Adventure of Strategy

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 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 ....

The prospect of non-lawyers being allowed to own businesses that dispense legal services in England & Wales is leading to a comprehensive re-examination of how one values a law firm. I wrote an article on this topic on this blog nearly four years ago in January 2006 (see How Much is a Law Firm Really Worth?) There are a range of others that have also written in this area, varying from those that paint an exuberantly optimistic picture, to the likes of that doyen of law firm strategy and management, Prof Stephen Mayson, who like me takes a FAR more pragmatic and sober view.

The simple fact, according to Stephen in a keynote address to a seminar organized by the Solicitors Regulation Authority recently, is that lawyers are overpaid if one evaluates their compensation together with the return on [financial] capital and the cost of labour. Those that believe that external investors are going to pay them a large cheque for their firm so that they can "waltz off, retire, play golf, go yachting ...." are deluding themselves.

The basis for this is that if one views a business in conventional terms, which is what any sensible external investor should do, then the business needs to :

• Provide a decent return on the financial capital invested relative to alternative investments available (i.e. provide a 'return on capital.')

• Pay the firm's owners a salary comparable to what they would earn elsewhere or, put differently, what it would cost to employ others to deliver the substantive professional services to clients and to manage the firm (i.e. provide a 'return on labour.')

• Provide a return over and above that, as a profit that can be returned to shareholders as a dividend. This is the part that will be of most interest to external investors and in the case of most firms .... it simply isn't there. In calculating net profit, partner/owner return on labour is reckoned at zero. If all the "profit" is required to compensate partners/owners at a level that is competitive in the market, then the real profitability of the firm is .... well .... also zero. At least from the prospective of an external investor.

The really interesting impacts that might result from the Legal Services Act will not be caused by external investors injecting capital into law firms as we know them and understand them. Far more interesting will be if the opportunity for non-lawyer ownership creates entirely new and different business models that (a) provide a decent return on capital AND (b) provide competitive compensation for all senior talent whether owners or not AND IN ADDITION (c) provide a decent return over and above that too. That kind of innovation could easily have a domino effect in legal services across the world, fundamentally transforming the way that legal services are delivered to clients.

One thing is very sure: this will not involve an income model that simply relies on "rate x hours."

HG Wells, the prolific science fiction writer of the early 20th century, once said that in order to write a good science fiction novel, the writer had to limit him/herself to one assumption that defied current convention. In other words, a story could be about either aliens from Mars attacking earth or someone inventing a time machine or an invisible man, but not about more than one at once. Would that strategy was a simple as Wells' recipe for science fiction! Yet people often couch strategic questions in similar, mono-dimensional terms .....

1.  What will the impact of a much faster internet be on the legal profession?

2.  What will the impact of non-lawyer ownership of businesses providing legal services in the UK (will they still be able to be called "law firms?") on the legal profession?

3.  What will the impact of standardization of (especially commercial) legislation across jurisdictional boundaries be on the legal profession?

4.  How will the new dispensations in banking across the world, post recession, impact the legal profession?

The point is that none of the above issues can sensibly be considered except integrally with the others, and a whole lot more besides. That is simply the way life works. Approaching issues independently leads to predictions that are as flawed as accurate representations of the future as stories like "War of the Worlds" or "The Invisible Man." This is difficult, and the processes involved represent a radical departure from the way that law firm strategy has typically been approached.

Some of you may have heard me speak on the future of legal services in the 21st Century. (I have been honored to be invited to address this topic before a wide range of audiences in several countries over the past two to three years.) My material on this subject has now been fundamentally revamped into three interactive half-day sessions, designed specifically to "provoke strategic thought" in your firm about what your market may be like post-recession, and also to provide specific guidelines for dealing with the complexity involved in preparing for that world. If you are a managing partner / executive director (or of a similar title) of a prominent US, Canadian or UK law firm, or we have exchanged business cards, then a document briefly outlining this is on its way to you. If not, and you'd like a copy, please email me and I'll get one to you.

So you work at CitiGroup, Bank of America or one of the other banks that has accepted bailouts. You're a successful middle manager, earning somewhere around $200 - 250k a year including bonus. Your spouse is a successful professional or entrepreneur or something, earning the same. With the TARP bill that Congress has just passed, you will get to keep just 10% of the household income over $250k. In other words, if your spouse earns $250k a year, just 10% of your entire income. A populist rage tax, Henry Blodget calls it.

