A blog by Joel Barolsky of Barolsky Advisors

Posts Tagged ‘pricing’

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From pyramids to rockets to ecosystems

In Articles, Commentary on 19 October 2017 at 8:36 am

The pyramid has been the foundation operating model in professional services 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 four or five juniors below them. These ratios obviously vary from practice to practice. Leverage of the mid and lower levels of the pyramid is currently the profit engine of most professional firms.

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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 juniors and their work will now be done by a combination of technology and lower-paid process workers. The rocket is being driven by powerful clients demanding that services be ‘disaggregated’ (using Susskind’s term), that is, highly-trained practitioners doing advisory and judgement tasks and technology and para-professionals doing process activities.

In my view, the rocket is not the destination but merely a stepping-stone. The rocket model doesn’t really take into consideration the growth of client co-creation and client involvement in the delivery of services. It largely ignores the role of third-party software vendors, freelancers and experts in adding value to the firm’s offering. And lastly, it underplays the potential impact of HR, IT, BD and Pricing functions.

Take this recent case study for example. In August 2017, Allens-Linklaters won the highly-coveted ILTA Innovative Project of the Year award for its Real Estate Due Diligence App (REDDA). Allens’ Chief Legal Technology Officer, Beth Patterson, stated that REDDA was “the result of a collaboration between partners, real estate lawyers, technologists, project managers and business analysts at Allens, client representatives and artificial intelligence provider Neota Logic.”

This case study illustrates a future with a delivery model where a partner or project leader will configure up to six different types of resources, in the form of an ecosystem, to address a client’s need or solve a problem (see diagram above).

A cup of latte is pictured at a cafe in Sydney

Source: vocative.com

It’s important to distinguish this ecosystem model from a multi-disciplinary offering. The latter involves multiple professional services or technical disciplines working together. The former is focused on one service line, such as legal, integrating multiple resources, both people and technology and both firm and client, to provide the most cost-effective solution.

Even if I’m half right, there are profound implications of moving to the ecosystem model for firm strategy, culture and operations. Almost everything is likely to be impacted, most especially the firm’s basic economic model and profit engines. It will also profoundly change recruitment and development, measurement and reward, pricing and firm governance.

How ready is your firm for this kind of future?

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10 questions for your PLAN B

In Commentary on 1 June 2017 at 8:04 am
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Source: CoffeeStencil

MY 50th BLOG POST…

What’s your firm’s PLAN B?

PLAN B addresses the scenario of your firm primarily selling talent, to selling a combination of talent, technology and data. It means moving from the pyramid to the rocket business model (read this BCG report if you don’t know I’m talking about). It’s about the digitisation of professional practice.

These 10 questions may be helpful in crafting your PLAN B:

#1 How big do we need to get?

Economies of scale have not traditionally been a key success factor in talent-heavy professional services. One shining example of this is Wachtel Lipton Rosen & Katz, which is one of the world’s most successful law firms despite being a relatively small single-office partnership.

With the addition of technology and data to the mix, there may be specific advantages that larger firms may have over smaller rivals, including…

  • deeper pockets, that is, the ability to wear the risks of technology-related R&D, software and start-up acquisitions;
  • bigger footprints, that is, the ability to deploy new technology in more relationships and in more markets; and
  • more data, that is, the ability to develop better analysis, insights and products.

Small may be more nimble and cosy, but if you can’t afford the new bright shiny toys clients might stop playing with you.

#2 What’s our dividend policy?

Be they partnerships or incorporated entities, many traditional professional service firms tend to do more handing-out than hoarding when it comes to profits.

The “cash burn” phase of new technology acquisition is generally much longer than that of new talent. It took Amazon over 20 years to turn a profit. Firms need to re-align their dividend policy and balance sheets to suit their business models. Without patient capital, firms won’t be able to invest in or acquire the new tools necessary to compete.

#3 How do we (re)structure ourselves?

The rocket model raises a range of interesting organisational design issues:

  • Do we keep the suits and skivvies separate or together?
  • How do we structurally protect the core traditional business, while we invest in creating the new?
  • Is there a structural solution to the problem of improving the digital literacy and experience of everyone in the firm?
  • Do we structure our new firm primarily around practices, processes, products or technologies?
  • Do we separate sales from delivery?
  • How far do we locate the laboratory from the surgery?

#4 Who can become a partner in our firm?

