Adventure of Strategy

The Resource-based View of corporate strategy dictates that a firm's basis for competitive advantage lies in the way that it applies the unique bundle of valuable resources available to it. In this case, one person's strategy for getting from "A" to "B" appears to have included a somewhat unusual resource ..... a garden hose. (Photo taken in a parking lot in South Africa.)

If you are at all interested in what is happening right now with value pricing of legal services / alternative fee arrangements then please do join me and my friends Pat Lamb and Jordan Furlong for a webinar on this topic on 18 March.

Who says British lawyers are a dour lot? Not true! In this video, now out on YouTube, an all-star cast from law firm Macfarlanes show that they can do far more than strut their top tier tax and finance stuff, as they bring down the house at Koko night club in London at at their annual charity cabaret night. Good for Charles Martin and his team! It looks like The Lawbreakers at Wilsons may have some competition as to who "rocks" more :-)

Hat-tip to RollOnFriday.

I'm getting a little flak from some of my more pessimistic friends at this comment that I made a few days ago in my post on the WEF 2010 annual meeting in Davos:

"While the possible imminent economic collapse of Greece is of intense interest to Germany and others who will have to bail the nation out to preserve the Euro, it is unlikely to be more than a transient blip on the radar of global affairs."

Well ..... Morgan Stanley have just joined others that appear to agree with me (see their post A European Slowdown Would Only Nick the US.)  Short term gyrations in the markets do not constitute an unraveling of the western way of life.  The Forbes article on the Global Debt Bomb (alluded to by my friends) is a worthwhile read but has a somewhat different focus.  I fully buy the assertion that the pain of recovery will not be felt until interest rates start to increase (as they most certainly will as the mountain of debt that has been amassed starts having to be repaid at exactly the same time as demand for spending on healthcare and social security increases.)  Then, as the Forbes article points out, "the taxpayer will have the devil to pay."

BUT .... I hold firmly to my view that in times of radical change and discomfort such as we are experiencing, opportunities abound for them that can maintain acuity and optimism.  What is required is a clear strategic perspective so that the right opportunities are seized and the wrong (superficially equally attractive) opportunities let go.  It is important, in stormy seas, to focus one's attention on the navigation instruments and steering the ship; not the size of the waves, the intensity of the wind or why life is so unfair that there should be a storm in the first place.

Apologies if some of my blog readers find this post a bit obtuse.  Those at whom it is aimed know who they are and I thought the topic was of wide enough interest and strategic importance to warrant airing publicly (but with no reference to the identity of those concerned, of course.)

Courtesy of Add Letters; hat-tip to Verasage.

My friend and colleague Jordan Furlong has posted a piece on his blog titled The new rules of pricing, that is well worth a read. I have posted the comment below in response. This is an important topic and one on which it is well worth getting a discussion going. If you'd like to add to it, please would you click the link to Jordan's blog and do so there by also posting a comment / response?

I’ve just finished reading Nobel Prize laureate Joseph Stiglitz’s new book Freefall: America, Free Markets, and the Sinking of the World Economy, which has been an educating albeit somewhat disconcerting experience. A proponent of New Keynesian Economics, Stiglitz joins the long, long queue of people who over the years have pointed out the dangers of compensation systems that over-emphasize production, in particular with stock options: 

“In many sectors where “performance pay” had been tried,” Stiglitz writes, “it was abandoned long ago. If workers are paid on the basis of a piece-rate and they have any discretion – which they almost always do – they produce the shoddiest products they can get away with. After all, they are paid on the basis of quantity, not quality.  [my underlining] This phenomenon occurred throughout the financial chain" [in the disaster that befell global financial markets in 2007-2010.] pp 151-152

It is not too many years ago that associates in one of the larger offices of a premier global law firm drafted a memo to their partners, that found its way into the press, in which they complained that their extremely high billable hour targets may have caused clients to be double-billed and otherwise overcharged. This firm found itself in the spotlight not because the situation was unique but because it was a memo from within that firm that was leaked and many a managing partner in other firms no doubt looked on aghast and thought to themselves “there but for the grace of God go I ….”

The fact is that very high salaries to newly minted attorneys (in some cases salaries higher than those earned in other professions after decades of experience) coupled with “money in must exceed money out” coupled with client intolerance for paying high rates for inexperienced lawyers and also the rapid commoditization of many legal services and so pressure on fees generally …. is a very toxic mix. Nor is the problem restricted to the ranks of the newly minted.

The annual World Economic Forum Annual Meeting in Davos, Switzerland has come and gone again for 2010. Unsurprisingly, it was not the happiest of events this year. The global financial crisis proved to be a popular carcass on which to feed. As usual in such global networking efforts, individual national interests trounced actually finding long-term global solutions, so there was not much progress on that front. There are a few conclusions that can be drawn from the proceedings, though, that would be of interest to leaders of law firms and many others:

After a far-too-long hiatus, I'm delighted to announce that Edge International has just published another edition of its journal, Edge International Review. Personally, I think it is the best that we have ever produced and I do hope that you like the new format and style.

