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A strategic partner of the Forum the Russian Corporate Counsel Association held a business-breakfast and conference "Lawyers and business". The event was attended by representatives of state officials and heads of legal departments. On the agenda the question of interaction between business and government in case of building an effective legal system. During the discussion sessions participants also discussed the risk management at the company.
"For every firm that has successfully implemented a strategic plan, several others have failed to execute"
Jim Hassett and Tom Clay
Recently, Altman Weil was consulting with the senior management of a midsized law firm about its strategic plan and got into a discussion of the importance of measuring profitability by practice group, client, and matter. The CFO dismissed the idea; they had already tried that, he said, but it simply didn’t work.
A few years earlier, the firm had spent several hundred thousand dollars on software to measure profitability. Mathematically, the software was indeed a good way to calculate profitability by matter or by client. But when management tried to roll out the new system, there was an enormous amount of negative pushback from partners. The software was too complicated, partners said, and the assumptions too controversial.
More importantly, almost every lawyer who was told that a matter was unprofitable said there must be some mistake and questioned the way profitability was calculated. After months of acrimony and debate, the firm decided to simply stop using the software and put it on the shelf as a costly experiment that had failed. They wrote off all the time that had gone into choosing the software, installing it, and training lawyers to use it. Not to mention the initial investment of several hundred thousand dollars.
Mind you, management still felt that measuring profitability was an important and valuable strategy. Presumably, it just couldn’t be made to work in that firm’s culture. In any other business, the CEO might have required that the software be used whether people liked it or not. But many law firms are fragile partnerships where firm leadership simply does not have the power to enforce change.
In several decades of working with hundreds of law firms, we have seen many such examples where well-designed strategies have failed because partners refuse to embrace them.
Customer relationship management (CRM) software is another great example.
Many firms have recognized the value of tracking client relationships more closely and invested six figures or more in technology to do that. But based on our unscientific count, CRM systems have failed at the vast majority of the law firms that have installed them, due to lawyers’ resistance to sharing information about their clients and their unwillingness to put in the hard work of tracking details in the system. Enormous effort was put into the initial stages of selecting software and implementing it, lawyers pushed back, and in the end management gave up and the money was thrown out the window.
The problem of failure to execute is not limited to software. “Key client programs” to improve service to top clients sound like a great strategy when they are committed to paper, but, when the time comes to act, many lawyers just keep doing what they’ve always done. Practice group planning is another problem area. When 81 managing partners responded to the Altman Weil Practice Group Performance Survey a few years ago, we concluded that “Law firm practice group performance … is mediocre at best across a series of measures.” For example:
Sixty-three percent of law firms say they have a formal Practice Group planning process, but planning quality is inconsistent and many firms fall short on plan execution. On average, on a scale of 0 to 10, firms rate the effectiveness of Practice Group planning at 6.0 and the effectiveness of plan implementation at a meager 5.6.
For every firm that has successfully implemented a strategic plan, several others have failed to execute.
As Drucker Said…
We could go on, but there is really no need. You could probably add several recent examples from your own firm. As management guru Peter Drucker has famously (if apocryphally) said, “Culture eats strategy for lunch.”
Several decades of consistent financial success have led many law firms to develop cultures that are frustratingly resistant to change. As Richard Susskind noted in his widely quoted book, The End of Lawyers?, “It is not easy to convince a group of millionaires … that their business model is wrong.”
In a series of Web articles entitled “Leadership and Culture,” Sean Culey noted that:
Every organization has its own unique culture, defined as the set of deeply embedded, self-reinforcing behaviors, beliefs, and mindset that determine “the way we do things around here…” It controls the way their people act and behave, how they talk and inter-relate, how long it takes to make decisions, how trusting they are and, most importantly, how effective they are at delivering results… Studies have shown again and again that there may be no more critical source of business success or failure than a company’s culture—it trumps strategy and leadership every time.
For example, consider the attitude toward perfectionism at many law firms. As consultant Ron Friedmann wrote in his blog several years ago:
Clients often want to know if there are any major risks: “Let me know if there are any boulders in this playing field.” Lawyers often hear that and think they need to find not just the boulders, but also the pebbles. The fear of being wrong—and of malpractice—runs deep. “Perfection thinking” makes it hard to approximate, to apply the 80-20 rule, to guide in the right direction but with some imprecision.
When lawyers were getting paid by the hour and most clients didn’t seem to care how many hours it took to reach perfection, the mindset was reinforced by the compensation systems that are still found at most law firms: the more hours you bill, the more you are paid.
But clients are increasingly questioning hourly bills and/or asking for fixed fee alternatives. When realization goes down far enough, firms will gradually be forced to change compensation, as Jackson Lewis did when it recently announced that associates will no longer be compensated for billing more hours. Instead, they will be rewarded based on factors tied to results such as efficiency and client service.
Strategic Challenge to Increase Efficiency
For anyone who follows the legal marketplace, it will come as no surprise that corporate clients are exerting enormous pressure to receive greater value from their law firms and that law firm profit margins are being squeezed as a result. What remains a surprise to many firms is how urgent the need for change is and how difficult it is to get lawyers to change their behavior.
It’s something we’ve seen both in our consulting work with law firms and in the results of several research studies. When, in Altman Weil’s “2014 Law Firms in Transition Survey,” 304 managing partners opined on which of 14 current trends were most likely to be permanent, 94 percent put an increased focus on practice efficiency at the top of the list. That’s right, 94 percent. When have you ever heard of 94 percent of lawyers agreeing about anything?
