The Simple Truth About the Professional Firm Business Model

As we slip into 2014 there is much talk- and even some action-about what business models are appropriate for professional firms in the 21st century.

Whilst some professional firms are still in denial and others struggle with how to make the change it is clear that the 19th century era partnership model, overlaid by the early 20th century industrialized notion of the leveraging of people x time, upon which most professional firms are still based, has run its race.

There are now many options for professional firms as to how they best structure themselves and create firms that are much more suitable for the people that work within them and to better serve the customers they seek.

In my view no matter what structure your firm is- or should be-for many years I have held a very simplistic view as to how really good firms look at themselves. This is represented as follow:

 

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Let me explain.

I believe that only the best firms have an incredibly strong base that everything else is built upon.I call it their internal environment-their culture if you like. This is the way things are done around here,the way we treat each other, our values, our leadership,our behaviours,how innovative and creative we are,our goals,our vision and our aspirations. And I happen to think it is this internal environment and little else that attracts and retains really good people (at all levels in the firm); that really good people are inspired and motivated to do really good work; that really good work attracts and retains really good customers, and, finally, that really good customers pay really good fees.

And it is in that order. It is from the bottom up-not top down.Play around with the order at your peril.

Good luck in trying to attract and retain good people if your culture is crap. Good luck too in trying to produce good work and service if you have the wrong people.Best of luck trying to attract and keep the customers you really want if your service and work ethic sucks. And you will need more than luck if you are trying to extract top fees from average customers.

I know it is not MBA stuff nor worthy of a Harvard Business School program. Its not even new. Our parents might have even called this using common sense with common courtesies. But it is that simple.

Is it easy? No of course not. If it is was that easy all firms would be able to do it.

What do you think? Have I got this wrong? Is there something I am missing? Love to hear your thoughts.

The Potential Consequences of Hourly Billing

I ran into this still shot from a video I did with Mike Bailey in 2011. (If you haven’t seen the video yet, click HERE.)
Homeless CPA

How would Charles Darwin see you?

DodoIt isn’t about survival of the fittest. Darwin actually held that the most adaptable were the survivors. So, are you and your business adapting or are you heading down the path of the Dodo?

The current environment is one where there are so many changes taking place that the firm of 20 years ago will find it hard to compete. I know looking at my business and the work we do that to produce our current output, 20 years ago we would have required a heap more people and resources. Thankfully, technology has developed and enables us to create the results etc that our customers want and need.

But, there are two other components that are vital – your people and your customers. Unfortunately, a lot of firms “out there” have taken on (some very grudgingly) the technological change, but they have made few, if any steps, toward adapting their approach to their people or their customers.

Most of my thinking here comes from the “Growth Curve” approach which looks at “Three Gates” – people, process and profit. The technology has helped us deal with and adapt to the process gate, but I am seeing very little in the way of adaptation to the profit or people gates.

The profit gate needs to be adapted to by looking at the way that you engage with your customers, the service you offer them and the methods by which you price and they value what they get from you. The arcane approach that is the timesheet is becoming less and less popular (as can be evidenced by a brief review of other posts on this site) and customers are demanding more certainty, clarity and comfort that they are not signing on to an annuity stream for the advisor whereby they are being charged and billed for the advisor’s inefficiency or learning. In effect, given the timesheet places the customer and the advisor in directly opposed positions, the customer is now waking up to the fact that they want to know in advance what the price for the work will be. Those firms that do not adapt to this emerging reality will find it very difficult to retain or attract customers where other firms out there offer this as an alternative.

The people gate is the other area where firms are finding it difficult or are not wanting to adapt. The blunt object that is the timehseet that is used for performance management in many firms is rapidly becoming redundant. As an example, we recently advertised for an accountant and one of the headlines in the ad was “no timesheets”. We have had some sensational applicants for the role who are currently working in accounting firms in town where they are managed and measured by the timesheet. I don’t know about you, but if my performance is being measured in 6 minute increments, it is going to be fairly meaningless to me. I want to be judged on results and outcomes. Inputs are irrelevant. Hence – particularly with our Gen Y guys – our people want to be and remain relevant and highly valued based on what they have added to the business, not how much time they have spent doing it.

