A blog by Joel Barolsky of Barolsky Advisors

Posts Tagged ‘professional service firms’

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Why premium law firms are falling behind in a downward trajectory

In Articles, Commentary on 6 April 2019 at 4:54 pm

Full text of my op-ed that first appeared in The Australian Financial Review on 5 April 2019.

The recent Hayne sugar hit can’t hide the fact that the 10-year trend line for legal work done by Australia’s premium firms is on a downward trajectory.

AFR oped 5 April 2019 copy

AFR print edition

One conclusion to draw from this data is that the market for legal work is flat or declining. Another way to look at is that the total market for legal is booming, but the premium firms – those law firms selling their deep expertise and charging higher fees – are losing market share.

There are three key reasons to suggest the latter conclusion is more likely correct:

First is the growth of in-house lawyers. NSW Law Society data revealed a 59 per cent increase in corporate in-house lawyers across Australia from 2011 to 2016.

Second is the growth of  ‘alternative legal service providers’ (ALSPs). Thomson Reuters’ Legal Executive Institute recently reported that ALSPs recorded global revenues of $US10.7 billion ($15.04 billion) in 2017, with compound annual growth rate of 12.7 per cent. ALSPs include firms doing litigation and investigation support, legal research, document review, e-discovery and regulatory risk and compliance.

Third is the growth of regulatory risk and compliance. Over the past 10 years, the Commonwealth Government has introduced roughly 5500 pages of new legislation each year. For every major new regulation there is usually the need for strategic and legal advice; the design and implementation of new compliance systems; and support and investigations when there are breaches. It appears that the demand for legal-related regulatory work has mostly been satisfied by accountants and a range regulatory specialists and software providers.

Vacating low-margin segments

A kind interpretation of the premium law firms decline in market share is that firms have deliberately vacated the segments they’ve perceived to be dominated by low-margin commodity work. By focusing on specialist higher-priced work, firms have been able to maintain partner profits and keep the essence of their business models intact.

A less glowing view is that these law firms have been blindsided by the new entrants, in-house lawyers, the accountants and software providers – and that they are slowly losing the battle of being the most relevant legal advisers to companies and government organisations. They are become niche specialists called in only when there is a really complex legal issue or a dispute and/or where the client organisation wants to transfer risk.

At the recent Managing Partners Forum, Anthony Kearns of Herbert Smith Freehills stated the top concerns of many his firm’s general counsel (GC) clients were more managerial than strictly legal.

They included issues such as:

  • How can we enhance the value of legal to our business?
  • How can we enhance the performance of the legal supply chain?
  • How can we build a platform of influence within our organisation?
  • How can we meaningfully contribute to the development and delivery of our organisation’s strategy?
  • How do we do more for less?

Gap for Big 4

His thesis was that if law firms didn’t start to help their GC clients with these problems, then the Big 4 and other consultants would.

On the surface, it would seem law firms might not have the expertise to assist. But on closer examination most of the larger firms are full of highly specialised HR, IT and marketing and operations people that are highly skilled in dealing with lawyers. At the moment, they’re just facing inwards not outwards.

So, our premium law firms are facing another strategic choice whether to accept this opportunity to help their GC clients, or leave it to other advisers to fill the void?

My prediction is that a small number of premium firms will say “yes” and pursue these and other adjacent business opportunities with vigour. The majority will stick to their knitting and retreat to what they know best – being legal specialists.

There are some interesting times ahead.

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Avoiding the Bermuda Triangle of law firm management

In Articles, Commentary on 2 March 2019 at 8:50 pm

Full text of my opinion piece first published by the Australian Finance Review on 1 March 2019.

Is your firm getting trapped in the Bermuda Triangle of law firm management? It might be and, worse still, you might not even be aware of it.

In the early 2000s, Professor Ashish Nanda of Harvard Business School commissioned a study to test whether the concept of economies of scale applied in commercial law firms?

