Despite improved marketing and planning strategies, many law firms fail against the competition because they lack the infrastructure to sustain their efforts and achieve results. The push for increased volume and leverage and the lack of client-service and project-management skills have driven clients to look elsewhere for legal services. This article describes the need for change in law practices and offers a change process that will allow firms to stay in the race.
Using the analogy of an unprepared runner in a marathon race, it becomes clear how law firms were caught short facing the competition of recent years. During the previous twenty to twenty-five years, law firms didn't make time for disciplined training and experienced what may be described as a loss of muscle tone, surplus weight, and complacency. When they were suddenly forced to compete for clients, they were out of shape and headed for disaster.
Lawyers developed an assumption that their value to a firm was based on their performance as a profit center. Therefore, lawyers who hoarded portfolios of work felt more important, powerful, and mobile. They also believed that hours times billing rate equaled value added to the client. Given that view of value added, any work was better than no work, and leverage produced profit. Firms became overstaffed, and lawyers lost their spirit of teamwork and their sense of accountability to the clients and the firm.
Law firm leadership lacked credibility and firm support to make tough decisions about a lawyer's true contribution. For years, firm leadership defaulted to the easy, old measures of performance (hours worked and dollars collected by each lawyer), which did not fully measure real contribution to a client-driven firm. Most compensation systems reflect a strong correlation between personal profitability and compensation. Client responsibility, delegation of work throughout the firm, improving return on resources employed on behalf of the client, and other critical success factors have not been rewarded. Quality of service was defined by the lawyer - not the client. Firms expanded through acquisitions of practices with which they had little synergy, creating an independent-contractor environment. Finally, the arrogance of success left little incentive to understand what clients perceived as value added. Law firms then hit the psychological and physical wall experienced by untrained marathon runners.
Conditions That Can Lead to Disaster
What are the obstacles, or "walls," that prevent firms from going the distance? The psychological wall includes:
- No agreed-on vision and strategic direction,
- Unrealistic expectations of earnings,
- No agreed-on, and enforcement of, norms of behavior, and
- Little effort to establish a culture of teamwork and collaboration.
The physical wall is what has made lawyers become short-distance sprinters, focusing on short-term contributions. The long-distance run requires a team operating as one body with a common goal in mind. The profit-center orientation positioned lawyers to compete with one another for the size of their piece of the pie, in the short run, instead of increasing the size of the pie in the long run. Nothing is being stored for endurance. Demands for cash distributions have siphoned money from the working capital required for investments in the future of the practice, such as client interview and needs assessment training, associate training, talented support, creation of substantive systems, and technological support. This lack of investment has left lawyers very few resources to run the hills and endure the heat of the marathon.
What are the hills? The first hill is the client pressures that force down bill ingrates. In addition, exponential growth in per-lawyer expenses and investments creates more strain on earnings. Finally, billable hours shrink as more time is demanded by clients to maintain a credible relationship. Many firms will not make it up the hill of return on time, billable hours, and cash requirements that would keep the firm united.
What is the heat? When more and more lawyers compete for the same business, competition will heat up! Increasing client power and control thrusts demands on firms that they are not prepared to face. These demands include audits, staffing decisions driven by clients, and new definitions of responsiveness. Most lawyers define quality of service as technical competence, not as superb sensitivity to client needs. Little preparation has gone into systems to efficiently respond to requests for proposals (RFPs). Lawyers are reactive, not proactive. Once behind, they will have difficulty catching up to the leaders.
Shifts in Buying Power Forces Change
The continuing increase in the power of the buyer will create the most significant change in the legal profession. There are four key indicators of that change. First, the slower growth in the demand for legal services is creating a client-dominated market. Within the old competitive market, changes such as deregulation, ADR, tort reform, and higher demands on partners and associates for non-billable activities occurred. Second, firm staffing has become more challenging. Staffing requires a legal group to understand and respond to new career goals, the needs of the market for more diversity in the mix of professionals in the firm, and the demand by staff for contract or part-time work. Third, the number of new competitors is increasing. These competitors include special-niche firms that are structured more appropriately in their overhead and services to meet the needs of clients. Finally, an increasing number of alternative providers are coming into the market. These alternative providers furnish services formerly provided only by lawyers and include insurance brokers and adjusters, companies such as American Express offering legal services, consumer associations, CPA firms, and para-professionals approved by a state to provide specific legal products.
