Allen & Overy's profit conundrum

Back in February 2010 I recorded UK law firm Allen & Overy's Australian opening. Then in February this year Clifford Chance entered the Australian marketplace. Both moves were part of a shift east towards new growth markets.

Wednesday 6 July Allen & Overy announced their results for the year ending 30 April 2011, effectively the end of the firm's first full year in Australia. The results were headlined "Robust growth and investment" with the key features summarised as:

• Turnover up 7% to GBP1.12bn (USD1.87bn; EUR1.26bn)
• Profit per equity partner stable at GBP1.1m (USD1.8m; EUR1.2m)
• Distributable profit up 6% to GBP455.8m (USD759.8m; EUR512.6m)

On the surface, not bad. However, I was curious to know more, so downloaded the accounts. These showed a considerable increase in the number of partners and an actual decline in operating profit, as well as a small decline in the firm's net assets. How, then, did A&O achieve an increase in distributable profit so that profit per equity partner remained stable?

The answer lies in the treatment of Canary Wharf costs. I quote:

The Board decided that as the cost of exiting the Canary Wharf office is only payable in the future and benefits the partners in the future, for the purpose of determining the distributable profit for the current year, the charge would not be taken into account.

This may be fair enough, but it does suggest that the quoted key figures on firm performance may be a little misleading when it comes to assessing the firm's actual results.

So far as Australia is concerned, an article by Samantha Bowers in Friday's Australian Financial Review noted that A&O in Australia has grown from 17 to 21 partners with about 100 lawyers. She quotes Finance Director Jason Haines as saying that Australia had produced high revenue growth but not much profit growth since A&O in Australia were still in an investment phase.  

If you have a hammer, everything looks like a nail

Back in May in Clients are their own worst enemies, I returned to one of my recurrent themes on this blog, the need for professionals to educate clients. In the period since, there has been an interesting discussion in other fora on issues associated with cognitive dissonance and the law.

The latest post in this discussion is Legal Eagle's The Art of Law. The post includes links to earlier posts, including two I wrote. In the comments Jacques Chester made a very interesting comment @4. It begins: Here in software-land we often quote the old saying that “if all you have is a hammer, everything looks like a nail”.

Jacques' comment drives to the heart of the point that own professional backgrounds dictate the way we see and respond to client problems even if that way is not in fact appropriate. I mention this now because I want to come back to Jacques' points in the context of improving professional practice in a general sense.

 

Asia-Pacific IT services growth projections

I see from IT Wire that IT service revenue in the Asia-Pacific region have finally rebounded from the global economic downturn and are expected to hit $US205 billion over the next four years. Ovum forecasts an annual compound growth rate of 6.6 per cent over the period to 2015.

Fujitsu retained the number one slot in IT services revenue in 2010, with a market share of 13.9 percent.

I was actually a little surprised at the projected growth rate. It seems a little low. 

 

Australian March 11 capex figures surprise

The Australian Bureau of Statistics capital expenditure figures for March were higher than some expected. You can clearly see the upwards trend.

The expectations data  on future capital expenditure also continues strong.

The multiple speed nature of the Australian economy continues, with some data very soft indeed.   

Postscript

In this morning's Australian (27 May), Sarah-Jane Tasker reports that the Australian Bureau of Agricultural & Resource Economics & Sciences planned investment in Australia's resources sector has hit a record $173.5 billion.

Some care must be exercised in interpreting these major project figures. I know from my own experience, my then area was responsible for similar monitoring back in the early 1980s, that the numbers can bounce around. If prices fall, projects can be deferred or re-scheduled.   

Australian annual CPI increase reaches 3.3%

The Australian dollar has soured through the US 108 cents mark, while the Australian CPI figures are up. The two have been connected in some commentary, as though the markets have interpreted the CPI increase as a reason for buying the Ozzie. I must say that this strikes me as a bit odd.

I will comment on the currency in a later post. Looking at the trade figures, I am cautious about the sustainability of the increase, accepting that the market does as the market does. In this post, I want to look at the CPI numbers. Those who are interested can find the Australian Bureau of Statistics release here.

The headline number was a CPI increase in the March quarter of 1.6% bringing the annual inflation rate to 3.3%. The largest group increases for the quarter were education (5.7%), health (3.9%), food (2.9%) and transportation (2.7%). Food was influenced by the floods, transportation by global oil price increases.

  The rising Australian dollar is keeping downward price pressure on imports of fuel and final goods. However, because Australia imports so many intermediate goods, the high dollar is also increasing producer prices, increases that feed through into final goods prices.

At the moment, the concept of a patchwork economy is popular in this country, reflecting the fact that the combination of mining boom and consequent high dollar is having differential effects across the country. Some parts of the economy are effectively in recession, others booming. The on-ground impacts vary greatly depending on the locale economic mix.      

Proposed NSW data centres strike trouble

I see from IT Wire that the NSW Government's proposal to build two mega data centres in Sydney and Wollongong to replace existing centres has struck yet more trouble. IT Wire uses the word "farce"; that's not unreasonable.

Just at the moment I'm working on an assignment that has a connection with cloud computing. The NSW problems do raise the question as to whether thus type of mega centralised solution is still appropriate.  

Clients are their own worst enemies

In December in The importance of a discipline of professional practice I said:

Bluntly, we professionals are letting down our clients. Worse, we are sometimes doing it through our narrow definition of what constitutes professionalism.

