Gladwell and the Future of the Professions

Recent posts have looked at recent publications that provide insight into the likely evolution of the time billing business model of most professions.

Another author that provides perspective on this theme is legendary thinker Malcolm Gladwell and his release David and Goliath (see - http://www.amazon.com/David-Goliath-Underdogs-Misfits-Battling/dp/0316204366).

In many respects, the book uses a myriad of practical examples to highlight how the theories underpinning Christensen's innovator's dilemma play through.

The central theme of the book is that the very things that make an incumbent, dominant market leader strong can in fact be their greatest weaknesses with someone who does not play by the rules.

Indeed, while I cannot easily see it referenced in Gladwell's book, the famous quote by Mark Twain is reinforced many times –

The best swordsman in the world does not need to fear the second best swordsman. The person for him to be afraid of is some ignorant antagonist who has never had a sword in his hand before, does not do the thing he ought to do and therefore the expert is not prepared for him, does not do what he ought to do and often the expert is then caught out and is ended on the spot.

As mentioned previously, we began the journey to address many of the challenges of redefining the professional services firm business model over 10 years ago.

For many, the journey has started more recently and we believe it important to share our learnings. Our upcoming July roadshow will be a full day example of this.

Download the brochure here.

Before then, our free webinar on Thursday this week (that is 28 April) will also share a number of insights (see - https://viewlegal.com.au/product/free-webinar-foundations-for-the-future-28-april-2016/)

Insights on the Journey to Value Pricing

For those who do not otherwise have access to it, the contribution I made to a recent eBook published by LegalTrek is extract below. The complete eBook that features among others Ron Baker, David Wells, John Chisholm and Ed Kless is available at the following link – https://legaltrek.com/afa-ebook/ Our legal services business has operated entirely on a fixed price basis since 2004.

This said, timesheets were not completely eliminated until 1 July 2013 (see photo attached!), shortly before founding our firm View.

There have been challenges, mostly unpredictable, however unsurprisingly no one in the team is likely to volunteer to fill a timesheet in ever again.

A key influence has been VeraSage, the international think-tank dedicated to eliminating hourly billing from the professions (see - http://www.verasage.com/). Consultant John Chisholm is the leading Australian based Fellow of VeraSage and is a fantastic mentor, as are the trail blazing firms associated with the group – see - http://www.verasage.com/thelist/

The key lessons we have learned in running a truly ‘timeless’ firm include:

1. Parkinson's Law is a serious challenge even without timesheets – perhaps counterintuitively our key performance metric is still time related; that being – what is the duration between agreeing on a scope of work and delivering that scope to the customer.
2. Communication both internally and with customers is vital. Many law firms only exist because of Murphy's Law (i.e. everything that can go wrong will go wrong). Successful fixed pricing almost entirely depends on carefully planning and agreeing a defined scope. If there is a legitimate change to scope that could not have been identified at the start of a project, there must be real time communication within the team and immediate engagement with the customer.
3. Centralisation of all team learnings in a logical and easily accessible manner is critical. This includes (using VeraSage founder Ron Baker's language) ‘AARs’, being after action reviews (see – https://www.linkedin.com/today/post/article/20130303194245-38251380-replacing-the-performance-appraisal). This 'non-billable' concept is rarely, if ever, done in a time billing firm. In a fixed price firm it is a discipline that must become automatic.
4. The Goldilocks Principle helps explain why we always provide the customer with alternatives in the level of service that is provided. The time billing professions remain essentially the only industry in the western world that do not empower their customers to choose service levels, and this one change to our approach has been vital.
5. The Donkey Principle explains that the best performing lawyers in a time billing model are generally of least benefit in a fixed price model - the impact of this culturally cannot be underestimated.

There are numerous other impacts that we have seen, sometimes on an hourly basis (no pun intended).

Ultimately, the most important lesson is the depth of cultural change because what timesheets do (even when you are fixed pricing) is create a focus solely on what is billable.

Without timesheets, the focus is solely on what is valuable.

This one concept has an impact on every part of a professional services business. Increasingly we are finding customers get this, and are allocating their legal spend accordingly.

As I suspect is the case for everyone in the VeraSage community, we happily share our experiences with others contemplating changing their business model.

As mentioned previously, we began the journey to address many of the challenges of redefining the professional services firm business model over 10 years ago.

For many, the journey has started more recently and we believe it important to share our learnings. Our upcoming July roadshow will be a full day example of this.

