few years to perfect it in our firm. Then I started teaching and writing books in '94. So yes, I've been working in this space for a long time. I’ve helped literally thousands of firms across the world make this conversion.
Carl: How does it affect employees at companies that decide to do this?
Ron: Employees love it because the billable hour is stressful. It splits your life. The firm is telling its knowledge workers, "You're either billable or you're non-billable. And when you're non-billable, we want you to feel guilty." When you take time off for a sick child or to go to their baseball game, you're thinking, "I should be billing time. I should be billing time." But time has no value. People say it's our most precious resource, but it's not. It's the outcomes we produce for customers that have value, not the time it takes us.
Time is the wrong thing to focus on. I explain it this way: it's like when someone has a baby. We don't care about the labor pains; we want to see the baby. But when you look at the billable hour, not only do we measure the labor pains, we bill them in six-minute contractions. And that takes our attention away from the baby, which is what the customer cares about.
Carl: It's like the father who didn't do a good job raising his children. He was there, but he was always on the couch watching TV. No value in that, but he was present.
Ron: Yes. I can spend time writing books, but if they don’t sell well, I can’t run around the world yelling, "Hey! I spent hundreds of hours on this. You owe me a living. Buy my book!" That's insane.
Carl: You have value-based pricing 1.0. It's a 30-year journey you've been on.
Carl: What's the next big thing?
Ron: Value pricing 2.0, especially for professional firms. Also known as the subscription model.
Look at models like Amazon Prime or direct primary care medicine where you subscribe to a doctor. Rather than selling services one-off – break, fix, break, fix, sell services, sell scope of work, sell this, sell that – you subscribe. Your customers subscribe to the company. Then you do whatever they need for that subscription.
I think it’s a much better model. It's a more valuable business to sell because revenue is predictable, and it's easier to scale. It blows up everything I've been teaching and writing about for the last 30 years, but I think it's the wave of the future.
Carl: The software-as-a-service model has affected the IT world and is throwing revenue projections and many things upside down for companies and giving them real challenges to blast through the change.
Carl: It hasn't been as fast as some people anticipated, at least in parts of the industry, but it has been a challenge.
Ron: I know Adobe did it and Microsoft has handled the transitions well.
Here’s another example: the Porsche Passport program. You can subscribe to a Porsche for $3,000 a month in some cities. And they pay for everything! Well, except your gas. But that's it – they pay insurance, registration, taxes, etc. You can trade between eight or ten models, anytime you want. You can say, "I’m taking friends to a wine tasting. I need an SUV." They'll white glove one out and pick up the other. There's no limit on miles. People ask, “How is it different from buying or leasing?” It’s different because it's not tied to a car. By subscribing to Porsche, you become a citizen of Porsche, which is why I think they called it the Porsche Passport program. Think about how much car companies spend to get you to buy another one of their cars. But when you subscribe to Porsche, what will you drive for the rest of your life? A Porsche.
I'd much rather have customers subscribe to my firm than just buy a glop of services every year.
Carl: I like that idea. When I was a young father, my oldest asked me what the number one thing I would like in life just for me. And I said a Porsche, and she promised to buy me one. Now I’ll tell her she can just subscribe to one for me.
Ron: It's not in your city yet. You’d have to move to San Diego, Las Vegas, Phoenix, Atlanta, or Toronto. But it's expanding. You can go to the Porsche Passport website and sign up for notifications when it's coming to your city.
Carl: I may have to check that out.
Ron: And analysts predict that over half of cars will be subscribed to by 2023. A company in Australia recently started offering subscriptions for cars. This is a macroeconomic trend. It's not just Amazon. The most valuable businesses are subscription-based. It's been growing more than a hundred percent for the last five years, according to McKinsey. It's a massive change.
Carl: There's a lot of change happening in business these days. One thing I always ask our guests is how, in their careers, communication has changed and what they’re considering regarding ways to communicate with their clientele and supply chains. Because if anything out there doesn't stand still, it’s how we communicate today versus yesterday.
How is most of your business communication done, and do you see it changing?
Ron: I have future glee about all this change because I literally couldn't do my job if I didn't have access to some of these platforms, whether it’s Zoom, GoToMeeting, or Teams. I do a lot of webinars, emails, and teleconferencing. I still use the telephone, although a lot less.
But with all this technology, high touch is important. Airports have never been busier; flights have never been more packed. And it’s because business is conducted belly button to belly button. If you want to develop a relationship, you have to get on a plane and be physically present. Not always; all these technologies have reduced the need for that. But I still do a lot of personal interactions around the world, and I would never want to give that up. Relating to other humans is part of the joy of being in business. I wouldn't want to be sequestered in a room looking at a pixelated version of somebody. If you want to strengthen and deepen a relationship, you have to meet them face to face.
Carl: I agree. I’ve always been strong in interpersonal communication, and I miss being with people one on one/face to face. But here we are, using one of those tools today. I'm reaching more people, but I don't have the same reward as that interpersonal touch. I understand what you're saying.
Ron: Innovative companies like Google or Apple don't do the whole virtual thing. They want their people there. They want them meeting and running into each other in the hallways. Their offices are designed for that because there's something to that innovative spark of collaboration and spontaneous conversations. You don’t get that if you're more virtual. So, I think there's no replacement for physicality, even with all these tools we have at our disposal.
