A blog by Joel Barolsky of Barolsky Advisors

Posts Tagged ‘pricing’

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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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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).

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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).

Light bulb icon on coffee

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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