Ten Things I’d Do Differently as a Law Firm CEO

by Timothy B. Corcoran on March 28, 2013

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There are many good reasons for law firms to adopt business practices from other industry segments.  As has been made abundantly clear, the laws of economics apply equally to law firms as to other businesses.  Faced with declining demand and an oversupply of providers, law firms are experiencing unprecedented downward price pressure and clients are aggressively seeking substitutes.  Law firm leaders who have reduced overhead to maintain profit margins have learned that this approach falters when adverse economic conditions persist.  Many law firm leaders now struggle with what to do next to survive.  Alternative fee arrangements are still considered necessary evils, rarely embraced but reluctantly accepted upon client demands.  Growing top line revenue through lateral recruiting remains a risky proposition because there is no guarantee a lawyer’s clients are as portable as the lawyer.  Too, a lesson most of us learned as teens applies to lateral love affairs:  the pretty girl too popular to commit to one guy is, statistically speaking, unlikely to stay with you for very long either.  Lawyers, not unlike their forbears in other industries facing massive upheaval, tend to do more of what they know rather than proactively seek change, and as a result simple techniques to improve client satisfaction and retention — efforts that in other industries are generally called “sales” — are discarded as unseemly or unnecessary for educated professionals to take on.

Law firms are not mere factories, churning out countless replicas of a popular product.  Nor are they think tanks focused on producing thought leadership for academics to ponder.  But law firms are somewhere on that continuum, subject to market forces, facing changing client needs, price pressure from entrenched competitors and constant innovation from new entrants.  Few law firm leaders have sufficient experience to navigate this maze.  But there is hope.  Unlike the leaders of, say, print encyclopedias, whose business model was disrupted by the unprecedented speed and force of the Internet, law firm leaders have plenty of corollary lessons to draw on to chart a course from fear to prosperity.  To be clear, I don’t believe a law firm should be run primarily as a business.  I’ve been a CEO of a publicly-traded company and I climbed the corporate ladder in divisions of private and public multi-national corporations and there is a common thread:  the business school maxim that earning a profit is the primary goal is interpreted primarily as a toxic quest for short-term profits above all else, including the long-term health of the business, typically because executive incentive plans are pegged to short-term profit measures.  A law firm can generate a healthy profit, which is not a shameful goal, while simultaneously improving client satisfaction and work product quality, and building a sustainable culture for the long haul.  But how?

Here are ten ideas drawn from my own corporate experience that law firm leaders can embrace to improve the fortunes of their firms.

Change the governance model.  Let’s first dispense with the arcane notion that a partnership is an effective or efficient management structure.  Notwithstanding any potential tax or liability benefits of the business form, it is ridiculous to believe that all partners should have an equal say in the operations of the business, particularly after an organization reaches a certain size.  Nor is a dictatorship acceptable, even when led by a benevolent leader, because such organizations lack sustainable business processes and falter when the leader inevitably departs. Identify a core leadership team at the firm and practice group level and give them the authority to lead.  Stop allowing the blowhard down the hall to substitute his childish behavior for sound business practices.  Stop crowd-sourcing important decisions.  Speed up the decision process by eliminating needless voices.  Let the lawyers practice law and the leaders lead.

Productize the offerings. Every law firm has products, we just choose the collective delusion that legal services are unique and non-repeatable actions.  Sure, some matters require unique tasks, but every legal matter includes tasks that have been done before, usually many times before.  Figure out which products — or service offerings if you will — the firm produces profitably and effectively and commit these to a repeatable series of actions.  Repeatability leads to improved profitability and improved quality by reducing variability.  And yes, there will still be plenty of unique matters that only highly-trained and creative minds can tackle.  If you can find a matter or task that’s so unique that it’s never been done before, bill for it by the hour.  Otherwise…

