In the spring of 2009 Froese Forensic Partners Ltd. purchased the Canadian assets of LECG, an international expert services company. LECG is now in the process of blowing itself up, facing a cash crisis in trying to fund debt coming due at the end of March. LECG is selling off its most valuable assets and is not expecting any proceeds will be available for common shareholders – in other words, a complete loss to investors.
So how did it come to this?
An expert services business is only as good as its assets – in this case “human capital.” LECG’s stable of professionals included many of the world’s leading experts. To keep experts motivated they must be told, and also sense, that they are valued. More importantly, they have to be fairly compensated. They also need to feel confident that the business is being successfully managed, and that the company has a clear and impressive corporate plan in place.
If a company doesn’t provide these basic needs, it risks losing some, or many, of its experts. Experts today are far more mobile that they were a few decades ago, and competitive firms and companies are more aggressive in recruiting experts from competitors.
LECG faced a few major issues. Probably the biggest one was the expert’s compensation model. The model for “at risk” experts provided for an average of 72% of the expert’s fees to be paid to the expert. In addition, experts could receive “finder’s fees” consisting of a much lower percentage of LECG professional staff’s fees earned on the expert’s engagements. LECG’s share of revenue was thus primarily derived from the experts’ use of LECG professional staff.
This model works if a business is expanding. But if it’s contracting, an expert is personally motivated to hold onto chargeable hours at the expense of hours that would otherwise be worked by LECG professional staff, thus maximizing the expert’s income at the expense of LECG’s profitability.
LECG was also impacted by David Teece, a former LECG Chairman, setting up a competing expert services firm, Berkley Research Group, which attracted some of LECG’s consulting practices.
So what have we learned from the process? What are some key success factors for an expert services business? That’s for the next blog.
