First published in the Australian Financial Review, 6 July 2018
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The opposite of a ‘perfect storm’ is what BigLaw is enjoying right now. The combination of the Banking Royal Commission, strong corporate deal flow, numerous class action defence cases, regulatory change, major infrastructure projects and general economic growth has seen many of the nation’s top law firms enjoy double-digit profit growth over the past year.
The key strategic question is whether these firms treat this as a one-off, or see it as the start of a new era of prosperity?
Both scenarios are worth exploring.
The One-Off Wonder Scenario
If firms predict a return to a shrinking market with a looming threat of disruption, then conventional wisdom would suggest retaining some of the current surpluses to make themselves ‘future-proof’. A war chest could be used over the next few years to transform culture, invest in adjacencies, craft new business models, acquire game-changing technology, recruit superstars and build relationship capital. It could also be used to introduce a more consistent dividend policy.
While this all makes perfect sense none of the major firms will do it.
Current tax law requires each partner to declare their individual share of the partnership’s net income in their individual tax return, whether or not they actually received the income.
It follows that most firms will distribute all F18 supernormal profits to avoid the partners paying tax on income they don’t immediately receive. This payout will be accompanied by a communal prayer session that the second scenario comes to fruition.
While this tax issue does provide some constraints to reinvestment, there’s nothing stopping firms setting up new investment vehicles outside of the partnership in which partners acquire a stake in their personal capacity. Gilbert + Tobin partners’ collective investment in LegalVision is a good example of this. This strategy may be useful for taking a stake in new discrete businesses, but it could get messy if only a subset of partners elect to invest and the new ventures were directly involved in co-creating the legal service.
The Glory Days Scenario
If firms are more bullish and expect the good times to continue, then maybe some really interesting strategic choices on the cards.
With a higher risk-tolerance, firms may elect to do some or all of the following:
- Take the opportunity to incorporate and create the capital base and balance sheet to innovate that is not possible within the partnership model. With more money to play with, firms will be in a better position to compensate partners for any one-off capital gain issues.
- Double their investment in developing the skillset, toolset and mindset to compete in the digital age. Within four to five years, the firm will experience a step-improvement in its capability to harness the power of new technology, but more importantly the willingness to embrace change.
- Double the intake of legal graduates and make the life for junior lawyers more bearable. Creating more system capacity and having a bigger pool of talented happier people will make the firm mentally stronger and healthier.
- Acquire a boutique management consulting firm will the express aim of accelerating lawyers’ abilities as holistic strategic business advisers.
- Split the firm into two: one part that can command super-premium value-based pricing, and the other housing those practices that require market-leading operational excellence to thrive.
- Create an internal ‘risk enterprise’ modelled on the litigation funding business model. This new business will enable the firm to enter more innovative gain-sharing pricing arrangements with clients and bring more creative value-building opportunities to the table.
- Make an aggressive play in the compliance market. Over the years, the Big 4 accountants and other providers have controlled this market and reaped millions of dollars from it. The Royal Commission has essentially revealed that these incumbents have failed and it’s time for legally-trained risk experts to return.
So which one?
So which is more likely to eventuate: the one-off wonder or glory days?
My best guess is that it will be somewhere in-between. Yes, the Commission will end but there is a lot of underlying demand driving growth in top-end legal work. The broader economic outlook is okay to good, slated infrastructure spend is massive, in- and outbound capital flows will remain strong and post-Commission restructuring will keep the corporate lawyers busy for quite a while.
The perfect storm has become the perfect calm. The open question is just for how long?
Source: strikingly.com
business, change management, culture, executive leadership team, governance, growth, innovation, internal collaboration, Measurement, planning, professional service firms, strategy management
Measurement matters more than money
In Articles, Commentary on 24 July 2018 at 7:56 amA firm’s profit-sharing model is a poor determinant of collaborative behaviour.
Motivational theory predicts that firms with equal-share or lock-step model would be far more collaborative than those with more performance-based reward systems. The logic is that in equal-share firms there is a strong financial incentive for partners to grow the collective pie by sharing clients, staff and other resources.
I can think of a number of firms where this theory simply does not hold true.
Source: strikingly.com
Despite equal profit share, partners in these firms hoard work and clients, they hold onto resources and they operate primarily in silos. They continue to do this despite all the evidence that better collaboration will result in higher profits, more staff engagement and stronger client loyalty.
SO WHAT IS GOING ON?
In many firms, partner performance measures are oriented around financial metrics like personal and supervised production, fees billed, fees collected, work referred, utilisation, write-offs and WIP. They are usually reported monthly in arrears and are transparent to the rest of the partnership.
It appears to me that silo’ed behaviour is driven by a reaction to the measurement system by three different types of partners.
Insecure Overachievers
Insecure partners view their relative ranking on performance reports as a signal of their worth, both to themselves and others. The data is a form of validation or redemption. Getting higher up the individual billings league table takes on new meaning, that is, proving that they’re ‘okay’. At the extreme, one hears of stories of partners gaming the practice management system and manipulating data so as to rank higher. Perhaps in an eat-what-you-kill firm, this behaviour is more understandable, but in an equal-share firm, it just smacks of paranoia.
Inflated Egos
Those with above-average egos use individual reporting as a competitive scorecard signalling that they’re winning and the others are losing. While some internal competition is healthy, in some firms, it strays into a dog-eat-dog culture where collaboration is the last thing on people’s minds.
Tenureds
‘Tenuritis’ is my term to describe the mindset of a partner who feels that as an owner they have a self-directed job for life with next to zero accountability. For those even partially inflicted with tenuritis, the performance reports have little impact. They’re mostly ambivalent about the data and care little whether they sit at the top, middle or bottom.
SO WHAT CAN YOU DO ABOUT IT?
The key issue here is that measurement should not be used as a proxy for leadership. It’s just plain lazy (and a little cowardly) if firm leaders send out the monthly reports and then think their job is done.
Effective leadership is about [i] providing regular feedback – the good, the bad and the ugly, [ii] active listening, [iii] setting direction, [iv] developing capability, [v] offering support, [vi] opening doors, and [vii] removing constraints.
In equal-share firms, effective leadership is crucial to mitigate the measurement system risks outlined above. It is also fundamental to restoring a sense of fairness across the equity partnership and to get everyone performing to their full potential.
Without effective leadership, meritocracies run the risk of letting the “money do all the talking”. The differential in reward might address the perception of fairness but it does little for partner development, especially for those not intrinsically motivated by the Dollar. Profit-share, on its own, is a blunt pseudo-precise deferred performance management tool.
I believe a firm’s leadership capability is a far better determinant of one-firm collaborative behaviour than its profit sharing model. There are thousands of examples of deeply collaborative public and private companies that operate with merit-based rewards. There’s no reason why professional service firms should be any different.
CALL TO ACTION
If cross-firm collaboration is on your strategic agenda, don’t just jump to the reward lever and expect everything to change. Rather take some time to think about what and how you measure and the critical role your leaders play in driving one-firm behaviour.
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