Law Firm 4.0

Considerations for the Global Law Firm in 2020

02.01.09
By Deborah McMurray
Published in Bright Ideas:  Insights from Legal Luminaries Worldwide

We’re at a unique time in. history. Global financial analysts are calling what happened in the equity markets in 2008 “unprecedented.” The “2009 Outlook Ahead—U.S. Sector Strategy” by Merrill Lynch (the financial services giant acquired by Bank of America in September 2008) is guarded, but overall, the view is optimistic.

Merrill Lynch identified “three primary investment themes for U.S. equities for 2009:

  • Slowing global growth, and the resulting impact of a stronger U.S. dollar.
  • Balance sheet strength of corporate America – especially in terms of high cash levels, steady cash flow and decreased leverage.
  • Increased conservatism–moderation of corporate and consumer spending.”

These three themes set the stage for this discussion of “Law Firm 4.0.” They will affect clients of law firms for years to come, and will therefore affect regional, national and global law firm choices.

Rethink and Reimagine the Law Firm Business Model

If you were starting your law firm today, what would you do differently? Most of today’s law firm leaders inherited clients, infrastructure, locations, practices, policies and governance structure, and more from the firm’s previous generations of lawyer leaders. Culture and inertia are powerful forces in law firms, and even de minimis change is resisted by firm stalwarts, from secretaries to partners. So, the most forward-thinking, concerned law firm leaders run into obstacles that make sweeping, top-to-bottom change almost impossible.

Already in this new century, we’ve seen an industry boom quickly dissolve to bust, Wall Street investment banks, Fortune 500 companies and their law firms report record profits, and in 2008, we saw the best brand names in home-building and construction experience revenue decline by 80% or more, the U.S. automotive industry essentially fail and financial services and the storied Wall Street firms go bankrupt or end up in a fire sale. We’ve also witnessed prestigious, old law firms who were so closely tied to these industries fail or struggle to survive with double-digit percentage decreases in lawyers and staff, and much lower revenue and profit.

There is an opportunity for today’s leaders who have the right attributes – vision, courage, accountability, blocking and tackling skills – to rethink the business model for tomorrow’s law firm. There will be another boom and most assuredly, another bust. The lawyers who understand the lessons in today’s turbulence and don’t repeat the folly and sins of the past have the best chance to shape the future that they want.

The December 2008 issue of Harvard Business Review features an article called, “Reinventing your Business Model” by Mark W. Johnson, Clayton M. Christensen and Henning Kagermann. Two statements struck me: “One secret to maintaining a thriving business is recognizing when it needs a fundamental change,” and “Business model innovations have reshaped entire industries and redistributed billions of dollars of value.”

The authors state that, while everyone’s talking about business model innovation, there have been “precious few” innovations in global companies over the last decade that were business model related. They note that a 2008 IBM survey of corporate CEOs reported the need to adapt their business models, and more than two-thirds said “extensive changes are required.” Many are looking at business model innovation “to address permanent shifts in their market landscapes.” So, if our clients are doing it both to survive and thrive, law firms should be doing it, too.

The First Step: Identify What’s Getting in your Way

The HBR article includes a handy list for companies, broken out into financial, operational and other things to analyze and consider as you rethink your business model. They warn that rules, norms and metrics protect your status quo and can thwart progress. I have taken the HBR list and redefined them below for law firms.

FINANCIAL
OPERATIONAL
OTHER
Gross revenue/profits per partner/profits per equity partner/revenue per lawyer
Quality of legal services
Target industries and geographic markets
Growth or decline from existing clients
Quality of suppliers, vendors, consultants
Practice mix and practice life-cycles
Opportunity size from new clients and opportunity cost
Outsourcing: legal processes (LPO) and business processes (BPO)
Pricing of services
Associate salaries and cost of recruiting
Client relationship management/client service
Service and delivery innovation
Fixed cost investments
Strength/sophistication of professional and administrative departments
Brand value, enhancement and growth
Credit availability and cost
Lawyer to staff ratios
Business development
Malpractice and other insurance
Facilities maintenance and management
 
Bonuses, rewards and incentives
Essential support services for lawyers
 

Adapted for law firms from the article by Johnson, Christensen, Kagermann, Harvard Business Review, Dec. 2008
These lists aren’t exhaustive, but they are a good start. Understand where old thinking preserves old behaviors, and push to zero-base your thinking in each of these key areas.