I have no truck with approaches that guarantee clients higher costs and worse results, even accepting that clients are their own worst enemy!

While I did not follow up on that remark in the way I said would because of other pressures, the same pressures that forced me to merge my two professional blogs, the issues have been much on my mind.

At the moment I am working on a web based project for Sydney law firm Dilanchian Lawyers & Consultants. I normally don't mention specific clients, but in this case I know that Noric won't mind because we share common concerns.

I won't go into the details of the project. However, it does focus on ways of assisting lawyers and others concerned with law to improve performance. Not performance measured by billable hours, but performance in the actual delivery of, or management of, legal services.  

As part of the project I have returned to the mapping of the service delivery process. I am focusing on legal services. However, the processes involved are common across all professional services. By service delivery processes I am not talking matter management, although I recently saw some rather good workflow software here that makes matter management much easier. My focus is broader.

I have written before about the importance of the diagnostic (Role of the Diagnostic in Professional Services - medicine vs law, Professional services - the importance of the diagnostic). My focus here was on the professional. However, we also need to focus on the client.

Simply put, my argument is that we need to educate clients in the approach that they should follow in seeking professional advice.

Let me illustrate with an example that all lawyers and many other professionals will understand. A client needs a contract or agreement to do x. The client comes to the lawyer and says draw up a contract. This is where the diagnostic comes in because it helps the lawyer better define client needs. Often, the lawyer will find or feel that there are some underlying problems.

Before going on, remember that a contract is no more than the legal wrapping around something that the client wants to do.   

Now what the gun slingers do, they used to be called cowboys in the computer industry, is to give the client just what they asked for regardless of any underlying issues and then move on to the next billing. Others ask questions and try to identify problems.

A difficulty now arises.

Say the case involves an intellectual property matter. Definition of the IP involved is usually central to such matters. This may seem self-evident, but you would be surprised at just how often the IP is ill or even wrongly defined. Then there are the questions of the relationships between the parties - these involve multiple flows (money, management, IP creation) - as well as the various protection and reporting clauses. Again, you would be surprised at just how often these are ill-defined.

The lawyer faces a choice. How much effort should be put into assisting the client to identify and solve what are, after all, commercial or business issues? 

We live in a just in time world, a world of see problem, fix problem in which scrappy emails or even SMS instructions have come to replace proper instructions. This adds to costs. We also live in a world where the thinning out of management, something that I have written about, means that in-house knowledge is less than it used to be. This means that people have become more reliant on external sources of advice.

To the gun slinger lawyer, all this is an opportunity.

If the client has cash and is prepared to pay, then you follow through. Give the client the contract, but ask passive information questions. This process can be strung out. If the client has no money, just give them what they ask and move on. After all, you know that further legal fees will come should things fall over. The more conscientious lawyer will try to help, but also knows that the time costs involved may never be recovered.

All this is not an academic argument. Real money is involved. I have seen cases where large legal sums were paid that were not only unnecessary, but could actually have been seen to be unnecessary early on. 

This is not an attack on lawyers as a profession. Rather, it is an argument that says that performance improvement in the delivery of legal services is a two way street.

Lawyers can improve their performance through things such as better diagnostics. But we also need to educate clients as well.       

Boeing, outsourcing & Ayn Rand

A brief follow up to Problems with outsourcing. There I mentioned Ben Sandiland's blog as a good source on Boeing's outsourcing problems. The 787 runs out of time and lies extends Ben's reporting.

In an apparently unconnected post on my personal blog, Ayn Rand, selfishness and reciprocity, I looked at one element of the philosophy of Ayn Rand. The link is the way in which disconnects between a short term focus on both personal rewards and key performance indicators can distort behaviour.

We management consultants are meant to be practical people. Yet the biggest problem and I have found, and the cause of some of my biggest professional failures, lie in the disconnect between apparently practical solutions and underlying values, processes and assumptions.

In general, it's pretty easy as an outsider to identify ways in which a firm can improve performance. Sometimes its impossible to get that across when the client's world view is diametrically opposed to what has to be done.

I still haven't worked out how to solve that one!  

Sir Roger Douglas to leave politics

My thanks to Catallaxy Files for drawing my attention to this post by Eric Crampton, Farewell Sir Roger,  on the decision by New Zealand's Sir Roger Douglas to leave politics. 

Sir Roger was a key figure in major changes that took place in public administration that extended well beyond New Zealand. I wrote two earlier posts that first set a context and then talk specifically about some of his work:  

• Changes in Public Administration - Notes sets a broader context

• Changes in Public Administration - the New Zealand Model looks at some of the specifics

Problems with outsourcing

A post on Management Perspectives, Problems with maintenance, I spoke of the problems that could arise through through deferral of maintenance in order to meet immediate targets. I suggested that this had become something of a pattern.

The post was triggered by problems experienced by the Australian Navy. Now an article in the Australian, 'Cancerous' morale risks our navy fleet, fleshes out a related element. Reading this and related material, the argument goes that in out sourcing key maintenance functions, the Navy has lost in-house engineering capability to the point that it now threatens the very capacity to properly manage the maintenance function.

The problems Boeing faces with the 787 Dreamliner have been well documented and especially on Ben Sandiland's blog Plane Talking. Something of the same issues seem to have arisen here. Boeing outsourced to the point that it lost effective control of the whole project.

New airliners are always a complex, bet your business, project. Success depends upon strong internal management and engineering competence. Boeing appears to have got the balance wrong.