Before then, our free webinar on 28 April will also share a number of insights (see - https://viewlegal.com.au/product/free-webinar-foundations-for-the-future-28-april-2016/)

Image credit: Brian Turner cc

Fixed Pricing and Change Orders

Following a recent post, I had questions about how our fixed pricing approach operates where there is a significant change in the scope of work required.

In very broad terms, there are three relevant issues in relation to our approach in these types of situations, namely:

1. As we are specialists in the areas that we provide pricing on, we are normally able to anticipate the vast majority of likely work and can therefore provide the fixed pricing very early in the process; 
2. Where there is significant uncertainty about what might be required (for example in a sale transaction), we compartmentalise the process and scoping to provide fixed pricing for each step in the process before the work is performed; and 
3. In situations where there are substantial changes to the work required, we do not perform any additional work unless the client agrees in advance to the pricing for this additional work.

As mentioned previously, we began the journey to address many of the challenges of redefining the professional services firm business model over 10 years ago. 

For many, the journey has started more recently and we believe it important to share our learnings. Our upcoming July roadshow will be a full day example of this. 

Before then, our free webinar on 28 April will also share a number of insights (see - https://viewlegal.com.au/product/free-webinar-foundations-for-the-future-28-april-2016/)   

Image credit: Sebastien Wiertz cc

Tantalising opportunities for trust restructures under new Subdiv 328-G

For those that do not otherwise have access to the Weekly Tax Bulletin, a further recent article is extracted below.

Introduction

The new Subdiv 328-G rollovers (the provisions) commencing 1 July 2016 provide significant opportunities for Small Business Entities (SBE) to restructure into a more appropriate entity, assuming the “genuine restructure” provisions can be satisfied.

This article considers a number of opportunities to restructure discretionary trusts. In particular:

1. trust cloning with or without a Family Trust Election (FTE);
2. trust splitting and effectively limiting the range of potential beneficiaries without causing a resettlement; and 
3. restructuring out of trusts with heritage issues. 

The new rollovers were introduced via the Tax Laws Amendment (Small Business Restructure Roll-Over) Bill 2016 which passed all stages without amendment and received Royal Assent on 8 March 2016.

Ultimate Economic Ownership (UEO) and cloning

Section 328-430(1)(c) requires the UEO of assets being transferred remain the same, or in the same proportion after the restructure. While this is relatively simple for companies or sole-traders, it presents difficulties for trusts, where beneficiaries do not have a direct and absolute interest in the assets of the trust (merely a right to due administration).

Trust cloning of discretionary trusts is again available following its abolition on 31 October 2008 through the provisions without causing any CGT consequences. Where a trust makes (or has previously made) an FTE pursuant to Sch 2F of the ITAA 1936, the provisions ensure (under s 328-440) access to the roll-over if the cloned trust has made the same FTE.

Historically, the Tax Office had set out its view of how to implement a valid trust clone for tax purposes in the (now withdrawn) Taxation Ruling TR 2006/4.

Although not free from controversy, the Tax Office was of the view that in order to implement a valid trust clone, it was necessary for the "beneficiaries and terms of both trusts (to be) the same".

In this context, the position of the Tax Office was that any FTE made by the original trust would need to be made by the cloned trust in order to gain access to the tax concessions.

Under the UEO rules, in situations where there is either no FTE made by the original trust or a desire for the cloned trust to not make a FTE, the provisions still allow cloning to take place so long as there is "no material change" between the original trust and the cloned trust.

It is assumed, pending more detailed comments from the Tax Office, that withdrawn TR 2006/4 will provide at least a framework for how to interpret the concept of "no material change". Given that there is a discrete roll-over available under the provisions for trusts that have identical FTEs, it is reasonable to conclude that the no material change requirement will be satisfied regardless of the approach taken by either trust in relation to a FTE.

Anecdotally, prior to 31 October 2008, there was some debate as to whether "reverse clones" could be implemented without tax consequence. In other words, consolidating assets across 2 or more trusts into one trust. Again, under the provisions, it seems clear that reverse cloning will be available, so long as each trust has made the same FTE, or alternatively, the "no material change" test can be satisfied.

Trust splitting

With the Tax Office providing some clarity in relation to trust splitting through Private Binding Ruling Authorisation Number 1012921290075 (Ruling) (see - http://blog.viewlegal.com.au/2016/03/trust-splitting-some-clarity-at-last.html) the provisions appear to provide further opportunities to structure a comprehensive split.

In the Ruling, the Tax Office confirmed its view that narrowing the class of potential beneficiaries of each split trust to a separate family unit would cause a resettlement. Relying on the FTE safety net, it should be possible to limit the range of potential beneficiaries to individuals or classes of individuals falling within the specific family group.

