A blog by Joel Barolsky of Barolsky Advisors

Posts Tagged ‘executive leadership team’

Is HWL Limited a buy?

In Articles, Commentary on 30 August 2020 at 12:35 pm

Full text of my opinion piece first published in the Australian Financial Review on 27 August 2020.

Earlier this week, the Australian Financial Review reported that HWL Ebsworth (HWLE) was preparing to list the firm on the ASX with a $1 Billion-plus valuation.

While details are scant at this stage, it is worth asking whether stockbrokers will recommend a BUY when the HWLE Limited prospectus is issued?

My prediction is they will give this IPO a thumbs down for five main reasons.

#1 Insufficient surplus

As a listed entity, HWLE partners will have to share a portion of the firm’s profits with external shareholders. For the sake of argument assume the current partners enjoy average earnings of $1.5 million per annum. In the future, partner earnings – salary plus bonus minus profit share – might reduce to say $1 million. The incumbent partners will most likely accept a reduced annual income given their significant capital gain upon listing.

This business case seems logical but misses one key point – there is a fiercely competitive market for top talent. Many of the best HWLE partners are proven rainmakers will still be able to command incomes around $1.5 million or more at other non-listed law firms or by setting up their own practice when their employment and escrow handcuffs come off.

At $1 million – the maximum the firm can pay and still maintain dividend payments – HWLE Limited will be way off the mark in attracting any new ‘$1.5 million’ partners.

Over the long term, there’s insufficient surplus to keep both partners and external shareholders happy.

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#2 Clients don’t buy the firm

When Shine Justice Limited first listed on the ASX, they presented strong evidence that their personal injury clients chose them because they trusted the firm’s brand and were largely lawyer agnostic.  When IPH listed, investors were enticed by a large proportion of annuity income from patent and TM renewals and an ambitious plan to scale.

When it comes to HWLE’s mostly business-to-business relationships, research shows that clients are much more discerning around who does their work.

HWLE external shareholders will not be buying a company with a strong brand with sticky institutional client relationships. They will be buying a collection of individual portable practices, each with their own reputation and client following.

#3 Vague growth story

External shareholders examining the IPO prospectus will be looking for a compelling growth story. They will want to see how a fresh capital injection will drive shareholder value.

Under Juan Martinez’s leadership, HWLE has a solid track record of acquiring legal practices without the need to splash much cash. Economies of scale work well in mining but less so in premium legal where even boutique firms can generate supernormal profits. Despite all the hype, there’s no legal technology yet available that will create a sustainable cost or client service advantage. Creating a multi-disciplinary practice or moving offshore is fraught with risk.

So, unless I’m missing something, the growth plan beyond more of the same seems less than convincing.

#4 Key person risk

From interviews with former staff, it appears that Juan Martinez has a robust directed leadership style. Overheads are kept to a minimum and all lawyers are encouraged to be on the tools all the time to compensate for below-market pricing.

This is the operating model that has been the bedrock of HWLE’s success to date.

Given Mr Martinez’s tenure and track record, the market will have many questions over the strength of HWLE’s bench. If the proverbial bus had to arrive who will keep the firm together and herd the cats? I’d imagine the firm’s value will be discounted heavily because of this key person risk.

#5 More losses than wins

Future investors in HWLE will have a good look at the investment category and proceed with caution. A 20-year analysis of law and accounting firm IPOs in Australia reveals far more losses than wins, especially for external investors. This includes firms like Stockfords, Harts and Slater & Gordon.

One of the reasons for these failures is the loss of the partnership culture that underpins their initial success. This culture comes from the incumbent partners’ sense of proprietorship, stewardship, collegiality and identity. Shifting from partner to employee is a big shock to many. Financial transparency, share price volatility and an added compliance burden all often have a negative cultural impact.

In conclusion

I have drawn strong conclusions about the potential float of HWLE without access to any specific details. I look forward to reviewing their IPO prospectus and seeing how wrong I am. But if I’m not, buyer beware!

