Realistic Approach to Innovation in Law Firms: Collaborate with Your Best Clients

Posted on April 24, 2014 by Sterling

We addressed innovation (disruptive and otherwise) in a series of articles last summer. The topic is certainly not resolved as evidenced by the many posts responding to and expanding upon a recent discussion of disruptive innovation at Harvard Law School. Both that Harvard Law panel and the subsequent responses to it have underscored (at least for us) the need for some pragmatism as law firms invest in innovation – and perhaps a refresher on some fundamentals regarding disruptive innovation.

Fundamental Truths

Let’s start with some fundamental truths about disruptive innovation.

Disruption is happening in the legal industry. The longer it takes you (and your firm) to recognize that fact, the more vulnerable you are to disruptive competition.

Disruptive innovation is rarely a pure technology play (i.e., disruptive technology directly displacing existing, presumably people driven, competitors). Rather, technology enables new business models that disrupt incumbent competitors – generally by targeting “over-served” customers (see Clearspire, Axiom and other LPOs) or entirely unserved customers (see Legal Zoom).

Incumbents rarely succeed in adopting disruptive business models – mainly because it cannibalizes their existing business and their margins. Michael Raynor’s Innovator’s Dilemma explores the data at some length and concludes that incumbents are highly successful at sustaining innovation, while new entrants excel at disruptive innovation.

Source: Michael Raynor; Innovator’s Dilemma; Crown Business; 2011

Raynor’s findings are unsurprising if you think about them in the context of today’s sophisticated law firms. For instance, if a firm were going to adopt the disruptive model(s) at work at firms like Axiom and Clearspire, they would need to be prepared to get rid of 80-90% of their current office space, half or more of their associates, and a likely a majority of their partners (equity and non-equity) as well. Who is ready for that kind of change?

Rather than trying (almost certainly unsuccessfully) to imitate the disruptive innovators, incumbents have a couple of reasonable alternatives.

First, incumbents can (and in some markets do) acquire a disruptive competitor. To make that acquisition work, the acquired entity needs to largely be left alone by the incumbent parent (i.e., it provides a source of new revenues and perhaps a place to direct lower margin work, but it should not be integrated into the traditional business).

Alternatively, incumbents can co-opt a disruptive competitor – outsourcing activities to them that are done better (and usually much more cheaply) in the context of the disruptor’s business model. In this scenario, the revenues are lost, but the relationships are preserved (and possibly strengthened).

So, am I arguing that large and mid-size incumbent law firms should give up on innovation and surrender to the disruptors? Heck no. There are tremendous advantages associated with being a high service, high value incumbent service provider. However, to survive, evolve and prosper over the long run, you will need to innovate – pragmatically.

Pragmatic Approach to Innovation

We provided some background and some examples of an innovation model (co-creation) here and here. In addition, we talked at some length about the growing importance of non-lawyers in successful, sophisticated law firms here. All of that can be put together in a pragmatic approach to innovation.

Consider launching a pilot innovation program following these basic steps.

Pick a client with whom you have a broad (i.e., multiple practices, multiple partners), deep (i.e., significant volume and revenues), and warm (i.e., mutually trusting) relationship.

Empower (and hold accountable) your firm’s senior business development person (or your managing partner if you do not have a highly experienced and polished BD person) to start a dialog with that client. Note that this dialog may require multiple conversations with multiple people in the client organization. The dialog should include the following topics.

A review of the work the firm has been doing for that client over the past three years with an emphasis in the discussion on two topics: 1) what was the best work, the work where the firm delivered the most value; and 2) what was the most disappointing work, the work that fell short of expectations for value?

A discussion of the work the client is doing in-house with an emphasis on who is doing that work (e.g., level of experience, lawyers or not, etc.); what costs are associated with that work (e.g., salaries, benefits, bricks and mortar, etc.); and why the work is in-sourced (e.g., value assessments, risk management trade-offs, etc.).

A discussion of the work that the client is sourcing to other law firms and contractors. That discussion should focus on categorizing work that is going elsewhere because: the competitor delivers at a cost/value that is hard to beat; the competitor has irreplaceable expertise and/or experience; the competitor has tenure, a long standing relationship, or other intangible reason(s) for having that work.

What new legal issues and/or projects are coming down the pipe?

That client input should lead to analysis with/by the client service team. That analysis should focus on the full portfolio of legal issues, matters and risks the client manages. The analysis should include (at a minimum):

The volume of work associated with each category of work;

The cost sensitivity of that work;

The risk profile associated with the underlying legal issues;

The level of expertise/specialization needed;

The firm’s current capabilities in each area;

The firm’s ability to improve the value the client currently captures (e.g., via process, people, technology improvements).

In turn, that analysis should lead to a plan of action and recommendation to the client for each substantive category of work within their portfolio. There is a broad range of outcomes you may recommend for each category of work:

Some things should continue largely as is (status quo, whether done by the firm, the in-house team, or someone else).

Some things should continue to be done by your firm, but with a new approach, model, or set of tools (e.g., KM, project management, other).

Some things may call for a more robust in-house team – that may include moving things out of your firm to the client’s in-house team.

Some work should probably be moved to your firm (either from in-house resources or from other firms – be prepared to demonstrate the superior value you will deliver as a result of that change).

Some work should probably be moved to others – either to low cost vendors (some that you will manage and some that your client will manage) or to highly specialized experts.

