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 the '90s. 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.
The booming demand for legal services in the 1970s and early 1980s created a faulty success formula. 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. Firms and lawyers entered the 1990s ill-equipped to face the pressures of competition and the demands of the contemporary law business.
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:
Leadership's weakness of condoning dysfunctional behavior is one reason for this barrier to constructive change. If leadership provides new models for measuring and rewarding performance, the best performers will respond. Collegiality, whereby individuals are bound by a common profession with each professional taking independent action, must give way to collaboration, whereby professionals are bound by a common vision in serving their clients and are accountable to one another for the accomplishment of that vision.
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 in three decades. 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 nonbillable 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 an 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.
Identify what behavior the system condones. If you condone behavior, you are rewarding it. For example, I know of many firms that express a requirement for being a mentor to others and building a team. Yet, when personal billings and collections are aligned with the compensation, there is almost an exact correlation. Those lawyers who do not take the time to train, mentor, and build teams are being rewarded. If specific performance is important, a firm should measure and reward that performance.
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. First, culture produces expected behavior that binds a group of lawyers together by accountability to each other, employees, and, most important,their clients. Next, armed with a common understanding of culture, leadership can see and reward behavior that must be encouraged. Leaders become more credible when they reward what is expected to make the firm work and do not condone behavior that takes the firm out of its norms. With credible leadership, the firm begins to construct a vision for service and performance that binds owners and employees in collaborative efforts on behalf of clients. Finally, that collaboration cultivates efforts that enable people to perform and support the culture of the firm. Professionals become accountable to one another for mentoring and coaching others to succeed.
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 large firm has secretaries and paralegals score summer associates on their ability to fit into the culture of the firm. Many of the summer associates may be rated favorably for work product but score low for behavior that is outside firm culture. Another firm does not let anyone in the firm use the word "my client"; it sounds trite, but it works. 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.
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. For example, my daughter's volleyball coach is constantly "raising the bar"and challenging players to improve. The coach asks a lot of the players, and they respond as a team because improvement has become the norm. Is your leadership setting higher and higher standards for client service and measuring it? Is your leadership demanding a higher and higher return on lawyers' use of the firm's resources, or is leadership just asking for more hours? Is leadership coaching? Is leadership creating the environment in which people can excel in client service and career satisfaction?
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.Former President Harry Truman said, "Make a decision. If it is wrong, then make another one." 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.
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 firmwide 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.
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 AND MODELS FOR 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.
TECHNICAL COMPETENCE VS. SERVICE QUALITY
Although a professional views his or her effort and technical competence as "value added," the clients do not necessarily see it in the same way. A lawyer tends to assume that he or she adds value based on his or her depth of knowledge and the effort expended. In other words, a lawyer's hours times a lawyer's rate should equate to the lawyer's value added. But clients do not regard something they do not understand or something they do not need as a service or as value added. The initial public offerings(IPO) documents do not add value; the capital obtained from the IPO adds value. Clients regard responsiveness, understanding of their businesses, knowledge of what they are about to face as business owners and managers, and similar lawyer contributions as value added.None of these have any relation to the technical competence of the services delivered.Clients assume technical competence.
Two simple examples described below show how the model presented at Exhibit 1 can be used. Remember the bike you bought for your children that stated on the box"Some assembly required." This product would fall in the upper left corner of the quality-service grid, because it may be a great product, but is utterly useless if the buyer does not have the tools or knowledge to build it. The lower right corner of the grid shows excellent service but poor technical quality. A good example of a product that falls into this category is the pizza that is delivered to you in less than twenty minutes but tastes like cardboard. A lawyer's ability to prove his or her worth will not only be based on a demonstration of technical depth and accumulated knowledge, but also the lawyer's usefulness in helping the client overcome barriers to the client's success. A lawyer's arrogance in not recognizing and responding to the needs of the clients will turn many of them away to other, more responsive firms.
How do you know if you are becoming more "useful" and"client-driven"? There are three questions that you should be able to answer in less than ten seconds each with regard to your core-client contacts.
1. What has happened to that person in the last eighteen months that has changed his or her job, his or her scope of responsibility, or the way in which he or she is being evaluated? If you answered this one, you may go on to the second question.
2. What must you now provide as part of your bundle of services that you did not provide before? What must you do differently? If you answered this question, you may go on to question three.
3. So, what have you done about it? How have you changed your services to meet those needs and become more useful to your client?
An example here will help. A partner interviewed an in-house counsel and found that the in-house lawyer was being evaluated by a new assistant, general counsel on the organization of his files and the presence of clear and concise status reports in the front of each file. The relationship partner created a new element in the team's bundle of services with his team and agreed to send an associate out once a week to compile the status report, brief the in-house lawyer, print the report as a memorandum from the in-house lawyer, and then file it in the front of each file. Of course, the in-house lawyer started sending more work to the firm.
