October 28, 2008

The Firm of the Future

Whether you agree with its conclusions or not, you owe it to yourself to read Ronald J. Baker's article in the November 2008 issue of the Journal of Accountancy. That article, The Firm of the Future, makes an interesting case for moving beyond leveraging people hours to leveraging intellectual capital. According to Baker, the formula for success of the Firm of the Past is:

Revenue = People Power x Efficiency x Hourly Rate

Baker argues that we should move away from this tired approach to the formula for success of the Firm of the Future:

Profitability = Intellectual Capital x Effectiveness x Price

In highlighting the contrasts between the two systems, Baker notes:
Micromanagement of knowledge workers is the culture of most firms. Tracking time in six-minute increments, measuring productivity, measuring efficiency, and measuring relative worth all are driven by time sheets. The management attitude that anything that is not billable is not worthwhile has destroyed the intellectual pursuit of knowledge and self-improvement that is critical to the long-term success of every professional knowledge firm.
The examples cited in this article are drawn from the world of accounting, but the parallels to the law firm world are close enough to allow them to be a reasonable proxy. Both professions have come to value headcount and efficiency as the most reliable means to success. In the process, they attempt to sell clients "time," despite the fact that clients are looking to buy solutions not time. From that mismatch comes a persistent disagreement as to the true value of the solutions clients want. By contrast, Baker argues that the real source of wealth in the Firm of the Future is intellectual capital. When the firm is in the business of selling its unique intellectual capital coupled with practical applications of that knowledge, then it is finally offering something clients value.

In his scheme, intellectual capital is not just the knowledge of the firm's workers. Rather, intellectual capital has three components, all of which need to be nurtured in order for the Firm of the Future to realize its potential and be successful:

- human capital (i.e., the knowledge of its people)
- structural capital (i.e., its systems, software, tools and resources that allow it to perform work)
- social capital (e.g., clients, firm reputation, vendor relationships, referral sources, alumni, alliances, networks, etc.)

The implications of this new approach are marvelous for both knowledge workers and knowledge management. With respect to knowledge workers, focusing on intellectual capital and effectiveness encourages managers and knowledge workers alike to value learning and the sensible application of that learning to client problems. This in turn sets the stage for personal growth, creativity and innovation.

The focus on intellectual capital and effectiveness also puts a premium on the tools and methods of knowledge management that facilitate the growth and sharing of knowledge, and assist knowledge workers to improve their personal effectiveness. In one fell swoop, that pesky question of knowledge management ROI becomes a little less elusive.

Ron Friedmann and others have long argued that it would be healthier for firms and clients alike to move to fixed fee or value billing rather than hourly billing. And, advocates of this approach have looked to clients to insist on it. Thus far, few clients have exercised the necessary muscle to bring about this change. However, given the current economic climate, the stars may be aligning in such a way as to make this new approach more plausible and thus more possible.

[Thanks to Dennis Kennedy's dkennedyblog posts on Twitter for pointing out this article.]

1 comment:

Ron Baker said...

Hi Mary,

Thank you for mentioning my article in the Journal of Accountancy.

There are law firms that have moved away from both hourly billing and timesheets. Some are profiled in the "Trailblazer" section of our Web site at www.verasage.com.

Also, clients will not drive the move away from hourly billing. That change is up to law firms, for a very fundamental reason: throughout the history of commerce, it is always sellers who change pricing strategies and business models, not buyers--known as creative destruction.

I've written extensively about this on our blog, such as this post:

http://www.verasage.com/index.php/community/comments/sellers_change_pricing_strategies_not_buyers/

I agree with your comments on the importance of knowledge, which is why we refer to law firms as Professional Knowledge Firms, and not Professional Service Firms.

Regards,
Ron Baker, Founder
VeraSage Institute
www.verasage.com