Finally, those recommendations and the related plan should be presented to the client’s team – ideally by a team from your firm (e.g., relationship partners, selected legal experts, selected functional area leaders, etc.). That presentation should include a discussion of the investments the firm is prepared to make on the client’s behalf (e.g., new technology, tools, process improvements, etc.); the cost implications associated with managing the portfolio of work as recommended (presumably a reduced total cost, improved total value, and/or a reduced risk exposure for the client); and the benefits the client can expect from adopting the recommendations.

Now, there will almost certainly be additional dialog – some changes may not be easy for the client to make (for instance, they may not want to make additional in-house hires and/or make in-house lay-offs). But, the net outcome should be a stronger relationship – greater transparency and trust – and ultimately, more work done by your firm at sustainable (and presumably improved) margins. Most importantly, it will lead to continuing (i.e., sustaining) innovations on the portfolio of work your most prized clients turn to you to execute. And that it a pragmatic form of innovation that you can control and do with a high probability of success.

Ensuring Practice Group Effectiveness

Posted on March 7, 2014 by Sterling

Our joint research project with the Managing Partners Forum continues and our topic in February 2014 was practice group management. Specifically, are there particular responsibilities practice group leaders should be taking on in order to drive effective practice management? In addition, what kinds of base level support are firms providing to practice leaders (e.g., job descriptions clarifying the role, training for leaders, etc.)?

At the core, we found that firms experiencing higher levels of success with practice group management have different (and higher) expectations for their practice leaders. Firms reporting the highest levels of success with practice group management ask their practice leaders to take on more responsibilities – the most common responsibilities in more successful firms can be summarized as:

Strategic planning for the group;

Work flow management (right people on the right matters at the right time);

Coordination and encouragement of teamwork, esprit and morale;

Coordinating and encouraging marketing to new clients;

Coordinating and encouraging professional development and training.

Those top responsibilities are depicted graphically below.

A complete documentation of the results of this survey on practice group management can be found at the Managing Partners Forum web site. We welcome your questions and feedback regarding these findings.

Our March 2014 research focuses on best practices in law firm strategic planning. Highlights will be presented here, a full write-up of results will be published at the Managing Partners Forum, and a more in-depth article will be developed for and published in the June edition of Legal Management magazine.

Talking with Clients: The Critical Role Non-Lawyers Need to Play

Posted on February 26, 2014 by Sterling

This article is a follow-up to a major section in our recent article Non-Lawyers: A Critical Success Factor for the Law Firm of the Future. Namely, when should non-lawyers – and specifically, business development professionals – be expected to interact directly with major clients? This follow-up is both informed and motivated by the comments, feedback, speaking invitations and other conversations that original article sparked.

To be clear, we are talking about non-lawyer involvement in communications with major clients. By major clients we mean that group of clients that (with the possible exception of the very largest law firms) fall into an 80:20 or 70:30 rule (i.e., the 20% of clients who represent 70% or 80% of the firm’s revenues). That especially includes clients for whom the firm provides multiple legal services (i.e., clients served by multiple practice groups). Even more particularly, that should include major clients who are using other law firms in areas where your own firm has demonstrated strengths (i.e., where your firm is not getting work from otherwise great clients in areas where your firm has exceptionally strong capabilities).

Are You Advocating Cutting Lawyers Out of the Relationship?

The short answer to that question is, “of course not.” So, let’s stipulate some things that may be obvious, but ought to be underscored nonetheless.

Lawyers are the primary contact(s) with clients for the delivery of legal services and the management of legal (and often other) risks.

Nearly 100% of current client relationships originated with a lawyer or team of lawyers – though in many instances, the “originating” attorney is no longer active in the practice of law (i.e., the client relationship pre-dates the current team serving that client).

Lawyers should (in fact must) remain integral to client relationships – maintaining, improving and growing those relationships.

The point is not that lawyers are set to be thrown on the trash heap of history. Rather, the point is that the efforts of client serving attorneys can be greatly enhanced and augmented by involving non-lawyer (particularly business development) professionals in client communications. Also, while a few firms are turning to (non-practicing) lawyers to take on these business development or client relations roles, the majority will be filled by professionals whose training and experience has prepared them to lead business development in a professional services setting.

So, How Can/Should Talented Business Development Professionals Be Interacting With Major Clients?

Business development professionals are (or at least should be) extremely well positioned to gather systematic, objective, constructive, deep feedback and input from major clients. That feedback gathering can benefit from the involvement of managing partners, practice or section leaders, or others law firm (i.e., lawyer) leaders. However, law firm leaders are generally too busy to maintain regular, systematic contact with major clients. Gathering that input via well-structured, extended conversations with multiple people within major client organizations is the starting point for non-lawyer interaction with clients.

Remarkably, relatively few firms are gathering feedback from clients (major or otherwise) on a systematic basis. Even in firms that are committed to gathering client feedback informally, many do not leverage the skills and experience of business development professionals to do so. Many firms on the smaller end of what we would consider to be mid-sized may not have a seasoned business development professional capable of leading that process (i.e., the marketing and business development function is staffed by people skilled in marketing communications and/or event planning). In that case, feedback gathering can be outsourced – frankly, the return on investment is outstanding.

With systematic, objective, constructive, deep feedback and input from major clients in hand, what should the firm do? There are several answers to that question.

