A blog by Joel Barolsky of Barolsky Advisors

Formula won

In Articles, Commentary on 29 March 2018 at 1:21 pm

 

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Source: Kazuki Yamamoto

Formulas, equations and rules of thumb continue to be a popular way to communicate important principles in leading and managing professional service firms. For your interest, here are the ones I use or refer to most often…

 

CHANGE

David Gleicher: D x V x F > R. D = level of dissatisfaction with the status quo. V = a vision of a future state i.e. clarity of what we’re moving to. F = first steps in a clear action plan. R = level of resistance to change. If R is more than the multiple of the other three, then no change. Click here for more. A graphical variation of this formula:

eqn-for-change

STRATEGY

A.G. Lafley and Roger Martin: Firm strategy = 5 questions – What are our winning aspirations? Where will we play? How will we win? What capabilities do we need? What systems and enablers are required? Click here for more.

Mehrdad Baghai et. al: McKinsey 3 growth horizons – concurrently manage both current and future opportunities for growth. Spend roughly 70% of your time on H1, 20% on H2 and 10% on H3. Click here for more.

George Beaton: Firms that fly = a shared vision + a strong culture based on shared values + shared power across the firm and key stakeholders + strong leadership and management to pull it all together and sustain it. Click here more.

Joel Barolsky: In the past… Firm Success = Ability x Stability (firms succeeded if they were competent practitioners and were able to keep the firm stable and collegiate). Over the past decade with the increase in client power and sophistication… Firm Success = Ability x Stability x Affinity (firms that have close trusting relationships with their clients outperform others). In a VUCA future… Firm Success = Ability x Stability x Affinity x Agility (firms that can make changes that add value quickly and efficiently will outperform others). Click here for more.

BUSINESS MODEL

David Maister: Profit per Partner = Leverage x Utilisation x Realisation x Blended Hourly Rate x Margin. Click here for more.

Ron Baker: Profit = Intellectual Capital x Effectiveness x Value-based Price. “Effectiveness” is a measure of the outcomes achieved for the client, not like the Maister equation which focuses on the cost of the inputs used to create the service. “Intellectual Capital” includes leveraging human capital, structural capital and social capital. Click here for more.

ORGANISATION DESIGN

Dunbar’s Rule: Our brains are only capable of sticking together within a community of around 150. Design organisations, offices, divisions, etc. with this number in mind. Click here for more.

REMUNERATION

J. Stacy Adams: People will trust a remuneration model when they perceive, [1] there is a sense of fairness of their contribution relative to their reward, AND [2] there is a sense of fairness of others’ contribution relative to the reward that others receive. Click here for more.

INDIVIDUAL PERFORMANCE

Mitchell and Porter: Performance = Motivation x Ability x Environment. Click here for more

David McClelland: Match jobs to an individual’s relative needs. People have three core needs, usually with different weights – Need for Achievement, Power and Affiliation. Achievement – the drive to excel, achieve in relation to a set of standards, strive to succeed. Power – the need to make others behave in a way that they would not have behaved otherwise. Affiliation – the desire for friendly and close interpersonal relationships. Click here for more.

Dan Pink: Drive = f(Purpose, Mastery, Autonomy). Click here for more.

STAFF TURNOVER AND PRODUCTIVITY

Mornell: If you make a mistake in hiring, and you recognise and rectify the mistake within six months, the cost of replacing that employee is two and one-half times the person’s annual salary. Put another way, the wrong person earning $50,000 will cost your company $125,000. Click here to read more.

Revenue per employee: In most industries, above-average firms produce revenue per employee that exceeds three times their average employee’s salary. Interestingly at Apple, it exceeds nine times. Click here to read more.

CLIENT RELATIONSHIPS

David Maister and Charlie Green: Trustworthiness = (Credibility + Reliability + Intimacy) / Self-orientation. Click here for more.

Joel Barolsky: Long-Term Relationships = (Understanding + Reliability + Value + Affinity) / Complacency. Click here for more.

Ford Harding: Geometric growth of social networks. With 90 strong connections in your personal network, you can make around 3,500 matches i.e. introduce one person to another for mutual benefit – see chart below. Click here for more.

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SALES

Sales 101: Your Revenue = Number of Opportunities x Average Value x Overall Strike Rate. Click here for more.

Andrew Sobel: Number of Opportunities = Number of initial conversations you have or initiate x % that convert to a proposal. Click here for more.

McKinsey’s 2-4-8: Directors in McKinsey need to be working on 2 major assignments, be the process of proposing for 4 more, and in communication with 8 more prospective clients. Management within McKinsey follows up to ensure that 2-4-8 is a reality. Click here for more.

PRICING

The Discount Matrix: The amount of additional revenue required to make up for the lost profit as a result of a price discount:

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SERVICE EXPERIENCE

Frederick Reichheld: Net Promoter Score = % Promotors (i.e. clients that score 10 or 9) – % Detractors (i.e. clients that score 1 to 6) on the question, “What’s the likelihood of recommending XYZ to a friend or a colleague?” Click here for more.