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AFR print edition

He plotted profit per equity partner (PEP) against the number of fee earners for over 200 firms in the United States. The results disconfirmed the scale economy theory but revealed something even more interesting: PEP was relatively high for small boutique firms focused on specific market segments, and for very large firms who were able to compete for larger bet-the-company M&A transactions, projects and disputes. However, a majority of mid-sized firms had lower PEP relative to their much smaller and much larger peers. While the graph had dots everywhere, the best-fitting line looked like a large ‘U’.

Two theories were put forward to explain the U-shape. The first was that many of the mid-size firms found it hard to differentiate themselves and as a result were unable to secure a price premium. The proposition was these firms were in the ‘mushy middle’ losing out smaller and larger firms that were better positioned in the market. A deeper analysis of the data revealed high- and low-priced firms across all the three groups and therefore market differentiation was concluded to be a relevant factor but not the full story.

Growth pain zone

The second theory was that many law firm partnerships suffered heavily from growing pains. Small firms benefited from quick, informal decision-making and lean management processes. Large firms had the advantage of more mature and formal management practices and leadership capability. Problems emerged when shifting from small to large. Professor Nanda called this growth pain zone the ‘Bermuda Triangle of Law Firm Management’.

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The Triangle phenomenon can be explained as follows.

Growth in the number of fee-earners, office locations, service range and clients often results in more management complexity. There are more day-to-day decisions around who to hire, fire, promote, take leave, reward and sanction. There are more issues to deal with in regard to administrative processes, technology and systems. Marketing and business development decisions such as client pursuits, pricing and conflicts become trickier. At a strategic level, there’s more at stake when making major investment decisions and signing long leases for larger premises.

Many law firm partnership struggle with this increase in complexity. A common response is to allocate more partner time to deal with management issues. As decisions become more complex, more and more time is taken up in internal meetings and management conversations. Partners are drawn away from the things that matter most, that is their clients, prospective clients, referrers and people. Firms become internally-focused at the very time that an external market-orientation is most critical. This collective distraction has a material negative impact on firm performance and competitiveness.

With the noble pursuit of partner equality, fairness and sense of proprietorship many firms are reluctant to take away any decision rights from partners. With this approach, almost every decision, from the colour of sticky notes to staff parking policy needs consultation and consensus. This often results in extensive delays and lowest common denominator decision-making i.e. doing what all can agree on rather than on what’s right.

Major blind spots

In some growing firms, partners take on designated management role in key functional areas like HR, IT, Marketing and Finance. While this helps share the load very often the partners overseeing these functions have next to no training or experience in these areas. They have major blind spots and often make sub-optimal decisions that ultimately cost the firm. Even when firms hire specialist managers in these business support areas it is quite common for partners to second-guess these professionals and override their decisions.

The most critical element in navigating through the Triangle is effective leadership and followership. If the firm has a competent leader, they tend not to over-invest valuable partner time in governance roles, they make the right decisions quickly and implement them. Effective leadership builds trust amongst the partners who are happy to cede many of their low-level decision rights. Good leaders provide the right support and intolerance for partners to perform to their full potential. They facilitate a culture that is focused on delivering a superior client and employee experience. All these things matter.

A quick review of the high growth firms in Australia over the past decade confirms this hypothesis. Many have a strong, effective leader or a leadership group that have helped minimise growing pains and navigated through the Triangle. The words of the Bear Hunt, “they haven’t gone over it / they haven’t gone under it / they’ve gone through it.”

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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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Measurement matters more than money

In Articles, Commentary on 24 July 2018 at 7:56 am

A firm’s profit-sharing model is a poor determinant of collaborative behaviour.

Motivational theory predicts that firms with equal-share or lock-step model would be far more collaborative than those with more performance-based reward systems. The logic is that in equal-share firms there is a strong financial incentive for partners to grow the collective pie by sharing clients, staff and other resources.

I can think of a number of firms where this theory simply does not hold true.

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Source: strikingly.com

Despite equal profit share, partners in these firms hoard work and clients, they hold onto resources and they operate primarily in silos. They continue to do this despite all the evidence that better collaboration will result in higher profits, more staff engagement and stronger client loyalty.