Most importantly, firms need to use that client input to help the team of lawyers who serve the client on a day-to-day basis – together with lawyers who perhaps should be serving that client – to develop and implement a plan to expand the relationship. Seasoned business development professionals can and should facilitate this process (though it can also be outsourced if necessary).

That includes both deepening the relationship (i.e., doing more of what the firm is already doing for the client, ideally with a more engaged and informed team) and broadening the relationship (i.e., bringing other strengths of the firm to bear on behalf of the client – providing legal assistance in other areas where firm strengths align well with client needs).

That also includes tracking and coordinating implementation of those “client service plans” (which almost certainly should include metrics, action plans, and milestones).

In addition, that feedback needs to be used to draw other non-lawyers into the client relationship. In the current environment, client feedback often uncovers expectations and/or needs that require the assistance of IT professionals (e.g., extranets, connectivity, proprietary systems, etc.); knowledge management expertise (e.g., process automation, database integration, smart forms, etc.); project management expertise (which may reside at the firm and/or at the client’s organization); and finance expertise (e.g., cost analysis, creative pricing arrangements, etc.). Again, a seasoned business development professional should be able to bring this extended support team to the table and coordinate their efforts with those of the rest of the client service team.

The ultimate vision for non-lawyer interaction with clients ought to be somewhat akin to a more traditional marketing function in a corporate setting. In a corporate setting, market intelligence and customer input is used to drive an integrated marketing function that goes well beyond marketing communications and business development. Some may remember the “Four P’s” from Phillip Kotler’s Introduction to Marketing text books (i.e., Product, Pricing, Promotion and Placement/distribution). Gradually, the legal industry is moving toward this model. For instance, there are reportedly over 300 “pricing directors” at law firms now. Similarly, there are more and more non-lawyer business development and outright sales roles.

Ultimately, these roles need to be integrated and coordinated. Call the leader of that group the Chief Marketing Officer, the Head of Client Relations, or some other title. Frankly, the title is less important than the function, which is to bring the outside into the firm (e.g., client input, market intelligence, competitor intelligence, etc.) and to coordinate the firm’s response to that information in ways that (profitably) extend and deepen existing client relationships and establish new ones.

Partner Compensation System – What Drives Satisfaction (and Dissatisfaction)?

Posted on February 6, 2014 by Sterling

As noted at the outset of this year, Sterling Strategies has partnered with the Managing Partner Forum and TheRemsenGroup for a series of monthly mini-surveys of managing partners on topics of strategic importance to law firms and their leaders. It bears strong similarities to our 2012 “strategy question of the month” series – with the added benefit of a partnership with the Managing Partner Forum.

Our first topic – for the January 2014 mini-survey – was the drivers of satisfaction (or dissatisfaction) with partner compensation systems. The survey drew nearly 140 responses and the findings are informative.

Subjective systems, informed by objective data are the most common approach to setting partner compensation.
The overwhelming majority of systems are fully open (i.e., both performance data and compensation results are open to all partners).
The smallest firms encounter the highest levels of dissatisfaction.

See the full analysis of the partner compensation satisfaction survey at the Managing Partner Forum web site. The results of these monthly surveys will be published under the “Leadership Matters” tab on the MPF web site. We hope you find the results interesting and useful in your own firm.

Our topic for February 2014 is practice group management – and the approaches that lead to more effective (and less effective) practice management. The survey is open to all managing partners (we recognize many of our readers hold other leadership roles – we need to find a good way to tap the collective wisdom of law firm leaders who are not lawyers by training). If you are a managing partner and have two-minutes to share your experiences with practice group management, click here to be taken directly to the survey.

We welcome your feedback on the survey results and your ideas for capturing and sharing the collective insights and experiences of all law firm leaders. Improving law firm management and leadership is the primary purpose of this blog and we are always open to your ideas.

You can join our mailing list by clicking here.

Strategy Advice for 2014

Posted on January 17, 2014 by Sterling

Many smart analysts and commentators have made their predictions for the legal industry in 2014. LexisNexis compiled a number of predictions; the Future Lawyers Network made their predictions for the UK legal market; the Wall Street Journal legal blog made financial predictions; and the Time Blawg compiled a range of predictions around legal IT and marketing. Rather than add to that pile, we thought it might be useful to answer the natural follow-up question to the predictions. Namely, what should we do given the trends and likely future of the legal industry in 2014?

The short answer to that question is, “Do what your clients want you to do.” Taking that a step further, you will find three pieces of pragmatic strategy advice for large firms; for mid-size firms; and for smaller firms in the sections below.

LARGE AND MEGA FIRMS

There is a continuing stream of good advice available to larger firms – both solicited and paid for as well as unsolicited and offer via ALM, consultancies, and blogs. Much of that advice is well conceived – invest in technology, get knowledge management tools in the hands of client servers, adopt project management discipline on large scale matters, understand the growing importance of non-lawyers to your firm, and so on. That advice responds well to the mega-trends influencing the legal industry, and particularly larger firms. We would add three areas of focus for 2014.