How your law firm can limit virus hit to bottom line

In Articles, Commentary on 7 August 2020 at 3:42 pm

The full text of my 7 August 2020 opinion piece first published in the Australian Financial Review.

There is every chance that COVID-19 will mean a big hit to your firm’s revenue for the 2020-21 financial year. So, what levers are you using to limit the downside impact on profitability?

Greg Keith, the chief executive of accounting firm Grant Thornton, recently indicated he was anticipating a decline of 8.5 per cent in revenue and 33 per cent in profit.

It means that for every 1 per cent drop in income, they are forecasting a fall of nearly 4 per cent in profits.

Accounting firms, like law firms, are mostly high fixed-cost businesses that are super-sensitive to changes in revenue – both on the downside and the upside.

To limit the profit impact, firms tend to first cut non-essential spending like travel and entertainment. After these “easy” savings are exhausted, reducing staff numbers comes into the frame.

While there are obvious short-term benefits – staffing can comprise 60 per cent of all expenses – there’s a significant risk of not having enough of the right resources on hand when demand picks up. So, the 2020-21 saving needs to be weighed up against the full cost of re-hiring and training in the future.

In my view, there are two areas where firms could do a lot better to enhance profitability without letting people go – pricing and the sharing of resources.

Pricing for profit

Over the last few years, most mid-sized and large firms have worked on their pricing practices.

With a significant market downturn and price war on the cards, one firm recently redoubled its support for partners to preserve and capture value through price. This included video training modules on value articulation, gamified programs around price negotiation, improved analytics, new pricing tools [like Price High or Low 😀] and more direct hand-holding for new business pitches.

Some firms are adopting a range of creative strategies to meet client needs rather than merely dropping price. They include:

  • Adjusting payment terms and conditions so strapped clients are more willing to brief the firm rather than others;
  • Offering non-time-based pricing structures such as subscriptions, contingency fees or amortising fees;
  • Special promotions in ‘ring-fenced’ service areas to avoid across-the-board rate cuts and safeguard the firm’s brand position; and
  • Offering options at different price points.

One law firm offers its clients three pricing options on every new matter. They’ve adapted Qantas’ pricing approach by offering the equivalent of the airline’s Red e-Deal, Flex and Business Class options.  As with Qantas, each option has the same core benefits around quality and reliability but differ in terms of the format of the deliverables, roles, timing and scope.

Another firm analysed their top 100 clients to determine how each was being affected so they could tailor messages and offers. In one instance, this led to a new digital service offering as some clients moved to virtual selling and distributed operations. In another case, they shifted to a self-service model for a client going through a major cost-cutting exercise.

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Resource sharing

I was recently advising a law firm where analysis of time records revealed that some individuals and teams were extremely busy while others were well below capacity.

When I asked why resources were not shared to even out workloads, the most common response was that lawyers could not easily work outside their area of specialisation.

Not satisfied with that objection, I delved a bit deeper. My enquiries revealed a range of constraints – cultural, structural and personality – to collaboration. For some partners, “letting my people go” was a sign of failure. For others, they didn’t see any direct financial incentive to share resources, so they didn’t bother. In one office, each practice team saw itself as a self-contained business, and the prevailing mindset was more competitive rather than co-operative.

In good times, there’s often enough fat in the system to ignore these problems, But if your firm is looking at an equation that means every 1 per cent drop in revenue leads to a 4 per cent drop in profits, then you might need to change your thinking.

Firms pay price for poor HR record

In Articles, Commentary on 4 August 2019 at 7:22 pm

Full text of op-ed first published in the Australian Financial Review on 2 August 2019.

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Almost all large and mid-sized law firms have an in-house human resources (HR) team to handle recruitment, development, reward and other people issues. A high-performing trusted HR team is essential in winning the war for top talent.

