Full text of an opinion piece first published in the Australian Financial Review on 4 October 2019.
With the march of technology, law firms face a profit problem if two trends persist.
The first trend relates to how firms charge for their services. Recent Acritas data reveals that time-based pricing still predominates across the legal market. This includes both billing retrospectively via hourly rates as well as upfront capped or fixed fee pricing based simply on an estimate of time multiplied by hourly rates.
The second trend relates to investment and advances in legal technology. Over $1.75 Billion has already been invested in new legal technology across the globe in the nine months to September 2019.

The published version of the AFR article
Today, technology is used primarily for email, word processing, legal research and in discrete areas like e-discovery. At a very simplistic level, one could say that software is currently about 5% of the “average” service product.
In five years, sophisticated technology will become integral to service delivery. It will be used legal document preparation, contract review, advice in rules-based legal areas, due diligence, case prediction and in process automation. Many elements of a firm’s IP will be incorporated in smart precedents and algorithms.
As best as we can predict, in five years legal technology will make up roughly 25% of the legal product. This percentage will be much lower in brain surgery practice areas, but higher in volume more commoditised work types.
The profit problem arises because it’s really hard to charge for software in 6-minute increments!
Using the simple percentages noted above, revenue for 25% of the legal product will not be captured if firms just bill or price based on the time that humans are involved.
Moreover, given that much of the new technology is focused on lawyer efficiency, revenue will decrease by having fewer human hours in service delivery. Costs will increase to procure, tailor and deploy software, and in capturing firm IP.
Find a new model
The financial impost will be huge unless law firms find a new model.
Value-pricing is one approach that can be used, in part, to address this problem. Rather that setting fees based on inputs and time, price is set by reference to client perceived benefits. A fee is agreed upfront based on client preferences, context, scope of work and anticipated outcomes, both short- and long-term.
While value-pricing has much appeal, there are constraints on both the supply and demand side. Some lawyers are reluctant to take on the risks of promising outcomes and in fixing fees. Others really struggle to quantify and communicate the value they provide. They prefer selling time as it facilitates practice autonomy and it covers up any inefficiencies. Many law firms have an entrenched culture of using time records to assess productivity.
On the demand side, it appears most large corporate and government clients are very comfortable with the transparency and comparability of conventional time-based methods. They back themselves, or their e-billing software, to critically review proposals and bills, and not pay for any obvious time padding or wastefulness.
Almost every major client panel tender in Australia over the past three years has asked firms to propose “alternative fee arrangements”. Very few clients adopt any of these alternatives and most resort to discounted hourly rates to compare firms and to pay for services rendered.
Enough fat
Some clients view technology, project management and other non-lawyer time as ancillary benefits or ‘value-adds’ that firms have given away in the past and they should not need to pay extra for in the future. They see high hourly rates as having enough fat in them to comfortably cover all the elements that go into service delivery.
So, if the tech wave is unstoppable and hourly rates are entrenched, what options are on the table?
- Do nothing and just wear the cost.
- Focus exclusively on highly complex and bet-the-company matters where rates can be increased to maintain margins.
- Redouble efforts to collaborate with clients to find new pricing models where the total value created is captured and shared fairly. This would include negotiating a mix of time, value-based and technology pricing models including license fees, subscriptions and platform payments.
- Scale-up, merge with competitors and accelerate the adoption of technology and other tools to be the lowest cost provider and have more price-setting discretion.
- Close-up shop and go surfing.
Feel like a surf, or are you up for the challenge?
business, change management, client relationships, culture, governance, growth, internal collaboration, professional service firms, strategy management
Why culture really really matters
In Articles, Commentary on 20 October 2019 at 2:41 pmThe full text of my opinion piece first published in the Australian Financial Review on 18 October 2019.
‘Culture eats strategy for breakfast’, is a frequently cited quote attributed to Peter Drucker.
My recent experience with three firms suggests that Drucker, whom some call the father of management thinking, might just be right. These firms have consistently outperformed their peers and recorded double-digit profit growth. This success has come without superstar rainmakers, with undistinguished brands and with no fancy-schmancy disruptive business models.
So, what is it that has made them so successful?
Original AFR article
It appears to me that the secret lies in their organisational culture, that is, the set of shared assumptions, values and beliefs that underpin how people do their work and relate to each other.
It’s their implicit management system that creates order and provides inspiration without the need to codify each and every activity.
I posit that there are seven areas where culture really matters.
#1 Productive politics
In firms with highly politicised cultures, enormous energy is expended addressing internal matters like who takes credit, who earns what, who ‘owns’ which client and who can and can’t work for whom. Power struggles and infighting between divisions, office locations, practice team and individuals distract from time with clients and staff.
A managing partner of a leading law firm once revealed to me that he spent around 40% of his time making and justifying partner remuneration decisions. In other words, splitting the pie, not expanding it.
#2 Collaboration
Research by Harvard’s Heidi Gardner reveals there is a significant financial upside when partners work together to solve wicked client problems. She distinguishes this kind of integrative collaboration from cross-selling. The former is about drawing together a diversity of knowledge and experiences to add value to clients, the latter is merely an arms-length referral to a colleague.
#3 Consistent high standards
In a recent panel discussion, I asked three General Counsel what distinguished top firms from the rest? ‘Consistency’ was the universal response. Leading firms were characterised by extremely high technical and service standards delivered consistently by all staff at all levels.
Successful firms are those that have cultures that are intolerant of mediocrity and expect, and get, high standards from everyone.
#4 Discretionary effort
Organisation cultures that are perceived to be purpose-driven and genuinely caring, trusting and fair tend to get the best out of people. Staff are more likely to go the extra mile, to act above and beyond the call of duty, or just do that little bit more. Toxic cultures often result in lower productivity, higher absenteeism and substandard output.
#5 Continuity
Continuity builds deeper client understanding and fosters trusting relationships. In a study in a large bank, the researchers found that where a client had five different relationship managers over a two-year period only 40% of clients were satisfied. This jumped to over 80% where there had been only one relationship manager.
Positive firm cultures facilitate retention and ensure continuity. A stable workforce also reduces the direct costs associated with staff churn.
#6 Self-management
Each of the three firms mentioned in the introduction is characterised by a lean management structure. All senior people, but excluding the managing partner, still retain significant practices. Each team within the firm has an ethos of self-sufficiency. They don’t see themselves as paralysed subordinates waiting for orders.
Alignment around firm direction, trust in leadership and a strong culture provide the glue that binds the collective but at the same time encourages individual empowerment.
#7 Accountability for action
Strange as it seems but many firms struggle with simply doing what they say they will do. An accountability culture is one where there’s a bias towards keeping promises and there’s less denial and deflection in cases of inaction. Successful firms have the disciplines to implement strategy and the fortitude to overcome obstacles that might emerge.
In conclusion
It is common for law firms to describe their cultures as ‘collegiate’, ‘respectful’ and ‘friendly’. In these tough times, I don’t think just being nice is going to be enough.
It is incumbent of every professional service leader to strive towards a cohesive, productive, healthy and disciplined culture.
This type of culture will take care of breakfast, but it will also allow the firm to have strategy for lunch and glass of the finest champagne over dinner.
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