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 development, client relationships, culture, governance, planning, professional service firms, strategy management
A post-corona legal world: more kindness, less paper
In Articles, Commentary on 4 April 2020 at 4:45 pmFull text of opinion piece first published in the Australian Financial Review on 2 April 2020.
At some point later this year or early next we will move into a post-Corona world. What might that world look like from a law firm perspective? On my reckoning, it will involve deeper relationships, less paper and more flexibility.
Deeper relationships
There is much research that shows that people that go through acute stress together come out at the other end with stronger relationships. War is one of the greatest stresses anyone could ever encounter yet it also often leads to deep human friendships and incredible acts of heroism and sacrifice.
As Stanford’s Emma Seppala states, “Understanding our shared vulnerability — that life makes no promises — may be frightening, but it can inspire kindness, connection, and desire to stand together and support each other.”
To illustrate this point, I heard a story this week of a law firm partner checking in every day with every person in her team via Zoom. These check-ins covered some work matters but mostly were about sharing the fears, loss, grief and the black humour of the pandemic and the remote working experience. She said she encouraged her team members not to avoid interruptions from partners, kids and pets during the video calls.
The partner indicated her surprise as to how deeply personal the conversations had become, and how much closer she felt with her team members. Seeing her team members at home interacting with loved ones added a whole new level of understanding and appreciation of them as individuals.
She imagines a post-corona world with much deeper social connections – with staff and clients. Going through a crisis together can help engender trust and understanding, the foundations of all solid business-to-business relationships.
Source: AFR
Less paper
Over the past decade, many law firms have invested in sophisticated and expensive document management systems to reduce paper, streamline processes and improve control. It is a common experience that firms don’t realise the full benefits of these systems because a small group of lawyers, often senior partners, refuse to change their habits and prefer to edit in hardcopy only and/or keep paper copies of everything.
The coronavirus has forced some law firm partners to change their rusted-on work habits in about one week. When the hardcopy file is inaccessible and no assistant is at their side, only then will the penny really drop that a change is required and the painful process of stepping outside comfort zones will commence.
In a post-corona world, there will be less paper and greater compliance with enterprise-wide systems that promise so much but often deliver less. Allied to this there is likely to more defined workflows, greater support for cloud-based applications and better use of deal platforms.
As legal project management expert Ron Friedman notes, “Litigation and investigations have long employed [and co-located] armies of contract lawyers to review documents for responsiveness and privilege… The technology exists for secure, remote document review. Though supervision and collaboration may be harder working remotely, it does tap a much broader labour pool [and meet social distancing rules].”
More flexibility
Pre-corona, flexible working arrangements were mostly the exception rather than the rule in law land. The past two weeks have reversed this statistic.
The generally positive experience of meeting via videoconference, accessing files remotely, collaborating online on shared documents and engaging staff and clients virtually has brought a new realisation: actually, we don’t need everyone at the office all the time. If people want the option to work flexibly it can be done without destroying productivity or team dynamics.
While I don’t foresee a shift post-corona to complete remote working or agile office set-ups (that is, an office with no allocated desks), I would expect firms to be far more comfortable with people seeking flexible work arrangements that include some regular time working from home or other locations outside of the office.
Remote working must be balanced with having a team congregate in one space to collaborate to solve complex client problems, to share knowledge and to socialise. There is still no technological substitute for face-to-face interactions and the serendipitous opportunities that come from overhearing conversations – and unexpected bumping into colleagues in corridors and kitchens.
In conclusion
In conclusion, the post-corona legal world will be different. While there’s a lot to fret about, there are also some important positives to reflect and focus on.
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