Many of the firms with which I speak are afraid of moving from the timehseet and adapting their business model to what the world is slowly going to demand of them. These poor bastards are going to be wondering what hit them in about 5 years’ time when it will be all to late.

They will have few staff and fewer customers but they will be able to account for every single minute of their day.

They will be preceisely irrelevant.

And a future Charles Darwin will wonder why they chose not to adapt.

The Billable Hour Is Dead-Sort Of.

 

the demise of the dinosaurs (2)Fearless lawyer Mike Ayotte who is never afraid to express his opinions as The Last Honest Lawyer, recently wrote a post titled “The Billable Hour is Dead” and likened lawyers use of the billable hour to the demise of dinosaurs, whilst conceding that even after dinosaurs met their fate lizards pulled through (as did crocodiles and sharks!).

As you know, I would so love to believe that the billable hour is indeed dead-but I regret to report it is not- at least not yet. It is no doubt sick, but if it is dying its death throes are still reverberating.

I recently returned from the US attending some legal conferences and meeting with many lawyers, law firms, legal commentators, consultants, academics, legal authors and law students. Almost without exception (the exceptions primarily being legal consultants and software vendors who peddle time “capture” methodologies and who perpetuate the “lawyers sell time” myth) all agreed that the billable hour is pretty crook, is a sub optimal model and is no longer meeting the business needs of either the law firms or their clients (let alone the social and cultural needs of those who work in law firms).

What then has largely been the response from the profession to this sickness?

Apart from the innovative and courageous outliers- whose numbers I hasten to add are increasing all the time- and who have put the billable hour out of its misery by completely changing their business model- most firms apply a bandaid approach and continue to work within, and therefore prop up, the existing leveraged based business model.

Some firms have come up with all sorts of ingenious ways to increase the billable hours of their lawyers especially by spending huge dollars on technology & training so lawyers can better (“more accurately”) record their time wherever they might be and whatever the day or night of the week. (Atticus Finch’s tombstone would these days read something along the lines of “Here lies Atticus-a heroic biller & time recorder”). Whilst it is true many firms have adopted Alternative Fee Arrangements (mostly in response to client demands, rarely of their own volition), most of those AFA’s look to me to be billable hours in drag (“if it walks like a duck, quacks ……”) based around fixed fees, capped fees, blended rates, etc- all calculated on the time x rates x people model.

Is it any wonder good people are increasingly looking for better alternatives than working in a private legal practice; clients are looking to other providers to add value to their businesses; and that external disruptors will continue to flock to the legal profession in droves to exploit law firms’ soft underbelly-our lack of flexibility, failure to innovate, unwillingness to collaborate, our short term greed for the almighty dollar, our 19th century governance structures, absence of diversification-and most of all our cultural desert.

 

 

File Under “You Can’t Make This Up”

This last week from the Business Insider: Minnesota Lawyer Billed Client For Having Sex With Her.

This is clearly an extreme, but it does support our contention that the ABH (Almighty Billable Hour) leads to immoral and unethical behavior.

Certified General Accountants: Outlook magazine interview

I was honored to be interviewed by Lynn Sully for the CGA’s publication, Outlook.

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We discussed the idea that “you are your customer list,” among other Firm of the Future topics.

You can find the interview here, beginning on page 38.

The Bottom Line: Beyond the Billable Hour

I’m happy to be the cover story in this issue of the State Bar of California’s Law Practice Management and Technology Section. You can even earn an hour of MCLE reading my article (I flunked).

VeraSage is quoted throughout the issue, including Mark Chinn and Jay Shepherd, and Exemplar Law gets a mention, too.

It’s also encouraging to see so many “director of pricing” folks who are quoted throughout the articles.

But reading through the articles has been less than encouraging. Here are some brief comments on each article.

Will Hoffman: I’ll let our lawyers comment on the “comprehensive petition pending” to the California Supreme Court. But the fact that the Bar should acknowledge and encourage Alternative Fee Arrangements (AFAs) is, I suppose, progress, even though it lags way behind the free market.