Most firms see “multi-disciplinary” as adding more work types or professional disciplines. With the onset of the rocket model, this definition might need to widen to include designers, technologists, project managers, marketers and sales engineers. It is interesting to note that Herbert Smith Freehills (HSF) recently appointed the head of their ALT business as an HSF partner.

#5 What do we measure?

David Maister’s profit formula (Leverage X Hourly Rate X Utilisation X Margin) has been the foundation of measurement (and therefore reward), practice management and pricing for the past four decades. The key assumption in this model is that the core asset being leverage is human capital. With new tech-based assets and products, firms will need to radically transform what and how they measure things. To illustrate, if a firm sells compliance systems and AI tools via a subscription model, tracking staff utilisation will not only be meaningless, but dangerous.

#6 How do we price?

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.

#7 Who are we competing with?

In 1960, Ted Levitt published a brilliant HBR article called Marketing Myopia. He cited the example of US railway companies going out of business because they defined themselves as competing in the railway rather than in the transport industry. In a world, where the client solution includes a combination of talent + technology + data, your biggest competitor may not be the lookalike firm three floors up, but rather the software vendor who is using your firm to iron out bugs before attempting global domination going directly to your clients.

#8 Which clients do we say ‘no’ to?

There is a general trend towards more co-created integrated solutions between firms and their clients. In this environment, firms may be forced to choose target clients, not on size, scope or sector, but rather on systems sophistication and complementarity. One could imagine a very progressive firm not being able to service clients who were technology laggards. Platforms and standards could equally determine relative client attractiveness.

#9 How do we adapt our talent pipeline?

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.

On the plus-side, the rocket model opens up a number of new career pathways and facilitates a more diverse talent pool.

At more senior levels, the prerequisites for partner promotion might need to shift to include digital literacy, project management and solution integration. Partners need to be able to supervise people who are not like them. They also need to be able to align clients’ needs with the firm’s full talent + technology + data offering and be confident in selling it.

#10 What kind of culture do we want to become?

Many professional service firms have technical excellence as the dominant cultural norm. In the end, it’s scarce specialist knowledge, advice and skill that clients are willing to pay for. In changing the business model, firms need to question the kind of culture they’d like to become and what constitutes “cultural fit”. The new culture could be anchored around things like…

  • the client experience,
  • the client relationship,
  • navigating change,
  • digital literacy,
  • experimentation/innovation,
  • collaboration, or
  • operational excellence.

Your next strategy workshop

Rather than focussing on reviewing or tweaking PLAN A in your next strategy workshop, run an “alternative futures” session and flesh-out your PLAN B. As stewards of the firm, you owe it to your partners to have thought through these possible futures and your contingency plans. An expert independent facilitator would add considerably to the discussion. Call +61 417 305 880 to speak to one.

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5 takeaways from teaching management at the Melbourne Law School

In Articles, Commentary on 31 October 2016 at 7:30 am

“The best way to learn is to teach.”

Cup of hotlatte art coffee on wooden table

Source: fotolia

I had the privilege and pleasure to present the Management for Professionals subject on the Melbourne Law Masters program over this past week. The course covered the foundations of leadership and management within a legal context. Reference material was sourced from Maister, Porter, Kotter, Beaton, Martin, Susskind and Day, amongst many others.

After road-testing all the material in the classroom, my five key takeaways are…

#1 Maister needs an update

David Maister’s famous practice spectrum outlines a range of business models for professional service firms to consider. These include Rocket Scientist, Grey Hair, Procedural and Commodity, which in turn influence the settings on leverage, utilisation, margin and rates.

Maister’s models are still largely relevant in a people-intensive firms, but less so in technology and data-intensive legal businesses. These latter firms clearly price, operate and scale up differently. Perhaps a better business model map – see below – is to have High to Low Complexity on one continuum and People to Tech-Intensity on the other. The top right position is currently vacant, but has a huge number of aspirants.

#2 NewLaw is no longer new

During the course we studied INSEAD’s new case study on Axiom Legal. We had a great presentation from Jarred Hardman, the founder of Crowd & Co, and explored alternative models such as Keypoint, Lexvoco and Bespoke.

It appears that over the past 12 months, many traditional law firms buying-in or are copying the “new” bits of NewLaw to the point that they are no longer really fresh or compelling differentiators. One student commented that many NewLaw models shifted so much business risk to individual lawyers that they would struggle to attract really top talent.

#3 Love the grey

One of the most interesting class discussions centred around a HBR video on the common myths of strategy execution, that is, success will come from aligning goals, better communication and following the plan. The video highlighted that while the latter approaches are worthwhile there are many nuances and subtleties that need to be considered. It appears there are few absolute truths in management and most things are contingent on context, characters and constraints.