What would you do? Logic dictates that these banks are going to experience an unprecedented brain drain just as soon as viable alternatives emerge. With a threshold of $1,700 to $2,000 per month after tax to beat, the alternatives do not need to be overly lucrative, either. The sense of injustice that bank employees feel will accelerate this. Where will that leave the bank's commercial viability, with its talent gone? What value then the taxpayer investment in saving it?

AIG executives are being vilified ... even getting death threats. I've not exactly been over-complimentary on this blog about mega-bonuses either, .... but what exactly was AIG to do? Is there any doubt whatsoever that had they not paid out bonuses that were contractually obligatory in terms of their employee agreements, they would have been forced to do so by the courts? The 'escape hatch' would have been to override those bonus obligations in the legislation used to provide the bailout money. That bit apparently got taken out. One can understand why .... the legislators [correctly] recognized the banks' and AIG's ability to retain their talent as being crucial for their return to sustainable profitability; so too then the need to allow them to pay talent packages that are competitive with alternatives in the market. What they did not foresee was the extent of the public rage that would result from rewarding with bonuses the very people who actions are perceived to have caused the crisis. An enigmatic dilemma, indeed!

Would you voluntarily forgo a bonus to which you were contractually obliged? In most cases, I think not .... especially not under current economic circumstances where most people have seen their wealth shrink sharply. Most peoples' reaction would be Darwinian .... "survival of the fittest" .... and take the bonus that is contractually due and even fight for it through the courts if it was withheld.

The point? Crises tend to make people think linearly, as in simple cause and effect. At the most fundamental level, thought and action is driven by the "fight or flight" phenomenon that has one taking the shortest and most effective perceived route to a solution. We're seeing a lot of that in firms, these days, on both sides of the Atlantic. Almost always, fear leads to linear thought which leads to unanticipated consequences. Sometimes, those consequences in themselves cause serious problems; perhaps as, or even more serious (in this case for AIG or the banks) than the original ones.

Beware of knee-jerk "populist rage" reactions in your firm. Laying people off? Read the WSJ post of 5 March titled For the Cost of Just One iPhone, You Too Can Save a Lawyer. What will the unanticipated consequences be when the recession recedes and you find your firm short of talent? Is the cost really worth the (possibly quite modest) benefit? If the carefully considered answer is "yes," then by all means go ahead. If you're focused on this year's profitability and you're planning to think about the future when the future comes, then a different answer is indicated. Look then at the measures that some firms are taking to avoid layoffs (beyond under-performers that should have been laid off long ago and those whose practice areas aren't expected to return to profitability and who cannot / will not "retool.")

Times like these call for action .... sometimes drastic action .... but it is dangerous to take drastic action without thinking hard about the "what if" scenarios that might emerge as a result, and without considering all the solutions rather than just the most superficially apparent. Balancing short term pressures with long term needs is DIFFICULT!!! Treat it with the rigor it deserves and (perhaps self-servingly given that I am a strategy consultant myself,) get external help to improve objectivity.

Hat tip to Tyler Cowen.

Paul Lippe's blog Welcome to the future: the 2011 scenario and the end of leverage in LegalWeek today is well worth a read. Drawing on a conversation on the evolving legal-spend habits of banks, he draws some conclusions that make critical reading for those thinking about their firm's business models once the recession subsides. Which should be every law firm leader, of course!

Here's a "byte" :

"A typical law firm bill in January 2011 will generate the same amount for partner work as it does today, but it will generate half the revenue for associate work. Consider a bill in July 2008 for $1,000,000, representing $450,000 of partner contribution, $500,000 of associate contribution, and $50,000 of 'other'; in January 2011, the bill for an essentially identical project will be $800,000, reflecting $450,000 of partner contribution, $250,000 of associate contribution, and $100,000 of 'other.'

Whether this is accounted for as hourly billing or 'value billing' is not particularly strategic, except that to measure differently will of course incentivise firms to be more thoughtful about how to structure work.

Where will those dollars go?  Four places.

• Clients will just flat out spend less, drive harder bargains, and get more for their money.
• Some work will go to outsourcers, whether onshore or off.
• More work will go to contract lawyers or proto-associates not on any kind of partnership track.
• Some associate time will be replaced by technology."