Similarly, all other substantive aspects of a trust split, including limiting the right of indemnity for each trustee to only the assets of the split trust, will fall within the ambit of at least the "identical FTE" aspect of the provisions.

Whether a traditional trust split can also be used, for example, to extract certain assets out of the reach of a pre-existing FTE, for example, by relying on the "no material change" provisions, is more debatable. In particular, from a stamp duty perspective, access to duty concessions in most states for trust splitting relies on any split trust still forming part of the original trust, in which case, any FTE made would need to continue to apply for tax purposes.

Heritage trusts

Where a trust deed has heritage problems, such as limited variation powers or a proximate vesting date, the provisions can be used to transfer the assets to a "clean skin" trust deed, avoiding the difficulties and costs associated with making an application to Court to vary the deed.

While there have been a number of Court decisions in recent years allowing the extension of a vesting date to avoid adverse impending revenue consequences, it should be noted there are similarly a number of cases where the Court has denied such an application (see Re Arthur Brady Family Trust; Re Trekmore Trading Trust [2014] QSC 244; Re Plator Nominees Pty Ltd [2012] VSC 284; Stein v Sybmore Holdings Pty Ltd [2006] NSWSC 1004 and Paloto Pty Limited v Herro [2015] NSWSC 445).

In any event, the costs of a Court application itself would appear to be able to be avoided if the provisions can be accessed.

In theory, the new rules will also provide a potential pathway in other problematic areas of an existing trust such as narrow beneficiary classes, mandated (but now inappropriate) appointor or principal roles and, potentially, lost trust instruments.

Future focus While the provisions appear to meet many of the tax-related issues facing SBEs wishing to restructure, other potential transaction costs, particularly stamp duty, will need to be carefully considered before implementing a rearrangement. With New South Wales, following the lead of Victoria and South Australia, set to abolish stamp duty on business transfers from 1 July 2016, it is hoped that all states fall into line in the near future.

Image credit: Markus Spiske cc

Trust Splitting – some clarity at last

For those that do not otherwise have access to the Weekly Tax Bulletin, a further recent article is extracted below.

The recent Tax Office Private Binding Ruling Authorisation number 1012921290075 (Ruling), considers a number of key issues relating to the concept of trust splitting.

While trust cloning is generally seen as preferable to trust splitting, there are a range of reasons cloning may be commercially inappropriate including –

• an inability to access any of the small business CGT rollovers;
• assets that do not lend themselves to complete separation;
• no stamp duty relief (which is the case in most Australian states).

The Ruling is a timely reminder of the need to ensure care is taken with any intended rearrangement of an existing trust.

Overview of questions answered

The Ruling confirms the following key conclusions -

• the insertion of powers into a trust instrument to provide a trustee the ability to create a split trust will not be a resettlement if the power of variation is sufficiently wide;
• a change of trusteeship in relation to certain trust assets will not cause any tax consequences, again subject to the trust deed providing the requisite powers;
• a change to the person nominated as principal or appointor of a split trust will not cause any tax consequences, again subject to the trust deed providing the requisite powers; 
• varying a trust deed to limit each trustee’s right of indemnity such that each trustee is only permitted to be identified from the assets of the split trust they act as trustee for will not cause a resettlement; 
• narrowing by deed amendment the class of beneficiaries of each split trust to focus around the family unit intended to control that trust will cause a resettlement. 

Arguably, since the decision in FCT v Clark [2011] FCAFC 5 (Clark) and the ATO’s response in Tax Determination 2012/21, none of the above conclusions are controversial, other than in relation to the narrowing of beneficiaries causing a resettlement. It is important to note however that the ability to limit the right of indemnity does change the previously adopted ATO position.

It might be recalled that in Clark, a majority of the Full Federal Court held that changes to a trust (primarily a change in the ownership of units of beneficial entitlement to the trust property and changes to the trust property itself) did not result in a break in continuity of the trust. As a result, capital losses incurred by the trustee before those changes occurred could be offset in calculating net capital gains arising after the changes occurred.

Each of these issues are explored in more detail below.

Narrowing of right of indemnity

One of the fundamental concerns with trust splitting, as compared with trust cloning, was the asset protection issues with trust splitting, if the trustee of each split trust remained able to be indemnified from assets held by other trustees of assets in a different split trust.

Prior to this Ruling, ATO guidance has historically indicated that limiting a trustee’s right of indemnity as part of a trust splitting arrangement could cause CGT event E1 to happen.

In particular, in ATO Interpretative Decision 2009/86, it was decided that a trust split did trigger CGT event E1 on the basis that there was a 'fundamental change to the rights and obligations attaching to the trust assets’. A key aspect raised by the ATO was that the trustee's rights of the ‘original’ trust had been altered by excluding the transferred assets from its right of indemnity.