Process Redesign – There are a number of buzzwords associated with process redesign (e.g., six sigma, lean process, re-engineering, etc.). Take a step back from the buzzword bingo card and remember what the clients are asking for – greater efficiency and predictability. Focusing energy on the so-called “golden triangle” of people-process-technology remains the best approach to improving efficiency. And, the analysis required to truly improve processes will lead to better pricing decisions and substantially improved predictability.
Partner Loyalty – Bruce MacEwan posted a couple of short, insightful articles around the turn of the New Year regarding people management (See Talent, Kill It; and See Talent, Feed It). The demise of major law firms can be traced – at the core – to a loss of partner loyalty. As partners depart via the back door, instability grows and the risk of a downward spiral increases. Ask yourself what cements partners to the law firm. Dedicate energy to strengthening the ties that bind partners to the law firm – particularly the non-monetary ties.
Client Focus – The largest law firms have built tremendous platforms that span geography, legal specialties, and industry expertise. You have to make sure your firm and your partners are harnessing that platform for the benefit of your clients. Is client work being done by the right people, in the right places, at the right rates? Do your people have the tools they need to make that happen? And critically, ensure that clients’ broader needs are well understood by the firm and that the firm’s ability to address those needs are understood by the clients.

MID-SIZE FIRMS

Recognizing that “mid-size” is in the eyes of the beholder – and therefore one size most decidedly does not fit all – we offer three points of advice for mid-size firms at the start of 2014.

Capitalize on Being “Big Enough” – LexisNexis (pdf) has found that large scale matters are moving to mid-size firms. That is a trend we have seen anecdotally at our mid-size clients for many years – now the data confirms it. To capitalize on the trend, you need to target large companies (ideally via personal/professional contacts you already have among your people), let them know what your strengths are, and emphasize the dual advantages you bring to the relationship (i.e., your firm is cost effective and lean and it has sufficient scale, sophistication and experience to hand complex matters). This window of opportunity will close – make sure your firm benefits before that window closes.
Portfolio Management – As a mid-size firm, you almost certainly have practice gaps. That is perfectly fine – you can’t and shouldn’t try to be all things to all clients. That said, your most important clients would probably like you to add selected capabilities. Ask them directly what legal issues they wish your firm could fulfill so they didn’t have to send it elsewhere. Filling strategic gaps is one of the biggest (if not the biggest) driver of last year’s record merger activity. Manage your portfolio of practices and fill your most strategic gaps in 2014.
Client Focus – Real growth, profitable growth, is available to mid-size firms from the relatively simple task of investing time off-the-clock to ask clients directly what challenges they anticipate and/or face today. Those conversations lead to better relationships, add to the existing flow of work from the client, and sometimes open doors for new types of work. Yet, remarkably few firms put any kind of discipline behind systematically gathering and acting on client feedback. If you don’t already do so, make 2014 the year you focus on asking clients about their business and their future (and of course, how you can help them achieve their goals and objectives).

SMALLER FIRMS

In many ways smaller firms have been insulated from the mega-trends influencing the legal industry. That was unfortunate in the go-go years, when profits at larger firms soared, but somewhat satisfying in the wake of large firm lay-offs and competitive pressures. That said, this is no time for leaders of smaller firms to be self-satisfied. Technology and non-traditional competitors threaten to erode work from small businesses and individuals, while the increased competitive pressures facing large and mid-size firms encourage them to hunt for work among your largest (and probably most lucrative) clientele. Advice for smaller firms for the coming year includes the following.

Focus – Know what your genuine strengths are (be honest with yourself) and build on that strength. In particular, ensure that your business development investments are focused on your existing strengths. The surest way to waste those investments is attempting to gain visibility (or new work) in areas where your firm isn’t genuinely strong.
Be Open – It is entirely reasonable to adopt a strategy that does not include mergers. In fact that may be the most advisable strategy (depending on your circumstances). However, you will learn something valuable almost every time you have lunch with the managing partner of a mid-size firm. And, you never know when you might run across a proverbial match made in heaven. Autonomy is great, but the legal industry is changing fast. Technology and other advances carry substantial costs. So, be open – to conversations, to learning, and to possibilities.
Client Focus – The need for active client focus is just as valid (if not more valid) for smaller firms as it is for the larger and mid-size firms. That is often easier for smaller firms – clients may be close personal friends and/or you may be their most trusted advisor. Maintain that active focus on clients as 2014 unfolds.

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Obviously, the common theme across all firms for 2014 is focusing on clients and their needs. As Peter Drucker observed 50 years ago, “The purpose of business is to create and keep a customer.” Everything else follows from that – make that your mantra for 2014.

Non-Lawyers: A Critical Success Factor for the Law Firm of the Future

Posted on December 5, 2013 by Sterling

Having great attorneys – well-trained, highly capable, hard-working and client focused – has long been a critical success factor for law firms. Strategically, it has become basic table stakes for competing effectively in the legal industry, particularly among more sophisticated law firms (i.e., BigLaw and BigEnoughLaw). The big change coming to the legal industry is the growing criticality of non-lawyers. Yet, it is currently an area in which many otherwise sophisticated law firms fail miserably.

Think about it for a moment. Where else (besides large and mid-sized law firms) do highly educated professionals get placed on such limited career paths, essentially for lack of a JD? Furthermore, what is it about obtaining a JD that qualifies a person as an expert in information technology, project management, business development, process redesign, innovation, knowledge management or really anything besides the law and precedent? As Bruce MacEwen astutely observed in his Growth is Dead e-book, “lawyers are inclined to assume they can do anyone else’s job but no one else could possibly do what they do.”