Given that the modern law firm is built on the premise of leverage, this means that some fundamental rethinking of law firm economics is required, if the slack is not simply to be taken up by partners either earning less or working harder.

Remember David Maister's formula for determining equity partner profits:

So if you can't cut overheads any more (and if you can you probably should) and associate leverage is under pressure, then you have three basic choices left in order to maintain the same level of partner profits:

1.  Sell more hours / work harder

2.  Earn more fees per unit hour worked. Note this does not mean just pushing up the hourly rate. This tactic is sure to meet a predictable response from clients this year, anyway. "Rate" in this formula means the total amount of fees earned divided by the total number of hours worked. It is the actually realized hourly rate. So, this puts discussions about innovative billing practices and ditching the billable hour as a primary billing mechanism "front and centre" in strategy discussions.

3.  Leverage in other ways .... with technology or outsourcing work to cheaper jurisdictions or to subcontractors that you can make a mark-up on but who consume less overhead than salaried employees.

If this is on your radar, and you're well up to speed with determining your options, then kudos to you .... you're thinking strategically and your firm will be the better for it. If you'd like to have a discussion with me about what your options might be, please email me or call me. This is too important to procrastinate.

According to Roll on Friday today, yesterday is a day that "Top 100" British firm DMH Stallard would rather forget. Anybody logging in to their website was greeted not by information on the firm but by the above invitation to purchase rendered pig fat products .... or alternatively place a "back order" for the firm's internet URL. Somebody had apparently neglected to pay the renewal fee and an enterprising entrepreneur had seized the opportunity to register the name themselves. Of course, the firm's web site was the least of the firm's problems with this debacle. Their email traffic both into and out of the firm also ground to a halt, as did the ability to access the firm's systems remotely.

A warning to all of us, lest we be tempted to throw stones, to watch the important little things as closely as the important big things. Happily, the firm's web site has now reverted back to its original format, including news of the award they won last week for their innovative online property portfolio management tool called "DMH Direct."

Post mortems are never pleasant to read but if they specify the maladies that caused death in sufficient detail then sometimes they can be useful for others wishing to avoid the same fate.

Here's a good one from law.com titled "Why Heller Died." Unsurprisingly, it suggests that although the final cause of death was "mass partner defections," the root causes were more complex. To wit:

Putting "avoiding hurting peoples' feelings" ahead of good strategy. (In 2004, when they decided not to change the terms of their partnership agreement to allow managing partners to serve a third term and so removed an excellent leader [Barry Levin] from the head of the firm.)

Botching its downsizing. (What should ALWAYS be a quick, objective and clinical exercise dragged on for months as partners jockeyed to try to prevent "favorites" from being fired. The result was severe trauma as people waited to see who would get the axe and in the end, the cut was compromised and not deep enough to restore profitability.)

Failing to communicate when it changed direction. (In 2006, the firm developed an aggressive new strategy to grow its way to profitability, aiming to expand to 1500 lawyers worldwide. Offices were opened in Shanghai and London, the US operations took on laterals. But how the expansion strategy was actually going to work was never articulated by the firm's leadership. So partners starting voting with their feet.)

Fundamental basics!

Putting collegiality ahead of business sense, botching a downsizing exercise and failing to communicate a compelling vision of how a radical strategic change is going to work. I could name several more firms that I know that have fallen or could easily fall prey to the same foibles. Is yours one of them? If so, then what are you going to DO about it? Now .... before it's too late.

Much law firm strategy, especially in smaller to medium sized firms where the partners all know each other, is crafted in strategy meetings or at strategy retreats. Typically, such meetings consist of some preparatory information being presented and then, quite quickly, the meeting moves on to consideration of a number of alternatives. It is here where the phenomenon of an “information cascade” can rear its ugly head.

In 2005, behavioral economist Robert Shiller and Karl Case conducted a survey among San Francisco home buyers, measuring their perception regarding likely house price movement in their market. The median expected price increase, over the next decade, was nine percent per year!

Obviously, history has proved them to have been badly wrong. According to Shiller & Case, their baseless optimism was based on two factors: salient price increases in the recent past and the apparent, and contagious, optimism of other people. In effect, an information cascade.

