Value – Mark Gould…

Three steps to the future

14 October 201515 October 2015 Mark Gould1 Comment

In the last two blog posts, I looked at the limits on improving productivity compared to growth, and suggested that real changes in yield come with improved working practices and products or services that do not depend on contemporaneous fee-earner input. Coincidentally, yesterday I saw a very good explanation of the issue (defined as ‘the problem of constant cost’) in a guest post by Michael Mills of Neota Logic on the Beaton Capital blog.

…quantity in legal services is not necessarily a good thing. We have the diseconomies of scale—internal coordination costs, quality variation—but not enough of the economies, other than branding and cross-selling (when it works).

In short, law practice missed the industrial revolution. We didn’t build power looms, and we certainly didn’t build Jaquard looms, programmed by holes in paper cards (the model for the 80-column, cropped-corner punch cards of computing’s adolescence).

Forget about billable hours, alternative fees, and ABS’s. The problem is constant cost.

Neota Logic’s systems are good examples of the kind of thing I described in my last post — a combination of knowledge and technology increasing law firm productivity. This and systems like it are an inevitable future for firms. The problem, I think, is not in creating these new ways of working, but in ensuring that when they are developed that they flow into the firm as well as possible. How, in other words, does the innovative become the norm?

As technology teams have faced this problem for longer, it is not surprising that a model has been created to describe how an IT function might be structured to allow it to deliver new things while continuing to support existing products and services. Gartner has invented ‘bi-modal IT’:

the practice of managing two separate, coherent modes of IT delivery, one focused on stability and the other on agility. Mode 1 is traditional and sequential, emphasizing safety and accuracy. Mode 2 is exploratory and nonlinear, emphasizing agility and speed.

But these are two complete opposites, and the gap between them is cavernous. Unsurprisingly, things can fall into the cavern and never escape. Simon Wardley (whom we have met before) is scathing about Gartner’s idea:

I couldn’t stop howling with laughter. It’s basically 2004 dressed up as 2014 and it is guaranteed to get you into a mess.

Wardley’s alternative is a system with three parts rather than two.

When it comes to organising then each component not only needs different aptitudes (e.g. engineering + design) but also different attitudes (i.e. engineering in genesis is not the same as engineering in industrialised). To solve this, you end up implementing a “trimodal” (three party) structure such as pioneers, settlers and town planners which is governed by a process of theft.

The three roles are summarised neatly in this diagram (taken from Wardley’s blog under the Creative Commons Attribution-Share Alike 3.0 License).

The bi-modal model advocated by Gartner only considers the two extremes — pioneers and town planners. Filling the gap with a specified role or function helps to prevent the work of the pioneers being rejected by town planners for being undeveloped. As Wardley puts it:

The problem with bimodal (e.g. pioneers and town planners) is it lacks the middle component (the settlers) which performs an essential function in ensuring that work is taken from the pioneers and turned into mature products before the town planners can turn this into industrialised commodities or utility services. Without this middle component then yes you cover the two extremes (e.g. agile vs six sigma) but new things built never progress or evolve. You have nothing managing the ‘flow’ from one extreme to another.

(In an update to his original post, Wardley adds that a similar model was identified by Robert Cringely in his history of Silicon Valley, Accidental Empires. Cringely’s model used different archetypes — commandos, infantry and police. The relevant passage is in Chapter 12 of the book, published online by Cringely in 2013.)

Whichever terminology is used, the idea is the same.

The first wave of change is the responsibility of highly expert groups who work hard and fast to create products and services that might meet particular needs. Some of these might fail, but the speed of work is such that there is always something new to work on. In established businesses, this might be a dedicated research and development function, or it might be an activity open to all (as at Google, for example, where there was an expectation that everyone could spend 20% of their time on their own ideas).

When complete, the successful experiments might have proved their worth, but that doesn’t make them ready for widespread adoption. There will inevitably be some rough edges to smooth off, and some issues that could not have been foreseen until the idea needs to be scaled up for general use. That process of perfecting a new product or service is the responsibility of the middle group (the settlers or infantry). Some ideas may fail at this stage too — an idea that works in a lab may hit obstacles when it encounters real life and work.

