The New Rules of Pricing
0 Comments - Posted By Rob Millard In Strategy 101 , , , - Permalink -
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?
General versus Specific Measures of Performance
3 Comments - Posted By Rob Millard In "Off the Wall" Insights , Strategy 101 , - Permalink -
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
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 ....
Post Mortems
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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.
What Do "Bad" Clients Cost Your Firm?
1 Comments - Posted By Rob Millard In , Tools for Strategists , , , , - Permalink -
If you were able to ask just one question of a client, with the assurance that the answer would give you a good indication of their level of satisfaction with your firm's services, what would that question be? Fred Reichheld's article The Microeconomics of Customer Relationships (subscription or purchase for $6.50 required,) in the Winter 2006 edition of the MIT Sloan Management Review, has the answer. It is:
"One a scale of 1 to 10 where 1 is 'not at all likely' and 10 is 'extremely likely,' how likely is it that you would recommend us to a friend or colleague?"
Depending on the answer, clients would be categorized as promoters (scores of 9 and 10,) passive (7 or 8) and detractors (6 or less.) Note that passives do not straddle the 50% or even the 60% mark. Anything less than 70% is viewed negatively.
General Electric, already the 9th largest company in the world by revenue, is using this model to try to drive its organic growth rate from 5% to 8% pa. According to Reichheld's data, a promoter has a net present value (NPV) to the firm of 1.5 and 2.5 times that of an "average" client (i.e. a passive.) On the other hand, a detractor frequently has a negative NPV. Sometimes, a surprisingly high negative NPV. The article explains how a firm can calculate these figures for themselves and also how to use them. A summary follows:
Continue ReadingHarnessing the Phoenix
0 Comments - Posted By Rob Millard In "Off the Wall" Insights , Competitive Intelligence , Culture , Innovation , Inter-Generational Issues , Leadership , Strategy 101 , Tools for Strategists , , , , , , , - Permalink -
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.
Continue ReadingLove Your Dogs?
0 Comments - Posted By Rob Millard In Strategy 101 , The Strategy Process , Tools for Strategists , , , - Permalink -
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.
Continue Reading
"Jordan: You are of course absolutely right but I think many underestimate the magnitude of the change that is looming, or the level of effort that will be required of firms to adapt … or die.
At the most fundamental level, the whole model of a modern law firm has evolved over the past few decades to align very precisely with the notion of very intelligent, highly independent professionals crafting bespoke solutions for clients and being compensated on an effort-basis. Changing it is not a trivial matter. Over the years, this has also been an extremely successful model. It is facile to argue (a finger pointed not at you but at others) that law firms are simply recalcitrant in not accepting change more readily. The magnitude of the change that is looming in this instance may be akin to what happened in the auto industry when Henry Ford introduced the Model T and assembly lines, driving manufacturers that were building automobiles by hand into bankruptcy or seeing them assimilated into other manufacturers that also adopted the new practices. It also easier for us to see the looming icebergs from our perspective at the masthead because we, as strategy consultants, pay so much attention to these issues, than it is from the perspective of our law firm clients whose lawyers toil in the innards of their ships, shoveling coal and serving passengers.
This is precisely the dilemma that Clayton Christensen describes in “The Innovators Dilemma,” that emerges in the face of a disruptive innovation (and I have no doubt that what we are experiencing right now fits the description.) If Christensen is right, the solutions will come not from the established leader-firms but from the small splinters and start-ups that are not trammeled by established convention and who can move nimbly and change radically with greater ease. Those solutions, once proven, may well be replicated by the more forward thinking established firms. Those that do not follow suit will decline and be absorbed by the new leaders, or eventually go out of business.
Over the next 3 – 10 years, I expect the landscape of the Amlaw 100 to evolve quite radically as these and other ‘icebergs’ wreak their havoc on those that will not / can not / do not change their course."