An inch deeper on some of my observations on the impact of Web 2.0 on law and other professional service firms in yesterday's post on the new Facebook. Herewith a Powerpoint presentation courtesy of Slideshare, on how Web 2.0 is changing management consulting.

The punchlines:

1.  Management consultants are used to defining themselves as the kings of strategy

2.  The internet has opened up research that was once the domain of the consulting firms

3.  The modern consulting model no longer relies on copious research and thick reports but on consulting services where solutions are delivered in real time by:

• Leveraging existing management knowledge
• Developing an interactive engagement
• Valuing discovery in the consulting process, and
• Operating collaboratively with the client, rather than delivering ivory tower, dictatorial advice

In other words:  Faster, more hands-on, greater action orientation and by deduction far better likelihood of execution. Probably less expensive too.

How does this relate to the services that you deliver to clients?

Herewith our Edge International September 2008 Law Firm Strategy Newsletter

We have two items for you this month. Firstly, some tips on how to execute (as in kill-off, annihilate and utterly destroy) a firm’s strategy. Secondly, news about and an invitation to participate in an exciting new research project on globalization and its likely impact on the US legal profession.

We hope that you find them both diverting and useful. Feedback, as always, is most welcome.

Our best regards,
Rob Millard & Gerry Riskin

There are enough excellent folk out there operating in the law firm and professional service firm marketing space for me not to want to muscle in on it except where a specific marketing issue is of undeniably central strategic concern. Marketing uber-guru Seth Godin has a post today about launch PR and media campaigns that is well worth passing on, though. In a nutshell, his advice is .... don't. My response: As with most things in life .... it depends.

Seth is talking about start-ups, primarily, and the need for them to resist the temptation to over-invest effort and funds in garnering media attention. Certainly, there are more important things to do during this phase of the business life cycle and cash flow is also paramount in most start ups.

On the one hand, it is difficult for clients to buy one's services if they don't know that one's firm exists. On the other, professional firms are seldom launched without a critical mass of existing clients from the founders' own practices. The focus must be on retaining these clients first and securing new business second. Publicity does usually help with the latter although I agree with Seth's admonition not to "break the bank or your timetable in the quest." Publicity in a professional service firm launch is useful when:

1.  You have the type of practice that depends on a large number of once-off transactions with clients that use your kind of service only periodically, especially when that service is expensive. Personal injury lawyers and dentists specializing in cosmetic orthodontics spring to mind.

2.  You are operating in a market where a moderate amount of publicity is likely to get you quickly to "top of mind" in the awareness of potential clients, for instance in medium sized towns and cities.

3.  You have an undoubtedly newsworthy and memorable tale to tell. Messages that essentially say "hi, this is who we are and although we look, taste and feel just like the whole range of other existing firms that provide the same services, we're really better" seldom succeed.

Publicity is less useful where client purchase your services based on immense trust that you are amongst the best in your field in matters that are strategically important to them. It can even be counter-productive when it makes first-person assertions, promises things that your firm cannot deliver or attempts to create any sort of hype.

Marketing professional services, as my friend and colleague Gerry Riskin always says, is a full contact sport. Even in start-ups. It cannot be delegated to the media. If you are serious about wanting to learn or improve your skills in this sport, though, you really do need to contact Gerry.

"Then there is the central and controversial issue of how to pay people who work for financial firms. In blowup after blowup, compensation schemes based on short-term performance have encouraged traders, division heads, and C.E.O.’s to act recklessly.

In the typical case, a trader or executive places a bet that pays off immediately—or soon enough to increase the individual’s bonus or stock-options value—but exposes the firm to long-term dangers.

Examples include Merrill’s decision to step up its production of mortgage securities just as the outlook for the real estate market darkened and Bear’s refusal to keep an adequate reserve of cash on hand. Earlier this year, Raghuram Rajan, a former chief economist at the International Monetary Fund, referred to such behavior as “creating fake alpha—appearing to create excess returns but in fact taking on hidden risks.”

The September 2006 Harvard Business Review has a short article by Cass R. Sunstein titled When Crowds Aren't Wise. The article raises an extremely important point concerning how strategic and other decisions are reached, whether by consensus or majority decision, in profession service firms.

Conventional wisdom holds that crowds are "wise" and that all things being equal, the more inclusive a decision making process and the larger the number of people in a group making a decision, the more likely the "correct" decision will emerge.

