Tuesday, February 13, 2018

(To be) specific asset BDBNs **

Matthew Burgess - (To be) specific asset BDBNs

As highlighted in previous posts, there are a myriad of issues that should be taken into account before a binding death benefit nomination (BDBN) will be held to be valid (see for example - http://blog.viewlegal.com.au/2012/02/superannuation-and-binding-death.html, http://blog.viewlegal.com.au/2014/03/death-benefit-nominations-read-deed.html, http://blog.viewlegal.com.au/2014/03/double-entrenching-binding-nominations.html).

One issue that can arise is whether a BDBN can apply to specific assets, as opposed to simply nominating a percentage of total assets, which is the standard approach for most nominations.

The generally accepted position seems to be that given there is nothing in the superannuation legislation that prevents distributing specific assets under a BDBN, so long as the trust deed for the fund does not prohibit it, the approach is permissible.

If a specific asset BDBN is desired, it will also be necessary to ensure practical issues such as the following are addressed –

  1. the relevant asset must be segregated to the account of the member making the BDBN;
  2. compliance with all aspects of the BDBN rules under the trust deed;
  3. the various issues that should be factored into any BDBN, including changes in the values of assets, the wider estate plan, what is to occur if the intended recipient predeceases the person making the BDBN and the revenue consequences; and
  4. finally, the scenario where the asset the subject of the specific asset BDBN is sold prior to the member’s death should also be contemplated.

** For trainspotters, ‘To be specific’ is a line lifted from the song ‘Fidelity Fiduciary Bank’ from Mary Poppins, see here – https://www.youtube.com/watch?v=XxyB29bDbBA

Image courtesy of Shutterstock

Tuesday, February 6, 2018

When one is no more fun – another tip on changing trustees **

Matthew Burgess When one is no more fun – another tip on changing trustees

As highlighted in previous posts, there are a myriad of issues that should be taken into account in relation to any decision to change the trustee of a trust (see for example - Changing trustees of trusts – Simple in theory … not so simple in practice).

One critical issue under the Trusts Acts in most states is the rule that where there are two or more individual trustees appointed initially of a trust, the retiring trustees will continue to be liable unless replaced by:
  1. at least two individual trustees; or 
  2. a ‘trustee corporation’. 
For the purposes of these rules the ‘trustee corporation’ must be a formal trustee company, as opposed to a private propriety company.

Importantly, the trust instrument may override these rules and allow trustees to be discharged, even when replaced by a single trustee.

Often however trustees will be changed without the required permission in the trust instrument, completely ignorant of the Trust Acts rules, meaning the retiring trustees unknowingly continue to be liable.

For obvious reasons we therefore generally recommend an amendment to any trust deed that does not expressly override the Trusts Acts requirement, however this is approach is also subject to the standard mantra ‘read the deed’ as often deeds will not in fact permit this type of variation.

In situations where a variation is not permitted, one work around that helps in some (but unfortunately not all) states is to appoint (say) one individual trustee and a propriety company of which the individual trustee is the sole shareholder and director.

** For trainspotters, ‘More Fun’ is song by legendary Australian band Radio Birdman, learn more here – https://www.youtube.com/watch?v=xcZc5d0Wnws

Image courtesy of Shutterstock

Tuesday, January 30, 2018

Fairytale of Canberra** - The Tax Office plays Secret Santa as the long awaited guidance on trust vesting gets released

Matthew Burgess The Tax Office plays Secret Santa as the long awaited guidance on trust vesting gets released

As it seems is tradition, the Tax Office has delivered another substantive release on a long-standing issue in the last month of the calendar year with the publication on 13 December 2017 of Draft Taxation Ruling TR 2017/D10.

Subject to being issued as a final ruling, Draft TR 2017/D10 arguably resolves many of the uncertainties surrounding trust vesting.


