In Measure What Matters To Customers, Ron Baker challenges several common notions held by professional service firms including “costs drive prices” and “productivity can be measured by timesheets”. Too many firms, Baker says, are focused on optimizing production and lowering costs to the detriment of effectively serving their customers.
To be successful in today’s information economy, executives must shift their focus to ensuring the success of customers. In this new model, executives must increase the firm’s intellectual capital, price, and effectiveness. Baker advocates developing firm-wide Key Predictive Indicators–forward looking predictors of customer success, not backwards looking performance measures. If you are helping your customers be successful, it’s likely you will be as well. KPIs should be generated by hypothesis and periodically tested. If a KPI isn’t actually predicting your firm’s outcomes, go back to the whiteboard.
Baker presents Gordon Bethune’s transformation of Continental Airlines as an example of the new business model. In the 90’s, Continental was a budget airline so cheap nobody wanted to fly on it. It ranked last in all performance measures for airlines. All efforts had been made to reduce the cost per seat mile traveled. Bethune shifted the focus to customer metrics: on-time arrivals, luggage lost, and complaints received. The airline quickly won more customer satisfaction awards than any other airline in the world and the stock priced increased 25X.
Baker also discusses the rise of the intellectual worker. He regards the timesheet as a remnant of Taylorism. Knowledge workers are not like workers of the industrial revolution. They are paid for their ideas, not hours worked. Setting billable hour quotas is demoralizing. Knowledge workers should be, at least in part, compensated for the results they produce in the form of bonuses or stock options.
Without timesheets, how should services be billed for? Simple. Set the price of the service relative to its value to the customer. With a price set upfront, the firm can tailor its services’s cost appropriately. Decoupling the cost from hours works can lead to innovation within the company. By taking on the risk of a fixed price contract, the firm gains the ability to earn far more than margin on labor.*
I recommend this book to every professional services manager. Baker provides insight into where some of our widely held beliefs originated. I’m confident following his advice will help other’s find a profitable future serving others.
*For more on this topic, see his book Implementing Value Pricing.