Once a product or service has been proved worthy of inclusion as part of the core business, it still needs to be maintained and developed. That is the responsibility of the third group — the town planners or police. As their archetypes suggest, this group needs to ensure such things as stability, good governance, predictability and reliability. But their work is not immune from disruption — as Simon Wardley’s diagram shows (click to embiggen):

Wardley’s model was designed with technology development in mind, and with the benefit of his extensive experience running successful technology companies. However, I think it is also a valuable template for development more generally in law firms (and probably elsewhere).

As an example, knowledge teams in law firms are now an established concept. They commonly work in similar ways when dealing with established aspects of legal practice. The fact that there is a lively market in Professional Support Lawyers between firms, and that many firms have created career pathways for those teams, suggests that this is a ‘town planner’ type of function. But that was not always the case. The first PSLs were experimental. They created their own roles: trying different ways of working, some of which were successful and some weren’t (the pioneer phase). As firms became more familiar with the concept, they jumped on the bandwagon, perfecting the role in different practice groups and in different types of firm (the settler phase).

The same process can be seen at play in the way firms are adopting concepts like process-mapping and project management. Here, though, the pioneer phase can be massively foreshortened since these are concepts that have been tried and tested in different sectors before finding their way into the law.

Policing and town planning need to change when the context changes. Established knowledge functions need to pay attention to new ideas thrown up by pioneers. That message is at the heart of a recent call by David Griffiths for knowledge and HR functions to start disrupting themselves. When they do, they should consider how the three stages of development might be adapted to their situation.

Firms that cannot identify their pioneers need to consider where new ideas are going to come from. (Without those new ideas, the market will move on without them.) If they can point to a group of pioneers, but they expect ideas from that group to become part of ‘business as usual’ without additional work, they risk failure and frustration with the whole process. The latter situation is probably as bad as having no new ideas in the first place.

As usual, if you are keen to work out how these archetypes of development might work in your firm, we should talk.

Measuring success

5 October 2015 Mark Gould1 Comment

I have written before on the difficulty of measuring the return on investment in knowledge activities. Prompted by a couple of recent conversations, I have been pondering the issue a little more. What follows is a rumination on how successful knowledge activities might be identified within a law firm, especially over a period of time.

In the past, some knowledge folk might have responded to a question about the value of the work they do by pointing to volumes of documents in a know-how database. All this demonstrates is the amount of work done — it doesn’t help people understand how the firm benefits. Nick Milton helpfully summarised some ways in which business might benefit in a blog post earlier this year (together with survey results showing which measures were most commonly used).

In addition to the kind of successes that Nick points to, I have also been fond of using qualitative assessment of knowledge activities. Often it is easier to ask people (whether inside or outside the business) about their experience of KM work. Their responses serve a double purpose — as well as indicating how successful past activities might have been, they can also suggest fruitful directions for the future.

However, I have become more doubtful about the merit of highlighting one-off successes or of depending on how people feel about a service that is designed to make them feel good. These may give an impression of how well certain parts of the knowledge function perform, but they don’t help with a wider picture.

After reflection, I think the answer can be found in an analogy I have used before. Back in June 2014, I likened knowledge management to farming.

In order to improve the yield of the organisation (by whatever measure is appropriate), managers need to enhance people’s natural capabilities (fertilising for growth), while reducing the impact of adverse conditions (sheltering crops from bad weather). That isn’t possible without a deep understanding of the environment within which the organisation works, the natural capabilities of the people within the organisation, and the value of whatever the organisation produces.

The key to measuring the value of our knowledge activities is yield. If the set of things that we do to improve productivity are successful (allowing for the fact that some may be more successful than others), the firm’s yield will improve.

The next question is how yield might be measured in a law firm. The answer here, I think, depends on whether you want to consider the firm in isolation or compare it with the market as a whole. Financial data that is available within the firm may not match what is made available for publication.

Generally speaking, productivity is an expression of the ratio of outputs to inputs. At the national level, the UK Office for National Statistics derives labour productivity estimates by dividing measures of output by some measure of labour input. In professional services, productivity is measured by the turnover of companies adjusted for average wage rises in the sector.