In the Ruling, a desire to limit the right of indemnity was based on achieving the asset protection objectives and to align with the estate plans of the shareholders and directors of the trustee of the orignal trust.

However the ATO confirms in the Ruling that, following Clark, this type of change does not result in the trust estate as originally constituted coming to an end.

Furthermore the altering of the indemnity does not cause any of the assets of a trust to be subject to a new charter of rights or obligations separate to those on which the property was originally settled.

Rather, the restriction of the respective trustee’s rights to be indemnified is in fact consistent with the appointment of separate trustees over different assets of a trust. Ultimately then the changes, without more, did not alter the rights of the beneficiaries to be able to benefit from all of the assets of the trust.

Narrowing the class of beneficiaries

Again due to the objectives under the estate plans of the shareholders and directors of the trustee of the orignal trust, there was a desire to narrow the class of potential beneficiaries.

In the Ruling the ATO states that any such change will amount to a situation where assets are commenced to be held on trusts different to the original trust. In other words, that CGT event E1 would happen by reason of the changes.

In reaching this conclusion the ATO relies heavily on the decision in Commissioner of State Revenue v. Lam & Kym Pty Ltd (2004) 58 ATR 60 (Lam & Kym).

Whether the position adopted by the ATO on this point is correct would need to be considered in light of the following –

• Lam & Kym involved an express declaration of trust over specific assets, which does not appear to be the case in the factual scenario considered in the Ruling.
• In any event, Lam & Kym was a Victorian Supreme Court case which has been largely superseded by the High Court in Clark.
• Clark confirmed, as acknowledged in TD 2012/21, that a variation of a trust by the trustee in accordance with an express power in the trust instrument will generally not result in the establishment of a new trust. 
• The narrowing of a beneficiary class is analogous to Clark and TD 2012/21, which confirm that no resettlement arises from a variation of beneficiaries where the variation is permitted by the trust deed and there is continuity of the trust estate. 

Conclusion

The Ruling provides useful clarity around the scope of changes that can be implemented as part of a trust splitting arrangement. While the ATO’s position in relation to narrowing beneficiary classes is disappointing, there remains significant scope for helping trustees achieve succession planning objectives via trust splitting.

Image credit: OuadiO cc

Challenging a Will due to Undue Influence

A recent post listed the five main ways in which a will can be challenged – see - http://blog.viewlegal.com.au/2016/01/ways-to-contest-will.html.

One of the aspects listed was the ability to challenge a will due to the will maker not making the document of their own free desire.

While there will always be a myriad of influences on someone when they decide to make their will, a will is only invalid if any such influence is determined to be 'undue'.

Undue influence is said to exist when there is something so strong that the will maker is under the belief that while the document is not what they want, they feel compelled to sign it anyway.

Causes, Not Symptoms, the Key to Business Model Reinvention

A recent post http://blog.viewlegal.com.au/2016/03/joining-dots-innovators-dilemma-and.html touched on the combination of the 'ping' generation and the fact that time billing effectively rewards those who allow Parkinson's Law to rule unchecked.

The book by Steven Harper 'The Lawyer Bubble' (see - http://www.amazon.com/The-Lawyer-Bubble-Profession-Crisis/dp/0465058779) details why the legal profession, and probably most other professions, will likely struggle to reinvent any of the core aspects of their business model, at least in relation to time billing, in the short term.

While a myriad of reasons are provided, perhaps the most compelling is the fact that universities across the western world are essentially factories for producing professional service firm graduates, who specialise in the areas rewarded by time billing such as:

1. long hours; 


2. rote learning; 


3. technology adverse; and 


4. engrained arrogance, particularly in relation to solutions that undermine the traditional personalised bespoke service offering (such as alternative business models, offshoring, outsourcing and automation). 

Harper argues that any change to the 'BigLaw' business model from within the profession will require that the university system starts to reward students who are able to demonstrate more innovative attributes than those outlined above. Just as importantly however, the owners of the incumbent firms must themselves create a demand for this style of graduate. As Christensen predicts however in the Innovator's Dilemma, the prospect of the incumbent firms having the vision to truly cannibalise their existing business model is at best remote.

As mentioned previously, we began the journey to address many of the above challenges over 10 years ago. For many, the journey has started more recently and we believe it important to share our learnings. Our upcoming roadshow (see - http://viewlegal.com.au/roadshow-interest/) is another example of this.

Image credit: Book cover of The Lawyer Bubble Profession