Embrace strategic pricing.  Here’s a revelation: clients will care less about the mechanics of your invoice, whether you bill by the hour, by the word or offer flat fees based on astrology charts, so long as the value delivered is commensurate with the price paid.  Strategic PricingThe practice of issuing invoices with “services rendered” didn’t die because clients grew smarter; it died because law firms grew stupider and adopted billing practices with perverse incentives.  The idea that a law firm might not need a fax machine if not for client demand, and therefore we charged $1 per page sent or received until the fax machine earned in excess of 100,000 times its cost was idiotic.  Thankfully, we learned the lesson and today don’t charge per email.  Or view legal research as a profit center… wait, what?   Learn what it costs the firm to produce and deliver its legal services.  Accept that there’s no “perfect” way to allocate overhead.  Determine the differential value your firm offers against the competition, if any.  Determine the client’s perceived value, if any.  Establish a price that covers your costs, delivers value and generates a profit.  If you can’t figure this out, hire a new finance team. If you can’t find a profitable price, focus on lowering your cost of delivery, not just your overhead. Or accept that the client may not place the same value on the offering that you do and find something else to offer that has greater value.

Reduce inefficiencies.  Law firms carry extraordinarily wasteful overhead.  If you want fine art in your Italian granite-tiled restroom, go for it.  If you want to sponsor every 5k run or splash your logo on every cocktail napkin offered and pretend it’s a wise marketing investment, go for it.  But say no to the partner who demands his own graphic designer and high-capacity printing operation on the off chance he might leave a key proposal to the last second and need to run an after-hours-all-hands-on-deck fire drill to generate a boilerplate RFP response.  Stop running the same conflict checks on the same conflicted prospects, or their subsidiaries, by investing in a data cleanup operation, adding in corporate trees and linking your CRM system to your billing system and the conflicts database.  Improve your RFP win rate by requiring the lawyers adhere to best practices, instead of repeating the same mistakes.  Look at every single process in the firm’s back office and find ways to eliminate redundant and wasteful steps.  Don’t know how? Hire a firm that specializes in business process improvement (BPI) to do it for you, or to train you to do it.  Or hire a business process outsourcing firm (BPO) and let someone else manage your accounts payable function. On second thought, cease the silly sponsorships unless you secure a substantive speaking role and categorize the 5k run as a charitable donation or brand building exercise, not a business development activity.

Reduce the cost of goods sold.  The way to productize your offerings is to embrace legal project management and process improvement.  The techniques used to identify and reduce inefficiencies in the back office can be effectively applied to a legal practice.  When faced with flat or declining revenues, the sustainable way to maintain or grow profits and to defend against predatory competitors is to reduce costs at a faster rate.  If you’ve advised 100 clients on over 1,000 class action defense lawsuits, what are the specific factors correlated with defeating class certification?  If you’ve filed 500 appeals with the state’s regulatory authority, what are the specific steps correlated with success?  Whether in litigation or transactions, there are repeatable steps on the critical path to success and excess steps that may be deemed helpful or necessary by risk-averse lawyers, but are not statistically relevant to risk-taking clients.  If all tasks in all matters are of high value to the client, then your realization rates would approach 100%.  If your realization rate is lower than 95% (or closer to the new normal of 85%) then by definition you are billing for steps that are either unnecessary or that the client deems unnecessary.  Learn how to talk to clients about budgets on every single matter — how can you possibly employ strategic pricing otherwise?  Undergo a rigorous examination of your processes and develop project plans that reflect successful and profitable approaches.

Invest in knowledge management.  Back in the day, knowledge management (KM) meant writing summaries of notable briefs and memoranda and indexing and filing them away in a database for later retrieval in order to save time, which combined a task that no one liked with a result that no one wanted.  KM should be synonymous with a learning curve, or the economic principle that what we’ve done multiple times we can do more efficiently.  If your pricing analysis tells you the maximum market appetite for service X is $5,000,  then find ways to produce and deliver service X for far less than $5,000, relying on past experience to inform the process.  Poor leaders believe KM is a technology problem and will invest millions in tools that the lawyers happily ignore, but wise leaders recognize this as primarily a cultural problem.  Also, if you’re lamenting the decline of associate training fully funded by clients, you’ll be pleased to learn that a KM culture both accelerates and improves associate education.

