I wonder if you’ll allow me a few moments for some experimental thinking — to explore with you an idea: what is the price of profit? (it may not be in the way you’re thinking.)
In a previous post, I ruminated on a different way to view what CPA firms do: we sell access to emotional, intellectual, and creative capacity. What this means to me is that we have care, smarts, and the ability to imagine, and that’s truly what our customers want from us. This is how we help them. These are not unlimited resources, however. We have only so much emotional capacity. You know what I mean if you’ve ever had that morning customer situation that completely zaps your energy for the rest of the day. We have only so much intellectual capacity. Has anyone out there been able to keep up with changes in all the dimensions of accounting, much less the other things we have to know to run a business? And we have only so much creativity capacity. The juice it takes to rollout new products, or help customers imagine solutions to their situations, can only run so long before it needs to be replenished.
From a business model standpoint, our goal is to optimize the long-term yield on this emotional, intellectual, and creative capacity.
But we generally don’t have this type of “yield” mindset. And we usually don’t have a way to judge yield or keep it in the forefront of our minds.
Utilization and realization are perhaps the closest we may come. In my perspective, though, they are unidimensional — the time dimension. Which in the knowledge and creative economies, is not the most important dimension.
Of course there’s “Profit,” the “Revenues-less-Expense” number. But we’ve got no way to judge profit; no way to know “the price of profit.” It’s a context-less number, disconnected from any outside theory or judgement. How much did that profit “cost us”?
One measure I’ve seen is to take Revenues divided by Compensation. This is a little bit of a yield calculation, and it gives us some insight. Its a dollars-to-dollars comparison, using the same unit of measurement on the top and bottom. A related measure sometimes seen in the technology arena is Profit per Capita. Here we have a dollars-to-persons comparison, and perhaps it gives a little deeper insight.
Over the last year and a half I’ve been playing with a measure called Value Created — basically, Revenues less External Operating Costs. Those costs don’t include Team Compensation, because its intent is to see how much value we as a team created internally together. And a corresponding yield measurement could be Value Created per Capita. To me, this might be cleaner than Profit per Capita, because Profit can get muddied by other items.
Recently I attended the bi-annual VeraSage Symposium, where VeraSage Fellow Tim Williams shared how Agile principles were being adapted to the work that agencies do in the creative industry. One way is that agencies assign “story points” to a customer project to reflect the degree of difficulty, people interdependence, and duration of the project. It’s an attempt to acknowledge the ambiguousness of projects and give them more dimensionality, instead of planning just based on hours. Sometimes they even give a simple Small, Medium, Large, Xtra-Large rating, just like shirt sizes.
This got me thinking down the lines of intellectual capital, and attention. I think the economics of knowledge/creative businesses is based on the application of human attention. What if we estimated the “attention points” of various parts of our work? Now we can calculate a yield, based on Value Created per Attention Point. It’s a dollars-to-intellectual capital comparison. Now we have a judgement, and can get, albeit imprecise, an idea of the “price of profit.” We can know how much that profit cost us.
All sorts of implications and questions can now flow from this insight: The quintessential one for entrepreneurs: should we be arranging our resources differently? I call this the opportunity loss analysis. It also helps us evaluate our pricing effectiveness: a lower return could indicate a pricing deficiency. Or it could be tied to a need for product innovation. Conceivably, we could even turn around and calculate Attention Points per Capita, giving us a rough estimate of our team’s intellectual capital capacity.
So the agrarian economy has yield per acre. The industrial economy has return on invested capital. The labor economy has rate per hour. And the knowledge/creative economy has return on intellectual capital.
Adrian G. Simmons is a CPA innovating ways to put money in its place. He is Chief Creative Designer of his firm, Elements CPA, LLC where he works with the team to help their customers become financially strong, so they can focus on what truly matters in life. And he’s also a Practicing Fellow with the VeraSage Institute (the revolutionary think tank for professional knowledge firms), and Director of the Thriveal Accounting Laboratory (helping to accelerate the adoption of today’s innovations, and contribute to the imagining of tomorrow’s).