I had hardly finished my post Too Sexy For Wasabi when I came across this short post by Dan Hull, titled "Give Me Your Tired, Your Rich Abused Fortune 500 Clients," on the blog What About Clients?

A provocative sound-byte, aimed primarily at smaller firms that are actively using the "Masa Takayama approach to strategy" (in other words, differentiating themselves by delivering ASTOUNDING client service and charging premium fees) :

"Boutique firms with top legal talent in America, Europe and Asia are still bottom feeding. Unless your firm is doing a quality-of-life experiment, or trying to make law practice easy and not stimulating, you should be actively pitching to and stealing BigLaw clients. Get off your knees, get a grip. It's okay, we live in a free markets world. Just keep your rates high and your services superb."

Carpe deum? A strategy such as this is not the easy road. It's difficult. Very difficult. But then, how appealing is the alternative?

Why is it that a bottle of water at a theme park or sports event costs $5, when you can get basically the same stuff out of a faucet for free?

Why is that the reportedly "most expensive meal in New York" (at Masa Restaurant on the 16th Floor of the new Time Warner Centre) is basically the same kind of food as one can get from sushi bars across the country, at a fraction of the price?

The answer, of course, lies in the quality of the client experience. There are very few areas in which a professional service firm can differentiate itself (i.e. make itself different to its competitors in ways that clients value) as effectively as by driving the standard of the experience that clients enjoy when working with the firm. So we can learn from Masa Takayama and, with current research showing that upwards of 70% of Fortune 1000 clients are dissatisfied with the service that they receive from their law firms, the conclusions of that learning just have to be a no-brainer, too!

Here's a very succinct statement on strategy, and in particular on performance management systems, by Robert Kaplan and David Norton, authors of The Balanced Scorecard and Strategy Maps:

"Strategy must be understood and executed by everyone. The organization must be aligned around its strategy, and performance management systems help create that alignment. Herein lies one of the major causes of poor strategic management. Most performance management systems are designed around the annual budget and operating plan. They promote short-term, incremental, tactical behaviour. While this is a necessary part of management, it is not enough. You cannot manage strategy with a system designed for tactics."

Quoted from an Ivey Business Journal report titled Building a Strategy Focused Organization.

Hat tip to MBA Depot.

Dick Richard's post Don't Shield Them From Distress reminded me of a conversation that I had with the managing partner of a prominent law firm last year, where he expressed concern that the results of some research that we had done into their corporate culture might be divisive or distressing to some of his partners. Come to think of it, I've heard this concern (that disclosure of something contentious might cause distress) expressed many times over the years.

Yet an appropriate degree of distress is a critical ingredient for overcoming resistance to change.

David Maister's post today You've Gotta Serve Someone cuts to the quick of what being a professional (of any kind) is all about. A 'sound-byte:

"Commitment is not numbers of hours you work, the sales you generate or the rates you charge. It means placing other people - the client and your colleagues - first in your professional life. Commitment means attention to details, not because you might get caught, but because you want to provide the best product or service available and you relish the opportunity to step up and take on responsibility.

"Find people who disagree with you. If you get mad at them, it's a good sign you need to think. Fight as if you're right; listen as if you're wrong."

Bob Sutton (Co-author : Hard Facts, Dangerous Half-Truths and Total Nonsense)

Expanding on this, I've just come across a paper by Aneen Karnani at the Stephen M. Ross School of Business at the University of Michigan, titled Essence of Strategy: Controversial Choices.

While not aimed at professional service firms specifically, the paper does address many of the challenges faced by professional service firm strategists in today's complex world. Especially the idea of embracing controversy and dissent and channelling it as a tool to create better strategy, rather than try to subdue and avoid conflict in favour of collegial "group-think."

Gerry Riskin is a good friend and colleague in Edge International so I'm probably not dispassionate enough to make the statement absolutely objectively, but I truly believe that he is the uber-guru of all gurus when it comes to helping lawyers and law firms build client relationships. I've seen him in action in this area with accountants too, equally effectively. In short, he's astounding!

I don't mean what is usually called "marketing." In other words, the also important but different business development activities that professionals hire others to do, often while muttering the old refrain: "If I'd wanted to be a salesperson, I'd have become a salesperson." What I do mean is empowering the lawyers themselves to build strategically important, deep, valuable, bulletproof, highly profitable relationships with their key clients.