Most law firm structures remain unresponsive to these strategic forces. Many firms grew without making the tough management decisions of creating the culture, a strong sense of mutual accountability, investment capital, and infrastructure needed to make the larger firm work. We did see the problems coming, yet growth for growth's sake has become unmanageable. The underlying cause of this breakdown is the constant emphasis on generating more billable hours and leverage to achieve profits, which pushes hours and legal products, instead of efficiency and bundles of services that are more responsive to client needs. The faulty assumptions are that (1) size is a definition of power, expertise, and profitability; (2) leverage is key to profitability; and (3) billing rates will increase to enable continued profitability from leveraged capacity. The following paragraphs investigate the implications of these assumptions on investment choices, ownership equity, and effective plus efficient delivery of legal services.
Investment Decision Choices
Huge barriers are emerging against a firm's ability to adapt to a competitive environment. There are lawyers in the firm who will not abide by the norms of effective and efficient service to the clients. Some practices do not fit into the core competencies or the services required to sustain those core competencies. There is an assumption that any practice should generate money, even if there are no synergies to other practices in the firm. Lawyers have unrealistic expectations about their career paths and earnings. A perceived, automatic track to profit sharing and equity is expected without an understanding of the required commitment to client service, and accountability to others in the firm.
Ownership and Equity
A shrinking number of lawyers are willing to take the risk and assume a true equity position in the firm. Are lawyers who take those risks rewarded? Who are the true drivers of the business relationships with clients and referral sources? Who are the true leaders and managers of the practice? Who are the innovators? Which lawyers are constantly seeking greater effectiveness and efficiency in delivering legal services? If you can name these lawyers, are you rewarding them? Check your own rewards system and the behavior it reinforces.
Creating the Proper Environment for Reshaping the Firm
How can a firm initiate and sustain the process of preparing for and competing in the new legal environment? The transition requires four building elements: culture, leadership, vision, and enablement.
1. Developing Firm Culture
As an outsider, I begin to understand the culture of a firm by listening to the lore about former and current partners' service to their clients and to the firm. The lore shows where the lines have been drawn for behavior and accountability. Everyone knows where the boundaries are and that operating outside those boundaries will bring peer criticism.
One firm's executive committee complained to me that partners were not responding to their decisions. The committee members did not work as a team; one member came out with minority opinions and that member refused to follow the policies of the executive committee majority. No wonder the committee had no credibility - they did not walk the talk. By having every member of the committee make a covenant to come forward with one view, "it is our decision," and walk the talk, the atmosphere around this firm improved significantly.
2. Promoting Leadership
Strong leadership is essential to law firm survival. It must be supported by an accepted culture that encourages mutual accountability to others in the firm as well as to clients. Leaders must focus the culture of the firm on strategic change, not on the status quo.
Leadership is a big responsibility and is absolutely required if firms are going to turn away from the buffalo herd heading for the cliff. Leadership must make choices. One of my favorite and most effective managing partners has related the following story. When he was selected as the managing partner years ago, the two founding partners told him they would always support his decisions in any meeting with other lawyers and abide by them. But if they thought it was wrong, they would give a sign and he was to meet them after the meeting. There they would explain why he made the mistake and let him explain how, if needed, he would correct it. They allowed him to make mistakes, and he understood that making a mistake was not the worst thing in the world. He became better prepared for making decisions and also learned that it was much easier to beg for forgiveness from the partners for making a wrong decision than to ask for permission to make the decision.
Leadership is essential. I do not know of any firms that show strong promise of survival in the coming years that do not have good, strong leadership and reward that leadership.
