Wednesday, October 31, 2007

The Universal Principle of Value -- What's Missing in a Profession That's Missed The Point

I have been putting a lot of thought lately into what it is about the profession of law that has gone astray and left so many professionals either miserable or driving them out altogether. The perceived "roots" of these problems have long been the subject of scholarly articles and current discussion: Lack of work-life balance, unchallenging work, systemic under-delegation, no diversity (and no more than lip service to solving the problem], competitive individualistic work environments, eat-what you kill systems, and, of course, the dreaded billable our system with it's evil sister [quotas]. I have become passionate about Exemplar and the fixed-price model based on the subjective theory of value because executing on the business model Is DOMINO ONE to all of the other "symptoms" of a broken system. That's right -- the business model fixes and addresses each and every one of the factors that represent the deterioration of an honorable profession.

Many people have trouble understanding how to execute on a model that is based on the subjective theory of value so they depend on a far inferior model that is based on COST or TIME. The Time-based model has been long refuted by business experts and bear no relation to what the customer wants and values and yet the profession that is trained to ask the most questions asks none with regard to why we operate this way. Henry Ford put it quite well when he wrote:

" We do not bother about the costs. The price forces the costs down. The more usual way is to take the costs and then determine the price; and although that method may be scientific in the narrow sense, it is not scientific in the broad sense, because what earthly use is it to know the cost if it tells you that you cannot manufacture at a price at which the article can be sold?”

What has become even more clear than the impact of Exemplar's pricing model is that every once in awhile an industry or profession varies from the Universal Principle of Value and bad things begin to happen. The business model of billing by the hour started in the late 195O's and since then the way they manage, measure, and compensate knowledge workers has changed. What our industry has seen in the past 5O years is the wholesale deterioration in quality of life, work-life balance, challenge, meaningful client relationships, and loyalty to people in general, but particularly the next generation. Our industry has missed the point. . . . it has gone too far astray from the Universal Principle of Value. We are an industry that is NOTHING without its people and yet it is leaving its own behind where financial gain can be attained. It is no wonder at all that so many professionals choose to vote with their feet and simply walk away. It is also no wonder that professionals like myself have taken a stand for what they believe in. for bringing our profession back into alignment with clients and with the Universal Principle of Value. . . . Because Exemplar is about so much more than a pricing model. . . it is about changing people's lives. There is nothing more rewarding and humbling all the same than to lead our profession back to the center, the core, and one day reach the summit of Excellence at the crossroads of Great People and Profitability. Author James Davis Carter put it well when he wrote:

". . Discovery of the power to aim at ideal ends freely chosen by his own free will and intelligence is the supreme achievement of man, and in that, more than any other in any other single fact, lies hope of the future"

6 comments:

Jay said...

As always, thanks for the excellent post.

I am a corporate commercial lawyer in Canada struggling with the following questions:

What is my purpose as a solicitor? Am I serving that purpose? Can I serve that purpose within a traditional law firm?

Speaking as generally as possible, I believe a solicitor works to aid the smooth flow of capital, to reduce barriers and transactional costs for agents in the market economy and to help that agent appropriately manage risk (risk itself being a transactional cost). A market economy which operates as efficiently as possible within a given set of rules/laws will free up wealth to the benefit of all, and a lawyer that properly serves his/her client can help make that happen. I think that is a purpose that a lawyer could get excited about.

Does the modern firm serve this purpose? I don't think so. The cost of a lawyer is itself a transactional cost and the diconnect between the cost of legal services and the value provided means that a lawyer working at a traditionally managed practice is working at cross purposes - reduce transactional costs for the client, but at the same time get paid as much as possible for your time. I believe that the cognitive dissonance this creates is what leaves a number of lawyers feeling lost, including myself.

Billing based on time or cost recovery and not on value provided survives at least partly because of the professional monopoly that lawyers enjoy. I wouldn't suggest moving away from that system, as there is obviously some utility to it, but I do think it means that lawyers are placed in a unique position of having the onus of determining their value placed on them rather than the consumer. In my view then, a lawyer who continues to bill based on time or cost is shirking their duty to society. It is a lawyer's professional responsibility to determine the value of the services he/she provides to a client and charge on that basis, to do otherwise is indeed to have "missed the point."

Christopher Marston said...

