A blog by Joel Barolsky of Barolsky Advisors

Posts Tagged ‘innovation’

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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!

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Will new partners need to keep grinding away?

In Articles, Commentary on 13 July 2020 at 6:18 pm

Full text of my opinion piece first published in the Australian Financial Review on 9 July 2020.

Most practice teams in the larger law firms have been set up with partners as the “finders” and “minders” and associates as “grinders”.

A decade’s worth of time records analysed by Thomson Reuters Peer Monitor shows that associates have around 10 more billable hours per month on average than partners in the same firm.

However, in April and May 2020 – the first full months of the COVID-19 lockdown and remote working – this long-term trend reversed and partners recorded more billable hours than associates.

There are two questions worth asking. Why are partners producing more now? Can all the new partners in the Financial Review Law Partnership Survey expect a permanent change in their role? In other words, will they have to be finders, minders and grinders?

AFR July

Why now?

Many law firm clients went into crisis mode with the onset of the coronavirus. Deals needed to be completed quickly. Funding needed to be secured urgently. Disputes on unfulfilled contracts needed rapid resolution. Almost daily changes to government regulation needed interpretation and action.

To deal with these pressing and complex issues many clients indicated a strong preference to get more direct access to partners. This meant fewer opportunities for delegation to associates.

Cost-conscious clients also had less tolerance for juniors being allowed to learn on these matters. As one general counsel put it to me: “I was happy to see one maybe two people [from the law firm] on [Microsoft] Teams, but not a football team.”

Another factor that has led to the increase in partner hours at some firms is partners holding on to more work due to fear of a broader market slowdown so they can hit their personal billing targets.

During the GFC, many large firms cut partner numbers through a combination of de-equitisation, early retirements, dismissals and reduced promotions.

While many firms now prefer measuring the contribution of a team rather than an individual, having a healthy personal practice can strengthen a partner’s case for retention if things get tough. In recent weeks, it appears that some partners and associates have been getting a little tired of working from home.

After the rush of adrenalin in dealing with the crisis and keeping connected during March and April, there’s now slightly less enthusiasm for the weekly video drinks – and growing frustration with the clunkiness of a distributed workforce.

Supervision, training and delegation is hard enough when everyone is co-located and physically present in a purpose-designed city office. It’s that much harder when associates are working from a kitchen table in a shared rental apartment with variable NBN speeds.

As time moves on, some partners might resort to the easier – though strategically flawed – option of doing most of the work themselves.

Will there be a permanent change?

No, and yes.

Leverage of non-partner fee-earners is at the heart of the law firm business model. The economics of having lots of associates doing lots of production will not change in the years ahead. Effective and efficient delivery of larger transactions, projects and disputes will still require teams of lawyers, paralegals and legal technologists at different levels.

Over time, firms that don’t tailor their approach for each project will lose out to those that do.

When demand returns, the issues around less delegation should ease. Intransigent hoarders will get caught out and move on – or be moved on.

As technology and workflows improve over time, the clunkiness of the remote workforce should diminish and become less of a handbrake.

One change that will hopefully stick is that of the law firm partner as the client’s primary strategic risk advisor. The coronavirus crisis has revealed the relevance of experienced lawyers in assisting clients on things that matter. This period should hopefully build their confidence as strategic advisors from a legal perspective and not just narrow technical legal specialists.

The discussion above suggests that perhaps the finder minder grinder characterisation is a little out of date.

A better description of the role of partner is that of a strategic advisor and leader – a thought leader, a team leader, a client account leader, a project leader and a sales leader.

The winners will be those firms that recruit and develop outstanding legal leaders and not just see their associates as high-billable grinders.

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Does your law firm really need a barista?

In Articles, Commentary on 11 June 2020 at 2:14 pm

Full text of my opinion piece first published in the Australian Financial Review on 4 June 2020.

For the past three months, many law firms have been in crisis management mode.

The focus has been on ensuring staff safety, staying close to clients, sustaining productivity and shoring up financial reserves. The mindset has been mainly about conservation and survival.

It’s time now time to look up and to look ahead – to work out what’s needed to succeed in the next normal.

Here are four things to think about in creating your future.

