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.
“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 BurgessDisclaimer: 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?
How should lawyers position their law firm for the “new normal”?
What should the business model of modern law firms be?
Can lawyers use outsourcing, and if so, from where?
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:-
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?
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:
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?
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.
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.
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.
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:
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.
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:-
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).
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.
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?
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?