The Formula is the Foundation

I have always been a huge fan of capitalism. Not the shop window capitalism that so many businesses practice. You know the ones. The companies that pretend they are providing all the right incentives to their workforce with their speech but fail to step up in their actions.

Capitalism is really very simple. I hope someday that the United Sates finds a version which does justice to the economic principles behind capitalism. Capitalism is, after all, all about incentive. It is the proverbial carrot and stick. The carrot can be money. The carrot can be lifestyle. The carrot can be something as simple as fun.

Reading the Adam Smith Esq. blog recently reminded me how important capitalism is to both success and innovation. I have been posting recently here, here and here about the importance of a firm compensation formula which provides all the right incentives. In order to properly design a firm, you must first define what you are trying to achieve. If you are simply trying to achieve billable hours, that’s pretty straightforward. Any two-year old can create that business model. But if you are trying to achieve something more, you have to dig deeper. You have to decide what you want to reward and make sure that the carrot cannot only be achieved but enjoyed.

My belief is that a firm should be designed to define, document and achieve predetermined goals established by the client. Incentives must be put in place to achieve those client goals intelligently and efficiently. The foundation of my version of law firm capitalism is that money and revenue are never goals for the firm. Profits are the byproduct of a solid business model. Any business model designed around achieving client goals will inevitably generate profits. In fact, they will generate profits well beyond what could be achieved by a model which simply churns out billable hours.

What do you think?