Which, of course, is something that it is CRITICAL to have firmly front-and-centre in any sensible strategy.

My friend and colleague Gerry Riskin is reproducing his Seven Immutable Laws of Change Management on his blog.

Says Gerry to managing partners: "I guarantee that if you respect these rules, you will get the cooperation you need to effect the changes that will catapult your firm forward."

Well worth a look.

I've just spent a fascinating few days comparing notes with leaders of some of London's greater law firms. One of the topics that came up was the old favourite of the market's preoccupation with "profits per partner" (PPP) as a metric. More properly (in this case) "profits per equity partner" (PEP.) Bottom line: Look at the breakdown of equity versus non-equity partners before taking PPP/PEP, in isolation, too seriously. Now, I know this is probably old news to many readers of this blog, but just in case there is anybody that has missed this trick ...

Tom Peters quotes the Wall Street Journal today in a post titled To State the Obvious ... In it, he notes that in order to return to something resembling profitability, the airlines have resorted to the last resort - doing the obvious. Namely: Stop doing dumb things. i.e. : Get rid of flights that lose money.

In the same post, he also notes that in a recent survey, the chief commonality between companies that achieved superior Profit/ROAs ('return on assets') in 240 industries was that they "aggressively weeded out customers who generate low returns."

There's a lesson here for a frightening number of professional service firms.

"Subjective judgments do not become objective simply by translating them into numbers. More importantly, when some of the options under review require ethical considerations, we can cloud the difference between right and wrong when we translate all options into a quantitative order of dollar values. If you tell me that option A contains a moral impediment and option B is pristine, that is substantially different than if you tell me that option A has a probability adjusted present value of $2 compared to $1.50 for option B. And yet we tout the virtue of net present value analysis because it does that very thing."

James Haines (CEO and President, Westar Energy, Inc)

As true in professional service firms as anywhere else .....

Excerpt from an address Corporate Governance, Business Ethics and Individual Responsibility given at the The Robert O. Anderson School and Graduate School of Management at the The University of New Mexico. Full text of address here.

Thanks to MBA Depot for the pointer.

Strategic blindspots seems to be popular topic amongst readers of this blog. (My posting Blindspot Analysis - Uncovering Strategic Bias has featured on the list of five most read postings on this blog for two out of the past three months.) Given that so much of my own practice revolves around strategy, it is also a subject that is keeping me increasingly fascinated, too. Not so much blindspots as 'per se,' as how to identify them and what to do about them during strategic process.

Craig Henry, in his blog Lead and Gold, blogs about a new book on the topic that will certainly be in my next contribution to Amazon.com's profits. The book is called Changing Minds - The art and science of changing our own and other people's minds, by Howard Gardner.

His insights are critical not only for those who have to think themselves about strategy, but also those tasked with driving change.

In South Africa, one of the most ubiquitous items of cooking equipment (after a barbeque or "braai" grid) is a cast iron three legged pot called a "potjie." Which is Dutch for, oddly enough, "little pot." It comes in various sizes from small enough for a single egg, up to large enough to feed an entire wedding party in rural Zululand. There is nothing quite like a vension stew cooked in a potjie over a hardwood fire, deep in the African bush! But it is the three legs that make it a useful metaphor for strategy. You see: it's like a three legged stool. If one of the legs is missing, the potjie falls over, the food ends up in the fire and the wedding guests go home hungry.

There are three essential elements to strategy in a professional service firm. The first is a bold plan to achieve that strategy. The second is a solid body of clients that are delighted with the services that the firm is rendering, to fund the implementation of the plan (to say nothing of school fees, food and mortgages too.) The third is a pool of loyal talent that can execute the strategy and delight clients with their prowness and responsiveness. One needs all three. Two out of three doesn't hack it. The pot falls over.

Which brings me to one of the items in today's RollOnFriday, published in London.

Henry Mintzberg (pictured above,) Bruce Ahlstrand and Joseph Lampell, in their 2005 book Strategy Bites Back, present 5 "P's" as a way to define strategy. Each "P" shines a spotlight on what strategy is / means / encompasses from a different angle, to provide a comprehensive overview that is probably more useful that definitions that try to fit all into a couple of sentences.

The 5 "P's," adjusted where necessary to fit into the professional service firm universe, are as follows:

So you've had this important client (this VERY important client) for more than 30 years. You've been doing good work for them and your firm has grown steadily on the steady flow of fees. How secure is your position?

