Sunday, May 11, 2008

A MAP got us in this mess, only a GPS will get us out!

Over the last couple of days I had an interesting opportunity; I was asked to comment on a friend’s homework who is working on their MBA. For many this would not be considered an exciting opportunity. However, I saw it as such. Other than my personal research into my own ‘pet projects’, this was an opportunity for me to be academically challenged. After working through the assignment and speaking with other students in the class I realized that a decade has passed since the completion of my MBA. However, what really struck me was the immensity and diversity of business thought currently being presented in the academic world.

As I pondered the experience a statement that I had heard from a Nobel Prize winner a few years ago came to mind. The statement goes something like ‘…there have been more advancements in science, technology and insight in the last century than in all preceding time’. As I thought on this, I could name many of the greats of the last century, but I would be hard pressed to go back much further. The deduction I came away with; knowledge seeds knowledge and to that end, we will continue to see increasingly more ideas presented in our world.

With all of these new ideas it shouldn’t be amazing how the world continues to change so rapidly. These changes are the result of people assimilating new ideas and changing their world one tiny bit and as a whole the effect is commutative; hence more pronounced change. However this isn’t the case with everyone and every organization! There are a plethora of reasons why people simply do not assimilate new ideas. These could be self-imposed or a product of their ‘perception’ of the world; either way the gradation leaders and laggard continues.

A few of my recent readings have challenged me to make sense of why some organizations tend to be leaders and some laggards. I feel this gradient of success is a result of self-imposed limitations or narcissistic traits. Interestingly enough, in my career, I have visited organizations that continue to hold their place along the continuum of success, given the wealth of business knowledge at their fingertips they continue to run as they did a century or more ago.

In a recent article in The Lawyer, one of the London City firms had decided to increase rates by 11%, while other firms have upwardly adjusted their rates by 4%. While at the same time, more peripheral firms have refused to alter their rates while some have shed some associate staff, while on the other side of the globe, in Australia, a new industry is blossoming; that of legal advisory. Australian commercial clients are engaging advisors to determine a fair and reasonable cost for their legal work. The clients then present the findings to firms to see who will accept it for the specified rate. While several large US firms have trimmed staff and stabilized their rates. This radical divergence of behavior at a time of economic contraction is indicative of how people assimilate, the current thought and how others continue in their historical belief.

In my career and travels I have found that in the case of law firms, the non-US law firms are more amenable to change. Even though some continue in their pre-Cambrian ways, they still undertake change; often begrudgingly. In my 2007 contribution Taxation the best Collection Motivator, I addressed why countries who have a Value added Tax system and those governments who impose accrual accounting on professional services firms are much more focused on current asset (WIP and AR) management. In the US firms hide under the veil of cash basis accounting and a much more lenient taxation structure. It is the lack of external forces in the US firms that diminishes the urgency for betterment.

Throughout history professional services was the ‘class’ of the elitist. Those of professional designation could hang their shingle, acquire clients and get financing without any formal business constraints; other than those imposed by their professional association. It is within this self-perpetuating comfort zone that professional services continue, often oblivious to what is going on around them. They operate without a clear vision of where they are going or a clear mission of who they are. This is made clear through the diversity in reactions to an economic softening of the global economy.

Interestingly these are the same organizations that maintain a mantra of higher rates equates to higher profits per partner, when in fact profit is a multi-faceted entity comprised of billable fees, related costs, overhead costs and write offs. It never ceases to amaze me how these ‘head strong’ leaders simply overlook all of these components to profitability. During a conversation, earlier this week, with Ed Poll, author of many works on how to manage legal practices, I was reminded of statement Ed had made quite some time ago “…in many law firms collections is almost an afterthought with as much as 30-40 percent of their billings are collected in the last two months of the fiscal year”. It is surprising with all of the knowledge out there, so many firms continue in their historic practices; the fire fight mentality. While the rest of the world has assimilated the ideas that profit is the culmination of many components and requires a multi-pronged approach for its growth.

This position is the result of, what I perceive, a misaligned accountability process (MAP). Simply put, it is the failure of all of the firm’s partners to be held accountable for their contribution to the firm’s profitability. Since there is no external body like taxation, corporate organization or Sarbanes-Oxley to instill a methodology of accountability the historical practices continue. One would argue that the professional services regulatory body would set guidelines for behavior. However, in my experience this has proven to be ineffective. The article Learning the Hard Way, by Stephanie Ward from the May 2008 issue of the ABA Journal, gives insight as to why some firms continue to act as they have always acted. According to Litigator Michael Burke “Lawyers often think they are smarter than anyone else”, the article continues with many examples of how some lawyers’ self-empowering narcissism has pushed them to the top and caused them to crash and burn. I feel this makes a tremendously powerful statement when one fails to understand why firms resist change.

I feel it is high time that change enter the professional services market. The change that is required must begin at the partner level, first through the deflation of ego followed by the assimilation of ideas into the practice. Firms have to empower their highly educated support group to read market indicators and bring forward new and exciting ideas that will not only catapult the firm forward but begin to erase the negative stigma in the market place. Today’s professional service organizations need a good strategy for survival and growth that comes as a direct result of reading the market indicators, assimilating new ideas and acting in a concerted accountable approach that will yield success. This great practical strategy (GPS) must be the new insightful technology to lead the firm forward, as the MAP has really gotten the firm in a quagmire.

2 comments:

Ed Poll said...

Don, I love your article ... Your call for change should be heard by all.

I would disagree, however, with your MAP (great acronym!). While accrual accounting may be meaningful as one picture of a business (including a law firm), CASH is still the only metric that is important to the survival of a business. Many examples exist of poor accrual reports and great cash ... the business survives; and vice versa, great accruals with poor cash flow and the business dies.

Nevertheless, there is much about the operation of law firms that needs to be examined more closely and then changed if the "institution," called a law firm is to survive and thrive.

Don Downey said...

Ed,

Thank you very much for taking time to read my blog entry and also sharing your views. I cannot agree with more on several fronts. First, the method of account really has no bearing on profitability of an organization; it is all about what is done and not how activities are recorded.

In the professional services there isn’t an internal impetus for change and I feel this is a direct result of the structure. Firms continue along month by month and year by year making insignificant changes and the jugular issues of financial operations are never addressed. The accrual accounting hook on which I hang my belief, is not so much the accounting side, but more how an external body such as the tax department will indirectly impart change with the firm. My feelings are, if the tax authorities legislate professional service firms to operate on a full/modified accrual basis, the tax liability of WIP and/or AR on the books may be the motivation for change. In my travels I have found that countries where firms must run on an accrual or a modified accrual basis and/or face value added tax have a stronger incentive to bill their WIP and collect their receivables as they are liable for the taxes; regardless.

I am in total agreement with you that longevity of the institution of a legal practice rests on the need for a closer examination on those things that matter most. I feel today’s firms are leaving huge profits on the table simply because the key elements of operation are not analyzed and scrutinized.