THE COBB VALUE CURVE
The Cobb Value Curve, presented at Exhibit 2 , can be used to determine the added value of the services to the client and to determine future firm staffing. The impact of a particular task or problem is what will drive the client's (and the market's) view of what a service is worth in the market. If the client perceives the work as having a low impacton his or her goals, the client will view the work as a commodity. About 60 percent of the work sent out falls into the commodity category. This explains why many lawyers, without knowledge of the quality-service grid and the value curve, assume their worth is much higher than the clients think it is. If the market regards the contribution of the lawyer as brand name, wanting the name of the lawyer behind decisions, it moves up the curve, but the work is still price sensitive.
About 20 percent of the work falls into the brand-name category. For example, an underwriter may ask the firm to provide an opinion on an IPO but is not willing to pay a partner's billing rate to provide that opinion. If the client thinks the work is critical to the future of her job or her company, she will be willing to pay a higher average rate because of the impact of the transaction or case. Only about 16 percent of the work falls into the experiential category. Finally, if the task that the lawyer has been asked to perform is a nuclear event for the company, there is no price sensitivity. One largecompany uses the value curve to determine what lawyers it will hire for particular matters. If the impact of the transaction or case on the company is high (i.e., the value added is high), only one specific lawyer may be hired. If the transaction falls in the brand-name range on the value-added "Y" axis, one of ten firms may be hired.
The value curve helps identify, with proper understanding of the client's position, the pricing and the staffing mix the firm must use to satisfy the needs of the client. If the work falls into the commodity area, the firm should expect a high degree of price sensitivity and should seek to extensively leverage lawyers, paralegals, secretaries, and substantive systems. An example may help here. One real estate client requires about a hundred large interim finance agreements each year. This client sees the work performed by the law firm as low brand-name work. The firm must put a team on such matters to turn the deal around quickly and cheaply. Another real estate client has only one such deal a year.That client may perceive the same deal as a nuclear event for his company. That client is asking for a different bundle of services. He is asking for the name and reputation of the partner with the bankers and underwriters. He is asking for the partner's experience in guiding him through the transaction. He is asking for the partner's beeper number in case he wakes up in the middle of the night in a cold sweat. This work will be leveraged less.This is the same deal, but it falls at a difference point on the curve because of the client's requirement for a larger bundle of services.
CHOOSING YOUR INVESTMENTS
How can a firm determine areas in which it needs to invest its critical resources? The investment selection grid at Exhibit 3 takes the quality-service grid a step further. In the earlier discussion of the mission statement, the firm had to identify its core competencies and the things the firm must do in order to sustain those core competencies. A firm must represent certain clients and perform some low-profit work in order sustain the core competency or sustain a relationship with a core client. Exhibit 3is divided into four quadrants: Dying Swans, Core Competencies, Losers, and Investment areas. Placement in a quadrant is not based as much on profitability as it is on the future directions of the bundles of services provided by the firm. A lawyer may be personally very profitable but still have his practice appear in a nondesirable quadrant.
The dying swans of the practice mix are the practice areas for which the firm has built up tremendous depth, but for which clients show little need or the competition has overtaken the firm by performing in these areas at a much higher service level. For example, investment advisers are in the business of providing all of the services required for estate planning. They are replacing lawyers as the primary estate planning advisers.Some firms have reorganized their estate planning bundle of services to "life planning" and moved their practice over into core competencies with a new bundle of services.
The core competencies of the practice mix provided by the firm are those services that have a high demand in the market and for which the firm has built a tremendous reputation, depth of experience, expertise, and accumulated knowledge.
The losers are the practice areas for which the firm has established little credibility in the market and very little depth. Unfortunately, many of these services do not work synergistically with other areas of the firm and are typically run by a partner who acts as a solo. These are the services a firm should seek to abandon over the next seven years by outsourcing the work to other firms.
The investment areas are those in which future time, dollars, and energy should be spent. These are areas in which services must be provided to sustain core competencies and relationships with the core clients. Practices that tend to fall in this area may include:
Services provided to train professionals in the firm to perform in the core competency areas. Growing areas of need from clients as their businesses require a wider range of legal representation. For example, a staff services company supporting a hospital moved into the accounting services arena for the hospital. Now there is a need for support in the medical reimbursements arena. Potential and new clients coming into the level of business maturity that requires the core competencies of the firm.
Firms have also used the investment selection grid to categorize clients and help determine which clients and matters to keep, which clients and matters to manage toward a minimization of losses, and which clients and matters to abandon over time.