#4 Strategy should be for everyone

“I wish I had done a course like this when I started my career. It would have made sense of all the decisions my firm has taken over the years.”

It is common in many firms for discussions around strategy to be treated as secret partner business. In my view there is a strong case to give everyone in the firm a deeper appreciation of how the firm competes and how it makes money. Better understanding of these key concepts will facilitate innovation and execution.

#5 The world is small

From the class discussions, it appears that cats in Santiago, Perth, Beijing, Milan and Jakarta are equally hard to herd. The Melbourne Law Masters program attracts law students from over 40 countries across the globe. Professors, such as Katharine Christopherson (also teaching last week), come from far and wide to present their classes. Being immersed in this global village for one-week was truly an amazing experience.

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I will be presenting the Management for Professionals course again in October 2017. It is available as a single subject study option or as an elective on the Masters and JD programs.

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Stress testing Norton Rose Fullbright-LawPath’s new online offer

In Articles, Commentary on 11 May 2016 at 2:42 pm

$909.09 plus GST for a Norton Rose Fullbright (NRF)-drafted employee agreement plus two hours with a NRF lawyer to provide advice and additional drafting. This is one of the four online packages offered in a new venture between NRF and lawpath.com.au (LawPath).

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To my knowledge this is the first market offer that marries a top-end corporate law firm with SME-focused online legal service provider. Gilbert+Tobin have a stake in LegalVision but no obvious joint products. Allens have done it all by themselves with Allens Accelerate.

What’s to like

From a strategy perspective, I think there’s a lot to like in the NRF-LawPath new venture:

  • Accessing a new market. For NRF the new service allows them to cost-effectively access new market segments (start-ups and SMEs) that would not normally be on their radar. There would be little cannibalisation of NRF’s core target market of larger corporate and government enterprises.
  • Acorns to oak trees. Fast-growing emerging companies offer significant growth potential.  Imagine getting in on the ground floor with Seek.com.
  • Lead generation. Some customers of the online package will soon realise that they have much more complex issues than first contemplated. NRF will be in the box seat to advise on these matters and upsell traditional legal services.
  • Brand augmentation. For LawPath, partnering with NRF adds significant credibility for an young online business. For NRF, I think it’s net positive from the brand perspective in that it projects NRF as an agile and contemporary firm. A less-persuasive counter view is that this venture takes NRF downmarket.
  • Experimentation. One of the keys to remake professional services firms is to to experiment more often, and to learn from both successes and failures. There is little doubt that the digital economy is embracing every aspect of society. Active experimentation by a law firm in this space is a good thing in my view. Deloitte Australia’s journey over the past decade clearly points to the benefit of “try it rather than prove it” and a “fail fast and fail cheap” strategy.
  • Speed.  One option for NRF was to develop and launch its own online channel to market. Partnering with an established online service provider with a strong installed base of clients and a proven delivery system has facilitated a fast response and a range of first-mover benefits. While law firms like NRF are famous for their technical legal smarts, online retailing and branding is not a traditional core capability.
  • Cash friendly. Tyre-kickers are one of the biggest downsides of servicing start-ups and SMEs. Having clients pay cash upfront filters the real customers from the phantoms. It also reduces collections costs and improves cash flow.
  • Capacity filler. The nature of the online service offered is attractive in that its lawyer agnostic (the client is not requesting service from a specific person) and has some flexibility. The actual work can be done by any suitably-qualified NRF person in any NRF Australian office within a reasonable time expectation.
  • Low exit barriers. If this NRF-LawPath venture fails, there’s unlikely to be many problems in finalising all current matters and closing down the relevant sections of lawpath.com.au.  Any reputational damage can be contained.
  • Super margins. I’m guessing, but I bet around one-quarter of those that download the document templates don’t actually take up the advisory aspect of the package. While there are some risks, the marginal cost of a download is $0.00 and so these “lazy” clients will deliver super margins.

