It’s a revolution y’all, just not an industrial one
By Greg Kaple, Sr.
Abstract In the world of professional services, we are living in an era of change. The traditional industrial model is outdated, and professional services have taken over. This new industry is all about providing services like legal, healthcare, education, marketing, finance, and human resources. However, we are still following the old methods of economics, process improvement, and executive delegation that worked well for industrial manufacturing but don't fit this new era.
The industrial revolution is over 300 years old, and it's time to move forward with new strategies that fit the professional services model.
Lean Six Sigma, Just in Time Inventory, and Robotic Automation were all effective in the manufacturing industry. But, why are we still relying on these methods for professional services? We need to evolve to ensure our businesses are efficient and effective.
The service industry is different from manufacturing. Services are centered around knowledge and people, and there is a significant distinction between management, ownership, and labor. Professional services require investment, but most services pay out cash rather than retaining earnings. This causes challenges for investment returns.
The client is the most important stakeholder in professional services, not the stockholder or the employee. The client is co-creator in the process, and if the outcome is not created, they lose their time and money.
In conclusion, professional services are different from the industrial revolution, and we need to change our mindset accordingly. We must recognize that the professional services industry is still young and evolving. It's time to invest in new strategies that fit this new era, so we can deliver the best services possible to our future generations of humanity.
If you’ve taken a drive through corporate office parks, ignored the signs for “NO SOLICITATION” and walked in to explore the space or maybe more realistically, by-passed the empty "office factories" going straight to where the majority of Americans' work from home today, you'll find our working population are no longer standing in front of industrial machines (forges, metal stampers and welders), they are sitting in front of service machines (computers, phones and apps). So why is it that we continue to abide by the Keynesian manner of industrial economics, the GE method of six sigma process improvement and our father’s generation of executive delegation?
“Well stop what you’re doing, cause I’m about to ruin, the industrial model that we’re used to. Look around and see that the world has changed to professional services for you and me. In 2023 there’s no more factories for people to flee, it’s all been replaced with honey comb buildings full of professional service busy bees.”
Sung to the tune of Digital Underground’s The Humpty Dance performed by the
notable MC Shock G.
The industrial revolution is now over 300 years old. Starting in the early 1600’s blacksmiths began to use steam power to “automate” their work. By the late 1800’s electricity began powering modern machines and the Luddite movement of textile workers in England took aim at trying to break the machines to keep them from taking their jobs.
Fast forward to 1929 and the English philosopher and speculative trader John Maynard Keynes wins the battle over Marx about which form of economic system, capitalism or communism, will conquer the world. The ultra-competitive race for efficiency is then ignited by J Edward Deming’s TQM (total quality management), which propels Japanese manufacturing ahead of the US. And since then, the world has never looked back, much less ahead or side to side to consider anything new or different happening around us.
Today the dominant work of our world “industry” is professional services. Whether you see it as lawyers, doctors and educators or the marketing, finance and HR that runs most organizations manufacturing something, the methods for doing the work are still those that made light bulbs competitive for GE in the 1990’s. Lean Six Sigma, Just in Time Inventory, Robotic automation are all keys to keeping manufacturing competitive in the ‘90’s and 2000’s. While these principles may still have some place in the modern professional services world, why are we letting ourselves believe they remain the preeminent way to make knowledge work and teams of people succeed?!
As legal professionals, understanding this context and construct of how the world works is imperative for both serving clients in this new world order and in serving ourselves to operate more effectively within it. Professional services as an industry maturity model is still relatively young, with much learning and growth to go through before it can become or mimic its much older and different cousin in manufacturing.
Until the birth of the Internet in the 90’s and the rapid acceleration of information and knowledge automating that followed, professional services organizations were not too different from their blacksmith cousins from 300 years earlier. Operations were limited to a primary geographic area. Work was done manually through trained labor. The idea of unbundling work was nearly heretical and the concept of collaboration a nascent topic only beginning to be explored on college campuses in the form of “group assignments”.
It was the advent of high bandwidth network connectivity and “all you can eat” free phone calls that added steam to the power of professional services. Progress has continued over the past 30 years at building databases, beginning analytics and automating knowledge workflow. However, human teamwork and knowledge services do not behave with the same economic scalability models and mature efficiency of manufacturing.
Let’s first agree to recognize that professional services are different than manufacturing.
For example, a relatively small investment is made in purchasing a shovel, then expending time to knock on doors offering to clear the sidewalk of snow. This business demands making enough money on client #1 to pay for the shovel and shoveler’s time in order for the business to stay afloat. The client commits to paying the shoveler upfront and takes a risk on whether the job is completed to their expectations. If the shoveler only shovels half the walk or leaves a thin layer of snow to turn to ice, it’s the client out the investment and the outcome while the shoveler pockets their pay and argues the work was done.
Compare this to being in the shovel manufacturing business. One must first make a significant investment in designing a shovel, building a plant, developing supply chain sources and selling a million shovels before profiting. The business has put the money out first and when the client chooses to buy the shovel, 99% of the time they are assured to receive a quality product to meet their expectations and the 1% of the time it doesn’t they can return it for a refund, initiate a warranty or worst case sue the business for damages.
There are at least four fundamental differences between services and manufacturing:
1. Services are overly fixated on labor often without realizing the distinction between labor, management or ownership.
For example, Partners are owners of law firms that often also act in the role of managers and are still primarily motivated by activity and returns on their own labor. Often they have only been trained on the skills of labor and learned through poorly orchestrated on-the-job training about how to be a manager (yell loud) and an owner (demand more for yourself). In contrast, manufacturing explicitly segments these three roles, giving each a distinct incentive plan to manage for the economic consequence of agency (i.e., caring for one’s own self-interest above the interest of the client or organization one represents). What’s funny about professional services is not only does the agent often care more about billing in 6 min increments than their concern for the client’s total value outcome, they often act against their best interest as managers and owners to earn more profit with less labor time.