Unfortunately, many firms are shooting themselves in the foot by having poor relationships in and around HR.

At its extreme, it goes something like this…

HR team members perceive their firm’s partners to be disrespectful, disempowering and ignorant of the value that HR professionals can really bring. They feel excluded from critical conversations concerning performance management, remuneration and workforce strategy, especially for partners and senior practitioners. They are frustrated by people that don’t show up to important HR-initiated meetings, and if they do, they’re there in body but not in mind or spirit.

One the other side of the fence, the firm’s partners have an ambivalent or even hostile attitude toward their HR team. They perceive them to be process-driven, uncommercial, reactive and superficial fad surfers. Partners discount their advice because HR team members appear to lack deep knowledge of firm economics, firm strategy and broader legal market trends.

The consequences

In practice, this chicken or egg standoff results in things like:

  • Being too slow to respond to new talent opportunities and missing out
  • Being unaware of flight risks and reacting too late
  • More ‘ow’ than ‘wow’ in employee experience
  • Low impact and clunky performance management
  • Incomplete HR data and unreliable analytics
  • Wasted training and development resources
  • Expensive HR practitioners doing low-level process work
  • Partners second-guessing decisions in areas they have little or no expertise.

Accumulatively these problems add cost and become a strategy handbrake. Over time, firms simply become less competitive.

Addressing the problem

There are five things firms should consider doing to address this problem:

1.    Call it out. The standoff scenario described above is extreme. This problem may only exist in pockets or not at all, but it’s good to know the truth. An honest and comprehensive review of what’s working and what’s not can isolate what’s really needed. This review should not be seen as a HR witch-hunt, but rather how the firm’s partners and the HR team can truly collaborate to give the firm a competitive edge.

2.    Improve the science. Many HR initiatives are (a little unfairly) perceived as soft and fluffy and requiring a big leap of faith when it comes to return on investment. Applying the principles and practices of data science to HR can set the stage for true impact. New HR initiatives supported by compelling evidence will get much greater interest and uptake. There are myriad of fresh valuable insights waiting to be discovered from mining HR data and especially in the linkages with financial, operational and client data.

3.    Calibrate risk profile. Many HR decisions come with big risks. For example, a bad new recruit can become a cultural terrorist, or a poor reward decision can lead to a regrettable departure. These risks push many HR teams towards being very conservative and opting for the path of least resistance. This approach can be sub-optimal especially if the firm is trying to innovate and create a growth culture. A joint effort by the firm’s leaders and HR to calibrate HR decision risks and policy will go a long way to avoid blame-shifting and getting strategic alignment.

4.    Create lateral leaders.  As with all business service functions, HR has lots of responsibility but with little or no formal authority. This means HR practitioners have to develop lateral leadership skills to work across the organisation as influencers and catalysts for change. They need to learn to lean-in and develop the personal gravitas to have their voice heard.

5.    Learn from IT.  Many law firm IT departments have moved to a co-sourcing approach with the outsourcing and automation of low-level process, support and compliance activity, and insourcing of high-level advisory work and R&D. The managed service model is maturing at a rapid rate and HR should embrace this trend to focus their energies in becoming true trusted advisors.

‘True trusted advisors’! Surely that’s a better vision than process-driven, uncommercial fad-surfers?

Avoiding the Bermuda Triangle of law firm management

In Articles, Commentary on 2 March 2019 at 8:50 pm

Full text of my opinion piece first published by the Australian Finance Review on 1 March 2019.

Is your firm getting trapped in the Bermuda Triangle of law firm management? It might be and, worse still, you might not even be aware of it.

In the early 2000s, Professor Ashish Nanda of Harvard Business School commissioned a study to test whether the concept of economies of scale applied in commercial law firms?