Ed Poll: “All pricing is arbitrary.” What? This would come as a shock to the thousands who work as professional pricers. Why are they needed then? We’ll just let computers do it all.

Poll is still stuck, like most of the other authors, in an Industrial Era mindset of efficiency and cost cutting. There’s no mention of why or how knowledge work and knowledge firms work differently then Henry Ford’s factories.

This worldview invalidates nearly everything he writes about value and pricing.

Dr. Silvia Hodges: Silvia interviewed Mark Chinn for her article, along with Pat Lamb, and she mentions Exemplar Law. She quotes the ACC’s definition of value, which is unnecessarily complex. The ACC has yet to understand that all value is subjective, and they continue their quest to provide a checklist to quantify and qualify value.

She writes:

The purpose of AFAs is not to reshape a firm’s business model—although this is exactly what it might do in some firms—but to meet clients’ needs.

But Value Pricing is a business model change; it’s much more than just meeting the needs of clients. It’s also about meeting the needs of the professionals who work in those firms, as well keeping the profession relevant.

One of the reasons why so many of these articles are muddled is because they seem to get the idea of value being externally determined, but they miss the concept when the work comes back into their firms. They insist on applying Industrial Era, Six Sigma, and cost accounting principles to that same work. This is a prescription for failure, since it’s a contradiction to the theory of a Professional Knowledge Firm.

She also cites Pat Lamb, and if he’s right that most firms’ work is not customized, then their value is on the low-end of the Value Curve. But even here, a firm can utilize Value Pricing—see Southwest’s pricing on any flight offering a wide range of offerings.

But I believe Lamb to be wrong. The work that adds the most value is, by definition, customized and represents the applied judgment of experienced lawyers. To apply cost accounting principles to such work is to misunderstand—at the most fundamental level—the patterns and cadences of knowledge work.

Henry Turner, Jr.: Henry is with Valorem Law Group, and writes:

A proper value fee will not involve adding up the number of hours you think a matter will take and then quoting a fixed fee based on those hours. That is simply a “wolf in sheep’s clothing.” If you commit to pricing on a value basis, you can no longer think about pricing in terms of hours.

True. Why, then, does Valorem continue to maintain timesheets? He who says A must say B, and if hours are meaningless externally to the customer, they are also meaningless to the internal workings of a knowledge firm.

He uses the Apple store and iPhone as an example, but here’s the point that he and the rest of these authors are missing: the Apple store employee is not told to spend less time with you to lower costs and make more profit.

Rather, she’s taught to spend as much time with you as necessary, and Apple considers this cost an investment in the lifetime value of the customer.

Tracking time, and cost accounting, destroys this attitude, which is Paul Kennedy’s point in this brilliant essay. Read this essay and you won’t have to pick up a book on Lean Six Sigma.

Donna Seyle: Jim Hassett is quoted as saying he’d switch to hourly billing for his business in a heartbeat?

Wow, this is truly ignorant, as hourly billing is suboptimal for capturing value. The entire pricing revolution was started to move away from cost-plus pricing, not to hold it closer.

It also makes me wonder why he is spending so much time writing on Value Pricing and encouraging firms to make the change? The cognitive dissonance is indefinable.

Donna suffers from the same efficiency and cost containment mindset as the others in this issue. She also writes that a lawyer’s knowledge has “intrinsic value.” But nothing in this world—except for human life—has intrinsic value. Value is subjective.

Reading these articles illustrates the importance of linguistics. These authors will never truly understand the subjective theory of value if they continue to hold on to their existing vocabulary of commodization, cost control, efficiency, lean six-sigma, etc.

What do you think?

HSD from an attorney

Yesterday was a huge HSD. I received the following email from a sole proprietor attorney who specializes in elder care and estate law:

Dear Ron,

I tweeted a few weeks ago that I was reading your book, Implementing Value Pricing. Let me tell you a bit about how this began.