SO WHAT IS GOING ON?

In many firms, partner performance measures are oriented around financial metrics like personal and supervised production, fees billed, fees collected, work referred, utilisation, write-offs and WIP. They are usually reported monthly in arrears and are transparent to the rest of the partnership.

It appears to me that silo’ed behaviour is driven by a reaction to the measurement system by three different types of partners.

Insecure Overachievers

Insecure partners view their relative ranking on performance reports as a signal of their worth, both to themselves and others. The data is a form of validation or redemption. Getting higher up the individual billings league table takes on new meaning, that is, proving that they’re ‘okay’. At the extreme, one hears of stories of partners gaming the practice management system and manipulating data so as to rank higher. Perhaps in an eat-what-you-kill firm, this behaviour is more understandable, but in an equal-share firm, it just smacks of paranoia.

Inflated Egos

Those with above-average egos use individual reporting as a competitive scorecard signalling that they’re winning and the others are losing. While some internal competition is healthy, in some firms, it strays into a dog-eat-dog culture where collaboration is the last thing on people’s minds.

Tenureds

‘Tenuritis’ is my term to describe the mindset of a partner who feels that as an owner they have a self-directed job for life with next to zero accountability. For those even partially inflicted with tenuritis, the performance reports have little impact. They’re mostly ambivalent about the data and care little whether they sit at the top, middle or bottom.

With the Insecures and Inflated Egos it is the symbolic power of measurement that’s primarily driving behaviour. With the Tenureds it is the over-reliance of measurement as a leadership tool which, with these individuals, has very limited power.

SO WHAT CAN YOU DO ABOUT IT?

The key issue here is that measurement should not be used as a proxy for leadership. It’s just plain lazy (and a little cowardly) if firm leaders send out the monthly reports and then think their job is done.

Effective leadership is about [i] providing regular feedback – the good, the bad and the ugly, [ii] active listening, [iii] setting direction, [iv] developing capability, [v] offering support, [vi] opening doors, and [vii] removing constraints.

In equal-share firms, effective leadership is crucial to mitigate the measurement system risks outlined above. It is also fundamental to restoring a sense of fairness across the equity partnership and to get everyone performing to their full potential.

Without effective leadership, meritocracies run the risk of letting the “money do all the talking”. The differential in reward might address the perception of fairness but it does little for partner development, especially for those not intrinsically motivated by the Dollar. Profit-share, on its own, is a blunt pseudo-precise deferred performance management tool.

I believe a firm’s leadership capability is a far better determinant of one-firm collaborative behaviour than its profit sharing model. There are thousands of examples of deeply collaborative public and private companies that operate with merit-based rewards. There’s no reason why professional service firms should be any different.

CALL TO ACTION

If cross-firm collaboration is on your strategic agenda, don’t just jump to the reward lever and expect everything to change. Rather take some time to think about what and how you measure and the critical role your leaders play in driving one-firm behaviour.

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Strategies for whatever future holds

In Articles, Commentary on 6 July 2018 at 7:43 am

First published in the Australian Financial Review, 6 July 2018

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Click here to read

The opposite of a ‘perfect storm’ is what BigLaw is enjoying right now. The combination of the Banking Royal Commission, strong corporate deal flow, numerous class action defence cases, regulatory change, major infrastructure projects and general economic growth has seen many of the nation’s top law firms enjoy double-digit profit growth over the past year.

The key strategic question is whether these firms treat this as a one-off, or see it as the start of a new era of prosperity?

Both scenarios are worth exploring.

The One-Off Wonder Scenario

If firms predict a return to a shrinking market with a looming threat of disruption, then conventional wisdom would suggest retaining some of the current surpluses to make themselves ‘future-proof’. A war chest could be used over the next few years to transform culture, invest in adjacencies, craft new business models, acquire game-changing technology, recruit superstars and build relationship capital. It could also be used to introduce a more consistent dividend policy.

While this all makes perfect sense none of the major firms will do it.