The very term “non-lawyers” is a peculiar construct of law firms. And, at many firms it is used in a way that devalues, even marginalizes, professionals who are not lawyers by training and education. Given the trends affecting the legal industry, especially the trends facing sophisticated law firms, those with a cultural predisposition that devalues so-called non-lawyers will be at a distinct disadvantage in the future. Consider three examples where non-lawyers will be critical to success.

Responding to Macro-Level Trends

The most obvious arena in which non-lawyers will drive the success or failure of law firms is in response to the macro-level trends influencing the more sophisticated segments of the legal industry. Richard Susskind’s book is called The End of Lawyers in large part because it foretells a future in which legal training and expertise are necessary, but insufficient for survival and prosperity. More sophisticated law firms will be (are being) forced by clients and competitors to embrace technology, knowledge management, project management, lean process, and other management tools more common outside the legal industry.

Successfully adopting any of those management tools requires attracting great people – well-trained, highly capable, hard-working and client focused – whose professional training is grounded in engineering, information technology, organizational psychology, management, and other fields. Their training and backgrounds will not include a JD or a background practicing law (with rare exceptions). Even in cases where those functional managers do have a JD, it will not be instrumental to the contribution they make to the success of their law firm.

In short, winning law firms in the future will attract (and will highly value) professionals across a range of professional disciplines. Attorneys will defer to the expertise these professionals bring to the table. And, attorneys will collaborate effectively with those professionals to apply their expertise to the firm’s practice and its relationships with clients.

Business Development and Marketing

Over the past twenty years, marketing professionals have been gradually gaining credibility and respect in law firms. Marketing and business development positions have been elevated within the management hierarchy and investment in the leadership positions appears to be rising. However, there is a long way to go to fully capitalize on the expertise of marketing and business development professionals in law firms.

As long as powerful partners can push marketing and business development professionals (and their own partners) away from direct contact with select clients, the firm is at a disadvantage and at risk. That risk includes the potential of losing the partner (and his/her clients) to a lateral move. Frankly, partners who keep others away from “their clients” raise a number of red flags. Beyond the risk of purely mercenary behavior on the part of a partner, a lack of broader contact risks the loss of the client relationship. Studies demonstrate that clients with multiple partner relationships and/or that use multiple practice groups are much more likely to remain with a firm. Further, that broader contact improves the probability that emerging and/or nagging problems (e.g., responsiveness, pricing, quality of work, etc.) will surface before a client shops their work to other law firms.

Looking forward, business development and marketing professionals will play an increasingly important role in a number of areas including: gathering genuine, actionable client feedback; expanding existing client relationships (e.g., facilitating cross-marketing); identifying opportunities to deepen and strengthen existing relationships via process improvement, technology, pricing and other innovations. Marginalize marketing and business development professionals at your own risk.

Delivering Cost Effective Legal Services

Perhaps the most challenging (or controversial) change coming to the legal industry is the inevitability of involving more non-lawyers in the direct delivery of client services. That growing involvement of non-lawyers will go well beyond (though it will include) the use of paralegals over the next five to ten years.

Ask yourself a few questions (thought experiments if you will). Who is a better value to clients in managing document discovery, a well-trained paraprofessional with expertise in IT, database searches and document management or an associate earning three to four times the salary (with less grounding in large scale document management)? Can a $60,000 per year professional with a finance degree add value to a transactions team (perhaps many times more value than a junior associate)? Can a trained actuary add value to risk management assessments for major litigation clients?

Certainly, some firms have already made great strides in the use of non-attorneys in the delivery of legal services. For instance, the best IP practices and firms are loaded with PhD and Masters level technical specialists. In the future, firms across the practice spectrum will be challenged to become much more creative in integrating non-attorney professionals into their client service teams. That will be especially evident in practices where clients and/or competition drive the market toward more cost effective solutions.

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So, if your firm still has a culture that devalues non-lawyers – that doesn’t draw upon the knowledge and expertise of other professionals – you better get started on changing that culture. No silver bullet (technology or otherwise) will save you in the long run if the only voices that matter in your law firm are attorney voices (or even more narrowly, partner voices).

Intentional Management: Saying What You Mean and Doing What You Say

Posted on November 14, 2013 by Sterling

Over the past year we have noticed an important word showing up more often in the strategy deliberations of our law firm clients. That word is intentional, literally meaning “done in a way that is planned or intended; thoughtful; deliberate; goal-directed.”

Frankly, we could not be happier to see our clients embrace the term intentional to describe strategic and managerial priorities. For far too many law firms, for far too long, many aspects of firm and practice management have been anything but intentional. On the contrary, many firms – including many with smart, well-conceived strategic plans – accommodated highly autonomous action on the part of practices and (especially) successful partners. Firm strategy was essentially subservient to the needs and interests of individuals and small groups within the firm.

In his landmark article “Patterns in Strategy Formation,” (pdf) Henry Mintzberg accurately characterized this as the strategy of “muddling through.” This approach is inherently reactive and leads to continual bargaining vis-a-vis priorities and goals. As a result, strategy is fragmented and often reflects the narrow interests of powerful individuals, rather than the proactive pursuit of best opportunities available to the organization as a whole. Sound familiar to anyone?

What do we mean by “intentional management?” It simply means saying what you mean (i.e., being clear about the direction the firm is heading and the priorities it will adopt in its pursuit) and doing what you say (i.e., following through on those priorities). Now, it is easy to define intentional management, but more difficult to live it. Living it requires linking strategy across and through the firm.