Don’t guess.  Forecast.  In countless practice group retreats I hear the same goal: “We’ll grow the practice by 20% next year.”  Yet inevitably there is little rigor applied to the target, let alone how to achieve it.  Businesses thrive on certainty and generally value repeatable revenue streams over one-time transactions, and corporate budgeting is a never-ending exercise to identify revenues and expenses.  No business can operate without a clear sense of its working capital, cash flow and resource needs.  Yet most law firms employ lagging indicators such as profits per partner to determine fiscal health.  That’s like driving a car until the gas tank is empty to determine the gas tank’s capacity, which is then retroactively applied to the prior day’s agenda to see if we should have refilled the tank before embarking upon a series of errands or perhaps scheduled fewer errands.  Create and maintain a sales pipeline, applying simple methods to target the right prospects and predict not only future engagements but the resources needed, the likely cash flow and potential profits. Implement zero-based expense budgets and hold everyone accountable.  Measure the ROI of marketing investments, and not just the ad campaign but identify the partners whose entire “marketing” spend consists of taking the same clients or law school pals to sporting events with no discernible incremental business resulting from the expense.  Not sure how?  Select a client, any client, and ask them to walk you through their revenue and expense forecasting process.  But buckle in first, as it will be quite a jolt.

Measure client satisfaction constantly. There are many ways to do this.  Hire a consultant; send your managing partner on the road; ask your CMO to conduct interviews; conduct an annual satisfaction survey; conduct an end-of-matter survey after every matter.  Whatever you do and however you do it, study it, sustain it, and act on it.  Most law firms are “too busy” to systematically gather client feedback, naively believing good legal work speaks for itself.  Many who claim to care sit on findings that are too challenging to address, e.g., toxic rainmakers, institutional overbilling, etc.  Even those who measure client satisfaction effectively well tend to do so at too-infrequent intervals.  Take a cue from Disney, Ritz Carlton, even the local hairdresser — know why clients hire you, know why they don’t hire you, know why (and when!) they fire you, know what you do well and what you can improve.  Know these explicitly and implement programs specifically designed to improve performance.

Compensate for retention and profit.  Partner compensation is often described as the third-rail of law firm management.  We can talk all day long about changing the law firm model and improving client satisfaction, but nothing changes unless the partners are compensated for doing so.  Sadly, lawyers often must choose between personal wealth and client satisfaction.  Hogwash.  Partners will obviously act in their own self-interest when there is no alterntative. So let’s give them some alternatives that tie improved compensation to improved client satisfaction.  Long-term client value always trumps short-term transactional profit. Huh? Said differently, satisfied clients will generate higher profits over a longer period by lowering the cost of sales (retaining existing clients is always less costly than acquiring new clients), because of a reduced learning curve (see above), because of steady utilization and because many-to-many relationships between firms and clients magnify these benefits.  Contrast this with over-billing a client on a single matter, generating short-term billable hours and high profit, but resulting in client defection and constant utilization peaks and valleys.  Huzzah, the partner hit her billable hours target… but was doing so good for the law firm?  Businesses deal with these compensation conundrums every day.  Do we reward the high-volume hunter salespeople who bring in the most new clients but also the most unhappy clients (because of a poor fit) and who require the highest commissions?  Or do we reward the farmers who nurture key clients over time but generate less incremental revenue?  Do we compensate more for selling high-margin products, often because there is little competition, or do we compensate more for selling low-margin high-potential products, because gaining market share is more critical?  Do we compensate for profits, even though salespeople have little influence on the cost of goods sold?  It may seem complex but relatively simple calculations can help us identify the optimal approach.  At present law firms tend to maximize one factor, originated hours.  By tweaking the formula, leaders can better recognize and reward lawyers who contribute at different points in the process.

