Building the Firm of the Future

I'm a big fan of Matt Homann's the [non]billable hour. If you're not familiar with Matt, he is one of those rare professionals who spends as much time working ON his practice as he does working IN his practice. As a lawyer, he knew that the traditional system of billing clients by the tenth of an hour spent "working" on their matters was outdated and explored alternatives. He explored and blogged about these alternatives, and the information was applicable across many professions. Eventually he wised up and got the hell out of the legal profession decided to focus his prodigious talents on "thinking big thoughts" to help "people and organizations develop breakthrough, business changing ideas" in many professions.

Over the past couple of weeks he's had a guest blogger, Ron Baker, a fellow visionary of professional service firms. Ron came from the accounting profession, but his thoughts on the pricing and nature of knowledge work are useful to lawyers and technology consultants as well. He covers the basics of professional service firm business models in The Firm of the Past and The Firm of the Future. Having spent the early 90's in a technology consulting firm that focused on the legal industry, I can say his posts are spot on. What I did find amusing is that people were saying exactly the same things back then, but a great deal of professional services work is still done according to the old model to this day. I'm not sure if it is a majority, but I would bet it is. Which begs the question: why don't two professions filled with really bright minds adopt the Firm of the Future model?

Volumes have been written on this topic by minds much brighter than mine, including Ron's and David Maister's. But I think that the biggest reason for the lack of adoption is one of mindset. Professionals generally highly prefer working IN the practice. We're highly trained and expert in our practices, and derive great satisfaction in that expertise. In the realm of pricing and marketing we're relative dolts, and don't like the feeling of knowing that we are. It's like the old joke about the drunk searching for his keys under the street lamp instead of where he dropped them because the light is better. As long as clients will pay us under the old system, we'd prefer to focus on what we do best.

Even back in the early 90's a number of large clients were beginning to rebel against this system. My favorite was a Fortune 500 company that had gone through a company-wide Total Quality transformation, which meant that even the legal department had to apply the principles this company had learned from their successful partnership with Toyota. One of the first principles they applied was reducing the number of suppliers (external firms) they used. The contacted their primary outside council and made them an interesting offer: We'll give you all of our business in a certain area if you agree to 1) open up your books to us, and 2) work with us to constantly improve the quality of the work we get and constantly reduce the unit price of that work. In addition to the benefit of our business, we'll train you in TQ methods and you can leverage this knowledge capital in the rest of your practice. Some firms passed, but other swallowed hard and entered the partnership to significant mutual benefit. This situation was rather unique. Most customers seemed to adopt the attitude expressed by one GM executive who said that there were three kinds of legal work: the bet-the-company litigation for which they paid whatever the brightest minds asked, the semi-automatable clerical-type work that could be brought in house (now BPO outsourced, most likely), and the mid-ground legal work which they could reverse auction to 50 firms, all of whom provided similar quality legal work. Which is fine, except if you're a partner in one of those 50 firms, facing eroding margins ad infinitum. What could those firms due to improve their prospects?

Focus on working with customers like the first F500 company I mentioned. Ron talks about an interesting airline analogy in Baker's Law: Bad Customers Drive Out Good Customers, which discusses optimum vs maximum capacity. This is an excellent read on the subject of yield management. Of course, the idea of firing customers isn't unique to professional services firms. Plenty has been written about consumer product manufactures who said NO to Walmart and thrived without them.

But how do you get started on doing that? First, read my post on Cause and Effect in Professional Services [What, a guy can't plug his own work?]. If that doesn't make the path completely obvious, you might check out more of Ron's work, and by all means, subscribe to the [non]billable hour.