Current tax law requires each partner to declare their individual share of the partnership’s net income in their individual tax return, whether or not they actually received the income.

It follows that most firms will distribute all F18 supernormal profits to avoid the partners paying tax on income they don’t immediately receive. This payout will be accompanied by a communal prayer session that the second scenario comes to fruition.

While this tax issue does provide some constraints to reinvestment, there’s nothing stopping firms setting up new investment vehicles outside of the partnership in which partners acquire a stake in their personal capacity. Gilbert + Tobin partners’ collective investment in LegalVision is a good example of this. This strategy may be useful for taking a stake in new discrete businesses, but it could get messy if only a subset of partners elect to invest and the new ventures were directly involved in co-creating the legal service.

The Glory Days Scenario

If firms are more bullish and expect the good times to continue, then maybe some really interesting strategic choices on the cards.

With a higher risk-tolerance, firms may elect to do some or all of the following:

  • Take the opportunity to incorporate and create the capital base and balance sheet to innovate that is not possible within the partnership model. With more money to play with, firms will be in a better position to compensate partners for any one-off capital gain issues.
  • Double their investment in developing the skillset, toolset and mindset to compete in the digital age. Within four to five years, the firm will experience a step-improvement in its capability to harness the power of new technology, but more importantly the willingness to embrace change.
  • Double the intake of legal graduates and make the life for junior lawyers more bearable. Creating more system capacity and having a bigger pool of talented happier people will make the firm mentally stronger and healthier.
  • Acquire a boutique management consulting firm will the express aim of accelerating lawyers’ abilities as holistic strategic business advisers.
  • Split the firm into two: one part that can command super-premium value-based pricing, and the other housing those practices that require market-leading operational excellence to thrive.
  • Create an internal ‘risk enterprise’ modelled on the litigation funding business model. This new business will enable the firm to enter more innovative gain-sharing pricing arrangements with clients and bring more creative value-building opportunities to the table.
  • Make an aggressive play in the compliance market. Over the years, the Big 4 accountants and other providers have controlled this market and reaped millions of dollars from it. The Royal Commission has essentially revealed that these incumbents have failed and it’s time for legally-trained risk experts to return.

So which one?

So which is more likely to eventuate: the one-off wonder or glory days?

My best guess is that it will be somewhere in-between. Yes, the Commission will end but there is a lot of underlying demand driving growth in top-end legal work. The broader economic outlook is okay to good, slated infrastructure spend is massive, in- and outbound capital flows will remain strong and post-Commission restructuring will keep the corporate lawyers busy for quite a while.

The perfect storm has become the perfect calm. The open question is just for how long?

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Source: strikingly.com

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The end of the club

In Articles, Commentary on 25 June 2018 at 10:09 am

First published in the Australian Financial Review, 22 June 2018

A ‘club’ is a Tier 2 full-service firm of individual practitioners who enjoy each other’s company. It is a nice, collegiate, shared-office environment where partners enjoy a relatively high degree of autonomy and welcome the occasional cross-selling opportunity.

And the club, as a business model, is about to die.

The principal reason for its demise is that most of the individual practitioners that make up the club will not be able to compete. Unless their expertise is unquestionably superior or they have welded-on client relationships, these solo specialists will start to lose out to a combination of freelancers, platforms, networks, focus and one-firm firms.

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Source: strikingly.com

Solo specialists versus Freelancers

Many of Australia’s Tier 1 law firms thinned their partner ranks during the 2010’s (a trend reversed in 2018). This was done through de-equitisation, early retirements and forced redundancy. Ashurst, for example, had 186 Australian partners in July 2013 and 142 in July 2016.

A number of these very accomplished practitioners set up shop as high-end legal freelancers. Using sophisticated cloud-based software, a laptop and a phone, these lawyers have next to zero overheads and the flexibility and agility to practice where and when they like. There is simply no contest when matched to a Tier 2 practitioner constrained by firm pricing policies, high office rents and administration expenses.

