CHAPTER 1
The Firm of the Past
I’m willing to be occasionally wrong. But what I hate most in life is to stay wrong.
—Paul A. Samuelson, Nobel laureate economist
A business model is nothing more than a theory. I am defining a business model as follows:
How your firm creates value for customers, and how you monetize that value.
Let us analyze the predominant theory of professional firms. In Greek language, analyze means “unloosen, separate into parts.” Almost every book that discusses professional firms is based on this equation:
Since this model dominates the thinking of firm leaders to this day, it is worth explaining the model in greater detail to understand both its strengths and—as will be increasingly detailed—its fundamental weaknesses.
Consider a professional firm—such as accounting, legal, consulting, advertising, IT, and so on—the archetypal pyramid firm model rested on the foundation of leveraging people power, in effect their “capacity.” The theory is this: Since the two main drivers of profitability are leverage (number of team members per owner) and the hourly rate realization, if each partner could oversee a group of professionals, this would provide the firm with additional capacity to generate top-line revenue, and thus add to the profitability and size of the firm. If a firm wanted to add to its revenue base, it had two primary choices: It could work its people more ...