In summary, the key conclusions from the draft ruling are as follows:
  • While a trustee may be able to extend an approaching vesting date during the life of the trust to the maximum period available at law (generally 80 years), it is unable to be extended after the trust has vested without a court order. 
  • Upon the vesting of a discretionary trust, the trustee holds the trust property for the absolute benefit of the takers-in-default named in the trust deed. 
  • The vesting of a trust will not necessarily, of itself, result in a CGT event. However, this is dependent on the terms of the trust deed and subsequent steps, such as the transfer of assets to the beneficiaries by the trustee, which may result in a taxable event. 
  • While the trustee of a discretionary trust may distribute income between the range of beneficiaries in its discretion during the life of a trust, following vesting, all income is deemed each year to be distributed to the takers-in-default in proportion to their vested interests in the property of the trust. 
The Tax Office's conclusions in the ruling appear to be largely uncontroversial, although it is interesting to note it has finally explicitly acknowledged that the vesting of a trust will not, by itself, result in any CGT event in many circumstances.

Arguably the key reason for the relatively uncontroversial nature of the draft ruling stems from a failure to consider many of the fundamental issues the industry has been grappling with for some years.

Indeed, the main position adopted by the Tax Office on a potentially controversial issue is its rejection of the argument that a vesting date may be extended by implication where the vesting day has lapsed and all parties have behaved in a manner which is consistent with the vesting day having been extended.

Relevant CGT Events

As is generally understood, the relevant CGT events upon the vesting of a trust are A1, E1 and E5, as summarised below. The draft ruling confirms that (subject to the terms of the relevant deed), it is possible none of these events will occur on the vesting of a traditional discretionary trust.

CGT event A1

Section 104-10 of the ITAA 1997 defines when CGT event A1 occurs and reads:

(1) CGT event A1 happens if you dispose of a CGT asset. 
(2) You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner. 

In the context of a trust vesting, CGT event A1 will be triggered if the trustee transfers an asset to a beneficiary by way of an in specie distribution in satisfaction of that beneficiary's entitlement.

In other words, it is not the vesting itself which would trigger the CGT event. Rather, it is the subsequent disposal of the asset by the trustee which results in CGT event A1 arising.

CGT event E5

CGT event E5 is defined in s 104-75 of the ITAA 1997 which reads:

(1) CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee (disregarding any legal disability the beneficiary is under). 
(2) The time of the event is when the beneficiary becomes absolutely entitled to the asset. 

At face value, CGT event E5 is the most applicable event arising upon the vesting of a trust, as it could be thought that a beneficiary would become "absolutely entitled" to the trust assets either as a result of a positive determination by the trustee or as a consequence of the default provisions under the trust deed.

However, as discussed in more detail below, the concept of "absolute entitlement" is complex and at times, contentious.

Consequently, it is generally seen (and apparently now accepted by the Tax Office in Draft TR 2017/D10) as unlikely that CGT event E5 will occur automatically upon the vesting of a trust.

CGT event E7

Section 104-85 of the ITAA 1997 defines when CGT event E7 occurs and reads:

(1) CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital. 

As CGT event E7 only applies where a beneficiary has an interest in the trust capital, it will rarely apply in the context of the vesting of a discretionary trust.

CGT event E5 and absolute entitlement

As outlined above, CGT event E5 was traditionally regarded as the CGT event most likely to apply upon the vesting of a trust.

However, Tax Office rulings and cases prior to the release of Draft TR 2017/D10 cast significant doubt on the correctness of this position.

Specifically, CGT event E5 applies where a beneficiary becomes "absolutely entitled" to the assets of a trust.

The meaning of the term "absolutely entitled" is subject to significant contention and debate as evidenced by the ongoing failure of the Tax Office to issue a final version of TR 2004/D25 (2004 is not a typo; the draft TR has remained unfinalised for well over a decade).

Saunders v Vautier (1841) EWHC Ch 82

The 19th century English decision Saunders v Vautier set the groundwork for the concept of absolute entitlement.