I am a Certified Elder Law Attorney (CELA) and today limit my practice to elder law and estate planning, with the exception of Residential Real Estate Settlements, something that the previous attorney that practiced here did and I continued doing it.

At all times I had my eye on limiting my practice since taking over this firm in 1995. I have stopped doing divorces, civil litigation, landlord-tenant, all the types of “threshold” law that I inherited.

This year I am moving the real estate practice into a stand-alone settlement company with another attorney that he will manage, leaving me to fulfill my goal of simply being an elder law/estate attorney!

As part of this, I have been reviewing all my firm practices. That led me to Atticus and Atticus led me to you and VeraSage! I had been using fixed fees for a while because I have always hated keeping a timesheet.

When I was a 2nd year law student clerking at a litigation firm, I was taught how to do a timesheet before anything else! Further, I wasn’t very good at it. I would find myself trying to go back and recreate timesheets for the client or the Court. Yet, it was not until reading your book and listening to the audio recordings that I knew that fixed fees were not enough. It’s all about VALUE and I was leaving money on the table!

A few weeks ago my secretary placed a stack of old files in my office for review. One was from January. I had met with a gentleman about asset protection planning, specifically sheltering assets from the cost of long term care costs in the future. I had quoted the fixed fee range and he had “sticker shock.” The next day he called back to say he did not wish to go forward. When I saw his file two weeks ago, I figured I would put value pricing to the test.

I wrote the gentleman the attached letter [see below]. Within two days he had made an appointment and yesterday, he wrote the check for $11,250! This is trust planning that I had been charging a fixed fee of between $2000-$2500.

I can’t thank you enough for your books, speeches and blog posts! I will continue to let you know how the implementation of value pricing progresses in my solo practice.

Here is the letter he sent to the customer. It’s an excellent example of communicating value and handling sticker shock:

July 5, 2012
Mr. XXXXXXXX

Re: Asset Protection Planning

Dear Mr. X:

Upon reviewing files, I came across yours. I realize you had previously decided not to move forward, I just wanted to touch base one last time to complete my due diligence.

If I recall, you were concerned about the price of my services. I realize some clients have “sticker shock” when such a price is quoted, but if one balances that with the value the client receives, all previous clients have moved forward.

The one certainty is this: if you require long term care, recent surveys by Met Life reveal that in our area, the average cost of a semi-private room is $198.00 a day and a private room is $225.00 a day; that translates to $72,088.00 and $82,125.00 annually for long term services. Knowing these costs, it then simply becomes a matter of how long you live in need of assisted living/nursing home care. You can see, at approximately $6,000.00 or $6,800.00 a month, my fee is less than two months of care.

For example: three years in assisted living would cost approximately $125,325.00. Three years in the nursing home would be about $234,000.00. Thus, if you saved a mere two months from needing private pay, it would more then pay for the value you receive.

Think of it this way, if you knew an investment of $11,250.00 would yield an return of almost a quarter of a million dollars you would certainly make the investment!

Of course, the choice is up to you. If we do not hear from you in 30 days, we will close your file and wish you the best!

Very truly yours,

This is what amazes me about attorneys, and consultants, who continue to denominate everything into hours. How could he have received a price nearly $9,000 over average hourly rates by focusing on realization rates and not value?

Will this job be profitable? Does he need timesheets to know this with certainty? Give me a break. As we’ve said a million times, focus on value and time becomes superfluous.

Congratulations to this attorney for being willing to try something new, and thank you for letting me share the story with the VeraSage community.

Why the Consultants to the Professions are Whipping us into Irrelevance

The following is from one of our latest Practicing Fellows, Matthew Tol, from Australia.

Apparently, the 50 Shades trilogy is one of the fastest selling books (for those with matching chromosomes) ever. Quite a feat when you see that all “serious” reviewers describe it as appallingly written. It must have something to do with the escapism that the books engender—something a lot of writers apparently strive for.

In many respects, the consultants to the professions (and I”m mainly talking about accounting and legal professions here), fall into the same mould as that adopted by E. L. James in her books. They offer up a fantasy, some escapism and possibly a somewhat removed from reality view of what a “normal” firm should look like. Although, I do think that a large number of firms out there have a number of “Red Rooms of Pain”—they’re known as Partners’ Offices at review time!