Law Firm 4.0: Considerations for Change

The following common functions or departments in law firms require examination because they meet one or more of these criteria:

  • They are ripe for change
  • They are forgotten or overlooked
  • The mere cost of them in the annual budget makes them a target
  • They make clients angry.

Legal Service Delivery: Staffing and Ultimately, Recruiting

The Association of Corporate Counsel (ACC) launched The ACC Value Challenge in 2008, a program it says “reconnects cost with value.” Leaders of ACC have spoken at numerous legal industry conferences about this initiative, and the general counsel, Susan Hackett, had an interview in the December 2008 American Lawyer, called “Peace Talks.” The Value Challenge presentation focuses heavily on matter staffing and how corporate legal departments are refusing (or will refuse) to pay for inexperienced associates on their matters. This griping has been going on for years, but little has been done to bridge the value gap.

Hackett notes that Howrey is one firm that has stepped out; it is not charging for first-year associates’ time on client matters. She reports the early result of this: legal departments are now happy to have these young lawyers as team members, and happy to mentor them and guide them on both lawyer/client relationship issues and the specifics of the legal matter. They are getting solid training and experience, but the firm is footing that bill, not the client. Below are four other ideas to consider.

Idea 1: New internship approach.

Could we design a law firm internship program similar to what medical schools and teaching hospitals have done? This would require much lower first and second year salaries for associates and commitment by these interns to work hard, but there would be a guarantee of the best work and training. Salaries would bump up considerably in years three and four, so perhaps associates would see enough of a carrot to stay at the firms longer. According to the ACC presentation, law firms spend on average $450,000 per first year associate before their first day of employment. With first year compensation at or around $200,000 and typical attrition, large law firms have little hope of ever breaking even with today’s recruiting model.

Idea 2: “Teaching” law firms.

Perhaps the medical profession could be the harbinger of what’s to come in another respect: Certain hospitals are teaching hospitals, and many others are not. Interns at teaching hospitals build their careers outside their original hospitals—in private practice, as members of clinics, as physicians in other hospitals. Why couldn’t a few top law firms be the designated training ground for the best law graduates in the country? They become the teaching hospital equivalent. Then, when the associates become “residents,” they would interview and find the jobs around the world that best fit their skills and dreams.

Hundreds of U.S. law firms collectively invest millions each year in summer programs and associate recruiting. All this duplication of effort to recruit the same top 10% with predictably similar results year after year, firm to firm—well, it’s crying out for rethinking at a minimum, and better, a Law Firm 4.0 business model.

Idea 3: Placement of associate hires.

Only hire associates in your city locations with the lowest cost of living. Staff your most important client matters with senior partners (wherever the best ones live), but only use lower cost associates who live elsewhere. This can significantly reduce the cost of service delivery, because salaries and their hourly rates are lower, and you don’t have to lease the most expensive office space in the world to house them. Several global law firms are already doing this, but they aren’t quite ready to publicize it.

Idea 4: “Engagement Partners” for Major Clients.

This next idea has nothing to do with recruiting or young lawyers. It is about ensuring that every institutional (or important) client has the best client service lawyer and technical partner on the job. For decades, the major accounting firms have appointed engagement partners for key clients. While many global law firm partners serve as “key client relationship partners,” there are elements of the Big 4 approach described below that law firms could adopt to further raise the superior service delivery bar.

Big 4 leaders conduct a national search within their ranks to identify the best technical partners, who are chosen because of their proven performance in the client’s industry and with the client’s type of company. Because key clients are truly institutional, these partners may or may not have had any previous service responsibility to the client. The engagement partner manages the work and the team, and the Fortune 100 company clients also have a client service partner, who assures continuous, extraordinary service and focuses not on the technical aspects, but on the relationship.

