Famed UCLA basketball coach John Wooden is credited with saying, “If you don’t have time to do it right, when will you have time to do it over?” Quite a lot lately I’ve been hearing a related theme from lawyers struggling with adapting to the new normal: “We can’t afford to get it wrong, but we have no budget to bring in help to get it right.” They refer, of course, to the age-old tendency to suffer with the devil you know rather than take the costly path — in financial, time or distraction terms — of trying something new. How do we know when it’s time to devote energy and resources to adapting to the changing legal marketplace? What indicators should we watch for to indicate the tipping point is upon us? The stark reality is that when it’s abundantly obvious to everyone else, it’s far too late to gain a competitive edge. It may also be too late to survive.
I’ve written previously about the cost of doing nothing. Simply put, any organization should establish an explicit trajectory for its financial performance. We made $x last year, next year we will make $y and the year following we will make $z. This isn’t voodoo, it’s a calculation based on key performance indicators, both internal and external, that results in a forecast, with ranges based on our confidence in the underlying data. Most businesses operate with some combination of recurring revenue streams and transactional revenue streams. In a law firm, repeatable revenue may take the form of retainer arrangements, with established financial commitments for a fixed period of time. But long-term engagements such as a complex litigation matter that spans multiple years and provides recurring billable tasks can be forecasted with some confidence. At the other end of the spectrum is revenue associated with new engagements or new clients. We may know our historic success rate at cross-selling existing clients, and we may know our historic success rate at winning beauty contests for new work, but there are many unknowns so our confidence to forecast this revenue isn’t nearly as high. The point is, one way or another healthy organizations have a clear sense of their financial fortunes and the factors which will impact, positively or negatively, that trajectory. Without it, how can you possibly know if you’re on track or off track? Like the family that piles into the SUV for a an old-fashioned driving vacation, if you leave without a map and without a destination in mind, how will you know if you’re lost or behind schedule?
Based on my long experience providing strategic counsel to law firm practice groups, many readers are shifting uncomfortably as they realize they lack a map, though luckily they have a clear destination. Allow me to drop a wet blanket by suggesting that meeting or exceeding last year’s PPeP is not a destination. It’s an outcome. And it’s an outcome we can influence through a variety of financial shenanigans that mask significant under-performance. It’s like stating that our vacation destination at day’s end is a nice hotel in a nice location, and strategically manipulating our speed, direction and restroom breaks to ensure that at day’s end we have arrived at a location meeting our vague objectives.
Time to be more direct. The world has changed. And no, law firm partners, despite the perverse incentives of hourly billing, despite the $1,000 an hour rates charged by some “rock stars” and despite the supposed culture of bill churning by some, you didn’t cause this seismic shift. The balance of power would have shifted eventually. It’s an economic reality that all goods and services are on an inevitable and inexorable march toward commoditization. Buyers always, and I mean always, seek lower costs for the goods and services they need, and failing that they will seek substitutes. It’s an economic certainty that circumstances change. It’s also, sadly, a certainty that some players refuse to acknowledge that change is possible, let alone that change is upon us. And this is what causes the reluctance to adapt. The legal marketplace adds a few multipliers to this impact: lawyers are generally risk-averse, so working harder at what we know is far easier to absorb than embarking upon a risky new approach to practicing law; and the constant reliance on precedent makes it more difficult to recognize alternative courses of action because we’ve never seen any.
Time for the upside. Every industry on the planet, including other professional services segments, have found ways to survive, and often thrive, in the face of a changing climate. There are lessons to be learned from others. In short, law firms can rely on deep subject matter expertise to create competitive differentiation; lawyers can charge profitable fees based on the value of the outcomes rather than the cost of production (a.k.a. hours); lawyers can deliver services in the way they know best without clients meddling in the process (e.g., no more restrictions on young associates assisting in matters); lawyers can significantly improve client loyalty through service and work product quality, and not merely by offering discounts. Don’t know how? Get in line. It’s not that challenging, but you’re not expected to know how instinctively, or to read a blog post or two and grasp the nuances. But you may have to spend some time, and spend a few dollars (or Euros, or Pounds Sterling, for my global clients) to get the help you need.
In a recent conversation, a partner lamented that his practice group’s realization rate was 6 points below its all-time high, and 3 points below the firm’s average. The net effect was a loss of between $8M and $12M in top line revenue in recent years, despite the same lawyer headcount and the same mix of rainmakers and service partners. However, the practice group chair was unable to spend any money on a consultant to help address the problem because the management committee had forbidden any extraneous expenditures in order to preserve profits… even investments that would restore the realization rate! Predictably, the several consultants who were invited to participate in the practice group retreat on a pro bono basis were forced to decline the kind invitation. A variation on this theme is the request to provide an outline of topics the lawyers can discuss amongst themselves at a retreat, a request I receive several times per month. My impertinent response to such requests is to ask how often the firm’s lawyers agree to such an arrangement with clients: “Yes, Mr. CEO, we are quite familiar with high-stakes securities fraud investigations and we’re sorry to hear that you and your management team are under indictment. However, we’ll send over a couple of our client alerts with some insights that might prove helpful, and maybe we can spend an hour over lunch giving you some tips so you can handle most of the lawyering yourself. After all, you’re smart and this isn’t all that complicated.”
Some of you may be chuckling at how preposterous this sounds. I assure you, it happens all the time. More challenging is that clients know that some law firms are actively resisting change, and they’re shaking their heads in despair and disbelief. Despite what you may have heard, nearly all in-house counsel and corporate executives I work with are quite happy for their outside counsel to be happy, thriving, profitable businesses. In fact, many of them need just as much help adapting to the new normal and they’re desperate for trusted advisers to provide guidance along the way.
If you don’t have a clear sense of your firm’s financial future and the factors influencing that future, how will you know if you’re on track? If you don’t have a plan to adapt, how do you expect to compete with the many firms who are devoting significant time and energy to delight their clients… and yours? If you don’t have the answers but refuse to spend time, energy or money to find the answers, what are you saving for? The rainy day is upon us. Now, more than ever before, the cost of getting it wrong is far higher than the cost of getting it right.
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 firstname.lastname@example.org. – See more at: http://www.corcoranlawbizblog.com.