 

Question marks

While there’s a lot to like, there are some questions worth asking:

  • Make any money? Most of the costs of delivering this online service are fixed sunk costs and therefore one could claim that the marginal costs are very low, and therefore profits very high. If, however, one adopted an activity-based costing approach there would not be a huge surplus out of the $909.09 for the two parties to split*. Costs would include direct lawyer labour and on-costs, work allocation/triage costs, customer sales, hosting and servicing costs, insurance, advertising and credit card fees. If one then factored in apportioning software, website and legal IP development costs, there would be even less to share.
  • A genuine relationship? The argument that the new offer allows NRF to get in early and grow with future industry leaders is mitigated by a model that limits contact time, restricts personal engagement and is lawyer agnostic. One could counter-argue that the intent is to develop the relationship with the firm brand (similar to the strategy adopted by plaintiff law firms ) and this should provide some stickiness as the customer grows.  Personally I think it takes more than a template and a two-hour document review to develop a trusting relationship.
  • Price point? One of the new online packages prices a 5+ year NRF lawyer at $318.18 per hour + GST. This potentially sets a new frame of reference for both existing NRF clients and new clients. I’m not privy to NRF’s current rack rates but I’d imagine these price levels are significantly discounted, especially for smaller, non-institutional clients. Partitioning this pricing and the service offer from the core client base will become increasingly difficult for NRF.
  • Quality risk? If NRF allows their most junior lawyers to do all the review and advisory work then it potentially adds a significant quality and professional negligence risk. Having more senior lawyers supervise the work adds cost and compromises the business model. Balancing risk and cost will be an interesting challenge for NRF.
  • Impact on LawPath’s network? As I understand it, LawPath currently has a network of 600+ lawyers that it sub-contracts to review draft documents and provide advice. Many of these are sole practitioners and work in suburban or regional firms. The price point for these lawyers is generally much lower than the NRF-reviewed services. This price differential potentially undermines the credibility of LawPath’s established lawyer network and potentially creates confusion as to who is providing what service.
  • Staff engagement?  I’d imagine that NRF promises all its new uber-smart recruits the opportunity to do great work for great clients. I’m not 100% sure junior lawyers would jump with glee if their days were filled with reviewing standard documents for corner store milk bars.  It may be a good learning opportunity for a few weeks, but the novelty will mostly likely wear off quite quickly.

 

On balance

On balance I think NRF and LawPath should be congratulated for their enterprise. Most traditional law firms would look at the questions/cons listed above and run a mile.  I look forward to tracking their progress over the next few years.

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Key takeouts from major new legal market report

In Articles, Commentary on 28 August 2015 at 10:14 am

I’m proud to be lead author of the Thomson Reuters Peer Monitor report on the Australian legal market, prepared in collaboration with the Melbourne Law School. The report received good coverage in the Friday 28 August edition of the Australian Financial Review.

In summary, the report reveals that the Australian legal market bears all the hallmarks of a mature industry: declining demand, increased price-based competition, worktype decomposition, entry of market disruptors, technology substitution, and growth in both consolidators and niche players.  While market conditions are tough, they’re not calamitous. The larger firms generally have shrinking profit pools but have kept their heavy-hitters happy by de-equisiting other partners and cutting headcount. The contention that a firm cannot cut their way to greatness probably doesn’t hold true if one looks at how the larger firms have performed in recent years. However, the point when cutting comprises the underlying business model of scale, range and reach cannot be far off.

Coffee art AUIn my view, the biggest structural change in the market has not been NewLaw entrants or even globalisation, it has been the dramatic shift of work in-house and an increase in buyer power and sophistication. This trend has been prevalent in Australia for over a decade but its impact is really being felt in a benign economy and a demoralised political environment.

Some specific takeouts

  • While the long-term trend is negative, the last quarter of F15 saw an increase in demand and the first half of 2015 saw firms rehiring lawyers. It would be great to predict a bottoming out of the market and upside from here on end, but it’s foolish to pick a trend from one data point.
  • It’s been Christmas all year for firms with strong property and construction and M&A practices. It’s been Good Friday all year for firms with big banking and finance practices.
  • In the global versus local scrap, it appears the domestic firms are winning in litigation, IP and general corporate, with the globals making headway in property and M&A. It begs the question whether a global brand puts a firm at a disadvantage in targeting work perceived as domestic or jurisdiction-specific?
  • The data suggests that the firms that have gone down the global route have had a greater drop off in demand but have increased profits per equity partner. Perhaps it is these firms that have had more radical changes in their equity partner ranks and downsizing some practices.
  • In these tough times it appears that technology is the biggest investment area of the larger firms. In other sectors of the economy facing maturity, marketing and BD expenditure tends to increase relative to other areas. The signs are that law firms are banking on technology to make step-change improvements in efficiency and effectiveness.
  • The headhunters and recruitment firms supplying the legal market are popping champagne corks. Expenditure increased over 10% in this area in 2015 versus 2014.