In that judgment, Lord Langdale MR held:

"I think that principle has been repeatedly acted upon; and where a legacy is directed to accumulate for a certain period, or where the payment is postponed, the legatee, if he has an absolute indefeasible interest in the legacy, is not bound to wait until expiration of that period, but may require payment the moment he is competent to give a valid discharge."

The judgment has been interpreted as meaning that where a beneficiary who has attained the age of 18 has a vested and indefeasible interest in a trust asset, they can issue a call to the trustee requiring the transfer of the asset to them.

The principles of this case are akin to that of absolute entitlement. Where a beneficiary has a vested and indefeasible interest in a trust asset sufficient for them to require the trustee to transfer the asset to them, they are likely to be absolutely entitled to that asset.

Draft TR 2004/D25

In summary, Draft TR 2004/D25 takes the position that absolute entitlement over a single asset will only arise where a single beneficiary has all the interests in that asset.

Following that line of argument, the draft ruling concludes that if more than 1 beneficiary has an interest in a particular asset, no beneficiary will be absolutely entitled to that asset.

Applying this to a discretionary trust which generally vests with multiple beneficiaries each being entitled to a percentage of the trust assets, Draft TR 2004/D25 implies that none of those beneficiaries would be absolutely entitled as against the trustee (unless each beneficiary had an entitlement to a discrete asset).

Furthermore, the draft ruling takes the view (at paragraphs 16-19) that:
  • a beneficiary can be absolutely entitled to an asset even though they hold their interests in it as trustee for 1 or more others; 
  • the existence of a mortgage or encumbrance over the asset in favour of a third party does not prevent the beneficiary from being absolutely entitled; 
  • the existence of a trustee's lien (and ability to sell the assets of the trust) to enforce a right of indemnity against a trust asset will not prevent a beneficiary from being absolutely entitled to the asset; and 
  • a beneficiary can still be absolutely entitled to an asset for CGT purposes where they are suffering a legal disability (such an infancy or insanity). 
The correctness of a number of points contained in the draft ruling are subject to significant conjecture, perhaps none more so than the ramifications of the trustee's right of indemnity out of trust assets.

This point was tested in the decision of FCT v Oswal [2012] FCA 1507 ("Oswal"). Interestingly, this decision is not mentioned in Draft TR 2017/D10, despite an opposite conclusion being reached in Example 7 (which concludes that where a trust vests with a sole capital beneficiary, that beneficiary becomes absolutely entitled to the trust assets and CGT event E5 occurs).

FCT v Oswal [2012] FCA 1507

The Oswal case involved the trustee of a discretionary trust who decided to make 2 beneficiaries entitled to specific assets of the trust, being shares in a company.

The Tax Office put forward several alternative positions regarding the exercise of the power by the trustee, namely that it triggered 1 of:
  • CGT event E1 (creation of a trust); 
  • CGT event E5 (creation of absolute entitlement); or 
  • CGT event A1 (disposal). 
By contrast, the taxpayer argued that the determination by the trustee did nothing more than establish "a separate fund of assets under the umbrella of the trust" and that the determination did not trigger any of the CGT events listed above.

The Federal Court determined that CGT event E1 (creation of a trust) was triggered by the determination and a subsequent application by the taxpayer for leave to appeal the decision was denied by the Court.

The most significant comments in the judgment however perhaps related to the arguments regarding CGT event E5.

Justice Edmonds found that CGT event E5 could not arise, because the beneficiaries could not become absolutely entitled to trust assets where the trustee had a lien over the assets in respect of its right to be indemnified for trust liabilities out of trust assets.

Adopting the Court's view in Oswal, it seems the beneficiaries of a discretionary trust will rarely (if ever) be absolutely entitled against a trustee when a trust vests, as the trustee will always have a common law right of indemnity out of trust assets, able to be satisfied via an equitable lien.