SUSTAINING THE CHANGE PROCESS
Change must be evolutionary. The process proposed here will build en 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 multilane 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: (1) Create a sense of urgency, (2) set up a core coalition, (3) create a vision for the change, (4) establish norms of behavior for the core coalition team, (5) set up and communicate progress, (6)remove petty barriers, (7) identify and achieve short-term gains, and (8) anchor the change into the fabric of the firm. The eight steps are detailed below, showing how a firm that used the process was able to improve realization or the percentage return on the billing rates of time-keepers employed on behalf of clients.
1. Create a sense of urgency. The firm reviewed a list of areas in which there was pressure by clients to reduce billing rates and/or to move to task-based, fixed fees. Because the leadership had moved the firm to a position where all the excess expenses had been squeezed out of the financial statements, it had only one choice - work on the revenue side of the equation. Leadership knew that it was only a matter of time before realization on billing rates would go down and millions of dollars in income would disappear from the bottom line. Leadership had to take an approach that would totally restructure the way legal services were delivered.
2. Set up a core coalition. Leadership selected a core coalition of lawyers who understood the problem. This group of six lawyers possessed unique characteristics. They could see the implications on their personal practices and their supporting teams of lawyers. They had control over their clients and could not be told: "Don't try this on my client!" They were willing to take risks and felt comfortable enough in the firm's review and evaluation system to avoid gravitating to the old way of doing things just to improve hours or leverage.
3. Create a vision for the change. The core coalition team and the leadership established a vision of what the improvement process should do. The vision was: "Establish a model for the firm to use in improving the return on the resources of the firm." Along with that vision, the team established a course of action to measure where the team was in the process and what improvements would be achieved at specific points in the process.
4. Establish accountability. The members of the core coalition established what each was accountable for to the team during the process, including mutual support and meeting milestones in the course of action. They defined what a collaborative effort was: "A group of professionals bound by a common vision and accountable to one another for the achievement of that vision."
5. Communicate progress. The course of action and vision were communicated, first to the teams that supported the members of the core coalition team and then to the firm. Throughout the process, the team reported back to the firm on the milestones achieved. Specific milestones were set up to report back to the core coalition team and to the firm to force the team to stay on course.
6. Remove petty barriers. The team was strong enough not to listen to the interference from those who could not believe that the process would work. In addition, the collaboration of the team provided for the mutual accountability to "show up" at meetings and support the efforts of the team. Of course, the strong support of the leadership was needed to put down the forces that wanted the effort to stop. Many in the firm thought the effort was going to affect the way they did business and wanted the team to return to the old paradigm. The partners who favored the old paradigm wanted the core coalition to buy back into the measurement system that was in place - rewarding personal effort and collections.
7. Identify short-term gains. The team identified and measured short-term gains that helped build support for sustaining the process. In this process, the team was able to show increases in realization from the team's effort that produced over $10,000 for each partner in the firm. In addition, the team found that it would perform the same services with fewer partner hours and an overall reduction in staff. The result was fewer hours but a higher realization on time. Gains were reported at every appropriate milestone. Many in the firm rejoiced with the success and wanted to declare a victory. But, according to the course of action and the agreements of the team, new targets had been set to continue the improvement process.
8. Anchor the change into the fabric of the firm. As the team went through the process, it created a model and documented the benefits realized for each of the following parties.
The client and the specific individual representing the client. One of the fifty benefits was reduction in cycle time and fees for the client. The team working on the client matters. One of the more than forty benefits documented for the team was the improvement of the effective billing rate on the matters performed of the client. The lawyers working on the team. One of the more than thirty benefits was the ability to work on issues and tasks more challenging to the level of experience in the team. The firm. One of the more than fifty benefits to the firm was an improved bottom-line return to the partners' distributable income of over $20,000 per partner, and more to come.
RESPONSIBILITY TO LEAD
A client-driven firm must understand and respond to the needs of the market. Without culture, leadership, vision, and supporting infrastructure to enable professionals, a firm will be left behind in the race and possibly collapse. Establish a culture for accountable behavior through firm lore. Ask the question: "What has made us successful and powerful in the market?" Make decisions within the context of the firm's vision and then communicate that vision by filling in the blanks on how the vision affects every decision within the firm, from intake to partner accountability. Provide direction for your partners and employees, enabling them to excel in client service.
Copyright 1998, Law Governance Institute. Reprinted with permission of Law Governance Review.
William C. Cobb is the managing partner of the WCCI Inc. (William Cobb Consultants) based in Houston, Texas. Since 1978, he has been a consultant in strategic issues affecting law firms and general counsel and helps them improve their competitive positions. That counseling includes the assessment of the impact of trends in the market;pricing services and alternative billing; practice management; firm governance and structure; partner review; evaluation, and compensation; and similar subjects of critical importance to law firm and legal department leadership.
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