Full text of my opinion piece first published in the Australian Financial Review on 7 February 2020.
Law firm partners focus a lot their profit and loss statements but tend to glance over the asset section of their balance sheets.
This is a missed opportunity.
There are three main reasons assets are largely ignored. Firstly, in ‘zero-in zero-out’ partnerships with 100% dividend payout ratios tracking long-term asset value is relatively less important. Secondly, in some firms, the accountants lump all intangibles into a vague and unhelpful construct called ‘goodwill’. And thirdly, balance sheets tend to list boring things like plant and equipment.

Original AFR article
From a strategic management perspective, there is a significant benefit in framing goals around making the firm more valuable. This means identifying all the assets, both tangible and intangible, that the firm uses to create and sustain value.
A more detailed balance sheet can also be useful when it comes to partner performance management. Growth in asset value should be the heart of what’s expected of partners, especially in regard to their non-financial contribution.
Tangible assets are easy to quantify. The intangibles less so.
Here are five important intangible assets in your firm that are worth measuring, protecting and leveraging.
#1 Relationship capital
Relationship or social capital refers to the strength and stickiness of existing client relationships and, where relevant, referrer and community connections.
While there are no simple measures of relationship capital, good proxies include total client lifetime value, client commitment indices, net promoter scores, client loyalty rates, average service mix per client, share of wallet of platinum and gold clients, social network strength and percentage of sole-sourced work.
#2 Human capital
Human capital refers to the quality, performance and commitment of all partners and staff. Management reports often include data on salaries, recruitment, training and turnover, but these don’t get to the heart of tracking human capital growth or depletion. Additional measures might include:
- Toe-to-toe analysis comparing the quality of key practitioners in the firm versus direct competitors
- Loyalty and career intention indicators
- Succession and talent development pipelines by practice area
- Diversity and inclusion metrics
- Glassdoor, Seek and social media ratings
- Employee net promoter scores
- Leadership capacity and capability
- Culture maps, highlighting hot spots or blind spots
- Real-time measures around staff morale, firm climate, employee experience and discretionary effort.
#3 Brand capital
This refers to the strength of the firm’s brand and reputation in key target markets. Traditional measures include brand awareness, consideration, preference, use, board room impact, recommendation and social media following. An ability to attract star recruits is also an indicator of its brand capital.
One benefit of a strong brand is the ability to command a price premium. By way of example, in 2019, Apple’s brand premium enabled it to capture 66% of smartphone industry profits, 32% of overall market revenue while only selling 13% of total handset units.
Proxy measures around the firm’s pricing clout impact might include the percentage of bids won where the firm was priced higher than competitors, depth of discounting and percentage of matters with supernormal margins.
#4 Data capital
Most firms are sitting on mounds of valuable data with most of it stored on disconnected databases collecting digital dust. The main data islands include:
- client data such as matters delivered, interactions, service feedback, event participation, agreed pricing and billing,
- staff data such demographics, salaries, tenure, engagement, training, feedback and performance records,
- operational data such as time records, matters processed, productivity and utilisation, and
- financial data such as revenue, margins and expenses.
Joining these data sets and applying some smart predictive analytics will allow firms to make much better decisions. For example, the analysis could point to using a specific team with a particular process to do a specific type of matter for a certain client category using a defined pricing model. Each of these choices might mean a 2% improvement, but accumulatively you’re looking at +10% gain without working any harder.
#5 Intellectual capital
The last category is for important bits of firm know-how that don’t neatly fall into one of the other four areas. This might include the proprietary legal products, algorithms, websites, domain names, precedents, templates, applications, patents and trademarks.
Growth in intellectual capital could be assessed by things such as the firm’s investment in research and development and its innovation portfolio. Quantifying the revenue from new products and services can indicate success or otherwise in this asset class.
A call to action…
Take a quick glance over your firm’s strategy papers and board reports over the past 12 months. Is there a way to elevate your firm’s strategic thinking by delving into the intangibles that will sustain your long-term success? I bet there is.
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business, business development, change management, client relationships, growth, innovation, marketing, planning, professional service firms, strategy management
Does your law firm really need a barista?
In Articles, Commentary on 11 June 2020 at 2:14 pmFull 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.
#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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