3. Focusing on a Vision and a Mission
As Yogi Berra once said, "When you get to the fork in the road, take it!" Without a vision and mission, you will have no selection criteria, and if you do not choose a direction, you will get run over. Every firm must have a firm-wide understanding about the market in which it competes and its role in that market.
If you have a vision, you should be able to explain to a potential client, in less than ten seconds, what value you add to your clients and what your organization stands for. If you have a mission, you should be able to answer the following questions.
- Who are the core clients of your firm? Which clients represent the core that will improve the firm's competitive position and make it more profitable in the next ten years? How much do you know about them and the pressures that are affecting their business from customers, vendors, and competitors? How do you treat these clients?
- In what geographic area will services be provided to the core clients? Will services be provided on a local, regional, national, or other basis?
- What services will be provided to these clients? What are the services that must be bundled to meet the needs of the core clients? What are the core competencies of your firm? What services must be provided, or clients served, in order to sustain the core competencies? Of those services not included in the first two lists, what services must be abandoned over the next seven years?
- What competitive position will be sought from the clients and service areas? Do you plan to be the only provider of the service, one of the top few, or one of many providers?
- Given your clients, geographic market, core services, and expected competitive position in the market, what is your expected rate of return on the time of your professionals?
Without a vision and mission, leaders have a very difficult time making choices concerning the allocation of firm resources. A vision and mission will help leadership answer the following questions:
- Where should the firm invest in clients and what are the services to be provided?
- Where should the firm put its leadership time?
- Where should the firm invest the emotional and dollar capital of the firm?
- Where should the firm invest the talent of the firm?
- How should the firm identify the lawyers who are and are not making a contribution?
Use Available Tools Change
There are a number of tools a law firm can use to formulate a vision and a mission and make investment choices. These include a model that explains the difference between a lawyer's perception of quality service and the market's perception of quality service. A second model, called the Cobb Value Curve, helps a firm understand what criteria the client uses to establish the price the client is willing to pay for the bundle of services offered. It also helps the firm understand how it must structure itself to provide those services at a fair return on time. The third model helps the firm select those areas in which investments should be made in services that are to be provided by the firm in the future.
Sustaining the Change Process
Change must be evolutionary. The process proposed here will build an evolutionary change that will create significant long-term results. When my clients look back over the changes they have undertaken in the process, they are always amazed at what their small steps over the years have accomplished. Their efforts to build the norms, establish leadership credibility, build a vision, document a mission, and enable their people to follow the vision have produced incredible results. Walking the talk did not correct problems overnight, but it did create a multi-lane highway for the professionals to use in serving clients and working with one another.
Watch Out for Potholes
Patience, discipline, and vision are absolutely key to success. Moving too fast will take the leadership out of the credibility circle. Many partners are more than willing to force that approach. In some cases, these partners may suggest bringing in an outside consultant to "make the problem go away." Don't step into that hole. On the other hand, moving too slowly will make the partners lose faith in leadership. Of course, there will be plenty of partners who will support the status quo. Finally, one of the biggest challenges of leadership is to have patience in educating partners, then associates, and then the rest of the firm about the market and the economics of a practice. Leaders must build a knowledge base that strengthens partners' and employees' understanding and responsiveness to client needs and supports measurement of collaborative performance. This does not come easy or fast.
Establish Permanent Change as Part of the Culture
John P. Kotter uses an eight-step method to help leadership establish a permanent culture of change and transformation to a client-driven firm (see "Leading Change: Why Transformation Efforts Fail," Harvard Business Review, March-April 1995). This method encourages change by evolution. By building successful precedents in the firm through these steps, a firm can build on the culture, leadership credibility, and vision, and enable change through examples. The eight steps include:
- Create a sense of urgency,
- Set up a core coalition,
- Create a vision for the change,
- Establish norms of behavior for the core coalition team,
- Set up and communicate progress,
- Remove petty barriers,
- Identify and achieve short-term gains, and
- Anchor the change into the fabric of the firm.