Customer Effort Score: “Firm XYZ made it easy for me to handle my issue!” (on a Strongly agree / disagree 7-point Likert scale. Click here for more.

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What formulas or rules of thumb do you use? Please share using the comments feature…

Is the demand for legal booming?

In Articles, Commentary on 1 February 2018 at 8:14 am

The Thomson Reuters Peer Monitor report on the state of the Australian legal market indicates that overall market demand for major law firms has declined by around 10% over the past five years.

The IBIS report indicates a legal market declining in real terms – 1.9% nominal annual growth from 2012 to 2017, and 1.4% pa growth predicted for the next five years.

The Australian legal press is filled daily with messages of doom and gloom.

But what if we’ve got this all wrong? What if we’re being misled by inaccurate reporting, or as some might say, “fake news”?

There are five growth areas that I don’t think are accurately reflected in the market data that is reported:

  1. Growth of in-house lawyers
  2. Growth of foreign boutiques
  3. Growth of law companies
  4. Growth of legal imports
  5. Growth of bush lawyering.

By adding this direct and indirect demand to reported data, one might conclude that overall market demand is actually booming. If that is the case, the market is fragmenting even more rapidly than people realise with the large incumbent providers, as a whole, rapidly losing relative market share.

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Source: apartmentlist.com

#1 Growth of in-house lawyers

In June 2017, the NSW Law Society published a report that revealed a 59% increase in corporate in-house lawyers and 34% in government lawyers from 2011 to 2016:

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The increase of 6,222 employed in-house solicitors roughly equates to 1.4 million of production hours per annum. Even if this data is half right, the numbers are staggering.

ACC analysis indicates that some of this demand has been driven by insourcing, but it has also grown from a general increase in regulatory and risk issues as well as commercial, employment, real estate and operational matters. It is worth recalling that Australia holds the world record for the longest period of recession-free growth for a developed country and the outlook is strong.

#2 Growth of foreign boutiques

The revenues of large foreign firms like Allens-Linklaters, KWM, HSF, Ashurst, K&L Gates and Dentons are captured in the traditional metrics because most have involved a merger or an alliance with a large established domestic firm.

What’s missing from market reports like Peer Monitor are the 21 new foreign boutiques now competing mostly at the top-end of the market. These are firms with 30 or fewer partners with a premium focused offering. Examples include Clyde & Co, Jones Day, Squire Patton Boggs, Pinsent Masons, PwC, KPMG and White & Case. Carlyle Kingswood data suggests there are now over 225 partners working in this segment, roughly accounting for $350 million of annual fees.

#3 Growth of law companies

Australia’s Eric Chin is famous for coining the term NewLaw to describe legal startups. This descriptor is evolving into ‘law companies’, as explained by Mark Cohen in his recent post. Firms in this category include Elevate, Axiom, Lawyers on Demand, LexVoco, Keypoint, Unison, LegalVision, Hive, Helix, Nexus, Pangea 3, LawPath and Bespoke.

Data suggests law companies have grown their share of the outsourced corporate legal market from around 3% to 10% over the past five years.

Again, I wonder how much of this spend is include in official indicators tracking legal demand in Australia? Many of these companies have non-traditional employment arrangements, they engage a number of non-lawyers to deliver legal services, and they combine both local and overseas talent.

#4 Growth of legal imports

The chart below breaks down the $A15.4 Billion worth of Chinese investment in Australia by industry in 2016. Interestingly the figure was only $A2.1 Billion in 2007. One could provide similar statistics for the USA, Japan, UK, Germany, Singapore, etc.

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It’s a safe bet to assume that legal advice was necessary on a significant proportion of the transactions that facilitated this investment. I think it’s also a safe bet to say that a lot of this legal advice was not provided by Australian lawyers. In a sense, this is Australian-based demand for legal advice is not accounted for because it’s being provided by offshore advisors, i.e. it is being imported.

#5 Growth of bush lawyering

Australia is becoming more and more regulated. One proxy measure of this is the pages of legislation passed per year. The chart below shows the trend in Canberra. A similar story is evident in all the states.

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Developing systems to comply with these regulations and managing breaches usually requires expert legal advice. My guess is that a significant number of organisations don’t seek this advice but just wing it through a combination of ignorance, ignoring and bush-lawyering.

One could argue that this demand for legal services is actually non-demand. However, this is potential revenue lost by a combination of providers perceived to be expensive and consumer disregard.

What if I’m right

There are some pretty profound implications if we’re being misled by inaccurate reporting and the overall market is actually booming.

For established traditional Australian law firms, some of the takeaways are:

    • There might be more value in collaborating than competing to fight the threat of the newer entrants;
    • They should be making much more of the significant growth in foreign investment and government regulation;
    • They should be exploring new models to service those with atypical legal needs;
    • They might want to hedge their bets by investing in law companies and/or newer growth segments; and
    • Market fragmentation usually means less tolerance for mediocrity. There will be more winners and losers and a greater premium for sound strategic leadership and followership.

 

For industry bodies and professional associations, they need to:

  • Measure their industry more accurately and reliably;
  • Develop strategies to reduce legal imports; and
  • Help transfer latent demand to real demand.

What do you think?

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