Other surveys have found similar results. In the American Lawyer’s December 2014 report on its “Law Firm Leaders Survey,” Michael Heller, Cozen O’Connor’s CEO, sums it up very simply: “Law firms are being forced to completely change the way they practice law.”
Cultural Resistance to Demands for Efficiency
Clients are demanding efficiency and law firm leaders are struggling to figure out how to provide it. But as long as compensation systems reward lawyers for putting in more hours, it will be a tough nut to crack. Firms must stop focusing on simply generating more revenue, whatever it costs, and instead focus on the much harder issue of generating greater profits. As one managing partner put it in our recent research, “I have a $10 million practice. But that could be a disaster for a firm, because it could cost them $11 million to get $10 million. But nobody ever talks about it that way.”
What are firms doing about the demand for greater efficiency? Not nearly enough.
When the “2014 Law Firms in Transition Survey” asked, “Has your firm significantly changed its strategic approach to efficiency of legal service delivery?” only 39 percent said yes. (Thirty-five percent said no and the remaining 26 percent said changes are “under consideration”.)
As negative as these figures seem, in our day-to-day experience the reality is much worse. In many cases, firms that have “changed their strategic approach” have done so only on a piece of paper. In the trenches, most of their lawyers are still practicing the way they always have.
In 1962, Professor Everett Rogers published his influential text Diffusion of Innovations, which is now in its fifth edition. The book explains the elements that determine how quickly a new idea spreads. In this context, the most important idea is his argument that the people who adopt a new idea are distributed in a normal curve in several sequential categories: innovators (2.5 percent), early adopters (13.5 percent), early majority (34 percent), late majority (34 percent), and laggards (16 percent).
At some point, Rogers argues, successful social change reaches a critical mass when the number of adopters is large enough so that the speed of adoption becomes selfsustaining and further spreads the idea. It is, of course, very similar to the central idea in Malcolm Gladwell’s best seller The Tipping Point: How Little Things Can Make a Big Difference. According to Gladwell’s definition, a tipping point is “The moment of critical mass, the threshold, the boiling point.”
The introduction of Legal Project Management (LPM) is a good indicator of a law firm’s commitment to improved practice efficiency. The field of LPM is so new that there is still some disagreement about exactly how to define it. For this article, we use the very broad definition proposed in the book Legal Project Management, Pricing, and Alternative Fee Arrangements: “Legal project management adapts proven management techniques to the legal profession to help lawyers achieve their business goals, including increasing client value and protecting profitability.”
While there is no systematic data as to exactly where LPM stands on Professor Rogers’ continuum, based on our experience talking to a wide number of firms, we strongly believe that LPM is still at the early adopters’ stage. The bad news is that clients want faster progress. Many law firms have done an excellent job of putting out press releases announcing that they are leaders in LPM, and indeed many individual lawyers have achieved success. But when it comes to changing the way an entire practice group or firm does business, they have fallen far short.
The good news is that innovative law firms still have an enormous opportunity to get ahead of competitors. We believe that the key issue for most firms today is to find the LPM tipping point for each practice group. In our experience, the required percentage varies widely depending on the pressure the group is under as well as on the internal political dynamics of a practice group led by a few strong leaders versus one in which each lawyer acts as an independent agent.
Clients are certainly not impressed by law firms’ efforts to date. In Altman Weil’s “2014 Chief Legal Officer Survey,” 186 in-house general counsel rated how serious law firms are “about changing their legal service delivery model to provide greater value to clients” on a scale from 0 (not at all) to 10 (doing everything they can). The median answer was 3, a ringing indictment of the low level of effort.
In this context, LegalBizDev recently published the book Client Value and Law Firm Profitability, which summarizes in-depth confidential interviews with chairs, managing partners, and other leaders from 50 AmLaw 200 firms. Many of those leaders reported gaps between the firm’s strategy and what actually gets done.
To assure that strategies are executed properly, you’ve got to start with metrics. As consultants are fond of saying, “What gets measured gets done.” When law firms outline strategies without metrics, the follow-up quickly gets fuzzy. You’ve got to have a way to show people they are making progress. Defining effective metrics is not easy. In the case of LPM strategies, where metrics exist, they tend to be subjective measures of increased client satisfaction and new business. As the field matures, more sophisticated measures are likely to emerge.
In most other businesses, implementation is clearly seen as a four-step process that includes goals, actions, scorecards, and accountability. Most law firms never get past the first step of setting the goals. They fail to identify the actions—specific measurable behaviors—that are required to achieve the goal.
Some identify the actions but lack a scorecard or measurement system to track who is taking action and whether it is working. And the few who do have a scorecard often lack accountability. The lack of centralized power at many firms means that it is every partner for him- or herself.
To be continued…
Jim Hassett founded LegalBizDev (www.legalbizdev.com) to help law firms increase client satisfaction and profitability by improving project management and business development. He has written three books, including the ‘Legal Project Management Quick Reference Guide’ and the ‘Legal Business Development Quick Reference Guide’.
Thomas Clay is a principal with the management consultancy Altman Weil, Inc. He advises law firms on strategy, management, and leadership.
© 2015 Jim Hassett and Thomas Clay. All rights reserved.
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