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#1 Organise for a hybrid workforce

Most law firms will seek to capitalise on the success of remote working and will adopt a model in which people work two or three days a week in the office and the balance at home. While this offers benefits in terms of staff flexibility, reduced commute times and lower occupancy costs, the rhythms of office life will be very different from life before coronavirus.

Firms will need to help their staff create boundaries and new work habits. This includes setting clear ‘office hours’; finding new ways to socialise that replace the serendipitous corridor bump; ensuring consistent supervision of graduates and clerks; and providing regular and balanced performance feedback.

#2 Speed up decision-making and execution

During the ten days from March 16-26, most law firms discovered that if push comes to shove, they can execute big decisions very quickly.

My advice: keep going!

The short-term public health crisis helped concentrate decision-making power. And it appears that in the main those vested with that power acted promptly and professionally.

Firms should build on this experience and streamline decision-making processes for times when things are back to normal. It could mean less consultation on trivial matters, fewer meetings, better communication and greater respect and appreciation for leadership roles.

Most law firms are designed as network organisations with self-managed practice teams as nodes and a small central bureaucracy. In theory, this should make them agile and responsive, but the reality is often quite different. Firms should harness their structural strength to move earlier and faster.

#3 Plan and budget with less inertia

The coronavirus crisis has given firms the opportunity to assess the merits of every revenue and expense item.  Recent McKinsey analysis shows most organisations only reallocate 2 to 3 per cent of their budgets year to year. But those that do more—in the order of 8 to 10 per cent—create more value.

While starting each year’s budget with a blank sheet might be overkill, reviewing each item on a two- or three-year rotating cycle should ensure smarter allocation of resources.

Revenue targets might set with an honest assessment of market potential and how your team stacks up against key competitors. Expense items can be set with a clear-headed view on value creation.

#4 Personalise the client experience with scale

The client experience pre-coronavirus included numerous face-to-face meetings; document preparation shared via email; and multi-touch file handling.

The evidence from the past few months is that productive client meetings can still be held without a barista on call; documents can be prepared collaboratively in real-time and remotely; and that most aspects of file management can be automated.

In designing the firm of the future, think about creating a client experience that is personalised, streamlined and scalable.

This is the time to start imagining your firm as it should be. If you stay in conserve mode too long, you will land up being two or three steps behind those that are determined to create their own future.

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Love the tech you’re with, at least for now

In Articles, Commentary, Legal Technology on 11 May 2020 at 11:16 am

Full 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.

AFR op-ed May 2020 copy

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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Five ways to improve your firm’s balance sheet

In Articles, Commentary, Legal Technology on 8 February 2020 at 4:19 pm

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.

AFR 7 Feb 20 Balance Sheet

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.

If you enjoy my articles, please consider donating to my team participating in the 100km 2020 Oxfam Trailwalker. Learn more here

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Is bigger better?

In Articles, Commentary on 13 December 2019 at 7:20 pm

Full text of my opinion piece first published in the Australian Financial Review on 12 December 2020.

Ranking law firms by size implies in some way that second position is better than 22nd. But is it?

As with many things in the legal business world, the answer is not straightforward.

Gilbert + Tobin is a wonderful case study of a relatively small firm – only 16th in The Australian Financial Review Law Partnership Survey – competing very successfully in every market it chooses to focus on.

The firm is widely recognised as a powerhouse in corporate, banking and dispute resolution and is one of the most profitable commercial firms in the country.

In the US, Wachtell Lipton Rosen & Katz has only 260 attorneys but is No. 2 on the Vault table of best places to work for graduates, first for mergers and acquisitions work and generates in excess of $US6.5 million ($9.5 million) per equity partner per annum.

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AFR print edition

Russell McVeagh is regularly ranked as one of the top firms in New Zealand. Their website lists only 36 partners which makes it the smallest firm among its peer group by a significant margin.

Despite these compelling examples, there are four areas where it appears bigger is better.

Lower-cost operators

Australia’s largest partnership, HWL Ebsworth, offers partner rates at 30 per cent – 40 per cent discount to comparable firms. It is able to sustain these rates by having a low-overhead operating platform, maximising the utilisation of it, and consistently increasing the number of partners sharing its cost. Size does yield economies of scale to HWL Ebsworth and others that have adopted this model.