Image sourced from www.theaureview.com

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Redefining shared services

In Articles, Commentary on 17 September 2014 at 8:48 am

I think it’s time to think differently about shared services in professional service firms. By shared services I mean the HR, IT, Finance and Marketing functions.

In many firms these functions have been limited to service, support and enablement. Their job is the provision of day-to-day “back office” operational services, but that’s where it ends.

There is growing evidence of leading firms viewing their shared services as strategic capabilities and part of their competitive armoury. My observation is that these firms define their shared services in a much broader way and expect more of them. While they might not use these exact terms, the essence of this redefinition is as follows:

From IT to Technology and Digital Transformation

Last week I had the privilege of chairing the 9th LawTech Summit, Australia’s top conference for legal IT professionals. The conference heard about the billions of dollars currently being invested in legal tech R&D and the tsunami of new toys, tools and technologies that will fundamentally change the practice and business of law. The winners will either be cash-up start-ups or agile astute incumbents who use this new technology to take out cost and improve service and client connectedness.

Leading firms realise they need their IT function to address the major opportunities and threats of disruptive technology. IT’s (expanded) role is to inform and shape the firm’s strategy in particular around the potential predictive intelligence systems, operational efficiency, big data, worker mobility, workflows and innovation. Yes, firms still need computers that work, software that runs and help desks that help, but in the future IT’s most important role will be about digital transformation.

From Marketing to Brand, Growth and Client Success

Marketing in many firms is orientated towards inputs not outputs: let’s run that event, update the website, publish that blog post, prepare that capability statement, write that tender, etc. At a more strategic level Marketing’s role should be about three key outcomes – building the firm’s brand, driving revenue growth and enhancing client stickiness and advocacy.

Positioning Marketing as agents of growth raises the bar for marketing managers and elevates their internal status within the firm.

I like the term ‘client success’ in that it has a double meaning. From an external perspective it means we work to help our clients succeed. Their success is our success. Attending a client meeting as a “Director of Client Success” has a better ring to it than “Director of Business Development”. From an internal perspective it’s about being successful with our clients i.e. creating a great client service experience, winning more of their business and getting referrals.

From Finance to Finance and Business Intelligence

I’d love a dollar for every finance report I’ve seen that’s provided without any commentary, conclusions or insights. Leading firms have finance teams provide their product with more strategic value. They deliver a range of analytics and insights about the financial and strategic health of the firm. They are constantly finding new lenses and lead indicators to inform executive decision-making. They provide dashboards to practitioners to help them establish priorities, manage their time and track progress. The new finance executive needs to see themselves as truth-tellers, provocateurs and change agents.

From HR to Talent and Performance

In the July-August edition of the Harvard Business Review, Ram Charan created a real stir by arguing that the HR function should be split into two teams: one focusing on HR processes like recruitment, payroll and salary reviews, and the other focusing on strategic talent management, capability building and creating a high-performance culture. Most professional service firms are too small to justify this type of split, but the underlying argument for both roles is spot on in my view.

Creating a Pricing and Value capability

Pricing Directors appear to be the hottest job on the planet at the moment. The firms of the future will have specialist pricing functions to win more tenders (profitably) and to help practitioners get better at capturing, sharing and communicating value.

In my view pricing should be kept distinct from marketing and finance functions. Located in finance, ‘cost-plus’ thinking will start to dominate. In marketing, a ‘revenue at all costs’ bias might eventuate.

Collaboration is key

The firm of the future has each functional area deeply inter-dependent on the other. Many of the new challenges and opportunities don’t fit into a neat box. They cross over boundaries and require multi-disciplinary thinking and behaviour. For example, a new technology to assist in client reporting and connectedness will require cooperation from IT, Marketing, Pricing, Finance and possibly even HR.

COO’ed

If shared services cannot make the transition to more strategic thinking and execution, they run a risk of being “COO’ed”. In other words, having a strategy-focused general manager sit above them that keeps shared services doing largely operational work.

C titles

Titles beginning with the letter ‘C’ (CMO, CFO, CHRO, CIO, etc.) are all the rage at the moment. While “CXX” has market recognition and internal status, my problem is with the generic nature of rest of the title. For example a CIO is a Chief Information Officer. There is nothing in this title that reflects his/her role in leading the firm’s approach to technology and digital transformation. Perhaps Chief Digital Officer is better? I think titles are important and should appropriately reflect the redefined and expanded roles described in this post.

What do you think?

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