2. Services lack the fundamental aspect of investment for return.
The very nature of service companies is often built on LLC structures that do not keep retained earnings but pay out all earnings annually. This means if a Partner invests in something today meant to provide a return in the future, they face the economic equation of making less money this year. Since they are primarily motivated by labor return on time and believe they could leave or the organization could shut down at any time, there is a lack of risk appetite to invest today in making money as an owner at some future date. This unfortunately locks the clients into the same failed economy as the service provider since the client would benefit by the business investing in better outcomes at lower rates, but the business is incented to not poach its own labor return today and so stays locked into providing clients with existing services at an increasingly higher rate of labor inflation.
3. Services at its heart is still knowledge and people.
Whereas manufacturing studies every second and cent for efficiency, people insist on ignoring the differential dynamics of each person’s performance and their performance in a team. Sports figured this out and started playing “money ball” on individual athlete performance recognizing gut decision making and all-star players could only produce a limited set of results. Professional services still obstinately refuse to pay attention to these details thinking all people are equal outside the distinctions made by education level, job descriptions and resumes. How many times has a lawyer been hired because of their Ivy League degree and number of friends in the industry that say they are a good professional as opposed to a disciplined, data-driven analysis of their record.
4. Most importantly, services have a different reality about who are the most important stakeholders.
It’s not the stockholder (owner) or the employed agent (manager or laborer) of the business but the client that has a true stake in the outcome. If the desired outcome is not achieved, it is the client that is out the time and the money while the professional services provider can claim none the wiser and walk away with the wealth.
These are not foreign concepts to the legal industry. The advent of fixed fees, knowledge management and alternative service providers are all driven by market forces much like manufacturing to begin realizing more reliable outcomes for the clients they serve.
What is different is that instead of thinking freely about this new challenge, we rely on unarticulated attempts to replicate the past of manufacturing to get us there. Why? One possibility: services are still led by an older generation trained in the 80’s and 90’s on manufacturing techniques and working off the foundations of outdated economic principles. There needs to be a new leader that recognizes the economics of services where stakeholder is the stockholder; where the principle of agency doesn’t interfere with the delivery of outcomes; where investment is encouraged; and risks are returned with rewards for the real stakeholders, not just the owners and agents.
These evolutions require recognizing that the multi-dimensional components of the human spirit and team performance are as essential or more than education and role. Without this awareness and data about who people are and how they play together, how can a coach or owner know if they are fielding a soccer or baseball team especially when the league they are playing in is American football? Personality, authenticity, preferences, and team chemistry are more important than ever, in particular, because they must mix and integrate with the client’s spirit, performance, talent and roles in order to successfully create an outcome.
In this four-part series, we are going to take a novel approach to exploring how to begin “playing money ball with white collar athletes” to create better teams and performance on the professional services field. We are going to experiment with alternative principles to economic models that put the stakeholder in the center of service delivery. And, we are going to challenge the old guard methods of industrial management with new-fangled ways of orchestrating knowledge work. The results will be pivotal to future generations of humanity who will increasingly depend on higher quality, more affordable outcomes from our legal, healthcare and education systems.
Editorial Thank You’s
I simply could not have written such a troublemaking treatise without the super hero help of my justice league colleagues!
Catherine Krow, Managing Director of Diversity & Impact Analytics @ BigHand, is an attorney and litigator by background, reformed legal business and analytics evangelist today. Catherine has been an essential partner to me and secret ingredient to so much of our success with legal service provider management and diversity, equity and inclusion in the Kaiser Foundation Health Plan Legal Department. Thank you Cnote!
Karen Helten, Outside Counsel Senior Manager @ Salesforce, was my original partner in founding the Outside Counsel Steering Committee initiative to control costs, increase diversity and improve quality for the Kaiser Foundation Health Plan Legal Department in 2014. After helping lead us to saving over $100 million in legal fees and implementing three generations of legal service provider guidelines she’s moved on to leading Salesforce’s outside legal spend transformation for the last three years. Thank you Attorney Whisperer!
Peter Eilhauer, Managing Director of Legal Technology Services Products @ Epiq, was one of the first professionals in 2014 to assist me in building a modern legal service catalog, support desk and performance metrics for managing cost and scaling services for the Kaiser Foundation Health Plan Legal Department. A true Chicago economist at heart, he is helping to change the face of professional services as we know it by creating technology enabled, service level agreement outcomes for corporate legal departments and law firms alike. Thank you favorite Four Groups 3Te!
Kristin Magni, Founder & Principal Consultant @ C Future LLC, is the most dynamic consultant for company boards that want to integrate the value of diversity into the core of their products, operations and client delivery. Since beginning to collaborate with her in Northern Virginia she’s taught me how to “unmask” our authentic selves to push past uncomfortable bias’s and stretch into new business acrobatics. Thank you Diversi-K!
About the Author
Greg Kaple is a bootstrapping Appalachian with a penchant for Broadway theater that captain’s new business ventures transforming professional services. As a natural born navigator, he helps executives and companies to trail-blaze new paths to invest and realize returns through innovative service delivery. He is currently leading Kaiser Foundation Health Plan's legal department to deliver outstanding service affordability, risk management and legal solution outcomes. When he’s not disrupting the status quo for the benefit of better stakeholder results, you’ll find him playing a hella blues harmonica on stage.
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