While draft TR 2017/D10 does not explore any of the above arguments, it does still reach largely the same conclusion. It is hoped that before the final ruling is issued, the Tax Office does explain the reasons for concluding that CGT event E5 does not occur on the vesting of a trust and the inconsistency between the Oswal decision and the Example 7 in the draft ruling is addressed.

Some of the missing answers

The draft ruling does not attempt to address a range of questions that would seem to be critical to include before the ruling is finalised.

For example:
  • In what circumstances will a power of variation be deemed to be too narrow to allow an extension of a vesting date? 
  • If a power of variation expressly permits retrospective amendments, why will this not allow a vesting date to be extended after it has passed (the draft ruling is blunt in its view that a trust vesting date can never be extended once it has passed)? 
  • If there are no default beneficiaries, will the trustee of the trust be taxed on all income and capital gains derived (at the top marginal rate, with no CGT discount) pending the assets of the trust being distributed? 
  • Alternatively, if there are no default beneficiaries, does the Tax Office instead believe that the assets of the trust pass on a resulting trust to the settlor? 
  • Can a trustee resolve to amend the jurisdiction of the trust to South Australia, and thus have any vesting date essentially abolished? 
  • If an individual default beneficiary of a vested trust dies before the trustee distributes the assets to them, do those assets pass in accordance with their will, without tax consequence due to Div 128 of the ITAA 1997? 
  • What approach will the Tax Office have in relation to lost trust deeds, where it is impossible to confirm the date of vesting? 

Draft TR 2017/D10 provides some welcome clarity to the Tax Office's view in relation to trust vesting, although much of the guidance it provides is subject to the qualification that the issue "requires a close consideration of the effect of vesting as specified in the deed" and is subject to language such as "…it may be the case…".

Perhaps however these comments are merely the Tax Office using its language to restate the mantra featured regularly in this blog post, namely – Read the Deed.

Furthermore, as flagged above, there are a number of fundamental issues that have not been considered at all; a disappointing outcome given how long it has taken for the draft ruling to be released.

Without being deliberately trite, it is hoped that the final version of Draft TR 20017/D10 does not suffer the same delays as Draft TR 2004/D25.

The above post is based on the article we had published in the Weekly Tax Bulletin.

** For trainspotters, ‘Fairytale of New York’ is song by legendary Irish band The Pogues, featuring Kirsty McColl, see here – https://youtu.be/j9jbdgZidu8

Image courtesy of Shutterstock

Tuesday, December 5, 2017

Final Post for 2017 – Simply have a wonderful Christmas Time **

Matthew Burgess blog final post for 2017

With the annual leave season starting in earnest over the next couple of weeks and many advisers taking either extended leave or alternatively taking the opportunity to catch up on things not progressed during the calendar year, last week’s post will be the final one until early 2018.

Similarly, the social media contributions by both the View and Matthew will also largely take a hiatus until the New Year as from today.

Thank you to all of those advisers who have read, and particularly those that have taken the time to provide feedback in relation to posts.

Additional thanks also to those who have purchased the ‘Inside Stories – the consolidated book of posts 2010-2016’ (see - https://viewlegal.com.au/product/inside-stories-reference-guide/).

The 2017 edition of this book, containing all posts over the last year, edited to ensure every post is current, indexed and organised into chapters for each key area should be available early in 2018.

Very best wishes for Christmas and the New Year period.

** for the trainspotters, with Paul McCartney in AUS, listen to his Christmas song ‘Simply Having a Wonderful Christmas Time’ hear (sic) - https://www.youtube.com/watch?v=hMhMekfIyos

Image courtesy of Shutterstock

Tuesday, November 28, 2017

Just Beat It - the notional estate rules & a lesson from Mr Pratt **

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers the above mentioned topic in a ‘vidcast’ at the following link - https://youtu.be/sVKhCJ87BpI

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –

Mr Pratt allegedly died with a wife, some kids with that wife, and then perhaps two other spouses that were based in New South Wales. Those two spouses then made various challenges against Pratt’s estate.