Within a firm, inputs and outputs can be measured precisely. Firms know how many people they employ, how much they are paid, and how long they work. They also know which of these people contribute directly to the firm’s turnover. Productivity could therefore be measured as a ratio of turnover per person (full-time equivalent or otherwise) or per hour worked. Such a measure would not be useful for comparison over time, since inflation might increase fees without a real increase in yield. Using the ratio of income to salaries would smooth out such variations, since inflation in fees is likely to run at a similar rate to pay inflation.

Over time, then, a firm can see how productivity changes from year to year. As law firm knowledge management efforts tend to focus on the income-generating side of the business, examining the productivity of fee-earners in isolation over a significant period might help to show whether those efforts have had a real impact.

If comparison beyond the firm is needed (does our productivity match changes in the market?), then firms need to find publicly-available datasets. The most easily-accessible data is collected annually by The Lawyer (in the UK) and The American Lawyer (in the US). Both the Lawyer UK 200 and the AmLaw 100 calculate revenue per lawyer (RPL), which can be used as a proxy for more precise measurement of productivity. Because this measure does not take account of inflation, comparison between firms is only possible in a single year. On its own, that comparison is almost worthless. Factors such as the firm’s employment profile (does it depend on low-cost associates or is it partner-heavy in high-cost locations?), its client types, or work profile, little real insight is possible. At best, firms might pick comparators they know to be broadly similar.

There is a useful way to use published figures for revenue per lawyer. That is to compare the trend in a firm’s performance with a larger set. For example, the median RPL figure for the top 100 firms can be plotted against time. That line is likely to ascend, with occasional dips when the wider market was under stress. (I would use the median in preference to the mean, in order to reduce the impact of particularly high- or low-performing firms in any given year.) When the RPL for a single firm is plotted alongside the whole set, one can see whether the profile of the line matches that for the whole set (performance in line with the market) or whether it rises more steeply (outperforming the market) or more shallowly (underperforming against the market).

This graphical information, when combined with what is known inside the firm about any special factors, allows the firm to understand better how well it is doing in the market and what might be causing any difference in performance. The special factors could include investment in knowledge activities, as well as significant client wins or losses, so some caution is still needed.

I suspect very few firms do this kind of meaningful analysis. In a later post, I want to explore the implications for law firm support teams of not having this kind of insight.

Spending time and money

23 April 2015 Mark Gould1 Comment

In my last post, I mentioned the stresses that a GC might be under and how that might manifest itself as a shortage of time. Something similar is at play when one considers financial constraints. Often those who have money to spend have very little or no capability to make more. Anyone who makes demands on people’s time or money needs to be aware of the limited nature of those resources, and what else is competing for them.

A number of thoughts flow from this observation, which may be useful for people offering legal and other services as well as those providing internal business support.

What do they get in return?

If you do something in the expectation that someone else will commit time or money to it (or both), they need to feel that they will get something in return. This is most obviously expressed in financial terms as a return on investment, but that is only the most tangible form. At the other extreme, broadcasters and the film and music industries (for example) create products that take time to consume and often have to be paid for. In return for investing their time and money in a film, TV programme, book, or album, the audience need to feel that their lives have been enhanced in some way. They need, in Lord Reith’s words, to be informed, educated or entertained.

Crucially, investing in one thing often excludes the possibility of investing in another. If I choose to watch Mad Men (as I do), I will spend at least 92 hours (and probably more) of my time doing so. Those 92 hours can’t be spent doing something else — I can’t read a book, do some work, or go for a drive at the same time. Likewise, the financial cost of acquiring the right to watch the programme (by DVD or pay-TV subscription) means that I have reduced my capacity to buy other things. The impossibility of spending twice has repercussions on both sides of the equation — for those spending time/money and those demanding it.

Sometimes people know what they get when investing in something. This may not be conscious — slumping in front of a mindless TV show with a glass of wine after a hard day’s work may seem worthless, but it provides a valuable opportunity to relax and unwind. Sometimes it needs to be explained what the return on investment might be. Time spent on marketing may feel like a waste, for example, but not doing it will almost inevitably lead to a drop in income.

