“Our board gets preoccupied with operational issues. Important discussion around the firm’s strategy is the exception rather than the rule.”
Addressing the firm’s expanded balance sheet is one way to get your board to focus on big-picture strategy. Expanded balance sheets include the intangible assets that are crucial to the firm’s long-term competitiveness and profitability.
While accountants often refer to these intangibles as goodwill, I think there’s much strategic value in disaggregating these intangibles into four separate asset classes*: relationship capital, human capital, brand capital and structural capital.
Boards need to make a critical assessment as to whether capital value is growing or slowing? Asking good questions and directing management to address significant strategic issues and opportunities is what the board’s stewardship role is all about.
This refers the quantum, strength and stickiness of existing client and referrer relationships.
- Grow: growth in relationship capital can be assessed by things like major client acquisitions, client commitment/risk indexes, client engagement, Net Promoter Scores, % of sole-sourced work, sales pipeline velocity, bid-win ratios and service mix per client. Some firms track client lifetime value as an indicator of its relationship capital.
- Slow: relationship capital can be diminished by major client losses (actual and pending), loss of key people with strong networks, structural change in client organisations, and growth in competition, both direct and disruptive.
This refers to the quality and performance of all those that work in the firm.
- Grow: growth in human capital can be assessed by things like partner and staff retention, engagement, participation and discretionary effort. Culture mapping often reveals amazing strategic insights. Clear and compelling succession plans for the firm’s key rainmakers and team leaders is good a lead indicator of future capital value.
- Slow: human capital is often diminished by cultural misfits, major internal disputes and disruptive politics. One indicator of the latter is the percentage of time the firm’s managing partner spends addressing internal matters like performance measurement (i.e. who takes credit), partner remuneration, client ‘ownership’ and resource hoarding/sharing. Power struggles and infighting between divisions, office locations, teams, practices and individual partners are often major distractions and result in sub-par contribution from everyone.
This refers to the strength of the firm’s brand and reputation in key target markets.
- Grow: growth in brand capital can be assessed by things like brand awareness, consideration, preference, use, recommendation and social media following. This can be evidenced by awards, rankings and directory listings. Relative price premium is often a useful proxy for brand strength. The firm’s ability to attract star recruits, at junior, mid and senior levels, is also an indicator of its brand capital.
- Slow: the firm’s brand can be weakened by major losses, be it clients, projects or people. Recent developments at Slater & Gordon are ample evidence of the negative impact of an externally visible crisis. Clayton Utz took years to fully recover from the infamous BAT case.
This refers to the value of the firm’s IP, its systems, products, apps, methodologies, technology and platforms.
- Grow: growth in structural capital can be assessed by things like the firm’s investment in R&D and its innovation portfolio. Quantification of the current and potential revenue from leveraging the firm’s IP may also be useful.
- Slow: a strategic assessment of structural liabilities might include a systems effectiveness and efficiency review. In one leading law firm, they classified of each of their systems into:  value-adding,  functional and  deadweights. The latter were clunky systems that reduced efficiency, increased user frustration and/or lowered quality. The outcome of this review affirmed the conclusion that the internal user experience was a crucial part of creating a high-performance culture.
Boards that have adopted the four capital approach, or a variation thereof, usually rotate their agenda and focus on one area per board meeting. Discussions usually revolve, firstly, around the nature, quantum and key trends in the asset class, and secondly, how the assets should be protected, developed and leveraged further.
This approach results in a much clearer delineation in the role and contribution of the board and that of the firm’s management team. It also means that in-depth deliberations around preferred colour of Post-it notes are omitted from the board’s agenda.
* This approach is adapted from the work of Erik Sveiby.