One of the challenges related to assets owned via a family trust.

The structure involved a trustee company that had no individual shareholder.

The shareholder of the trustee company was another trust. That trust was ostensibly for Richard Pratt. The parties accepted that this was the case and that he had ultimate control of the trust beneficially and probably legally.

Importantly, that trustee company was setup in Victoria.

The trustee company was then a trustee of a standard family trust, other than this point, and that is Richard Pratt himself was not a potential beneficiary of the trust.

This trust then owned shares in a holding company.

That holding company was also a Victorian-based company.

That holding company owned 100% of the shares in a further subsidiary company. That subsidiary company owned New South Wales property, being I think an apartment where one of the additional spouses was living at Richard Pratt’s expense.

The argument of the spouse focused on the fact that in New South Wales, if you’ve got any asset in New South Wales, even if you died in another jurisdiction, the notional estate provisions can apply.

Like many business owners, Richard Pratt didn’t have many assets that passed under his will. Thus, there wasn’t a lot to be gained from trying to challenge the will, unless the notional estate provisions applied. If they did, then assets of the trust (being the shares in the company group that owned the apartment) would essentially be deemed to form part of the will.

What the court did was went through the notional estate provisions and methodically stepped through each aspect of the structures Pratt had put in place.

Despite the apartment being located in New South Wales, the structure used meant there was nothing else that created a nexus between the deceased, being Mr Pratt, and the New South Wales notional estate rules. In other words, the assets could not be attacked.

** for the trainspotters, ‘Beat It’ should need no introduction - watch hear (sic) and ask yourself if you can sing the chorus without swapping the lyrics to ‘eat it’ (also watch Weird Al’s remake below) -

MJ - https://www.youtube.com/watch?v=oRdxUFDoQe0

Weird Al - https://www.youtube.com/watch?v=ZcJjMnHoIBI

Tuesday, November 21, 2017

How to innovate: Think what BigLaw would do; and do the opposite

Matthew Burgess blog How to innovate: Think what BigLaw would do; and do the opposite

A previous post profiled the contribution I made to an eBook published by LegalTrek (see - Insights on the Journey to Value Pricing). For those that do not otherwise have access to the LegalTrek blog, a further article I have provided to them is extracted below.

While the article focuses on the legal industry, arguably the principles apply to all professional service firms.

Recently, we at View Legal started ‘Foundations for the Future’, webinars and one-day events, with the aim of broadening perspectives of how to structure professional service firms. The format is pretty straightforward.

The presentation is delivered by me, Matthew Burgess, with significant audience participation, in the form of questions and answers. The content is focused on optimising the business model of professional service firms. During the workshops, we usually discuss specialisation, productisation, resourcing, and pricing models.

This article explains why we at View Legal feel these talks are important.

Before that:-

For those who don’t know, in 2014 I exited ‘biglaw’. My sense is that most of biglaw is very similar in its thinking, regardless of how many partners are in a firm.

In biglaw, very few people are thinking anything other than the traditional model, charging in increments, and billing the hours.

Many believe that small is the new big. From the start, View has known we can think and act differently.

Here are some examples of what we do differently from the biglaw model:
  • We don’t bill by the hour and we have no timesheets; 
  • We don’t have any offices, so don’t spend $millions on fancy office space; 
  • We don’t do performance reviews; 
  • We have no holiday policy – we are a results-only company. If you think you can take 12 weeks leave and still deliver what we want as an organization: go for it; 
  • Our longest business planning cycle is 90 days. 
And how did we go about thinking differently? Sounds difficult, right? When, in fact, it is the opposite. There’s not a lot of actual rocket science in what we’ve done. It’s public information, what the biglaw model is. We have just said…
“Whenever we are in doubt, we say what would a big law firm do, or a traditional law firm; and then we do the opposite…” – Matthew Burgess 
Disclaimer: It hasn’t always worked. But we keep experimenting.