By contrast, people seem to be pretty poor at evaluating investment choices. I have referred previously to the work of Dan Ariely and other behavioural economists on choice and different kinds of value. In particular, people overvalue things they already have compared to future goods. That generally makes it hard to persuade people to stop doing something inefficient and start doing something new and better.

Learning (or not) from past spending patterns

One significant consequence of the way we value our expenditure of time and money, and yet fail to understand its cost, is a tendency to misunderstand change. This may have an impact on sellers as well as buyers.

A good example of this can be seen in the music business. For decades, recorded music was a dominant form of entertainment. From the 1950s until well into the 1990s, significant amounts of people’s leisure budget would be committed to vinyl or (later CDs). As a result, some (by no means all) recording artists and others in the music industry became quite wealthy. The possibility of riches attracted some to the business. Now, with the growth of streaming services such as Spotify, people can listen to recorded music without having to own a copy. As a result, it appears that less money accrues to the original creators than they have been used to.

One response to this drop in income is to reject the whole model — to withdraw from streaming services altogether. Another is to claim that such services should recompense artists at a higher level than they do currently. I suspect that neither of those options will work.

The problem is that, in general, people just don’t have as much money to spend on recorded music as they did. It is rare now to see people regularly “buying two CDs, a DVD and maybe a book – fifty quid’s worth.” Instead they have to commit £20-40 per month on a mobile phone contract, £10 to Spotify, even more for cable TV and broadband subscriptions. There just isn’t the money available to go back to the old way of doing things. Artists demanding that the clock should be turned back are wasting their breath. The simple economic fact is that people don’t generally value music as much as they used to.

Something similar happens within organisations. Without improvements in profitability or increases in income, the amount of money available for investment is finite. When external advisers or internal support teams demand more, their demands will only be ignored. That’s why businesses hate it when legal costs overrun. It is difficult to ignore those demands for payment, but the fact that costs have escalated is a clear indication that the lawyers have failed to understand how the client’s business works. Historically, lawyers’ demands for sustained income have been much more difficult to ignore than recording artists. As new ways of providing legal support move to the mainstream, it will become increasingly easy for clients to choose cheaper (and often better) ways of resolving issues than using traditional law firms.

What’s coming next?

Some folk in the music business appear to have been caught unawares by the changes in the way that people consume their product, and the consequent impact on their income. In fact, services like Spotify were a natural result of developments that they tried to fight (such as illicit peer-to-peer services like Napster and Limewire) and changes in other industry sectors (such as the growth of smartphones and broadband internet services).

New ways of finding and consuming music showed customers how much easier it could be to listen to what they wanted — no need to go to a shop to buy a CD to play in an expensive player of some kind. They also introduced people to the idea that music could be cost-free, albeit illegally. Once those ideas became more mainstream (as ideas tend to), they became hard to rebut. On that analysis, Spotify is actually an improvement. The options were that artists would either not be reimbursed at all for their efforts, or be paid at a much lower rate than they would prefer.

Had musicians analysed the financial impact of novel areas of consumer spending, they might have realised that their command of a large proportion of that budget was threatened. It appears that few did. By contrast, the music labels and distributors did understand. They did deals with Spotify and the like, so that those services could flourish legally. Those deals had to be done against the background of the streaming services’ likely revenues from subscriptions and advertising, and were therefore informed by how much consumers were realistically going to spend on music.

It is fair to say that few people could have predicted precisely what would happen to the music industry. However, understanding what was going on in and around it should have led anyone to the conclusion that there would be less money available than there had been previously. I suspect that people are still spending as much time as before actually listening to music, so I can see how musicians may be aggrieved that listeners are getting more for their money than they did previously. That may just mean that the music industry was particularly lucky in the past and that luck has now run out.

There are lessons for other sectors where the pace of change has been a bit slower. Everything you do that costs someone time or money is contingent on them continuing to agree to that expenditure. Keep an eye on the things that might reduce their interest in the way you do things.

Don’t dismiss the upstarts competing directly for your work (even if they are doing so illicitly). The likelihood is that if people like what they do, it will form some part of the future.
Be aware of how your customers/clients are spending their time and money. If more interesting things are happening somewhere else, you need to move to be with them, whatever it costs you. The alternative is the equivalent of the £3 CD or the £5 DVD.
Consider the possibility that the riches of the past were abnormal, and that the future may be much leaner. Don’t depend on a return to good times.