Solo specialists versus Platforms

HWL Ebsworth and Mills Oakley stand out as two very successful high-growth platform firms. Their strategy is about aggressively acquiring partners with portable practices and offering them incomes more directly aligned to their total financial contribution, both direct and referred. These firms have strong operational disciplines and lean back-offices. They are well led with partners focused less on office politics and more on things that matter, that is, their clients and staff. HWL prides itself on offering partner chargeout rates lower than many Tier 1 and 2 firms and fixing these rates over time.

These platform firms run harder and faster than the clubs. The energy and discipline they bring to the market gives them a real edge. And if they come across a high-flying solo-specialist in a sleepy club, they’ll make them an offer they can’t refuse.

Solo specialists versus Networks

The past five years have seen the emergence of a number of network law firms and legal staff companies. Examples include Lawyers on Demand, LexVoco and Crowd&Co. There are also a number of legal staff companies aligned with established law firms, such as Corr’s Orbit, Allens’ Adapt and Minters’ Flex. One standout element of these networks is they have a very small team of full-time staff and only contract lawyers to work when there’s a confirmed fixed-fee client assignment.

The toe-to-toe analysis of networks versus solo-specialist yields very similar conclusions to the Freelancer and Platform models.

Solo specialists versus Focus firms

Focus and boutique firms specialise in a narrow range of worktypes or client sectors. Two standout examples in this category are SBA Law, a Melbourne-based corporate boutique, and Thoroughbred Legal, a general practice firm focused on the thoroughbred racing industry.

These firms position themselves as having deep expertise, knowledge and critical mass, and a service delivery model 100% attuned to the needs of their target market.

Beaton data points to technical expertise and understanding of client industry as key drivers of client choice. As such, focus firms will almost always out-credential and out-compete Tier 2 practitioners largely competing on their own.

Solo specialists versus One-firm firms

David Maister coined the term “one-firm firm” to describe a full-service firm where,

  • the firm brand is stronger than individual partner brands,
  • the firm has a ‘house style’ and delivers consistent quality across the board,
  • the firm’s culture is deeply collaborative in regard to sharing clients and resources, and
  • the firm is prepared to invest in new profit growth initiatives without prejudicing individual practitioners.

One-firm firm’s competitive advantage comes from wider ‘institutionalised’ client relationships and the ability to bring many minds to solve complex client problems.

Over the past decade, many larger clients have sought to reduce the size of their panels and form strategic partnerships with fewer (one-firm) firms. This procurement trend effectively locks-out the solo-specialist in a collegiate club.

The preferred strategic option

Over the next five years, some clubs will fold, some will fracture into a series of boutiques and some will be acquired. Most will try to address their situation by trying to become one-firm firms. The leadership challenge of this transformation is huge, and the risk of losing star partners and associates along the way is high. Unfortunately, I expect only a small number will be able to make the necessary changes and survive.

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Formula won

In Articles, Commentary on 29 March 2018 at 1:21 pm

 

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Source: Kazuki Yamamoto

Formulas, equations and rules of thumb continue to be a popular way to communicate important principles in leading and managing professional service firms. For your interest, here are the ones I use or refer to most often…

 

CHANGE

David Gleicher: D x V x F > R. D = level of dissatisfaction with the status quo. V = a vision of a future state i.e. clarity of what we’re moving to. F = first steps in a clear action plan. R = level of resistance to change. If R is more than the multiple of the other three, then no change. Click here for more. A graphical variation of this formula:

eqn-for-change

STRATEGY

A.G. Lafley and Roger Martin: Firm strategy = 5 questions – What are our winning aspirations? Where will we play? How will we win? What capabilities do we need? What systems and enablers are required? Click here for more.

Mehrdad Baghai et. al: McKinsey 3 growth horizons – concurrently manage both current and future opportunities for growth. Spend roughly 70% of your time on H1, 20% on H2 and 10% on H3. Click here for more.

George Beaton: Firms that fly = a shared vision + a strong culture based on shared values + shared power across the firm and key stakeholders + strong leadership and management to pull it all together and sustain it. Click here more.