Why did we start the ‘Foundations for the Future’?

In short: because it is important.

The change in the business of law landscape is already taking place. Our overriding objective is to be part of the conversation, that we believe is very important.

I felt we should not simply wait for others to initiate the discussion. So, we decided to do something about it.

We didn’t want to be in a situation where we had an opportunity to share what we knew and did not act.

Imagine us, reflecting in five or ten years’ time, only to find the industry has completely imploded and all of us are left with nowhere to go. That’s what’s happened in other industries (e.g. taxis and Uber and driverless tech).

However, I feel that the overarching question ‘How to face the future in a professional service industry’ is conceptually wrong. What we should ask ourselves is – What value does the legal profession bring to the community?

It seems there is a wide acceptance that – ‘in the future’ – the legal profession will need to change significantly, to deliver a compelling value proposition. However, our concern is that the future is already here.

So, we feel there is really no time to lose. This is why we have already started the discussion.

What changes can you expect in the next three years?
Let’s see if we can make some analogies, and learn from previous examples.

The impact of technology has been seen across most other industries. It has been most dramatic in industries that are adjacent to professional service firms. Examples include the music, publishing, and consulting industries.

Our view, however, is that technology is only ever an enabler for change, a catalyst in all industrial transformations. The work of thinkers such as Clayton Christensen (in the book The Innovator’s Dilemma) reinforces this concept.

The solutions that are already gaining traction, at an ever-increasing rate in the professions, focus on the delivery of outputs to end-users.

This type of business model is diametrically opposed to incumbent providers, that focus almost exclusively on input-generated value creation (in other words, recording time and selling it, according to an arbitrary hourly rate).

We have a clear client trend toward those professional services firms that have changed their business model and stopped selling time.

How should lawyers position their law firm for the “new normal”?
My answer is simple – just focus on the results of your work, instead of your inputs. In other words – charge for the value you create, rather than the processes that you use (and the time that you spend).

In our example, the starting point for our firm has been to focus our entire business on the outputs that we deliver, as opposed to the inputs that we create. This one change has had the single biggest impact on our ability to demonstrate our value as a firm.

Based on our experience (and what we observed in other successful firms), until all participants focus fully on outputs, it is very difficult to achieve any substantive innovation.

Let me give the example of Kodak. We all know what happened to Kodak. Kodak was doing a lot to remain the market leader. Except for one thing – they did not change their business model.

They got stuck with their premise that people will ALWAYS want to print photos.

Kodak used to say “We are in the film business”. Arguably, all they had to do to be successful was to say “We’re in the memory business”.

Likewise, the only thing law firms need to do is to say “We are selling solutions” – and peace of mind – not hours recorded.

What should the business model of modern law firms be?
Without question, a business model that is focused exclusively on outputs created for clients is the only business model that is likely to be sustainably successful.

Certainly, in all other industries, there is no role for providers wishing to charge clients based on inputs, as opposed to outputs. On this basis, we believe that ‘timeless’ law firms should be the universal pricing model for every firm.

But it is actually not that difficult at all to think outside of the box here. Take thought leader Ron Baker, for example. Every year, he wants to either give away or discard, all the knowledge that he has, by the end of the year.

But why!?

Ron Baker says the only thing that keeps him relevant is if he is constantly renewing the way he thinks. So, letting go of his knowledge will force him to renew his learning, and he will continue to be relevant.

The point here is that if you’re not disrupting, or trying to destroy, your current most successful business, somebody else will be.

If you’re not disrupting or trying to destroy your most profitable, most successful part of your business, that’s fine. But accept that somebody else is doing that, right now.

Can lawyers use outsourcing, and if so, from where?
The model that best explains our views about outsourcing is known as the Stan Shih ‘Smile Curve’. Stan Shih is the founder of Acer, a technology company headquartered in Taiwan.