Do you have the capability to differentiate?

16 March 2015 Mark GouldLeave a comment

As the global financial crisis started to hit law firms half a decade ago (coupled in England and Wales with major regulatory change), there was a sense that this would see off more than a few firms. In fact, whilst there have been some notable failures, and some smaller firms have collapsed or been swallowed up, my sense is that the BigLaw landscape looks much as it did ten years ago (allowing for mergers). Within that group, however, there are significant differences in performance. Some firms have merely survived, but others have thrived. Survival, often on lower profit margins than before, is not a sustainable business model. But what causes the difference — how can firms thrive instead?

The short answer is that the most successful firms stand out for some reason. And, crucially, the market must value that.

The marketers call this differentiation. Being different alone is not enough — the difference needs to be attractive.

That just pushes the problem to the next level — how can firms differentiate? And more importantly, how can they sustain the advantage they get from standing out?

While the market was good to firms (which was probably true for most of the last century), it was enough for lawyers to be good at the law and well-connected with clients. That is no longer true.

Almost any form of differentiation depends on good use of the firm’s knowledge. This is not simply knowledge management as firms have traditionally understood it, but development of the firm’s knowledge capability. This is defined by David Griffiths as:

…the ability to deploy knowledge to constantly design, develop, deliver and maintain products and/or services that its current and future stakeholders will find valuable – put another way, an organisation’s Knowledge Capability is an indicator of its adaptive capability (its ability to anticipate (sense) and react to change).

This is more forward-looking than traditional knowledge management, which in law firms tends to concentrate on gathering and redeploying what is already known. That work is still necessary, but it is only sufficient to support survival — no firm will thrive merely by doing what it currently does more efficiently.

Importantly, the knowledge needed for an organisation to thrive is not just that which is known by the leadership. In fact, those at the top are likely to have such a partial view that their knowledge is actually suspect. Hayek made this point in a very different context as long ago as 1945 in his essay, “The Use of Knowledge in Society”:

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources—if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

Hayek’s response to this problem in economics was to argue that only the market can coordinate and value knowledge properly. The alternative for him, a single controlling mind, could not do the job. Unlike Hayek, however, we can see other mechanisms for drawing out what is known and applying it. We can address this as a social problem, rather than an economic one.

This approach requires the firm to use the knowledge of as many people in the firm as possible, as well as to engage with those outside (clients and suppliers). This insight will help define first of all what is important — which things are valued most or will have the greatest impact. Once that is understood, the firm needs to learn about itself — what is it capable of? Only then is it possible to decide what actions might be taken. Those actions need to be testable, so that the firm knows what works and what doesn’t.

It isn’t enough simply to ask direct questions to draw out this knowledge. Lawyers are particularly prone to entrained patterns of thinking, which means that the leadership will only hear what people expect them to want to know. Direct questioning also risks people putting a gloss on their experiences in order to make sense of them. It is more important that decision makers are able to see and evaluate for themselves the experiences reported by a wide variety of people. I use a variety of Cognitive Edge methods, rather than traditional facilitation techniques, as they are much better at showing decision makers what is really going on.

Firms that take this approach, rather than merely copying others or being browbeaten by their suppliers, are likely to find a better niche for themselves and so thrive for longest.

If you are interested in knowing more about the methods that can be used, please feel free to get in touch.

Measuring the difference: law firm metrics

27 January 201527 January 2015 Mark Gould1 Comment

One reasonable response to my recent posts suggesting KM delivers most value when it acts as some kind of irritant to conventional law firm practices is to ask “how can one know when things have improved?”

I have tried answering a question like this before, but this time I want to approach from a different direction. Previously, I looked at how much a firm might reasonably invest in knowledge management (the input). This time, I am more interested in outcomes.

When considering law firm financial matters, my first call is usually to Bruce Macewen’s site. As expected, I was not disappointed. A commonly used public measure of law firm health is a simple one — profits per equity parter (PPEP or PEP). The legal media like it because it gives them a handy figure to build into headlines and league tables. But actually it tells us nothing meaningful — it is too easily gamed. Bruce dislikes it too, and in one article suggested a host of alternatives that firms could use for themselves.