Carl: Absolutely. Your background is as a CPA, so you were a third party working with other companies. I've worked in consulting as a third party, and even as a consultant company we had to work with other third parties who come in to lend their expertise in the areas we've been discussing.
Every company is challenged with working with outside folks. What do you think are the most challenging things, and what things can they do to make those relationships better?
Ron: That's a great question because I am a third party. I spend my life as a third party, as an outsider, peering into organizations.
One important thing is setting clear expectations. What are the outcomes? Don't focus on the inputs, time span, or labor pains. Focus on the baby. What outcomes do you want to report? Do you want observations? Do you want them to provide input at meetings? If you make those expectations clear, you won’t have to micromanage.
When you tell people what you expect, you'll be amazed at their level of creativity and ingenuity, and it doesn't matter how long they take. If they can do it in an hour, they're geniuses. And it's probably worth more than if they spent 200 hours on it.
Carl: Absolutely. That's a great recommendation. Focus on the outcomes. I like that. That would clarify a lot of third-party relationships.
Ron: As a follow up, I'm a big believer in after-action reviews. The military does them. They're phenomenal. They’re the best learning tool ever invented aside from books, and it’s just four questions you ask after an engagement, project, milestone, or whatever. What were the objectives? What actually happened? What were the positives and negatives because of that gap? How can we do better next time?
If you spend an hour doing that with the project team after the fact, you'll capture lessons and improve future performance. The tools organizations use now to improve future performance – like time sheets – must go away because they don't improve future performance. After-action reviews improve future performance. And sad to say, most companies don't do them.
Carl: Hospitals do something like that. It's a little dark for some folks, but they call it a mortality and morbidity conference. Every time someone dies, whether from disease, a chronic situation, or surgery that doesn't go as planned, they meet. One person presents, and they go over this was the intention, this went wrong, and here’s how to prevent it next time.
I think it’s a great practice and not done often enough. People think they're doing it in real-time, but when you schedule it, it has a significant benefit.
Ron: People do it ad hoc. They talk about it around the water cooler or when they go to lunch – and there is benefit to that. But it's not formalized, and they're not capturing knowledge that can be disseminated throughout the organization. Imagine if a new hire could sit down and listen to or read after-action reviews for projects like the ones they’ll work on. They'd hit the ground running, being more efficient and effective right out of the gate.
Carl: I agree. It would be a great educational tool for folks just recruited into your organization.
This data is important to capture because, as you mentioned, the measurements we traditionally use in time-based organizations are the wrong things to measure. The things we were just talking about seem like far better measurements of our growth and experiences.
Are companies automating the capture of that data so they can create new measurements?
Ron: This is a tough issue because this area is dominated by MBA, finance, and CPA types with a mentality of “what you can measure, you can manage.” I used to believe this with every fiber of my being. Now I think it's the most dangerous thing in the world. Just because we can measure something does not mean we can manage it! How do you measure the effectiveness of management? Good luck with that.
The problem with metrics and measurements is that they crowd out judgment, wisdom, and experience. Also, it’s dangerous to rely on one number, no matter what it is. In Vietnam, we looked at the kill ratio. Robert McNamara, the Secretary of Defense, was obsessed with that number every day, but it was meaningless. Yeah, we could increase that number, but for every person we killed, we created five new Vietcong members. It crowded out any judgment or on-the-ground knowledge.
Metrics are an efficiency ratio or a mindless measurement, whereas effectiveness is judgment. Effectiveness means doing the right thing. I'd much rather have an effective heart surgeon than an efficient one.
Carl: When I was looking for a physician to do my hip replacement, I wanted a combination of bedside manner and skill. One without the other just didn't ring the bell for me. I hear what you're saying.
Ron: Bedside manner is not efficient. I’m not against being efficient with things. Great technology, the latest-and-greatest iPhone, iPad, whatever. I love the Dreamliner, for instance, that we can be efficient with things all day.
But I've never heard anybody describe their marriage as efficient. It would scare me if they did. We have to be effective with people, not efficient.
Carl: I do surveys for the company with customers that go live on a new ERP, and some of it includes those measurements. But the much more valuable part of that meeting is the stories the customer tells us – the human part, the outcomes.
It's hard to measure those things, but I think it’s essential to understanding the overall process and what's beneficial from teaching, learning, and improvement perspectives.
Ron: Exactly. A lot of metrics offer a false sense of security, precision, and knowledge. I blame a lot on MBA and accounting education. Accountants would rather be precisely wrong rather than approximately right. I think that's dangerous; I'd much rather be approximately right than precisely wrong.
Carl: Early in my education, I knew I could be an accountant or anything else, and I chose anything else. It led me down the theology route for a while, but I eventually transitioned into the IT world. The people side of that equation has always been the most valuable. The rest of it was about credibility, but I learned that the people side gave me more credibility with the customer than anything else I had.
Ron: That's fantastic. I have this theory we should close all the business schools and move everything over to humanities because this is all human interaction. That's what we need to focus on.
Carl: Very true, my friend.
Well, Ron, I really appreciate you joining us today. Your perspective is unique, and you are very articulate about it and have much experienced to draw from in the real world. Thanks for joining us.
And as I mentioned, my goal is to keep these short and to the point. And we were, and I'm grateful you helped me do that.
Carl: Until next time, everybody please stay connected.