Having endured a range of sessions with consultants to the accounting profession over the past 20 plus years, it appears that they have a view of the world which is based largely on some experience they had many years ago. They have leveraged off this to create a story which they sell to everyone in an attempt to enable them to believe that they are able to do what the Consultant had done. Similar to Anastasia Steele, in the book, the submissives are taken on a journey for which they are unprepared and are convinced to adopt certain behaviours even if they are outside their comfort zone.

Whilst there are some things that the consultants to the professions do well—mainly cause people to think, their approach is possibly not relevant in the current environment. They have updated their stories based on stories they have been told rather than learnings they have experienced.

Take the younger staff engaged in professional firms. They are very different to where I and my colleagues were when we started out! They have a greater focus on results, less need to be measured and a greater desire to “make a difference.” They don’t like being managed with a stick and they have been taught that they are good enough.

How do we then reconcile that with the command and control processes that are promoted by the consultants? How do they “fit” with their performance being measured by productivity rather than results? Do they feel like Ana who is satisfied after received 20 whacks on the bum because that is what makes her “owner” feel good?

For the consultants to the profession to be truly effective and act as the catalyst they should be, they need to assist the firms they work with to develop new and innovative strategies to manage and inspire their staff. Sorry, but a goal of 80% productivity just doesn’t do it!

A large part of this revolves around being aware of the “soft” skills needed in developing people. Most of us have been trained to be technically very competent and have further developed that with many years of practice. When you get good enough technically, you get to a senior or ownership position and you are often simply not aware of the methods that need to be adopted to mentor and develop younger staff.

“When your only tool is a hammer, the rest of the world looks like a nail” is an old adage. Lots of firms base their existence around timesheets. This is a measurement tool that is so subjective as to be fictional and which bears no connection to quality or creativity in problem solving by the people on the job.

Senior people in firms have been managed and developed using the blunt object that is the timesheet and are now passing this insanity on to the next generation. The trouble is the next generation is not buying it.

I received an email the other day from one of the consulting groups to the profession talking about concepts like “value billing” and the like. Great. But then they go on to discuss the need to measure the time spent on the job to see whether it is profitable.

Taking this the other way—you agree a price with the customer based on the results you’re going to deliver. You then spend time recording the time you spend so that you can get to the end of the job to spend more time determining whether it was profitable? At what hourly rate were you working? This is like driving your car in the rear vision mirror.

Don’t get me wrong, there are significant benefits from doing after-action reviews at the completion of a job. If it’s done based on time spent, you’re losing the value you can get from these. You need to look at the qualitative factors instead. This is what the younger people in professional firms want.

We also need to remember that the younger people entering our professions have spent a large part of their developmental years playing computer games. These games teach them strategy and process and help them to understand that there are ways around things for those “in the know.” How good would it be if we were to utilise these skills in problem solving for our customers (or, heaven help, our own firms!)?

I must admit that I have not read any of E. L. James’ books—and probably won’t. The information I have used in here has come as per a consultant—I have spoken to people who have read it. Hence, I am not an expert on that topic.

However, the message that is in those books about consensual agreement to being flogged bears a striking (couldn’t resist the pun) resemblance to the way the professions are going and the perpetuation of this silliness by the consultants to the professions.

At some point in the not too distant future, the 50 Shades trilogy will be consigned to the discount bins. I can only hope that the focus of the consultants on timesheets and forgetting about the new generation is also remaindered. For the sake of the future of our professions, we need to move from the Greyness that leads to Darkness and be Freed.

Cost of Billing Time

Our thanks to Peter Lawson of Hedgehogfx in Australia for allowing us to share this tool he put together for determining the cost of driving “time” through a professional firm.

Ron Baker and I usually use a figure of about 7 to 10 percent of timeline revenue, but Peter challenged us on this and produced the tool which he feels more accurately represents the true costs – about 30 percent.

 

Above is an embedded version. Click link to download.