Law Firms Should Plan Strategically to Remain Competitive
The legal profession is more exciting than ever. Changes that revolutionize the business world provide law firms with the greatest opportunities and challenges they ever have seen.
The good news is that most law firms are experiencing a period of great prosperity and therefore should have the financial resources to capitalize on the unprecedented opportunities unfolding in their midst. The bad news is that many firms lack the management structures and leadership necessary to reinvent themselves in order to take advantage of the changing market.
Of all the professions, the legal profession has experienced the least amount of real change—any doctor or accountant would be able to provide ample evidence of this statement. To clients in industries undergoing unparalleled growth and transformation, the way attorneys deliver their services is irrelevant. Old model firms are attempting to service new model businesses. A repackaging of their services is necessary for lawyers to provide meaningful assistance to their clients.
And it's important to undertake this repackaging now, at the height of the profession's economic success, when firms have the capital to invest in reorganizing their infrastructure in a way that positions them for continued competitiveness and profitability.
Two main characteristics emerge in studies of successful law firms within today's unique business environment:
a capacity, and appetite, for strategic thinking, as opposed to the often unsuccessful strategic planning; and
clear, simple and strong management systems and internal operating structures that are not encumbered by misapplied constitutional-like protections for partners; that are aligned with what the firm has become, as opposed to what it was ten years ago; and that calls for real accountability among partners and other law firm leaders to enable firms to make decisions and stick to them.
It is essential that law firms be certain that the expertise they bring to market meets the present and future needs of the business they serve. This requirement can be quite stressful for many organizations, because it calls for ongoing change and learning at all levels.
In practical terms, law firms must constantly look at what their clients are doing and how well their lawyers are staying abreast of client needs. They need to continually examine the changes in their clients' businesses, moves made by their clients' competitors and the forecasts for the markets in which their clients operate. Based on this ongoing research, law firms and their managers can then look inward to determine whether their services are comprehensive and adaptable enough to provide their clients with optimum counsel.
The important lesson here is that every firm must pause and look in the mirror before launching off in some new direction. When a firm really knows what it is, it then can determine what it can be. Only this insight allows a firm to undertake successful, long-term growth in a way that will make it more competitive and profitable.
We call it strategic thinking about growth, as opposed to strategic planning.
Some basic questions to answer before employing a growth tactic (such as a merger, move, development of new capabilities or increased recruitment effort) include:
Who are the firm's core clients? Why?
What services does the firm provide to these clients?
In the eyes of these clients, where is the firm strong? Where is it weak?
Is the firm attempting to sell something it cannot deliver?
Is the firm attempting to sell something that people no longer want to buy?
What practices does the firm have that are based on outdated or false historical premises?
Is the firm attempting to be a national or international firm built on a local, middle-market client base?
When firm leaders take the time to examine critically these answers before pursuing a merger, opening an office in a new location, offering a new practice specialty or significantly increasing hiring goals they greatly improve the chances that their actions will succeed.
Growth for the sake of growth should never be a goal: There are very valid reasons for law firms to create real depth of expertise in their areas of focus through growth, but those reasons become apparent only through strategic thinking.
Let's focus for a moment on the results of poorly planned growth. Many professional firms, regardless of size, specialty or location, enter into growth planning for the wrong reasons. This, in turn, can lead to poorly conceived and executed transactions; the waste of substantial amounts of time, money, energy and organizational political capital; missed opportunities; and the potential for serious injury to the organization and its reputation.
Management and Operating Structures
Too many law firms are still encumbered with an old-fashioned notion that a firm is a community of like-minded, autonomous professionals who do not need to be led or managed. Many American firms have gone so far as to design, whether intentionally or not, compensation and other management systems that affirmatively thwart any kind of change, planning or investment in their businesses. At the extremes, this is simply shortsighted and self-destructive, leading to very predictable results: attorney departures and firm dissolution.
Firm managers need to examine how their structures support—or inhibit—the achievement of their business goals. Successful management calls for a limited number of capable, trusted partners and executives to lead, taking calculated risks, dealing with tough issues and putting the firm's long-term future first. The remaining partners must be informed while allowing the leaders to lead, focusing their own energy on their clients and practices.
In addition, the other professional managers in the firm must possess the required skill and authority. Only through strong management and leadership can a firm create accountability. When accountability is built into a firm's management and compensation structure, firm members will accept and engage in the plans and activities necessary for dynamic progress. Ultimately, firm management structures must evolve with the firm. These structures must be adaptable, addressing issues that affect a firm's continued competitiveness.
Fee arrangements are good examples of the type of management structures that should evolve with the businesses of firm clients. Such arrangements can be repackaged for clients. Increasing costs, such as escalating associate salaries, are going to erode the profit margins of many firms, which then may attempt to protect their margins by shifting those increasing costs to their clients. Most clients, however, can see this coming and with few exceptions probably will put even more pressure on their firms to control their costs and deliver more for the money they are paid. Some relationships are likely to turn nasty, creating real opportunities for firms that are able to develop alternative, more economically efficient and valuable service models. The stakes in this aspect of professional life will become significantly higher if, as many experts are suggesting, the economy turns downward in the next 12 to 24 months.
Compensation systems can powerfully affect how and when a law firm achieves its business goals. A poor system can subvert a firm's long-range plans. It may fail to recognize the value of activities that strengthen client service, the possibility for future business expansion and effective practice and people management, but at the same time reward activities that ignore these competitive realities.
For firms that choose to maintain their lock-step compensation systems, the quality of their equity partners and their collective determination to maintain the highest partnership standards are absolutely critical. Absent almost ruthless dedication to protecting the partnership, these firms will struggle to operate in different cultures and economies using old-fashioned, poorly executed compensation systems. It can be expected that these firms, regardless of how successful, will struggle to adapt to changing market realities.
Firms should not necessarily abandon successful lock-step-based systems. There are many valuable aspects to stable, predictable compensation systems. (A lock-step system is just an extreme example.) Every firm would be well served to consider the real value created by a well-conceived and executed compensation system. Firms with solid systems have an unparalleled ability to make strategic decisions, prioritize investments and manage themselves as integrated organizations.
Finally, many firms around the world will have to restructure the career-advancement track of their professionals to include more tiers—both at the associate and partner levels. It is not realistic or workable to retain systems that allow only one meaningful career path, from associate to partner. Similarly, there is increasing recognition that many equity holders in firms are not “true” equity partners, but are nonetheless valuable to the firm. Equity dilution remains one of the recurring problems for many firms, akin to a form of organizational obesity.
Short of a real reinvention of law firms' management and leadership structures, coupled with strategic thinking about their growth opportunities, this economic boom time may turn out to be just that—a spike in the business cycle subject to the inevitable downturn. It should be a time of fundamental and exciting change that forever alters the way law firm clients do business. This, in turn, should lead to fundamental and exciting change that will forever alter the way law firms do business.
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