On the quantitative side:

Revenue Per Lawyer

Compound annual growth rate (CAGR) of revenue over a multi-year period

Realization rates (implying, I would argue, clients’ perception of value-for-services-received)

Associate retention rates (or attrition rates, measured negatively)

Percentage of business from clients of long-standing duration (say, more than 3 or 5 years)

Percentage of all legal spend from top 10 (20/50/100) clients

On the qualitative side:

Client satisfaction

Lawyer morale

Commitment to and investment in professional development

Commitment to and investment in such things as diversity and pro bono

The quality of firms the firm takes lateral talent from and the quality of firms they lose lateral talent to

The quality of firms the firm wins assignments from and the quality of firms they lose assignments to

Quality and morale of professional and support staff.

Any one of these would be a good starting point for assessing the value of any activity within a firm. If one makes a change and then sees a shift in one or more of these measures, it is possible to ascribe the shift to the change. However, there are two very important caveats.

First of all, it is important not to cast any of these metrics as targets. Setting a target doesn’t help people understand what they should do to meet it (and also implies, rather rudely, that people aren’t already doing all they can to help the firm perform at its best).

Secondly, many of these performance indicators depend on a huge number of interrelated variables. Take the first, for example: revenue per lawyer. (I would prefer to measure this by reference to all employees, not just lawyers, especially as law firms come to rely increasingly on non-traditional roles for client service.) This is a metric approved by McKinsey, and is easily measured and reported. It makes particular sense in a business that depends on people to deliver a service. A large firm with significant fixed costs (buildings, insurance, technology and other infrastructure, for example) will find it hard to make a real change to this number without also affecting some of the intangible factors — client experience, staff turnover, etc. It would be foolish to hope that a single activity (whether that be better knowledge management or improved marketing) could be responsible for a real change in the firm’s financial health. Things are too messy for that.

So how should we approach the problem? This raises four questions for me:

Which factors matter most to the firm?
What variables might affect the selected metrics?
What does the firm know about those variables?
What can be done to improve things?

The first should be obvious. There is no point addressing revenue per lawyer (or profit per employee) if the firm is actually more bothered about its exposure to a small number of key clients than about its profitability at present. This is a strategic question, but I think few firms have such a clear view of their priorities without seeing a list such a Bruce’s of the issues that might concern them. Once they do, it is important to work out which factor is the most important — which will always command more investment than any other?

The second point is an expression of my second caveat above. Once we know what really drives the firm — what is its highest priority — we need to understand how performance in that area is influenced by activities, actions and culture within the firm as well as the wider environment. That might be possible as a desk exercise, but it is a task better done by engaging with a wide cross-section of the firm.

This is the third point — in most situations, the collective knowledge of the firm itself will give the best insight into how things are now and what might be possible in the future. That engagement could uncover knowledge about clients and their markets, about the firm itself and the people within it, and about infrastructural or other opportunities and challenges. Exposing this knowledge is something that should be at the heart of the firm’s knowledge activities. A survey won’t do — what people say when they mean what they say needs to be carefully uncovered and intelligently analysed.

Once there is a better understanding into the way things are, the firm can start to think about what activities and actions might change things for the better. Sometimes that will be an obvious choice, but often it will be necessary to test a number of different actions and see which ones make a lasting difference.

Sadly, many firms start with the fourth step. Worse than that, they invest significant sums in large-scale activities that they cannot then prove to have the benefits they expected. The result? At least, wasted time and money. At worst, disenchanted clients and people, to the extent that the firm risks collapse.

If you are interested in going about things the right way, using this four-stage process (or something tailored to your needs), please get in touch: I can help.

Presentation: evaluating knowledge activities

15 October 2014 Mark GouldLeave a comment

Yesterday I attended and spoke at the London Law Expo. It was a very good event — I will be touching on some of the other presentations in future blog posts.

My presentation provided a very quick overview of issues for law firms to consider when assessing the value of their knowledge management activities. The slide deck is embedded below.

I will flesh out the content in a series of blog posts over the next couple of weeks, and link to them in this post.