Harvard: Theory vs Real World?

Tom Collins talks about an article in the April 2006 Harvard Business Review entitled

The 80/20 rule is a useful management concept, but those who latch on to it as a management mandate take its implications to the extreme with unintended negative consequences.

However, we have all seen the consequences in the consumer world when management latches on to the 80/20 rule to minimize inventories and maximize profits. Thanks to the internet, we now have a nearly unlimited number of sources to choose from; however, the choices they offer are all the same. In the apparel industry, if you are outside of the center area of the bell shaped curve because you’re are a little too round, too tall, too short or too thin, you are out of luck when it comes to finding your size.

The fact is law firm clients (even the unprofitable ones) begat even more clients. Professional work creates valuable reusable work product and experience when the work itself is done at a loss-Etc. Etc Etc.

So while the 80/20 rule is a useful concept and the rule of the fewest is even better, a firm that decides to grow its profits by chopping off clients, offices, and talent may just wind up with a smaller firm and a smaller future. So be careful when applying the concept-consider carefully the ancillary or indirect value of activities (values that may not be apparent to the accountant) before you start chopping.

Wise words from Tom Collins. And let me put a slightly different tone on his comments. First, most law firms have no clue as to which clients create profit for them and which are “losers.” That would be nice information to have. If we had such information, we would then get into a discussion about how to define the “profit,” how to allocate the firm overhead to the activities related to any single client, etc.

Second, if we want to grow with less risk, it seems to me that no signle client should be responsible for more than 10% of your revenue. If they are, you are at high risk when (not if) they leave for reasons beyond your control (merger, change of general counsel, etc.)

Thus, be cautious when following an arbitrary rule that suggests you “fire” clients who pay their bills promptly just because they fall in the 80% area of your current revenue. They may just be the next Micorosoft of your practice.

Categorized in: Management