This is exactly what Bob Bernstein and Skip Rein, founders of Missouri-based ad agency Bernstein-Rein must be thinking right now. According to an article in Fast Company, Wal-Mart are putting their $578 million advertising account up for review for the first time in 30 years. Bernstein-Rein and Omnicom GSD&M have been sharing that revenue river for three decades, the former growing to 300 staff in the process.

We've all heard the old clich?©:

Rule No 1:The client is always right
Rule No 2:If the client is wrong, refer to Rule No 1.

This has always sounded a little prostitutive to me. (Yes, I know that there is no such word but I'm searching for an adjective associated with "prostitution.") What happens when the client really is wrong? Isn't it a bit trite to simply say: "Refer to Rule 1?"

Of course it is. Ross Holman (quoting Seth Godin) blogs about this today on his blog Strategize, prompting the thought. If the client is wrong, then they should not be the client any longer. Not for a moment longer than necessary, that is. How many clients do you have right now that, quite simply, are wrong? How much effort and emotional have you expended on trying to make things right, only to find out that you can't? Imagine how much time you might have saved if you had simply fired that client, and the benefits that would have accrued if all that effort had been expended on more worthwhile clients instead.

Comments, as always, are most welcome and may be posted below.

Law firms in the state of New Jersey have just received the 'green light' to own other law firms as subsidiaries. (In most other jurisdictions and previously in NJ, law firms could own other kinds of commercial entity, but not other law firms.) The opinion was issued jointly as Opinion 704 of the New Jersey Supreme Court Advisory Committee on Professional Ethics and Opinion 37 of the Committee on Attorney Advertising.

The prohibition on fee sharing with non-lawyers remains, but subsidiary firms can turn over profits to the parent firm. While the subsidiary can have a different name to the parent firm, it still needs to contain the name/s of lawyers working in it. The relationship between the firms also must be explicitly disclosed through inclusion of the phrase "a subsidiary of X law firm" beneath or next to the subsidiary's name.

This development presents a great opportunity for firms with diversified practices. Law firm marketing professionals have been quick to point out the marketing implications (see Larry Bodine on the topic here) but the possibilities go far further, to the very roots of strategy.

Exemplar Law Partners LLC of Boston, MA claim to be the first corporate law firm in the USA to abandon the billable hour completely and exclusively adopt a fixed price model. Their CEO, Chris Marsden, has launched a blog called Inside the Firm of the Future to track their experiences and progress. This may prove to be an interesting one to watch. Thanks to Michelle Golden at Golden Practices for the 'heads up.' Michelle notes that while some firms will be applauding Exemplar and hoping that they succeed (because it will provide evidence that their firms might do the same,) it's likely that many others will be waiting for them to fail so that they can say "I told you so" as they dutifully check their watches and fill in their timesheets. Time will tell.

This is another posting of the Strategy 101 kind, in this case to introduce another of the basic tools that professional service firm strategists need to have in their toolboxes. This tool was first mentioned on this blog in my previous posting Love Your Dogs?

Only firms that have superior market share that can grow their business and develop the organizational learning capabilities to really capitalize on their experience. Empirical studies by the Harvard Business School in the 1970s first confirmed the basis for this assumption, leading the way to the development of the Boston Consulting Group's (BCG) Growth / Market Share Portfolio Matrix.

In the professional service firm context, the BCG matrix is a tool to determine the attractiveness of a service or practice area, based on the service life cycle and the experience curve. In other words, it provides critical information that strategists need, to help decide where the firm should be focusing resources over the next strategy cycle.

Surely the most dramatic mythological example of rebirth and renewal, is the Phoenix (or "Firebird.") It is found in ancient Egyptian mythology, various myths derived from it and, most recently, in Professor Albus Dumbledore's study in Harry Potter.

Said to live for 500, 1461 or for 12594 years (depending on the source), the phoenix is a bird with beautiful gold and red plumage. At the end of its life-cycle the phoenix builds itself a nest of cinnamon twigs that it then ignites; both nest and bird burn fiercely and are reduced to ashes, from which a new, young phoenix arises. The bird was also said to regenerate when hurt or wounded by a foe, thus being almost immortal and invincible.

