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.)
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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.
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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.
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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.)
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Courtesy of Add Letters; hat-tip to Verasage.
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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?
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I’ve just finished reading Nobel Prize laureate Joseph Stiglitz’s new book Freefall: America, Free Markets, and the Sinking of the World Economy
“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.]
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.
I wrote in another recent post of the problems that result where the measures of performance are complex and subjective to specific circumstances, as they almost always are with top-end legal services, yet firms use oversimplified general performance metrics. At the top of the list of these generic metrics, traditionally, has been “hours billed,” followed by “fees billed,” and then the different and somewhat more relevant “fees collected.” All of these are examples of the production-based metrics about which Stiglitz warns. The billable hour is so prevalent in the market though, despite its lack of logic, that its very prevalence is used as its primary justification. Quality is accommodated in this model only by implication, through the assumption that if a firm produces a poor quality service, then clients will stop using its lawyers and the production-based metrics will suffer. This is true, of course, but given the human species’ propensity to take care of the short term first even at the expense of the long term (especially if incentives actually drive that behaviour) I’d argue quite strongly that it is better to align the firm’s performance measurement and reward systems more explicitly on the behaviors required to drive quality, not just short-term production.
“Quality,” though, is quite difficult to define in specific terms. Dictionary definitions are inadequate. Even the fathers of Quality Management like W. Edwards Deming and Joseph Duran tiptoe around defining the term. There are, however, a couple of key points that transcend their inability to wordsmith the concept into a precise and comprehensive definition.
One key point that is undisputed is that quality is interpreted from the customer/client perspective. Juran talks of "fitness for intended use" and “meeting or exceeding customer expectations." Deming makes similar assertions, stating that the customer's definition of quality is the only one that matters. A law firm can be producing service that they quite sincerely believe to be absolutely stellar but if clients disagree then that service is .... poor quality. Adopting a client perspective also unavoidably introduces the aspect of pricing and what clients perceive to be fair value. If one accepts that the firm surviving and continuing to provide services to the client is also in the client’s interests, then so too is the economic sustainability of the firm itself introduced to the quality equation.
One can therefore distill three essential ingredients to quality legal services:
Does your law firm build significant client satisfaction metrics overtly into its performance management model? If your answer is “no,” then you are in very good company. Few law firms do, although there are several excellent firms where such metrics feature very prominently. If yours does not though then the brutal truth is that by definition, your firm’s business model is less interested in quality than in the internal priorities of your firm and the professional desires of its attorneys regarding how they want to practice, irrespective of what the client wants. Any person with business sense would realize that is a model doomed ultimately to failure.
There have been many attempts to integrate quality-based metrics into partner performance systems and compensation systems in professional service firms. Perhaps the most ironic example of the concept is not from a law firm but from the ill-fated accounting firm Arthur Andersen. In that firm, which collapsed in the aftermath of the Enron disaster in 2001, the culture of the firm was founded on founder Arthur Andersen’s own motto: "Think straight, talk straight" and his so-called "four cornerstones: provide good service to the client; produce quality audits; manage staff well; and produce profits for the firm.” Over the years, as the internal emphasis moved more and more to profits, an internal quip reportedly became quite widespread in the firm that the “four cornerstones” were really “three pebbles and a boulder.”
Balanced Scorecard systems translate well into law firms and are a very good framework indeed for capturing the range of activities that a firm should expect of its fee earners to ensure its economic sustainability and prosperity; not just this year's production. It is probably fair to say that the Balanced Scorecard is now the most widely used business tool for balancing performance and reward in a commercially sensible way in the world. Dating back to the mid 1980s, the concept was made popular by Robert Kaplan and David Norton in with their 1992 book The Balanced Scorecard and the later (more practically focused) The Strategy-Focused Organization
Almost always, the metrics related to finances and profitability attract the most weight and the others run the danger of becoming "pebbles," being paid little more than lip service. Money in must exceed money out, of course, otherwise all else becomes irrelevant. My own view is therefore that although the intellectual ideal may be to give equal weighting to all four "cornerstones" it is sensible to make the primary metrics financial and then pay an appropriate amount of attention to the other three, recognizing their critical role in driving the financial performance.
If you are rethinking your performance management and reward systems in your law firm at the moment (and many, many law firms are) then the final message is that you really do need to think deeper and further than just how to find creative ways to crack the whip yet harder. Difficult though it may be, it is ESSENTIAL to move from a production focus to a more comprehensive, client orientated quality focus in the way that you measure and reward performance, if your firm is to remain relevant and competitive with the changes currently sweeping through the market.
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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:
]]>Given the well-documented psychological propensities amongst most humans for avoiding risk over seeking reward and so towards pessimism rather than optimism, it is sometimes difficult to grasp just how much the world has progressed since the time of the Lehman Brothers collapse. This is not surprising. This recession has been and remains very personal. Family home mortgages are under water. Unemployment is so rampant that almost everybody knows somebody that has been affected. Retirement funds have been decimated. What would have been surprising, would have been to see a burst of optimistic exuberance at the first signs of spring.