Shih noted that in the personal computer industry both ends of the value chain have higher values added to the product, than the middle part of the chain. To illustrate:

Measuring Smile Curves in Global Value Chains, page 5

How does this apply to law firms? Simply put, firms should focus all of their internal energies, and resources, on the activities that are least able to be outsourced. In order of priority, this means firms should focus on:-
  • conceptualisation and sales; or
  • branding and marketing; or 
  • design and distribution; or 
  • manufacturing and production.
In other words, law firms should focus on strategies that will bring them more business. Including (without limitation) finding their right niche, positioning, putting the business development team and/or lead generation system in place, designing products, and experience around the service delivery.

The middle part of the Curve illustrates lower effort on the law firm’s end in terms of the actual service “manufacturing’’ (or rather, delivery).

This means law firm still must be hands-on in terms of controlling the process, but it would be wise to outsource most of the elements, if not all, from this value chain segment.

Based on these principles, in our business, we actively look to outsource (whether to computers, onshore providers or offshore providers) everything other than conceptualization and sales.

Indeed, even with conceptualization and sales, we also seek specialists, with non-legal backgrounds, to assist us to achieve best practice.

Why is P3 (process, product, and pricing) important for law firms?
P3 is widely recognized as the cornerstone of any successful professional services firm.

Somewhat ironically, however, in a firm that focuses on inputs (time billing, or even time recording), the level of innovative thinking that is applied to any of the P3 tends to be limited.

Arguably, it only makes sense to focus on processes, pricing, and productisation, once you have decided to move away from the billable hour.

Where a professional services firm focuses on the value it creates, then this tends to create significant improvements in each aspect of the P3 areas.

Again, once you focus on value-based pricing, in the true sense of that meaning, you will have no obstacles to improving any of the P3 areas.

Let me give an example. If you opt to charge based on value (and not use hourly rates), then:-
  • Process, particularly around project management, becomes very important; AND
  • Productisation of solutions becomes a core competency (if not immediately, then over time).
The journey from time billing to fixed pricing, to value pricing, to segmented and tiered value pricing, is a natural evolution as the firm’s skills in pricing continue to develop.

Disruptive innovation and ultra-specialisation is the perfect storm

What do I mean by that?

The science in relation to disruptive innovation (as first explained by Clayton Christensen, in The Innovator’s Dilemma) is compelling.

In short, the theory explains that disruptive entrants to a legacy business model tend to start at ‘the bottom’ of the industry.

The theory describes how incumbents get taken by surprise. Let me illustrate:

The disruptive firms use technology to undermine ‘low hanging fruit’, in the businesses of the incumbent firm. You can draw parallels here and see that this is exactly how NewLaw act today.

NewLaw has focused on the legal work at the bottom of the value chain. That is the work which can be most easily productised.

At the same time, incumbent law firms simply start disengaging from those practice areas, on the basis that they are becoming less profitable, and they wish to focus on more profitable areas.

In other words, law firms forego those standardized areas. However, they do not change their business model. As a result, they remain large inefficient machine, but with a smaller market share.

In time, the NewLaw will start to move up the value chain. The range of practice areas, that have been subjected to disruptive forces, continues to grow quickly, across areas such as conveyancing, general commercial work and even more specialized areas, such as intellectual property, estate planning, and industrial relations.

Also, at least some (if not many) of the highly specialized ‘best in show’ lawyers are becoming disenchanted with life inside the ‘biglaw’ machine.

These highly talented lawyers are leaving larger firms at an ever-increasing rate. Similarly, the number of international firms entering even the smallest markets means that much of the talent that is not setting up their own firms is joining these large multinational firms.

Essentially, many incumbent firms are ‘stuck in the middle’; losing talent and work at the very high end of their client base, and losing work at the bottom end also.

What is our experience with value pricing?

For us, value pricing has been a journey, with a destination we accept we will never arrive at. A threshold question of pricing is: How do you fixed-price litigation work?