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AFR print edition

He plotted profit per equity partner (PEP) against the number of fee earners for over 200 firms in the United States. The results disconfirmed the scale economy theory but revealed something even more interesting: PEP was relatively high for small boutique firms focused on specific market segments, and for very large firms who were able to compete for larger bet-the-company M&A transactions, projects and disputes. However, a majority of mid-sized firms had lower PEP relative to their much smaller and much larger peers. While the graph had dots everywhere, the best-fitting line looked like a large ‘U’.

Two theories were put forward to explain the U-shape. The first was that many of the mid-size firms found it hard to differentiate themselves and as a result were unable to secure a price premium. The proposition was these firms were in the ‘mushy middle’ losing out smaller and larger firms that were better positioned in the market. A deeper analysis of the data revealed high- and low-priced firms across all the three groups and therefore market differentiation was concluded to be a relevant factor but not the full story.

Growth pain zone

The second theory was that many law firm partnerships suffered heavily from growing pains. Small firms benefited from quick, informal decision-making and lean management processes. Large firms had the advantage of more mature and formal management practices and leadership capability. Problems emerged when shifting from small to large. Professor Nanda called this growth pain zone the ‘Bermuda Triangle of Law Firm Management’.

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The Triangle phenomenon can be explained as follows.

Growth in the number of fee-earners, office locations, service range and clients often results in more management complexity. There are more day-to-day decisions around who to hire, fire, promote, take leave, reward and sanction. There are more issues to deal with in regard to administrative processes, technology and systems. Marketing and business development decisions such as client pursuits, pricing and conflicts become trickier. At a strategic level, there’s more at stake when making major investment decisions and signing long leases for larger premises.

Many law firm partnership struggle with this increase in complexity. A common response is to allocate more partner time to deal with management issues. As decisions become more complex, more and more time is taken up in internal meetings and management conversations. Partners are drawn away from the things that matter most, that is their clients, prospective clients, referrers and people. Firms become internally-focused at the very time that an external market-orientation is most critical. This collective distraction has a material negative impact on firm performance and competitiveness.

With the noble pursuit of partner equality, fairness and sense of proprietorship many firms are reluctant to take away any decision rights from partners. With this approach, almost every decision, from the colour of sticky notes to staff parking policy needs consultation and consensus. This often results in extensive delays and lowest common denominator decision-making i.e. doing what all can agree on rather than on what’s right.

Major blind spots

In some growing firms, partners take on designated management role in key functional areas like HR, IT, Marketing and Finance. While this helps share the load very often the partners overseeing these functions have next to no training or experience in these areas. They have major blind spots and often make sub-optimal decisions that ultimately cost the firm. Even when firms hire specialist managers in these business support areas it is quite common for partners to second-guess these professionals and override their decisions.

The most critical element in navigating through the Triangle is effective leadership and followership. If the firm has a competent leader, they tend not to over-invest valuable partner time in governance roles, they make the right decisions quickly and implement them. Effective leadership builds trust amongst the partners who are happy to cede many of their low-level decision rights. Good leaders provide the right support and intolerance for partners to perform to their full potential. They facilitate a culture that is focused on delivering a superior client and employee experience. All these things matter.

A quick review of the high growth firms in Australia over the past decade confirms this hypothesis. Many have a strong, effective leader or a leadership group that have helped minimise growing pains and navigated through the Triangle. The words of the Bear Hunt, “they haven’t gone over it / they haven’t gone under it / they’ve gone through it.”

Measurement matters more than money

In Articles, Commentary on 24 July 2018 at 7:56 am

A 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.

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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.

With the Insecures and Inflated Egos it is the symbolic power of measurement that’s primarily driving behaviour. With the Tenureds it is the over-reliance of measurement as a leadership tool which, with these individuals, has very limited power.

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.

The end of the club

In Articles, Commentary on 25 June 2018 at 10:09 am

First published in the Australian Financial Review, 22 June 2018

A ‘club’ is a Tier 2 full-service firm of individual practitioners who enjoy each other’s company. It is a nice, collegiate, shared-office environment where partners enjoy a relatively high degree of autonomy and welcome the occasional cross-selling opportunity.