Dear Jay,

Thank you for your thoughtful comment. You are absolutely RIGHT. Billing by the hour really does a disservice to society and leave many attorneys asking themselves what realy "good" they are doing. I do no believe it would be accurate to say it is a "unique" position to determine the value that is places upon us by the consumer though. . . that is what every profitable company does. They set prices based on what they think the consumer will pay. . . based on the value. The company sets the price, and every industry employs different pricing models to understand and capture "value" to the consumer. Attorneys have the BEST and most effective model . . . . . . we get to interview EACH CUSTOMER to understand their unique perceptions of our value.

In general, the disconnect you mention is felt by attorneys around the world. I appreciate your sharing your thoughts. Indeed, the way Exemplar practices law has added so much meaning to what I do every day. . . doing well by doing good is the best feeling one can get!

Jay said...

Thanks Chris, what I meant was that the combination of a professional monopoly and monolithic law firm culture means that consumers are often stuck with the cost as dictated by law firms. Outside of the protection of a professional monopoly consumers of legal services would have a check on firms that do not provide value equivalent to cost because they would just shop elsewhere. Consumers don't really have that choice right now. They can choose to go without legal services, or choose between traditional firm A and traditional firm B. As long as all firms stay within their traditional business model consumers are held hostage and law firms get to dictate the cost of the value they provide. Consumers only have a take it or leave it choice. This becomes a satisfice model for consumers in that the value firms provide is only sufficient compared to the cost of going without legal services. Consumers do not have the chance to get maximal value for the cost paid. Most other profitable companies operate in a much different environment and would go out of business if they chose to operate on the traditional law firm model.

As I said, the professional monopoly lawyers enjoy does serve some utility and I am not suggesting moving away from it, but maybe we can move away from the monolithic law firm culture. Hopefully firms like yours can help do that and thereby open up competition amongst different business models within the profession, giving consumers a real choice. This will help keep firms honest and force firms to deliver value equivalent to cost.

Christopher Marston said...

Jay,

Your comments show a good understanding of how it works. You are right on both counts:

1} Consumers have not {until now}
had a choice, which perpeuate the "old model" and also contributes to the perceived commoditization of legal services. Most people believe that choosing between traditional firm A or tradition firm B is a Hobson's Choice. It is sort of like choosing your Proctologist. Either way you believe you are getting charged up the ass. Perhaps with Exemplar offering consumers the power to choose, that market will force traditional firms to be more responsive and service will improve!

2} YES - It is amazing how our entire industry determined, often without consultation with the client, the COST and Price to the client. That is what drives clients absolutely crazy. Lawyers simply do not know how to project manage. Whether it be zealous advocacy or Cover-your-ass law, attorneys manage to overbill their clients (relative to the value to he client} on a regular basis, equating a price gouging and in my opinion a serious ethical concern.

Thanks again Jay for your good points.

Jenn Alvey said...

Your theoretical points are right on, but the problem isn't simply theory. You have to change minds, and minds don't always listen to logic. In fact, most lawyers I've practiced with lead with their fears, then come up with a very quick post-hoc rationalization for why their fears are logically correct.

Which leads to another part of the probelm, the clients. In-house counsel go on at length about how they hate the billable hours system, yet when push comes to shove, someone at their company -- the GC, the CEO, or some other C-suite person -- wants a brand name law firm representing them. They are afraid to try the unconventional, even though they whinge on about hating it. I do sense some winds of change on the client side, but until clients really get some spine stiffener and decide to try the mid-size firm with flat project fees or some kind of risk-spreading basis for billing, the problem will remain.

Christopher Marston said...

Hi Jenn,

Great comment. You are VERY right. Phsychology shows that people decide emotionally and juistify logically. This is relevant to my most recent post specifically regarding how lawyers use clever questioning to rationalize logically a predermined decision not to change based on fear.

Let me take isue with you on the last part regarding companies resisting change. The research shows that in-house counsel actually want and are pressuring firms to adopt fixed pricing. The realistic problem that you mention is not one having to do with pricing, but certainly one having to do with size (the cover-your-ass factor]. Here is one good way to think about it: You do no need to displace the large firms in order to get in. We are not really competing with them for market share. . . . it really is about market positioning. Those large firms serve a purpose, but there is lots of work that is outources by in-house counsel that does not require brain surgery and would be better suited for a service oriented firm. Positioned as a complementary provider, I think there is room to show large companies the way! But hey, if I didn't have hope I wouldn't be doing this!

Thanks Jenn!