Require leadership and management training.  There are terms and concepts above that may be unfamiliar to law firm leaders.  Indeed, many successful business leaders have strengths in some areas but not in others.  It doesn’t require an MBA to lead a successful business, but it helps to be consciously competent.  In other words, know why you’re successful and how to repeat it.  Many law firms and their leaders have been unconsciously competent for a long time — successful, to be sure, but no one is quite sure why.  We believed it was because we were good lawyers offering necessary services at a fair, albeit supremely profitable, price.  But as it turns out, years of unlimited demand for legal services may have been more of a factor than our own efforts — and when that demand disappeared, our best efforts failed.  I sat in a law firm executive committee meeting recently where the partners struggled to understand the nuances of corporate finance so they could better manage the inherent risk of alternative fees.  They were stunned to learn that others could understand, even explain, their law firm business model quite clearly.  They were more stunned to learn that by treating non-hourly fees as a risk to be minimized, they had eschewed significant profits on several sizable matters.  Your own mileage may vary.  But you don’t have to do it on your own.  There are educated people who are willing to teach law firm leaders these techniques, and there are many who are eager to join firms to demonstrate from the inside. Stop treating the law firm leadership track as a hobby.  Stop hiring administrators whose primary asset is not rocking the boat.  Cast aside, or at least gently nudge, the unqualified or uninterested from the corner office and replace them with committed leaders — at the firm-wide and practice group level — who have or will learn new skills and who will employ experts to advise them along the way.

Contrary to what you may have heard, the law firm model isn’t dead.  Nor is law firm growth.  But law firms and law firm leaders stubbornly adhering to outdated models are gasping for their last breath.  The modern law firm can thrive, but not if we pretend it’s still 2007.  Or 1995.  Or 1975.  The future is now.  You can’t do nothing.  Are you ready to lead?

 

Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change.  To inquire about his services, click here or contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com. – See more at: http://www.corcoranlawbizblog.com

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{ 11 comments… read them below or add one }

Ian Farmer July 11, 2013 at 12:48 am

Simple – Lawyers need to learn to sell.

Tea Hoffmann July 10, 2013 at 10:15 pm

Love this article and have passed it on to folks here at the firm. If only firms could “go back in time” and correct the mistakes of the past, as these issues are much harder to address in the present and will get even harder to address in the future if they are not dealt with now. But, how on earth do you undo something like “coporate governance” without destroying the firm? Ideas?

Mike O'Horo April 16, 2013 at 10:24 pm

Jonathan,
The reason “evolve or die” hasn’t caught on is because the “or die” is too easily deniable. Even with the handful of recent high-profile law firm dissolutions, they’re still too infrequent, and associated with too few criteria, to put a dent in humans’ limitless capability for denial. “It won’t happen to us.”

To prove this thesis, in my sales training workshops I’d ask lawyers, by show of hands, how many were certain that some day they’d die. They all chuckled and raised their hands. I’d have them keep their hands raised, and asked them to lower their hands only if they’d already made whatever arrangements their personal beliefs prescribed for their death. Always, 65-75% of the hands remained raised.

Jonathan Marashlian April 16, 2013 at 9:29 pm

Brilliant article. Some firms “get it.” Others don’t. Some never will.

I’m rather Darwinian, so nearly a decade ago, the decision was made to “evolve or die.” And we evolved, essentially using two of the concepts Tim outlines. First, we identified services that are repeatable and we began offering these at fixed fees. We evolved even further in the past 5 years and now offer many of these “commodities” through our affiliated consulting firm. Second, we live by the simple philosophy that we can deliver value to clients by putting the right people on the right task for the right price.

It’s surprising more firm leaders are not persuaded to evolve or die. Though, as a competitive business, we are happy that more have not. In fact, Tim, may I please request that you erase your article? The less competition in the law firm client customer service department, the better (as far as we’re concerned)!

Mike O'Horo April 1, 2013 at 8:16 pm

Great stuff, as always, Tim.

In virtually every discussion I read about the evolution of the business of law, two factors are almost always absent:
1) Division of labor
2) Professional sales force

The first refers to law firms’ inherited habit of having every senior lawyer responsible for too many functions, e.g., marketing, sales, task performance, task management, team/unit management, firm management (contribution), billing, collections, and major account development.