The general insurance market in Australia has converged significantly over the past decade with four major companies now enjoying market dominance. The flow-on from this trend has meant that law firms specialising in insurance have had to get bigger to match the buying power of their key clients. Size helps these firms meet the unrelenting client demands for lower cost legal services and still make a buck, just.

Large matters

Clients do seriously consider the size, or “bench strength”, of the legal teams that compete for large-scale transactions, major projects, investigations or litigation work. Clients want the assurance that there are ample resources in place to manage large workloads without a hitch. They also seek to limit the risk of being reliant on just one or two key individuals; they want the B-team to be just as good as the A-team.

A large practice team also helps firms cope with the volatility of demand. A larger team can smooth out the peaks and troughs over a wider base of work. A smaller team runs a bigger risk of boom-bust actually meaning bust.

Innovation

Many of the new legal technology products that are emerging are based on cutting-edge cognitive technologies. The rough rule of thumb is that 70 per cent – 90 per cent of new products fail. Firms need to be of sufficient size with sufficiently deep pockets to be innovators and wear the cost of failure.

One of the key success factors in legal product innovation is effective distribution. Large firms with a wide reach will clearly have a market access advantage relative to say a smaller firm or a start-up offering a similar application.

Firm size also helps in taking a few more risks when it comes to lateral hire or practice acquisition. Recruiting a cultural terrorist in a small firm can be an existential problem. Larger firms tend to have more options and a bit more resilience to bad hire decisions.

Client panels

Many large corporate and government buyers of legal services have reduced the number of business law firms on their legal service panels.

A byproduct of this trend is that firms of scale, range and reach are often preferred to specialist boutiques. To target this market segment, law firms need to grow to ensure their full-service value proposition remains credible.

In conclusion

So, is bigger better?

Larger firms will generally point to their strengths in critical mass and coverage. Smaller firms will make the most of their focus and agility.

It appears they are both right.

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Legal technology products: A new trick for old dogs

In Articles, Commentary, Legal Technology on 29 November 2019 at 1:46 pm

Full text of my op-ed first published in the Australian Financial Review on 28 November 2019

According to The Economist, advice on strategy accounts for only 10 per cent of revenues for McKinsey and its peers, Bain & Co and Boston Consulting Group. The balance comes from sources including designing and developing technology products for their clients.

So if meat-and-potato strategy advice has become a side dish for the major consulting firms, will legal advice become a niche product for premium law firms?

I don’t think so, but some are seriously asking the question.

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AFR article print edition

Tier 1 law firm Allens currently has nine legal products in its a+ solutions portfolio. One of these, SmartCompile, pulls together publicly available company information for due diligence reports. The firm is also working on new risk assessment apps, a FIRB notification app and a contract workflow solution.

A quick review of other premium law firm offerings suggests the ripple of new legal products will turn into a wave in the years ahead.

With that in mind, I posit that law firms have to learn five new tricks to make their legal product strategy a success.

New measures

Current law firm KPIs (key performance indicators) such as utilisation, leverage and realised rates are irrelevant in a world of legal products. New indicators should cover factors such as product life-cycle cost, annual recurring revenue, channel profitability and subscription retention rates.

The time frame around KPI targets also needs a rethink. The rules of thumb around time to break even and profit cycles are vastly different for technology-based products. It took Amazon 10 years before it started to generate any cash profit, never mind recover its investment costs.

The challenge ahead is for firms to redesign their KPI dashboard to include service and product measures, but also balance short-term and long-term strategic objectives.

New channels

Most traditional commercial legal practices rely on two primary channels to market: direct selling to clients and referrals from intermediaries.

There are far more options when it comes to getting products to market: app platforms, a dedicated sales force, accredited resellers or agents, other technology vendors or via competitors.

Other channel-related choices include compensation payments, sales incentives, spotter fees, territory allocation and channel exclusivity.

New roles

Hall & Wilcox’s client solutions director Peter Campbell is tasked with providing technical support to the firm’s partners and clients as they develop and implement new products.

Other new roles like product manager, channel strategist and deployment specialist will start to emerge in law firms.

Existing positions will also be reshaped. Partners and senior associates will need to be trained to identify product opportunities and drive sales efforts. Marketing will need to hone their online retailing skills. IT will have to embrace working with both internal and external clients.

