A blog by Joel Barolsky of Barolsky Advisors

Posts Tagged ‘innovation’

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The future of law has fewer seats for grads

In Articles, Commentary on 16 September 2018 at 10:53 am

First published in the Australian Financial Review, 14 September 2018

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The pyramid has been the foundation operating model in private practice law firms for the past century. Put simply, a typical pyramid has a partner at the top, one or two senior practitioners below him or her, and then three or four juniors below them. These ratios obviously vary from practice to practice. Leverage and utilisation of the mid and lower levels of the pyramid are the primary profit engines of most firms that charge by time.

More recently there has been much talk of the pyramid losing its bottom left and right corners and becoming a rocket. In this model, there are far fewer junior lawyers and their work substituted by a combination of technology and lower-paid process workers.

The shift towards the rocket model is being driven by both the demand and supply side. Sophisticated clients are stating that they’re happy to pay premium rates for highly-trained senior practitioners to provide strategic advice, insights and judgement, but they’re not willing to pay high rates for junior lawyers to do largely process work.

On the supply side, many NewLaw and legal technology providers have seen the market opportunity to supply legal process services directly to corporate legal departments, to SMEs, to private clients and to law firms. Catalyst Ventures estimated the global LegalTech market to be worth over $US 16 billion in 2017.

There are four major strategic implications for private practice law firms in moving towards the rocket model.

#1 The role of partner

Law firm partners will no longer get by by just being great advisors and team leaders. Project management will become a critical element of the partner role. This means partners need to become adept at configuring the most appropriate mix of legal, process and technology resources to solve a client’s problem. They need to be able to design, prepare, price and sell project plans. To manage projects effectively they will need to be both digitally and economically literate. Teaching old dogs these new tricks will be a very big challenge in many firms.

#2 Size and access to capital

Economies of scale have not traditionally been a key success factor in labour-intensive law firms. New York’s Wachtel Lipton is one of the world’s most successful firms despite being a relatively small single-office partnership.

With the addition of product, process and technology to the business model, firm size and access to low-cost capital may bring specific advantages. These include the ability to wear the risks of R&D, and the ability to invest in high-potential start-ups, technology infrastructure, marketing capability and big data. There is also a defensive argument in that if your firm can’t afford the new bright shiny toys some clients might stop playing with you.

#3 Recruitment and development

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Source: strikingly.com

The pyramid model creates a “tournament” where a large group of aspirants start at the bottom and are encouraged to beat their peers on the way up. The rocket model potentially changes the game with far fewer recruited at the bottom and a philosophy of retention rather than competition. It also challenges the apprenticeship system of learning and development.

Firms will need to make profound strategic choices around whether they ‘make or buy’ talent. If clients are not prepared to pay for junior development and apprenticeship, then some firms may prefer just to poach mid-level staff trained by others. However, this free-rider approach may negatively impact firm culture and ultimately drive up labour costs.

#4 Pricing and measurement

Imagine your firm offers a new compliance solution for its clients that incorporates legal advice, training and a suite of software tools. You cannot bill for the software tools using hourly rates. Charging for the training by the presenter’s time severely undervalues the IP. Tracking staff utilisation in this scenario would not only be meaningless, but dangerous.

It is clear that time-based pricing will be less prevalent in a talent + data + technology world. New pricing models will be required to set, communicate and capture value. This will include things like user license fees, subscriptions and incentivised retainers. What constitutes a “fair price” will become more complex, and need to factor in development costs and risks, IP fungibility, the scale and scope of application, and duration of benefit.

Measurement will shift away from input measures like utilisation towards more outcome measures like client results and clients’ propensity to refer.

In conclusion

The rocket model scenario poses some profound challenges but it also presents many significant opportunities. There is clearly a benefit to be ahead of the curve in thinking through these issues and shaping your future. Not only it is critically important, the journey to becoming closet astronauts can be quite fun.

 

 

 

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10 ways to describe the Client Relationship Partner (CRP) role

In Articles, Commentary on 29 August 2018 at 11:41 am

Client Relationship Partners or CRPs are responsible for the overall success of the firm’s long-term relationship with each key client. Listed below are 10 different ways to describe the CRP role each with its own nuance and emphasis. These descriptions are useful in creating clarity in expectations, CRP selection, capability development and accountability.

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Source: strikingly.com

#1 The firm luminary and client advocate

The CRP faces outward and represents the firm to the client. At the same time, they face inward to ensure the voice of the client is heard and client’s interest are appropriately served. Read David Maister’s famous post to dive deeper into this job description.

#2 The pedestal seller (aka the Tinder Tactician)

The CRP networks actively within the firm and the client organisation, and brokers new relationships. They put colleagues and client contacts on a pedestal and talk them up wherever they can. They start their day by thinking about who they can introduce for mutual benefit.

#3 The strategic account leader

The CRP has the primary role of leading the team of practitioners and functional specialists servicing the client. As with any leadership role, their job is to set direction, communicate the strategy, inspire, motivate, cajole and align the various constituencies to execute this strategy. They span across formal organisation boundaries and facilitate collaboration in the core client team and with everyone in the broader client community. This job is made especially difficult in professional service firms because they usually have signifcant responsibilities without formal authority. They typically would have an internal network map looking like Partner 2 from Heidi Gardner’s recent research:

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#4 The planner

The CRP documents a clear set of activities that will help build a successful firm-client relationship over the short-, medium- and long-term. Their plan may look something like this:

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#5 The front-door

The CRP is the client’s first point-of-contact and the key person to address any service failures or concerns. They help redirect work to the most appropriate person within the firm that can service their need. They help make the client’s experience frictionless and engaging. This CRP role is a little more passive than the other models described, but it may suit a ‘care and maintain’ relationship that has little profit growth potential.

#6 The rainmaker

The CRP’s job is to maximise revenue and profit from the account. Full stop.

#7 The co-creator

The CRP facilitates the process of aligning the client’s strategic needs with the firm’s capabilities. They explore in some depth the client’s critical problems and opportunities and help bring together integrated bespoke solutions often involving multi parties, technologies and vendors. The CRP’s role would be to understand deeply the key elements that create value for the client. Page 1 of their client plan would be Bain’s 40 elements model applied to their key client:

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#8 The intrapreneur

Most relationships need ongoing renewal and inspiration in terms of product, process, people and pricing. The CRP role is to generate new ideas that add value and help get the best ones implemented.

#9 The elder

The CRP role is that of senior door opener, shmoozer, steward and repository of institutional memory. The role is less hand-on in terms of day-to-day account management but they do what’s necessary to influence key decision-makers and help win major new projects.

#10 The relationship choreographer (MY PREFERENCE)

The CRP orchestrates a set multi-lateral connections, value exchanges and mutually beneficial projects. They work internal and externally, strategically and tactically, short-term and long-term. The CRP brings the best of the firm to the client; and the whole of the client to the firm. Their job to drive the pink process to win more blue:

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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.

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Strategies for whatever future holds

In Articles, Commentary on 6 July 2018 at 7:43 am

First published in the Australian Financial Review, 6 July 2018

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Click here to read

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?

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Source: strikingly.com

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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.

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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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