Nobody could possibly have all the skills to to this. As a result, many things are done poorly, or not at all, by those ill prepared or not interested, while those better suited and more interested in contributing in those ways are precluded from doing so. Even if by some miracle firms found a supply of omni-talented people, how could any of those rarities possibly find the time to apply all those diverse skills? Partners’ fixation on PPEP is a major obstacle to changing this, because it discourages them from recognizing that many business functions require actual skills and experience not usually acquired in the normal practice of billing 2000 hours/year, and therefore, seeing value in those who possess such skills. As a result, they can’t conceive of paying people to do them well and reliably.

The second is the legacy of relying on a part-time, volunteer, untrained, unmeasured, unmanaged sales force. In a Seller’s Market, that worked well enough. Witness the 40+% profit margins that were the norm throughout what AmLaw called “the golden age of law firms.”

In a fiercely competitive Buyer’s Market, that’s just not going to cut it. “Saleslawyers” have become accustomed to the equivalent of having their cake while eating it: They get rewarded for producing results, but there’s no penalty for not producing. No risk, all reward. Where else does that happen?

Whether the sales professionals are formerly-practicing JDs whom the firm trains properly and manages prudently, or non-JD sales professionals who team with JDs in a manner similar to the way the enterprise software industry sells, i.e., a sales pro teams with a heavy techie. The sales pro brings the decision process credibility, and the techie brings the solution credibility.

Here’s a simple test for those with thick skin. Approach executives at some of your larger clients and suggest to them that they eschew practices #1 and #2 above. See how they react. Do it today, though, because you’ll need the cover of April Fool’s Day as a face-saver.

William Washington March 31, 2013 at 1:52 pm

Tim,
Great article and very thorough. I am a Six Sigma Black Belt performing a finance function for a law firm. My background in finance/pricing in consulting has exposed me to many pricing strategies that are based on the value perceived by the client. I think your points about reducing inefficiencies, reducing cost of goods sold and measuring client satisfaction are all things law firms should embrace and tackle. “MUDA” or waste can be found in every process and your point about identifying repeatable processes across matters means the opportunity to improve margins can have an exponential impact.

Timothy B. Corcoran March 29, 2013 at 11:37 pm

Excellent feedback, Howard. I believe law firms can and do deliver valuable services, and the modern law firm can be even more profitable than today. A key challenge is determining the relative value of the offerings without resorting solely to measuring the cost of production, a.k.a. lawyer hours.

By way of example, in my corporate life I was once directed to conduct an audit to determine whether my exempt and non-exempt employees were properly classified and that we weren’t inappropriately (I’m conditioned by long practice to not say “illegally”) withholding overtime pay, an action prompted by a costly error in another division. I didn’t have any budget for the project but I could certainly peg the financial risk of not acting — which for the other division was many millions. The lead law firm partner on the engagement could have quoted a rate that covered the usual audit activity, which was relatively straight forward work with a scope primarily influenced by the number of different job types under review (obviously I’m no expert, but the work was primarily studying job descriptions and interviewing employees to determine where the actual work differed, and comparing the result to some standard litmus tests to determine job classification), but he refused, billing me instead after the fact for hours that HE knew would fall within a certain range with a high level of confidence, but that I had zero basis for estimating. It was astounding to me that my in-house legal department hired a firm that had NO IDEA whether this would take 1 week or 10 weeks, 10 hours or 1,000 hours. And we hadn’t even addressed the cost of remediation should we learn that some employees were misclassified. I don’t recall any of the actual figures now, but I would have been quite content with a fixed fee that comfortably addressed the work necessary to complete the audit, even if that number proved to be larger than the resulting hourly-based fee, because I was looking for predictability — I had to re-prioritize several projects to pay for this, after all, and it was critical to know how deep the cuts would be. Not only did the partner fail to ask a single question about my budget or the impact to me of not acting, he was fairly dismissive when I asked for a fee range. He said it was absolutely impossible to give an estimate given the many variables and uncertainty of the outcome. The anecdote is intended to convey that (a) my primary need was predictability, not lowest cost; (b) the partner, despite being hired based presumably on some experience in the area, wasn’t able or wasn’t willing to demonstrate any subject matter experience at all when laying out the project, which left me wondering why we didn’t just select a cheap provider; and (c) the dissatisfaction I felt, which had nothing to do with the outcome (my staff was properly classified, a result I can’t take credit for since the job designs preceded my arrival) guaranteed that this firm did no more labor work for me for the duration of my time at this company.