To download high resolution PDFs of the individual articles or of the whole edition from our website, please click here.

If you are on a slower internet connection and would prefer a smaller (1.6MB) but regrettably lower resolution version, click here.

Feedback, as always, is MOST welcome!

The crux of the billable hour debate really seems to lie primarily in one very basic conundrum. That is: how else to accurately and sensibly value the output for a wide diversity of legal services, other than "by the hour," with anything like the same ease of applicability. It seems almost sacrilegious to ask the question .... but this by no means the first time that the dilemma has arisen about sensible metrics to measure performance in the production of diverse products or services.

In the erstwhile Soviet Union, where factories were state controlled and performance was measured in terms of output rather than profitability, similar problems emerged. When the product was simple and homogeneous (tons of iron refined; kilowatt-hours of electricity produced, for instance,) the issue was relatively straightforward.  When a wide range of products or services were involved, though, output either had to be defined in very specific terms for each and every item individually, or it had to be defined in general terms. In professional services, where the nature and range of the service being delivered cannot really be accurately defined until it is actually delivered, the availability of the former option often falls away. Defining output in general terms in the case of professional services, on the other hand, is well known. This is precisely what "billing by the hour" constitutes. The problem is: it was precisely where a general and often somewhat arbitrary measure of value was used that problems emerged for the Soviets, much as they do in law firms today.

“Whenever orders are given in units of weight, managers find it easiest to fulfill their output plan by making goods unnecessarily heavy. Thus, writing paper or roofing materials become too thick, screws and bolts are manufactured predominantly in larger sizes. The Soviet humor magazine Krokodil once carried a cartoon, showing a nail factory which had fulfilled its output plan by producing one single nail, the size of the plant, suspended from the ceiling. To give the orders in square meters of writing paper or in millions of nails would have the opposite, equally undesirable, effect, as paper would then be too thin or nails available in smaller sizes only."

Shaffer, Harry G. 1963. "A New Incentive for Soviet Managers." Russian Review, Vol. 22, No. 4 (October): pp. 412. (Thanks to Dr Michael Perelman at California State University for pointing me to this reference.)

I wonder if the current wave of enthusiasm for alternative fee arrangements and value pricing (which I enthusiastically endorse and with which I join) is going to achieve what the Soviets could not, and come out with usable measures of value for all of the wide range of diverse services that law firms deliver to their clients, in ways that make economic sense for both buyer and seller and are easy to apply. Hopefully it will ....

What was Cinderella’s slipper made of?

As just about every person who grew up on European fairy tales would know, the answer would be “glass.” But .... as Pascal Costantini, managing director in Deutsche Bank’s Global Market Research, points out in my current bedside reading Cash Return on Capital Invested: Ten Years of Investment Analysis with the CROCI Economic Profit Model (Butterworth-Heineman, 2006, and yes, my wife thinks I’m weird too :-) …. they would be wrong.

Ever played that game of comparing notes with friends about which person living or dead you'd like most to meet / spend time with? With me, that question has a really quick answer. It's Nelson Mandela. If you intend looking for me tomorrow evening, don't bother .... I'll be at the cinema :-)

My “aeroplane reading” this trip has been David M. Smick’s “The World is Curved.” Bill Clinton has called it one of the top three books on the financial crisis. Alan Greenspan has called it “an essential read for those who wish to understand the workings, politics and distresses of the global financial system.” Others endorsing the book are a veritable who’s-who of international finance.

The book outlines how the crisis of 2007 – 2009 unfolded both generally and, in quite specific and easily understood terms, exactly what went wrong in 2008 and how/why it might recur. He points out that the actual quantum of sub-prime debt was quite small, relative to global capital pools. (A mere $200 billion in a global economy worth several hundred trillion dollars.) The problem was the lack of knowledge of who owned the toxic assets and the consequent breakdown in trust. He stops just short of actually predicting that we will see a repeat performance in due course in the Far East, given the ballooning number of non-performing loans and far more opaque banking practices in China.

The Big Picture:  A VERY COOL, 165 second summary of what lies ahead for the legal profession by our friends at Beaton Consulting in Australia. Adobe Flash (free download) required.

Are YOU ready for the future?

I'm blogging from a Starbucks near Embankment station in cold, windy and somewhat rainy London today.

What do you do when knowledge that you have been selling becomes publicly available .... for free? Another milestone along this trend line surfaces today with the launch of a free legal search service engine from Google. From the Google blog:

"Starting today, we're enabling people everywhere to find and read full text legal opinions from U.S. federal and state district, appellate and supreme courts using Google Scholar."

More evidence that in the future ... the near future ... law firms that are relying on simply selling knowledge are going to be in for a tough time. Clients will buy deep, thoughtful judgment and business advice from their lawyers, but not simple repackaged knowledge.