Full text of my opinion piece first published in the Australian Financial Review on 7 February 2020.
Law firm partners focus a lot their profit and loss statements but tend to glance over the asset section of their balance sheets.
This is a missed opportunity.
There are three main reasons assets are largely ignored. Firstly, in ‘zero-in zero-out’ partnerships with 100% dividend payout ratios tracking long-term asset value is relatively less important. Secondly, in some firms, the accountants lump all intangibles into a vague and unhelpful construct called ‘goodwill’. And thirdly, balance sheets tend to list boring things like plant and equipment.
Original AFR article
From a strategic management perspective, there is a significant benefit in framing goals around making the firm more valuable. This means identifying all the assets, both tangible and intangible, that the firm uses to create and sustain value.
A more detailed balance sheet can also be useful when it comes to partner performance management. Growth in asset value should be the heart of what’s expected of partners, especially in regard to their non-financial contribution.
Tangible assets are easy to quantify. The intangibles less so.
Here are five important intangible assets in your firm that are worth measuring, protecting and leveraging.
#1 Relationship capital
Relationship or social capital refers to the strength and stickiness of existing client relationships and, where relevant, referrer and community connections.
While there are no simple measures of relationship capital, good proxies include total client lifetime value, client commitment indices, net promoter scores, client loyalty rates, average service mix per client, share of wallet of platinum and gold clients, social network strength and percentage of sole-sourced work.
#2 Human capital
Human capital refers to the quality, performance and commitment of all partners and staff. Management reports often include data on salaries, recruitment, training and turnover, but these don’t get to the heart of tracking human capital growth or depletion. Additional measures might include:
- Toe-to-toe analysis comparing the quality of key practitioners in the firm versus direct competitors
- Loyalty and career intention indicators
- Succession and talent development pipelines by practice area
- Diversity and inclusion metrics
- Glassdoor, Seek and social media ratings
- Employee net promoter scores
- Leadership capacity and capability
- Culture maps, highlighting hot spots or blind spots
- Real-time measures around staff morale, firm climate, employee experience and discretionary effort.
#3 Brand capital
This refers to the strength of the firm’s brand and reputation in key target markets. Traditional measures include brand awareness, consideration, preference, use, board room impact, recommendation and social media following. An ability to attract star recruits is also an indicator of its brand capital.
One benefit of a strong brand is the ability to command a price premium. By way of example, in 2019, Apple’s brand premium enabled it to capture 66% of smartphone industry profits, 32% of overall market revenue while only selling 13% of total handset units.
Proxy measures around the firm’s pricing clout impact might include the percentage of bids won where the firm was priced higher than competitors, depth of discounting and percentage of matters with supernormal margins.
#4 Data capital
Most firms are sitting on mounds of valuable data with most of it stored on disconnected databases collecting digital dust. The main data islands include:
- client data such as matters delivered, interactions, service feedback, event participation, agreed pricing and billing,
- staff data such demographics, salaries, tenure, engagement, training, feedback and performance records,
- operational data such as time records, matters processed, productivity and utilisation, and
- financial data such as revenue, margins and expenses.
Joining these data sets and applying some smart predictive analytics will allow firms to make much better decisions. For example, the analysis could point to using a specific team with a particular process to do a specific type of matter for a certain client category using a defined pricing model. Each of these choices might mean a 2% improvement, but accumulatively you’re looking at +10% gain without working any harder.
#5 Intellectual capital
The last category is for important bits of firm know-how that don’t neatly fall into one of the other four areas. This might include the proprietary legal products, algorithms, websites, domain names, precedents, templates, applications, patents and trademarks.
Growth in intellectual capital could be assessed by things such as the firm’s investment in research and development and its innovation portfolio. Quantifying the revenue from new products and services can indicate success or otherwise in this asset class.
A call to action…
Take a quick glance over your firm’s strategy papers and board reports over the past 12 months. Is there a way to elevate your firm’s strategic thinking by delving into the intangibles that will sustain your long-term success? I bet there is.
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business, growth, innovation, professional service firms, strategy management
Love the tech you’re with, at least for now
In Articles, Commentary, Legal Technology on 11 May 2020 at 11:16 amFull text of opinion piece first published in the Australian Financial Review on 7 May 2020.
One of the key decisions law firms need to make during the COVID-19 crisis concerns investment in new legal technology and innovation.
While some firms are keeping their R&D spend intact, anecdotal evidence suggests the majority are going into some form of hibernation.
Regardless of whether your firm decided to stop, reduce or continue, there is a strong business case for getting more out of what you already have. It’s not quite as exciting as playing with shiny new tech toys, but sometimes – as in the words of that great Stephen Stills’ song – it’s better to “love the one you’re with”.
To make more of your existing technology it’s important to ask three questions.
Can our partners and lawyers use it well?
Taking Microsoft Word as an example, my guess is that your firm currently uses it semi-well.
Most partners and lawyers use basic features like track changes, automated numbering, cross-referencing, indexing and sections. However, I suspect only a handful would be good at using styles, templates, programmed auto-corrects, tailored designs and macros.
There is much to gain in terms of lawyers’ and clients’, time and money from investing in targeted Word training. Not having everyone at a base level proficiency in the basic tool of the trade is going to bite hard especially if you are looking to reduce secretarial support ratios or to have a more flexible work-from-home operating model.
Can we make it work better for us?
The COVID-19 crisis is also a good time to experiment with add-ins, plug-ins and tools that add power and functionality to your existing applications.
It is much easier to extend an existing technology with a familiar user interface than adopt something completely new. What’s more, existing apps are usually fully deployed, paid for and supported.
Taking Word again as an example, there is a growing number of complementary tools on the market that are worth investigating. David Bushby, a lawtech expert from InCounsel, has kindly curated this list:
Are we becoming too dependent on it or its vendor?
During COVID-19 crisis, there has been a rapid uptake of Microsoft’s video-conferencing tool, Teams. It appears that the latter has become the favoured video application of many large law firms and the Federal Court.
Given the vast installed base of the Office Suite and now Teams, it’s not hard to imagine that Microsoft will attempt to monetize its strong competitive position further.
One scenario involves them adding code into documents and emails to capture data around document preparation time, quality, cost, originality, storage and authorship. Combining this valuable data with its established software suite and ‘voila!’ – they will control or strongly influence the entire legal supply chain.
In this scenario, it would be tough for individual firms to counteract Microsoft’s power. However, new collaborative application platforms owned by law firms, like Reynen Court in the USA, may point to a future with more options.
In this future, there may be opportunities to follow the advice of Wet Wet Wet rather than Stephen Stills – and make sure your “love is all around”.
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