Joel Barolsky: In the past… Firm Success = Ability x Stability (firms succeeded if they were competent practitioners and were able to keep the firm stable and collegiate). Over the past decade with the increase in client power and sophistication… Firm Success = Ability x Stability x Affinity (firms that have close trusting relationships with their clients outperform others). In a VUCA future… Firm Success = Ability x Stability x Affinity x Agility (firms that can make changes that add value quickly and efficiently will outperform others). Click here for more.

BUSINESS MODEL

David Maister: Profit per Partner = Leverage x Utilisation x Realisation x Blended Hourly Rate x Margin. Click here for more.

Ron Baker: Profit = Intellectual Capital x Effectiveness x Value-based Price. “Effectiveness” is a measure of the outcomes achieved for the client, not like the Maister equation which focuses on the cost of the inputs used to create the service. “Intellectual Capital” includes leveraging human capital, structural capital and social capital. Click here for more.

ORGANISATION DESIGN

Dunbar’s Rule: Our brains are only capable of sticking together within a community of around 150. Design organisations, offices, divisions, etc. with this number in mind. Click here for more.

REMUNERATION

J. Stacy Adams: People will trust a remuneration model when they perceive, [1] there is a sense of fairness of their contribution relative to their reward, AND [2] there is a sense of fairness of others’ contribution relative to the reward that others receive. Click here for more.

INDIVIDUAL PERFORMANCE

Mitchell and Porter: Performance = Motivation x Ability x Environment. Click here for more

David McClelland: Match jobs to an individual’s relative needs. People have three core needs, usually with different weights – Need for Achievement, Power and Affiliation. Achievement – the drive to excel, achieve in relation to a set of standards, strive to succeed. Power – the need to make others behave in a way that they would not have behaved otherwise. Affiliation – the desire for friendly and close interpersonal relationships. Click here for more.

Dan Pink: Drive = f(Purpose, Mastery, Autonomy). Click here for more.

STAFF TURNOVER AND PRODUCTIVITY

Mornell: If you make a mistake in hiring, and you recognise and rectify the mistake within six months, the cost of replacing that employee is two and one-half times the person’s annual salary. Put another way, the wrong person earning $50,000 will cost your company $125,000. Click here to read more.

Revenue per employee: In most industries, above-average firms produce revenue per employee that exceeds three times their average employee’s salary. Interestingly at Apple, it exceeds nine times. Click here to read more.

CLIENT RELATIONSHIPS

David Maister and Charlie Green: Trustworthiness = (Credibility + Reliability + Intimacy) / Self-orientation. Click here for more.

Joel Barolsky: Long-Term Relationships = (Understanding + Reliability + Value + Affinity) / Complacency. Click here for more.

Ford Harding: Geometric growth of social networks. With 90 strong connections in your personal network, you can make around 3,500 matches i.e. introduce one person to another for mutual benefit – see chart below. Click here for more.

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SALES

Sales 101: Your Revenue = Number of Opportunities x Average Value x Overall Strike Rate. Click here for more.

Andrew Sobel: Number of Opportunities = Number of initial conversations you have or initiate x % that convert to a proposal. Click here for more.

McKinsey’s 2-4-8: Directors in McKinsey need to be working on 2 major assignments, be the process of proposing for 4 more, and in communication with 8 more prospective clients. Management within McKinsey follows up to ensure that 2-4-8 is a reality. Click here for more.

PRICING

The Discount Matrix: The amount of additional revenue required to make up for the lost profit as a result of a price discount:

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SERVICE EXPERIENCE

Frederick Reichheld: Net Promoter Score = % Promotors (i.e. clients that score 10 or 9) – % Detractors (i.e. clients that score 1 to 6) on the question, “What’s the likelihood of recommending XYZ to a friend or a colleague?” Click here for more.

Customer Effort Score: “Firm XYZ made it easy for me to handle my issue!” (on a Strongly agree / disagree 7-point Likert scale. Click here for more.

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What formulas or rules of thumb do you use? Please share using the comments feature…

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