If that partner were a client of mine today, I would help him break down the matter into two steps – audit and remediation – and then break down each step into smaller parts, identifying the lowest-cost resource who can do the work properly (the leverage you speak of) and then create a decision tree with probabilities that he could complete with each client, at once informing the budget range and demonstrating his significant expertise. At the very least, we could establish a fixed fee for the audit step because it has easily identifiable variables, allowing us not only to generate a profit delivering the work, but also to forecast the profit. This process can be repeated again and again across all practices and matters. Sometimes, as perhaps with the remediation stage, there is little predictability so hourly billing is a better option, but the point is to price strategically based on the client’s perceived value and staff appropriately to ensure a profit.

As for laterals, I have no objection. If you can court a lateral with a portable book of business, and the net effect is additive (i.e., the revenue streams can be profitable given the firm’s resources, the new clients/matters have significant cross-sell potential, the work lost through new conflicts is outweighed by incremental revenue) then go for it. But also recognize that job #1 is to institutionalize those clients as soon as possible so if the partner moves again the clients stay… and this means selecting laterals who are openly willing to accept this arrangement.

Lots more to say but that’s enough for now. Happy to address in a subsequent post. Also happy to engage in a back and forth in a post. My goal is to inform, and there are certainly many valid and qualified perspectives to share.

Howard sloan March 29, 2013 at 10:12 pm

Tim obviously has a great deal to add to any law firm and its method of management. I am still confused about what business model he thinks is best. After a number if years as co managing partner and struggling with the concept of law being a business I have come to the conclusion that the typical North American law firm business model is a dead end. I would put forth the argument that any business that cannot provide the owner with a fair and reasonable price for his business after 25 or 30 years of practice is inherently faulty. I understand a great deal about why service businesses like law practices can’t provide long term security. But that doesn’t mean I have to accept it as a given. To have a proper business model you need to have a very restricted ownership pool otherwise it’s more of an association of lawyers working together to benefit his or her bottom line in the production of the work that he may bring in or do. The old concept of leverage is still valid, however it is increasingly difficult to find a firm that has so much work coming in that the only challenge is to find a way to get it out the door at the lowest cost i.e. young associates. Now the concept of leverage has to be laterals. Laterals can almost always result in some profit to the partners if managed well. The future of a law firm business model is akin to the manner in which real estate houses operate or insurance sales conglomerates. Gather the laterals and keep them as such. Don’t turn them into partners and fear not their defection. That’s your business. Attract them and keep them and make a profit. The synergies will keep everyone happy and productive and will help fill the ranks with young energetic lawyers to take over the practices and grow. I haven’t heard this from Tim. In fact he cautions against laterals. I’m sure that this comes from experience but nonetheless it’s the only meaningful model in the context of the real business world.

Steve Lauer March 29, 2013 at 3:08 pm

Youi makd esome excellent points, Tim. I particularly like your suggestion of strategic pricing based on the client’s perceived value. (I suppose that it’s not coincidental that my approach to value-related pricing, using Value-Related Qualities or VRQs, sounds much like your suggestion.) Project management also has been underappreciated for many years, since even before I recommended it in an article in 1999.

Dave Maurer March 29, 2013 at 12:08 pm

Excellent piece of work Tim. The Measuring Client Satisfaction and Leadership and Management Training sections really resonate with me.

Bill Flannery March 29, 2013 at 10:12 am

Tim’s insights are spot on. This should be required reading for all law firm leaders.

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