5/26/14

The Business Model is Not Broken

Image [cc] schoeband
Recently I participated in a think-tank discussion about how the law firm business model is broken. I kept quiet for the first part of the discussion (for those who know me, this was not easy). People in the room attacked most aspects of how law firms are run, which is popular and fun these days. Truth be told – I partake in it as well on this blog. But at a point I couldn’t hold it in any longer and blurted out: The business model is not broken.

Everyone turned and gave me the ‘who farted’ look (HT to Lincoln Mead for that descriptive phrase).

Which brings us to the question: What is the law firm business model? As I see it, it’s a
professional services firm in a partnership (or partnership-like) model where the owners actively participate in the delivery of services. Law firms sell the time and expertise of their people at a profit. Firms utilize various pricing approaches, more heavily focused on a time and material approach (a.k.a. the billable hour).

So in the conversation, I put forth the statement: What is broken about that?

One example thrown out was how the billable hour was broken since it motivates bad behavior. As in it motivates lawyers to spend excessive time performing various tasks.

My counter: the billable hour motivates hard work. What is wrong with that? Last time I checked, most ‘business models’ reward hard work, whether it’s spending extra time working or driving more value through creativity.

I suggest the billable hour is not a bad or broken aspect of the business model. But there is something missing: Leadership and Management. By this I mean that firm management has not done a good job of setting expectations around how hours can be accumulated. At the truck assembly plant, workers can increase their comp by taking extra shifts. However they are not the ones deciding how much effort they can apply to each task. If they take twice as along to install a wheel, instead of getting twice as much work credit, they probably get a reprimand since they are slowing down the assembly line.

Law firms need to adopt such an oversight function into their processes and practices. Many firms are pursuing project management as a means to accomplish this.

The point here is that although law firms are under increasing pressure to lower the cost of delivering their services, the basic business model is fine. What is needed is adoption of more business-like practices within that model. In the 70’s and 80’s the business model of American car manufacturers was not ‘broken.’ Instead they needed to adapt the practices and process to an increasingly competitive market. They installed automated assembly equipment to cut their cost of producing cars. They did not change their basic business model. They are all still corporations, designing, building and selling automobiles.

I’m not sure exactly what type of business model law firms would adopt if the current one is broken. Maybe we should set up a dealership network and offer incentives at the end of the year to clear inventory. Or not.

The model is not broken. Firms just need to evolve into a mode where they continually adapt to a changing market.

And if you are wondering; No – I did not break wind.

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10 comments:

Steven B. Levy, author of Legal Project Management said...

Hard work is not a useful goal once we pass from the 3rd-grade "you tried so hard, sweetie" stage. The best metric is accomplishments. What did you deliver? What was the value for the receiver? What marginal value did you add, especially that which you alone (or among very few) could add in a certain way?

The hourly model is a substitute metric. Substitute metrics are useful when we cannot measure the desired item directly, but they are also misleading, since you get what you measure. (That's the first law of metrics.) I think that's a different issue only indirectly related to whether or not "the business model is broken."

Are there cracks in the business model? I'm sure there are. However, remember also that a model is by definition a simplification, an abstraction. I've learned that firms that share a "business model" have some very different implementation mechanisms when you peer inside.

Ryan McClead said...

http://dictionary.reference.com/browse/broken

Broken
4. not functioning properly; out of working order.

Toby,
If the model wasn't "broken" by that definition, there wouldn't be a market for Toby Brown's services. :-)

Ryan

Larry Bridgesmith said...

There is truth in Toby's observations (even though his meteoric rise is attributable to the brokenness in the model). It doesn't seem that clients are afraid of the billable hour as much as they are leary of the secrecy and surprises it provides. Good leadership and management will find ways to deliver value through the billable hour, transparently and in real time through the kind of client communication our ethics rules require: before the train goes off the track rather than 45 days later when the invoice arrives. The penchant for fixed fees is a temporary and binary solution to the distrust. When clients and lawyers learn how to collaborate again, they will trust the billable hour becuase each invoice will be pre-negotiatied and approvpirate to the project, the client's objectives and the lawyer's capacity to do it better, faster and cheaper with profitbility maintained. I have yet to meet a client who wants the law firm to not make a profit. It should be value dirven and agreed to which great lawyers will be only to pleased to do.

Keith Dunn said...

The business model of professionals in a partnership both leading and working is not broken or else it would have been abandoned years ago. Toby is right that what is missing is the leadership and management skills to understand that it is the traditional revenue-producer compensation system that is broken and to move it to one based around profitability. Effort is necessary for success but effort alone is not what makes an organization successful, especially in a period where there is no growth in demand. The effort must have value and must lead to a profitable outcome.

The billable hour will live on because it is often an appropriate way to calculate the price. However, it should no longer be the primary means of communicating the value for what was delivered to the client. This is where project management enters the financial side of the house. By communicating with the client up front, finding the balance of time, cost and quality that the client expects and then setting a price for each deliverable at a scale the client can easily comprehend (as opposed to the scale of all work for the entire matter, project, year, etc.), the client can judge value without asking for hours expended. If firms were already doing this and were sensitive in their project management and billing to the client's cash flow and budgetary constraints, there would be no talk of broken business models.