And the club, as a business model, is about to die.

The principal reason for its demise is that most of the individual practitioners that make up the club will not be able to compete. Unless their expertise is unquestionably superior or they have welded-on client relationships, these solo specialists will start to lose out to a combination of freelancers, platforms, networks, focus and one-firm firms.

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Source: strikingly.com

Solo specialists versus Freelancers

Many of Australia’s Tier 1 law firms thinned their partner ranks during the 2010’s (a trend reversed in 2018). This was done through de-equitisation, early retirements and forced redundancy. Ashurst, for example, had 186 Australian partners in July 2013 and 142 in July 2016.

A number of these very accomplished practitioners set up shop as high-end legal freelancers. Using sophisticated cloud-based software, a laptop and a phone, these lawyers have next to zero overheads and the flexibility and agility to practice where and when they like. There is simply no contest when matched to a Tier 2 practitioner constrained by firm pricing policies, high office rents and administration expenses.

Solo specialists versus Platforms

HWL Ebsworth and Mills Oakley stand out as two very successful high-growth platform firms. Their strategy is about aggressively acquiring partners with portable practices and offering them incomes more directly aligned to their total financial contribution, both direct and referred. These firms have strong operational disciplines and lean back-offices. They are well led with partners focused less on office politics and more on things that matter, that is, their clients and staff. HWL prides itself on offering partner chargeout rates lower than many Tier 1 and 2 firms and fixing these rates over time.

These platform firms run harder and faster than the clubs. The energy and discipline they bring to the market gives them a real edge. And if they come across a high-flying solo-specialist in a sleepy club, they’ll make them an offer they can’t refuse.

Solo specialists versus Networks

The past five years have seen the emergence of a number of network law firms and legal staff companies. Examples include Lawyers on Demand, LexVoco and Crowd&Co. There are also a number of legal staff companies aligned with established law firms, such as Corr’s Orbit, Allens’ Adapt and Minters’ Flex. One standout element of these networks is they have a very small team of full-time staff and only contract lawyers to work when there’s a confirmed fixed-fee client assignment.

The toe-to-toe analysis of networks versus solo-specialist yields very similar conclusions to the Freelancer and Platform models.

Solo specialists versus Focus firms

Focus and boutique firms specialise in a narrow range of worktypes or client sectors. Two standout examples in this category are SBA Law, a Melbourne-based corporate boutique, and Thoroughbred Legal, a general practice firm focused on the thoroughbred racing industry.

These firms position themselves as having deep expertise, knowledge and critical mass, and a service delivery model 100% attuned to the needs of their target market.

Beaton data points to technical expertise and understanding of client industry as key drivers of client choice. As such, focus firms will almost always out-credential and out-compete Tier 2 practitioners largely competing on their own.

Solo specialists versus One-firm firms

David Maister coined the term “one-firm firm” to describe a full-service firm where,

  • the firm brand is stronger than individual partner brands,
  • the firm has a ‘house style’ and delivers consistent quality across the board,
  • the firm’s culture is deeply collaborative in regard to sharing clients and resources, and
  • the firm is prepared to invest in new profit growth initiatives without prejudicing individual practitioners.

One-firm firm’s competitive advantage comes from wider ‘institutionalised’ client relationships and the ability to bring many minds to solve complex client problems.

Over the past decade, many larger clients have sought to reduce the size of their panels and form strategic partnerships with fewer (one-firm) firms. This procurement trend effectively locks-out the solo-specialist in a collegiate club.

The preferred strategic option

Over the next five years, some clubs will fold, some will fracture into a series of boutiques and some will be acquired. Most will try to address their situation by trying to become one-firm firms. The leadership challenge of this transformation is huge, and the risk of losing star partners and associates along the way is high. Unfortunately, I expect only a small number will be able to make the necessary changes and survive.

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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