It also requires actively managing, monitoring and measuring progress toward the firm’s primary goals. Passively waiting for annual (or less frequent) partner compensation discussions is not sufficient. There need to be clear commitments to action at the firm, practice, departmental, and individual level. And, the whole endeavor benefits immensely from tracking what is working (and what is not working) via outcome measurement.

After all, we adopt strategies and implement those strategies with particular outcomes in mind (e.g., revenue growth, improved realization, stronger client relationships, a more effective work force, etc.). If we are following through on our commitments (i.e., managing intentionally), then we can use outcome measures to identify what is working, make appropriate adjustments, and challenge the strategy when circumstances dictate.

Intentional management applies to virtually every aspect of the law firm. For instance:

We need to be intentional in our approach to people management – especially in recruiting, training and professional development.

Client relationships benefit from intentional management. That is particularly true for relationships threatened by clients’ demands for greater value and/or cost reduction (e.g., where project management, knowledge management, or other aspects of the ACC Value Challenge are in play). It is also true of relationships that can benefit from greater breadth and/or depth (i.e., where others in the firm can help substantially in cementing the client relationship).

It is certainly a requirement for effective business development if that is going to be anything more than heroic individuals going to market on behalf of the firm. Any meaningful targeting, leadership in industry segments, and/or team-oriented selling is a function of intentional management.

Pricing decisions (e.g., rate setting, creation of alternative fee arrangements) and other basic economic decisions (both revenue and cost related) benefit from intentional management.

Finally, the ultimate decision of who owns the law firm (and at least here in the US, that means who becomes and remains an equity partner) should be driven entirely by intentional management.

So, three cheers to the firms out there embracing an intentional approach to management. It will serve you well as the legal marketplace becomes increasingly competitive.

Five Tips to Better Align Budgets with Firm Strategy

Posted on October 18, 2013 by Sterling

Most law firms are deeply in (or about to enter) budget season. We surveyed law firm leaders last year regarding best practices around budget development. As a seasonal follow-up to that survey, we offer the following five tips to improve the alignment of law firm strategy with annual budgets.

Engage Practice Group Leaders Directly in the Budget Development Process

A surprisingly high percentage (44%) of firms in last year’s survey reported that they do not build budget projects from the practice groups up (i.e., direct costs, gross revenues, realizations, etc.). The budget development process provides an excellent opportunity to cascade firm strategy (and strategy implementation) to the practice group level.

Engaging practice group leaders in budgeting – in thinking about cost drivers, revenue drivers and factors that contribute to client satisfaction (which often translates to realizations) – helps to “connect the dots” for people. It highlights how strategies are being operationalized in the practices and makes those connections tangible in financial terms.

Budget for R&D

What does the average partner (i.e., the partner not involved in management) think about budgets? Mainly, he/she wants the firm to beat its budget so that distributable income is higher than projected – creating a pool of funds that can pay partners more than their “expected compensation.”

By explicitly budgeting for R&D (both time investments and direct costs), the tension between partners’ desire to distribute all income at year end and the firm’s need to invest for the long term is mitigated. Essentially, R&D projects should be prioritized along with other investments (see the next section). At year end, assuming the firm had a good year, everyone is happy. The firm has made needed investments for its future. The partners get distributions above what was budgeted.

Prioritize Budgets in Financial and Strategic Terms

Law firm leaders (especially COOs and CFOs) are very comfortable thinking about projects and initiatives in financial terms. Projects with high returns on investment (ROI) and/or fast payback are a higher priority than low return projects – a blinding glimpse of the obvious (a la Barbarians at the Gate).

In addition to the financial perspective, we recommend adding consideration of the expected strategic impact of a project to the prioritization process. Essentially, projects that contribute to multiple strategic goals (i.e., that are more “mission critical”) are higher priority initiatives. For example, a Knowledge Management project may contribute to achieving goals associated with client satisfaction; improved efficiency/value; and improved predictability. Contrast that with a project to reconfigure office space – which may have a high ROI, but relatively little strategic impact.

Prioritization across both dimensions (financial and strategic) yields added clarity on what the priorities really need to be across a range of projects – and may even lead a firm to delay or spike selected projects.

Validate Revenue Projections by Taking a Client (bottom-up) View

Revenue projects are (more often than not) built on the basis of headcount, anticipated hours, and rates (i.e., FTE x Hours x Realized Rates = Gross Revenues). That is entirely logical and appropriate. However, a nice check on that approach is to look at revenues from a client perspective.

At many firms, the top 50 clients (plus or minus) represent a substantial share of total revenues (often well over 50%). By asking relationship partners what those major clients are expected to do in the coming year, a firm can help to validate its revenue projections. If most of the major clients are expected to continue to generate similar or higher revenue streams, great. However, if revenues from important clients are expected to fall (e.g., a major case has been resolved, the company has been sold, etc.), it may lead the firm to make important adjustments to its budget.

Align with Other Metrics – Financial and Non-Financial

Last December we asked law firm leaders where they had reliable metrics and where they did not. Over 95% of firms have solid, reliable financial metrics. Metrics associated with client satisfaction, people development, and business processes are more spotty – though those kinds of metrics do exist on at least a limited basis.