Larry Bridgesmith said...

Let me add to Keith's comment by noting that his firm is one of the I have encountered that in fact measure and reward profitability at the client, matter and timekeeper level. Way ahead of the rest.

Larry Bridgesmith said...

Let me add to Keith's comment by noting that his firm is one of the I have encountered that in fact measure and reward profitability at the client, matter and timekeeper level. Way ahead of the rest.

The Last Honest Lawyer said...

Right people. Right skills. Right place. Right price.

No amount of LPM will allow the traditional model to get the price right in today's market. $300 associates and $150 paralegals, the serfs feeding the top of the leveraged pyramid, even if working "efficiently," are simply too expensive because of BigLaw overhead to compete with NewLaw or LPO. That ship has sailed, or has at least pulled the gangway and is leaving port.

The stopgap for BigLaw is to join forces with New Law in a "co-source" arrangement that delivers the perceived quality and cya that clients desire at a Bob Barkeresque price that is right.



Jordan Furlong said...

Lengthy comment, broken into two parts:

I agree with Keith that the law firm business model is self-evidently not "broken"; otherwise, the shattered remains of law firms would cover the legal landscape. Law firms that operate in the way Toby describes aren't fully broken, yet -- but they're sure running way below optimal performance and there are extremely worrisome signs of serious breakdown in the offing.

I have some difficulties with Toby's definition of the law firm business model, primarily with this opening line:

[I]t’s a professional services firm ... where the owners actively participate in the delivery of services.

I think this reverses the direction of evolution. Law firm partners are producers first and owners second -- both in chronological and prioritization terms. They're not owners who began producing; they're producers who became owners. This might seem like a trivial difference, but it's not: the vast majority of partners I've met self-identify as workers first and owners second. Their value (both in their own eyes and those of their colleagues) lies principally in their production, not in their management or direction of the enterprise. Partnership is desirable to them for prestige, pricing, and increased profits, and to some extent for autonomy; but rarely is it valued for its own sake, for the guidance and growth of a valuable business. The fact that almost every lawyer continues to be a work producer after obtaining ownership demonstrates, to me, the ultimately secondary nature of the ownership role.

I think a better way to describe the current law firm model is one in which the producers of the firm's stock in trade eventually become eligible to share in the overall profits of the enterprise. That's not unlike an auto worker (to continue Toby's comparison) in a unionized environment who eventually qualifies to receive company shares as part of his compensation. It doesn't make him an "owner" of the company in the familiar sense of active and influential leadership, management, and direction of the enterprise. It's just another source of revenue, a token measure of influence, and a feather in your cap if you like that sort of thing.

[Cont'd]

Jordan Furlong said...

[Cont'd]

The fundamental breakdown in the law firm business model lies in the fact that the firm's equity owners collectively operate the firm for the benefit of its workers who happen to own equity. The interests of individual workers almost always trump the interest of the firm; in fact, I'd hazard a guess that most of the "owners" would say the interests of the firm are solely and precisely the interests of its workers. That cannot help but produce firms devoted primarily to the near-term convenience, comfort, and income of their self-interested workers. In how many markets and industries has that proven to be a sustainable model?

As Steven rightly says, "hard work" isn't the point. I can motivate hard work any number of ways; I can hire a big guy with a cat-o-nine-tails to walk around the firm in a menacing manner. And nobody suggests that the lawyers at Dewey or Howrey or Coudert weren't all working hard, right up to the day the roof caved in. People who work hard at maximizing their individual revenue streams at the expense of others within the same enterprise (which defines almost to a T the modern law firm and its partner compensation squabbles) are not the engine of a sustainable enterprise. Clients don't care how hard you work; they only care how much value you produced. So why do we motivate law firm employees to generate something that doesn't matter to buyers?

Toby is absolutely correct that leadership and management are critical to the success of law firms, and that firms that fail to reward these characteristics are missing out. But I think the more pressing issue, and the real fault line at the heart of the typical law firm, is that hardly anyone really cares about leadership and management -- and in fact, many of the busiest workers actively oppose the assignment and deployment of leadership and management insofar as it places the maximization of worker activity and revenue at risk.

That's not just a problematic side effect; it's a cancer. And if we want to see what its long-term effects look like, watch as the senior ranks of the AmLaw 200 move into retirement over the course of this decade, having left a leadership, management, and business development vacuum behind them.

James Hannigan said...

I think it's an issue of semantics; how about the business model needs to be radically updated. If it was in good condition we would not be seeing these numbers: http://businessoflawblog.com/2014/05/altman-weil-transition/
All these signs point to a broken business model that requires updating. I also often notice the state of the pipeline for new talent that is supposed to feed the system - law schools - is overlooked as a threat to the law firm business model.

 

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