Now, I’ve never done any litigation work, but we do M&A work, and I would argue that an M&A transaction is largely analogous to a litigation matter. You’ve got no idea where it’s going to go. You’re totally in the hands of both the client and the other side. There’s no definite timeframe. It can change on an hourly basis.

The answer to pricing this type of work is all about the scope, in other words, competent pricing is all about competent scoping.

One way to look at value-pricing, is to decide what is a fair price to be charging the client? The fair price is the most that you can charge the client with the client still endorsing your firm to their friends, and actually coming back and using you again – Not necessarily happy, but willing to be an advocate.

That, in a sentence, is what value-pricing is about.

This is just a journey. Don’t ever feel as though you’re getting close to being perfect about value pricing because you never actually get there.

Should law firms burn the timesheet? What is the substitute?
Until we, at View Legal ‘burnt the time sheets’, our sole focus was on what would be ‘chargeable’.

Having abandoned timesheets and embraced a timeless organization, our focus immediately changed to “what is valuable”.

While the journeys of other firms may be different, when we look at the industry, the common theme about the firms making real and tangible progress is that they do not track time on timesheets in any manner.

The substitute for timesheets is, in our experience, a very personal one.

The three KPIs we use are:-

Number one is the “Shipping”. This concept has been popularized by leading thinker, Seth Godin.

Counter-intuitively, even though we do not track any time spent on a task, we religiously track the time it takes for us to fulfill a promise to a client. In other words, how long it takes between agreeing a tranche of work and completing it?

Next, we regularly conduct “After action” reviews. Since we constantly want to improve our overall performance, after action reviews are the only tool that allow us to capture the key conclusions from any piece of work in real time.

Finally, we have “Fun and flow”. The concept of flow is an entire topic in itself. It focuses on achieving excellent levels of performance, and ultimately provides the foundation for a more easily understood concept – i.e. having fun.

Are you having fun at your law firm? How about your employees?

Tuesday, November 14, 2017

Privilege (on privilege) in family law matters **

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers the above mentioned topic in a ‘vidcast’ at the following link - https://youtu.be/E69HxwaO3A4

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –

The decision in Nolan (email me if you would like a copy of the judgement) is interesting because former parents-in-law of a spouse actually released all of the material around the estate plan to the former son-in-law, before their lawyer raised that the material might actually be privileged.

When the issue was reviewed, the court held as a general rule, estate planning material of the parents of a couple is privileged. In Nolan however, the court held the parents had already released the information and therefore no privilege attached to it. This is because privilege is the client’s privilege. Once they waive it, that's the end of the discussion.

Another privilege case in the family law space to remember is Kern. As usual, if you would like a copy of the judgement, please email me.

In Kern, the parents had arranged for vacant land to be transferred to their daughter and the son-in-law.

The daughter’s argument during the litigation with the former husband was that clearly the asset had come down ‘her’ side of the family and clearly that needed to come back to her benefit under the family law settlement. Not an amazingly complex argument and one that the court was comfortable to agree with.

Where it started to get somewhat more interesting was that the daughter then argued she and her parents had transferred the land to her for (say) $100,000, when it was actually worth (say) $400,000.

The reason for the transfer being significantly undervalued was to minimise the tax and stamp duty otherwise due and payable. The family court gave the wife the uplift to $400,000.

However, the undervalued transfer breached specific provisions under the stamp duty legislation. So while the court acknowledged the argument and gave an effective benefit under the family law settlement to the wife, the court also immediately sent the matter to the criminal investigations division at the Stamps Office.

Again, generally this information would be protected by privilege. However, as the wife was the one that submitted it into the court, she waived the privilege.

** for the trainspotters, ‘privilege on privilege’ is a line from the Church song ‘Myrrh’ (as I recall it I got an A+ when doing my grade 9 English assignment analysing the lyrics for this song … just sayin’) listen hear (sic) - https://www.youtube.com/watch?v=h6T_BtPSRL0