The budget process provides an opportunityfor firm and practice group leaders to think about and revisit financial and non-financial metrics. Essentially, it is an opportunity to ask the question, “If we make or exceed this budget, will we also achieve our other measurable objectives?” Similarly, it is an opportunity to ask, “Are the financial and non-financial metrics we have adopted to track the success (or lack thereof) of our strategy consistent with the budget we are about to propose and approve?”

Essentially, the budget process becomes another tool to help a firm and its practice groups effectively use a balanced scorecard to monitor and drive strategy implementation.

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As always we welcome your comments and insights – in the comment section below, via email at info@sterlingstrat.com, and over the phone at (312) 543-6616.

Strategic Thinking for Mid-Size Law Firms

Posted on October 3, 2013 by Sterling

Last month we talked about mid-size law firms: how best to define “mid-sized;” whether aggressive growth was the most logical strategy for mid-size firms; and alternatives to adopting an aggressive growth strategy. We got quite a bit of feedback – including some asking whether we had any alternatives to rapid, merger fueled growth. Part of the answer to that question was addressed in the second half of that article (a section entitled “winning strategies for mid-size law firms”). This article advances that discussion further.

Last month we identified some important commonalities among successful mid-size law firms, including the following.

Successful mid-size firms tend to be general service, business law firms (though not “full service” – that is unattainable even at 2,500+ lawyers).

A large number (perhaps a majority) of their clients are middle market companies – and that means that legal costs are essentially paid out of the owner/CEO’s pocket.

Successful mid-size firms have people and/or practices that are the absolute best in the local/regional market in their areas of expertise.

They have at some point (perhaps frequently) been approached by another law firm (probably a larger law firm) interested in merging.

There are important strategic implications associated with each of these traits, each suggesting potential sources of competitive advantage and vulnerabilities to competitive disadvantages. Some generic strategic thinking can be applied to these common attributes – a few examples follow.

General Service, Business Firm

As a diversified law firm, a “general business firm” has an opportunity to build deep, multi-practice, multi-partner client relationships.

Potential Advantage – Partners at mid-size firms have a strong personal familiarity with (most of) their partners. That should provide an advantage relative to introducing one another to clients as new needs arise (assuming partners have confidence in one another).

Potential Disadvantage – Every firm has practice capability gaps and those gaps can be pretty large at mid-sized firms (even in the strongest). When competing against biglaw, mid-size firms need to avoid competing on the basis of scale or breadth.

Middle Market Clientele

Serving middle market companies has preconditioned many partners at mid-size firms to be value conscious. The legal market has been moving decisively toward reduced costs and value, particularly since the great recession. Many mid-size firms have been benefiting from that trend.

Potential Advantage – Generally speaking rates are lower in mid-size firms. In addition, many mid-size firms are predisposed (temperamentally and practically) to staff matters with lean teams.

Potential Disadvantage – Biglaw firms are making substantial investments in knowledge management, project management, and financial management and that has the potential to close rate and efficiency advantages currently enjoyed by mid-size firms. In addition, as Bruce MacEwen has noted here, some large firms are engaged in “suicide pricing” – it isn’t sustainable for a biglaw firm, but it is a real threat to competing mid-size firms.

Market Leadership

Strong mid-sized firms are often the best choice in their local or regional market for a number of legal issues. Yet, they are rarely the largest or most visible firm in their own market.

Potential Advantage – Marketing and business development that supports market leading practices generally has the best return on investment. That includes both investments intended to attract new clients and those intended to expand existing relationships across practice areas. The key is being willing to make those investments.

Potential Disadvantage – Essentially, two can play that game (i.e., biglaw competitors will be pushing their own strengths forward in the marketplace) – and larger law firms have larger marketing and business development budgets. In addition, that biglaw competitor may have a great option for the client sitting in an office 2,000 miles away (geography often isn’t a barrier for work these days).

Merger Inquiries

Critically, you need to know what your firm’s general disposition is vis-à-vis merger. Even if it is quickly dismissed by the partners, it is important to have that conversation from time to time at the Executive Committee or Board levels, as well as with the broader partnership.

Beyond that, as a general rule of thumb, mid-size firm managing partners should accept invitations to lunch from an out-of-town (merger seeking) peer. At worst, you will learn a bit about a firm that is obviously interested in competing for clients and people in your market. And, you will gain insights into what other people value in your market and in your firm.

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As always, we welcome your comments and insights below, via email at info@sterlingstrat.com, and via phone at (312) 543-6616.

What Are the Prospects for Mid-Size Firms – and What Does Mid-Size Mean Anyway?

Posted on September 17, 2013 by Sterling

The Executive Committee of an AmLaw 200 firm (aspiring to become an AmLaw 100 firm) raised the following question. “(We’re at) an awkward size (roughly 500+ lawyers)…what should a mid-size firm like ours do (strategically)?” Given their aspirations, the answer was to keep growing and become a ‘big’ law firm. They certainly would not be the first to follow that road and some have realized their aspirations. For instance:

At the time of their merger in 1999, Piper Marbury was a 400 lawyer “Baltimore law firm” with most of its lawyers located outside money centers and Rudnick & Wolfe was a 350 lawyer “Chicago real estate powerhouse” with no New York presence at all. According to the American Lawyer DLA Piper is now the world’s largest law firm, with over 4,200 lawyers in 30 cities worldwide.