But all the signs indicate that spring is indeed emerging. We are apparently not heading into a decade of stagnation, after all. Growth has indeed returned to most international markets and while there will almost certainly be further surprises, the world is on the path back to sustained growth over the next 3 – 5 years, which is the timeframe usually employed in law firm strategy. It takes time to execute strategic plans. Firms therefore need to be crafting their strategies now, to capitalize on a return to “normality,” yet with an emphasis on building resilience against the further changes that will inevitably occur. Change is not an event that interrupts the continuum of human events. It is the continuum of human events!
“Normality” therefore simply means a slower pace and lower amplitude of change .... for a while. Both change and growth will have different drivers. There will be no housing bubble and easy access to credit this time; nor another dotcom boom. The next bubble (and there will be another bubble) will be elsewhere in the market. Much is evolving both nationally and globally. Strategic planning needs to be accompanied by a careful assessment of what the firm’s market may be like in 3 – 5 years, so that the firm’s strategy is focused on those realities than on the very flawed assumption that things will be simply the same as before. At the highest level of abstraction, this involves scenario planning to map out some of the plausible futures that might emerge, so that the strategy can be flexible enough to accommodate a range of different possibilities.
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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!
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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 ....
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 
In Charles Perrault’s original text in ancient French, the slipper was made of ‘vair’, pronounced the same as ‘verre,’ which indeed means glass. ‘Vair’, however, means squirrel fur … a far more sensible choice when it comes to fine footwear if not for squirrels. Because of the error in translation, generations of children have had to try to visualize poor Cinderella negotiating the dance floor in her slippery, presumably transparent and very fragile slippers. On the bright side, it is fortunate that the translator was not of German extraction, otherwise the word may have read sounding like ‘vair’ as in ‘fer’ (the letter ‘v’ is pronounced ‘f’ in German) and poor Cinderella may have had to wear slippers made of iron to the ball!
Costantini’s point in including this ‘tale about a fairy tale’ in a book about asset valuation is that the universality of a belief is not a guarantee of its validity. There are many such examples of this in the field of legal services, for instance:
In times of change, it is even more important than usual to rigorously challenge assumptions .... even if they are so widely held that they would never normally be challenged. How many “glass slippers” can you think of in your firm?
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 :-)
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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.
He notes the intent on the part of the Chinese automobile industry to produce 20 million units per annum by 2012, at which point domestic demand is estimated only to be 9 million units. Who, he asks, is going to buy the remaining eleven million units? He writes of the stockpiling of commodities. What, he asks, would be the impact of a slowdown in the Chinese economy, leading to an unloading of these goods into the global economy? Japanese strategists, he says, remember well the 1960s when that country’s economy grew at 10% per annum on the back of massive steel production, only to deflate to 4% as the steel bubble deflated. He quotes Chinese officials as saying that a GDP growth of 8% is the bare minimum required to avoid serious political disruption. Essentially, Smick argues that a significant risk exists that this level of growth may prove unsustainable.
A chapter is devoted to the crash of the British Sterling currency in 1992, as an illustration of how quickly and disastrously poor policy decisions can cause things to become unstuck. He writes of the shrinking ability of central banks worldwide to deal with crises as the global financial systems become more globally integrated and complex. He likens central banks to firefighters who rush to blazes only to find that their ladders and houses do not reach the upper floors of the burning building. He comments on the emergence for the first time of “class warfare” in the United States and on the folly of relying on higher taxes for upper income brackets as the solution to current ills. Not argues that this will effectively kill the entrepreneurship and innovation in which lies the real solution to America’s travails. He quotes a 2008 Morgan Stanley investment report that noted than in a national with three hundred million citizens fewer than nineteen thousand households enjoy immediately available, investable financial assets of $25 million or more. More than 40% of Americans, he writes, do not have sufficient savings to sustain a family of four at the poverty level for four months. He writes of how current U.S. policy is steadily retreating from the drive towards globalization that characterized the prosperous Clinton era and worries about the long-term effects that this might cause.
The final chapter is titled “Surviving and Prospering in This Age of Volatility.” In it, Smick calls for a better understanding of the factors at play, including climate change (another major wild card in the future) and a broad international strategy for dealing with the Chinese financial and manufacturing “juggernaut.” Above all, he calls for a reformation of “today’s dangerously flawed financial architecture, including the system used to assess and allocate risk.” The world faces a dilemma. On the one hand, unbridled greed by U.S. and European bankers in under-regulated environments nearly brought the western world to its knees. On the other hand, over-regulating the industry will simply cause capital to move to less regulated markets. Already, there are suggestions that higher risk financial services are simply moving east; out of the USA to Europe and beyond to the Middle East and Far East. He warns against a sledgehammer, “Sarbanes Oxley” approach.
While written primary through an international finance lens, the book is important reading especially for lawyers in firms with international practices. As important, perhaps, as Thomas Friedman’s “The World Is Flat 3.0: A Brief History of the Twenty-first Century
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?
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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.
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"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."