Wednesday, March 28, 2007

When Change Will Mean The Walls Come Tumbling Down: Why Big firms Will Never Change!

I just wanted to be clear that I am not saying big firms cannot implement VP because they are big, I am saying that an attempt to do so would likely cause them to dissolve.

At a macro level, please follow my logic and allow me to lay the foundation for my argument, first with questions, then with analysis:

Who get’s positional authority in a law firm? Usually the biggest rainmakers and billers in the office.

Who get’s promoted to Partner from Associate? Those who bill the most hours (a beauty contest of inefficiency) or come with a book of business

Therefore, who controls the organization? Partners (who got there by billing more TIME)

How do big firms attract top talent? Bidding wars, with winners curse.

What motivation in people does a bidding war attract? Those who are motivated by the money

How do firms attract lateral partners? By selling Partner positions for large books of business (Again, a highest-bidder problem . . .attracting money motivated attorneys)

How does a Billable Hour firm use work-flow to maximize revenue? Hoard work at the highest levels (systemic underdelegation) . . . have everyone in the organization bill for work that is well below their competence level because their rates are higher.
Implication of that practice? No delegation, Little challenge in work, therefore, little need to mentor, therefore, little workforce development and skill development in people AND no project management skills (or people management skills in attorneys on the team)

What are the IT systems designed to do? Minimize non-billable time, capture all billable-time well (NOTE: NOT minimize billable time, which would be to maximize efficiency)

Most Partners are? Old-white men, Close to retirement, risk adverse, financially comfortable and not in need of taking risks with capital to achieve greater returns. Particularly those in control of the firm hold the largest books and may be very close to retirement.

Note: Partners cannot maintain an equity interest in the firm after they leave, so there is no such thing as an “investment in the future of the firm” that extends beyond the term of their employment with the firm.

I could go on and on. Here is my point:

To be profitable in Value Pricing, you need to:

Have IT infrastructure that operates 180 degree opposite from the current infrastructure.
Implications? Significant up-front capital investment required before proof of concept. Since our industry is almost operating entirely under this model, great tools do not yet exist to MINIMIZE time investment for VALUE ADDED activities

Have a workforce that is willing to make less money while they work out the quirks in the system.
Do you really think they can do that? Consider this: If all of their talent chose the firm because of money, those will certainly NOT be the ones to approve a change to Value Pricing. None of us could argue that a change to this model from a billable hour model would be without an initial impact on profits and a significantly increased variability in cash flows (higher cash low risk- lower INITIAL returns)
Furthermore: the people who really are in a position to make that decision will not be around long enough to reap the rewards of the change in pricing model because they will be retiring within 5yrs. It would take a significant feat for the change in model to have a positive Net Present Value to Partners with such a short time-frame. PLEASE keep in mind that one rainmaker is supporting an entire department of these firms, and they occupy several floors of a high-rise for sure. . . . the departure of any one Partner can create an instability in a firm that is enough to destroy it. The Partners with the big books who are there because of the high-pay to begin with would likely move to a competitive firm that Is paying more (again, the same game that get’s em there, loses them in the end) while his old firm is “testing” the model and making less money for everyone. It won’t take to many of these to mark the end of a big firm as we know them today.

Have ATTORNEYS with Project Management Expertise:
Because delegation and use of lowest-cost-competent resources are critical, it will be essential that the leading attorneys have project management skills. This breed of attorneys simply does not exist today. I will bet you that most attorneys don’t even know that the hell project management really means in this context, let alone have an ability to manage costs in an organization.

Have attorneys who TRUST others:
Why do you think this is a core value at Exemplar? Most attorneys do things themselves because they really believe that nobody can do it better, or they want it done THEIR way! Problem? If you do not trust others to do the work competently, you certainly cannot project manage. This, unfortunately, is a character issue. You cannot change this in your people. They either have it or they don’t. Unfortunately, I believe that success in a Value Pricing model depends on this quality!

Have Pricing Competencies:
Decision-makers at BigLaw have been practicing under the billable hour model for decades and simply lack the ability to see what they do in the context of it’s value to the client. They are not wired to think this way and I have found it to be extremely difficult to try to change this mentality once it has solidified in an attorney. At best, attorney-pricers will go back to a cost-based pricing method and estimate time to arrive at a price because it is within their comfort zone to do so!!!! THIS IS A RECIPE fOR DISASTER – Why? Because fixing a price has shifted the risk to the service provider (higher beta), without increasing the potential return (because it is still based on time). The result is a guaranteed lower profit every time. As for pricing committees? Can you imagine getting a bunch of partners who are trained to only value time they can bill for to get together and talk about value in a meeting that is not billable?

Have Communication Skills
Sorry to say it, but success in the current model does not require one to be socially normal or have good communication skills. In Value Pricing, it is CRITICAL. If you add value without communicating the value you added, then you should not have quit your day job! Pricing profitably BEGINS with an ability not just to comprehend value, but to communicate value! Again, this is a core skills that people either have or they do not. Even so, they could not learn this skills quick enough to keep the firm from falling apart.

OK – There are about 50 more reasons, but I do have to sleep every once in awhile!


Anonymous said...

I really like your blog!

Anonymous said...

Making some sense, but still have the issue of client sticker shock. Other attorneys will talk $ per hour and that it ought to take X hours in getting a client, while as an experienced attorney I know it will take 4X hours, and that other attorney will charge 4x eventually. Client still has a hard time seeing the Value coming out of a full exploration of the legal matter.

Looking forward to more discussion on the topics. The other 50 points.

Anonymous said...

"IT infrastructure that operates 180 degree opposite from the current infrastructure... reat tools do not yet exist to MINIMIZE time investment for VALUE ADDED activities".

Chris, can you expand on what you mean by this, what sort of tools would be useful to you???

Christopher Marston said...

Hi There,

Thanks for the question regarding the IT Infrastructure problem. The situation is this: The entire industry (in corporate law) is based on the same business model. Naturally, companies are developing techologies that are responsive to the needs of these business models (otherwise they could not exist). They are designed to maximize profitabiliy under these models. Since profitability in a billable hour model is 180 degrees opposite from what makes profit in a fixed-price model, I am pointing out that firms are not positioned to be profitable in a fixed-price model, in part because their IT infrastructures would mean disaster (at least initially) to the bottom line. Significant investments in new techology would need to be made and technology providers do no yet have tools for corporate firms that maximize profitability under a fixed-price model. On a positive note, this presents a significant opportunity for developers who are targeting law firms as they begin to see firms switch over to this model.