Similarly, at the time Elliot Portnoy became chairman of the Firm in 2007, Sonnenschein, Nath & Rosenthal was a 600 lawyer “Chicago-based law firm,” with less than 20% of its people in New York. Since declaring its intention to become leading global law firm, Sonnenschein scooped up over 100 lawyers from the disintegrating Thatcher Proffitt & Wood in New York, merged with UK law firm Denton Wilde Sapte, and simultaneously merged in international firm Salans and Canadian firm Fraiser Milner Casgrain. Dentons now has over 2,600 lawyers in 80 offices across 50 countries.

“Moving up market” (as some like to term the strategy) is certainly not impossible. But, the conversation with that aspiring AmLaw 200 firm raises a couple of pointed questions. Is a 500-600 lawyer firm actually “mid-sized?” And, is growth the only winning strategy for mid-size firms that intend to survive and prosper into future generations?

What is a Mid-Sized Firm Anyway?

Let’s deal with that first question – is a 500+ attorney firm mid-size? Sure, if your frame of reference is the AmLaw 50 or 100, then an AmLaw 200 firm is mid-size. That is especially true if your firm aspires to being part of ‘BigLaw.’ To generalize the point, defining what mid-size is depends largely on what you are comparing it to (e.g., an elephant is mid-size next to a brontosaurus).

That said, for many, many firms ‘mid-size’ is better defined in the context of nearby (i.e., local and regional competitors). In other words, mid-size is a function of your size relative to other firms/offices in your primary (or only) city. Firms that are mid-sized by that definition tend to share some common traits.

They tend to be general service firms (since “full service” is unattainable at any size) focused mainly on the legal needs of business clients and their owners.
They have a number (perhaps a majority) of clients who are classic middle market companies – and that means that legal costs are paid out of the owner/CEO’s pocket (if it isn’t insured risk).
They have people and/or practices that are the absolute best in the local/regional market in their areas of expertise.
They have at some point (perhaps frequently) been approached by another law firm (probably a larger law firm) interested in merging.

Is the only (or even the most logical) strategy to say ‘yes’ to merger overtures and/or launch a search for suitable merger partners with whom to grow aggressively?

Winning Strategies for Mid-Size Law Firms

So, is aggressive, merger fueled growth the best/most logical/only strategy for mid-size firms? After all the demise of the mid-size firm has been predicted for at least 25 years. Our answer: it is certainly not the only strategy, but it really depends on what your firm aspires to become. We addressed that broader question in a recent article regarding strategic direction.

Mid-size firms can adopt a compelling strategic direction that does not include substantial growth. Assuming there is widespread agreement among the partners regarding that direction (whatever it might be), there are a few things that you can (in fact should) do to turn that into a winning strategy.

Focus on a Few Things that Can Create a Competitive Advantage

Focusing a a few things that create competitive advantages requires a firm to do at least two things. First, honestly assess what the firm is (or can become) truly great at doing – strengths that can become the epicenter of genuine excellence that cuts across the firm. Second, get external validation that being great at those things is meaningful in the marketplace. Focus on a handful of things you are great at (or can become great at) that also have meaning in the market.

A basic SWOT assessment (strengths, weaknesses, opportunities and threats) can highlight your areas of strength (actual and latent). If you are not good at looking objectively at yourself, a good consultant can help.

External validation can and should come from your clients. Your best clients want you to succeed into the future – they almost certainly consider your partners to be among their most trusted advisers. So, ask your clients what you are good at and what you can do better. It will inform your strategy and improve your relationships to boot. It is amazing how few firms do this in any systematic way.

Think Strategically

What does that mean, to think strategically? Well at a minimum, think about competitive advantage (those areas you might focus your energies on) through three lenses.

Consider whether you enjoy size or scale advantages over competitors – or more likely face larger competitors who have size advantages with which you must cope. Large firms do have deeper pockets (or at least more equity partner pockets) over which to spread marketing, technology and other shared costs.
Identify factors that may help you to defend your firm’s market position against competitors (even much larger, better financed competitors). It may be your knowledge of the local courts and judges, your reputation and brand may have deep roots in the community, you may have very deep and broad relationships with clients. Consider how you can capitalize on and solidify those defensive advantages.
Finally and most importantly, take an indirect approach – occupy the unoccupied market positions and be willing to do things differently from competitors. Precedent is a horrible source of strategy – don’t do what others are doing, do things no one else is doing.

Implement – Do What You Say You Are Going to Do

We have written extensively on implementation – through the balanced scorecard and through other means as well. Successful implementation involves:

Cascading strategy implementation throughout the organization – from firm level initiatives to practice and departmental level activities to a vital and meaningful roles in implementation for all of the firm’s people (partners, associates and staff);
Measuring and monitoring implementation and the results it is producing – reinvesting in and celebrating the things that are working;
Adjusting as implementation unfolds – abandoning or recalibrating initiatives that are clearly not producing expected results and responding to new market challenges and opportunities as they arise.

In sum, if you think you are mid-size, you probably are – it is entirely a function of your perspective on the competitive marketplace. Being mid-size is not equivalent to being diagnosed with a fatal disease. You are free to reject the label and seek to grow – others have done so with remarkable success. But, you can also adopt other winning strategies by focusing on few sources of competitive advantage, thinking strategically, and implementing with discipline.

As always, we welcome your comments and insights below, via email at info@sterlingstrat.com, and via phone at (312) 543-6616.