Imagine, for a moment, that you were able to regenerate your firm in this way. Miraculously, you were able to instantly transform it into an organization of the highest performance with, what's more, that performance being sustained.

For larger view, click on image

A current Strategy+Business article, Love Your Dogs, suggests that conventional wisdom may be wrong when it dictates that resources should be focused on a businesses 'stars' while leaving 'dogs' to starve or hiving them off. (The terms, of course, come from Boston Consulting Group's famous model that divides businesses into stars, question marks, cash cows and dogs.)

This issue is a particularly troublesome topic in many professional service firms, where practice areas that may have commoditized to the point of marginal profitability are not faceless business units but one's partners, colleagues and, frequently, friends. So facing up to the need to starve or divest dogs is something that many firms simply don't have the stomach for. The result is that they are tolerated and sometimes (in the name of 'fairness') even invested in as much as high growth areas of the firm.

The weblog Innovation Tools had a posting yesterday (10 March) on a strategic innovation tool called TRIZ (pronounced "treez".) The post describes the 5-Step process that TRIZ defines for a strategic innovation roadmap and references InSourcing Innovation, a new book on the topic.

TRIZ is a Russian acronym: "Teoriya Resheniya Izobretatelskikh Zadatch" (-¢-µ-æ--Ä-?--è --Ä-µ--à-µ-?-?--è -?-?-æ-±--Ä-µ--Ç-?--Ç-µ-ª--å--Å-?-?--Ö -?-?-¥-?--á.) An approximate English translation would be "Theory of Inventive Problem Solving (TIPS.)" The concept was developed by a Soviet patent specialist, Genrich Altshuller, while working with the erstwhile Soviet navy in the 1970s and 1980s. It has been considerably expanded and refined by subsequent work in the west.

How the tool can be applied in professional service firms is a topic for another posting. What I would like to blog about is an important insight about innovation itself, that emerged from Altshuller's work.

It is obvious that any strategy that is not focused squarely on one's clients is nonsensical. But which clients? Should the focus of the strategy be diffused shotgun-style over the whole client list, or rifle-like on the firm's key, "crown jewel" clients. James Hassett argues strongly for the latter in a two part piece in his blog Law Firm Business Development. Part 1 is here and Part 2 is here. The articles reference my friend and colleague Gerry Riskin quite heavily, and also Edge's 'bulletproofing' methodology for protecting one's crown jewel clients from predation by competitors. (For more information on 'bulletproofing,' please email me.)

BTW: Just to be different, the crown jewels pictured above are not the English but the Scottish regalia. Also known as "The Honours of Scotland," they consist of a crown, sword and sceptre. On the Union of the Crowns in 1603, the Scottish crown jewels were left in Scotland when King James VI of Scotland inherited the English throne. They are now displayed in Edinburgh Castle, as is the Scottish royal throne, the "Stone of Destiny," which was returned to Scotland from Westminster Abbey in 1996.

Compensation systems may be "Management 101" stuff and my apologies to anybody that feels that I am pitching too low here, but I have come across several cases recently where firms are really struggling to develop a compensation system that (1) drives their strategy, (2) keeps their star fee-earners happy and (3) is easy to administer.

There are few things more contentious than how performance is measured and rewarded amongst the owners (whatever they might be called) of a professional service firm. So firms simply avoid discussions about this like the plague until things reach boiling point. The result is that many tolerate compensation systems that are at best sub-optimal, at worst actually damaging.

My friend and colleague Gerry Riskin has a posting by the above name on his blog Amazing Firms Amazing Practices, today. He cites data from BTI Consulting Group's latest client satisfaction survey of Fortune 1000 clients, regarding their perceptions of the law firms that serve them. Bottom line: Only about 30% of clients polled would recommend their PRIMARY law firm to others; half had OUSTED a primary law firm in the past 18 months and more than half said that they were planning to try a new law firm for substantive matters in 2006. And this survey included some of the finest firms in the US of A. Does anybody hear alarm bells ringing?

Ross Dawson, author of bestseller Developing Knowledge Based Client Relationships, is posting a series called 7 Megatrends of Professional Services on his blog, Trends in the Living Networks. His posting on a recently released report on 10 Trends for 2006+ is worthwhile visiting too. He also gives the option of downloading the entire "7 Megatrends" white paper as a pdf. If you'd like to do this, then click here.