Interestingly, Allens has set up cross-functional “squads” to help develop new legal product concepts, test them and bring them to market – quickly.

New pricing

Technology-enabled products are usually priced via a licensing or subscription model. It can fluctuate based on the number of users or volume of transactions.

Setting the right price level will be tricky as there is often no clear frame of reference or way to compare prices for these products. In some cases, firms will be making the market or creating the category. Go too high, and there will be limited trial and take-up. Go too low, and the product will never be valued highly (or be profitable).

New norms

Many traditional law firms will need to adopt new norms in selling products.

Practitioners need to resist the buzz that comes from creating something new from scratch each time. The big egos need to get used to the idea of clients buying branded products, not them. Partners need to get comfortable with product-push campaigns rather than waiting for clients to call with a specific need.

In some ways, the most significant barrier for new legal product success is the firm itself.

If it does not adjust its business model, there will be little opportunity for these products to mature and flourish. Long-term, this will mean these old dogs won’t learn any of these five new tricks.

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Law firm partnerships could give BHP a productivity lesson

In Articles, Commentary on 7 September 2019 at 10:03 am

Full text of my opinion piece first published in the Australian Financial Review on 6 September 2019.

CEO Andrew Mackenzie and the top 200 global executives at BHP Billiton do not dig for iron ore, or cart coal, or drill for oil. They are 100 per cent dedicated to the task of leading and managing their company.

In contrast, almost all of the top 200 global partners in Herbert Smith Freehills (HSF) are involved in legal service production in some way. This includes advising clients, supervising the legal work done by juniors and pursuing new opportunities.

A BHP vs HSF comparison points to one of the key differences between law firm partnerships and corporations; almost all senior people in law firms have a producer-manager-leader (PML) role.

As producers they win and deliver legal work; as managers they organise and control people, processes, resources and facilities; and as leaders they help set direction, align constituencies, innovate and inspire others to perform at a higher level.

There is strong evidence that most law firm partners bias production over their management and leadership roles. The reasons for this are both structural and personal.

Proof of legal excellence and client followership are the most common ways people get promoted. Production-related outcomes are the things that are celebrated and rewarded – acquiring new clients, winning high profile cases, beating budgets, winning awards and ranking higher in directories.

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Entitled Millenials

Ask partners what they enjoy the most in the job, the most common response is helping clients solve really important complex problems. The thing they enjoy least is dealing with entitled millennials.

As the business of legal becomes more complex and competitive, so does the importance of effective leadership and management.

As firms grow there are more cats to herd.

As legal technology evolves there are bigger strategic bets to place.

As client expectations and sophistication rises, so firms have to deliver more for less and still make a buck.

As younger lawyers leave the profession in droves, firms have to do much better at engaging top talent.

One obvious solution to deal with this production-bias is to employ full-time specialised managers and leaders and let the lawyers just do law.

This thinking is seriously flawed.

Rather than blindly follow what corporations do, law firms should wholeheartedly embrace the PML model and just work harder at addressing the problems listed above.

Empowered self-managed teams

PML results in law firms being run as a network of highly empowered self-managed teams. There’s no middle management pushing papers and inventing new reports. There’s no CBD head office tower filled with bureaucrats. There’s no intricate incentive system to extract more discretionary effort from senior executives.

In the main, premium law firms are highly profitable perpetual engines of productivity. As an organisational form, traditional partnerships create wealth, share wealth and reduce risk very effectively.

Boris Groysberg of the Harvard Business School mentioned during his recent Australian tour that many large corporations are in fact trying to move towards the PML model. They see the obvious benefits of reducing overheads, fostering empowerment and having executives much closer to customers.

The key lesson is for law firms to reframe their whole talent system around the PML model. This means hiring more rounded legal graduates. It means providing non-legal training, especially in people skills, at all career stages. It means fast-tracking those with obvious leadership potential to senior roles more quickly. It means adding new elements to the symbols and measures of success.

It also means support for incumbent partners to better manage the trade-offs and tensions across their current portfolio of responsibilities.

The frequently cited claim that the partnership model is an anachronism is misguided. Having an empowered organisation with almost everyone on the tools in some way would make BHP’s Andrew Mackenzie think he’s discovered another Pilbara.

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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?

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