Because the engagement partners have a mandatory rotation out after five years for public companies, there is virtually no danger of lateral defection with the plum client in tow. The terms of the client service partners don’t expire. If in-house legal departments work harder to adopt the “hire the law firm, not the lawyer” shift proposed by ACC, then law firms must follow with a responsive business model, perhaps closer to the Big 4. Global, multi-office law firms are particularly suited to this new staffing and relationship structure.

Marketing and Business Development

Since the birth of this industry in the 1980s, law firms have made higher demands and marketing professionals have responded. Looking out a decade or more, there is great opportunity to reimagine the marketing department, its functions and structure, not necessarily to reduce cost, but to raise its contribution to top line revenue and bottom line profit.

Idea 1: Separate marketing operations from business growth.

The buck has to stop somewhere, and I still support a Chief Marketing Officer as the leader and overseer of these functions. But the department model where marketers serve everyone in the law firm, regardless of the request, is no longer viable. There are three primary reasons: 1) This approach can’t support a strategic plan. Pet initiatives are invented by individuals, not designed to meet strategic firm or practice goals. In this old, but familiar model, marketers must serve firm leaders, rainmakers and less productive lawyers equally. In many cases, they are criticized for serving the masses, yet also admonished by the under-served for not serving everyone. 2) Lawyers get inconsistent access, service, advice and expertise from a department of even the most willing generalists. And 3), marketers suffer burnout faster, and finding and retaining terrific marketers is as difficult as it is with lawyers.

Instead, organize responsibilities into two major functional areas—marketing operations and business growth. “Operations” would include your integrated marketing infrastructure that supports sales and business development—for example, marketing databases, technologies, Web site, marketing finance, tracking and measurement, PR, graphic design, advertising, collateral development, event planning and various concierge services.

The appropriate marketing and business development mix should vary from practice to practice. Consider the vastly different marketing resources one should employ to support certain mature practices or relationships versus growing and expanding new practices, industries and markets. Successful global growth initiatives require great investment of time, planning, energy and money. Programs that are less far reaching will require less.

The other functional area is “business growth.” The business development team should help lawyers analyze the best opportunities for business growth in the firm, and be involved in designing the client team around the client needs rather than being driven by the legacy lawyer relationships. This has its own infrastructure and resource requirements described in “Idea 2” below. Increasingly, business development professionals are sought after by major law firms, but in most cases, they are forced to work within a non-innovative business model. Consequently, the attrition rate is high, often at a high cost to the firm. Until a rigorous sales process is adopted and proven by a pilot group or two, and until the firm embraces this proven process going forward—because it works—law firm business development will continue to be centered only around those who like it and have the courage and discipline to pursue it.

In many firms regardless of size or reach, the ratio of rainmakers is low, estimated by firm leaders at 8-12% of all lawyers in the firm. For firms to markedly enhance revenue and profit, the number of producers must increase.

Idea 2: Build the necessary infrastructure.

To support business growth initiatives, lawyers and the bus dev group need the right infrastructure. This includes competitive intelligence (not just competitive information), scenario planning and financial analysis, client loyalty and feedback programs, sales and other training, and technology and systems that are Web-based and multi-purpose—tracking accountability, leveraging knowledge across borders, including fingertip retrieval of deals, cases and matters, collaborating across offices and time zones, logging and connecting opportunities in multiple offices and noting where they are in the pipeline, and more. All this frees up human capital so the team can focus on strategic ways to win business, not the tactical elements, such as proposal assembly and document management.

Then, after every major pitch or proposal, conduct formal win/loss interviews and analyses. Learn why you won or lost and make the appropriate changes in your approach to this and future clients. The key to driving more business from these interviews (or any client interview) is the disciplined follow up—tracking the effectiveness and result of changes the next time. This is one of the surest relationship enhancement vehicles available to firms today, yet few firms build the cost of these interviews into their budgets. Make both planning and debriefing equally disciplined.

Conclusion

The front page of a February 2009 article in Harvard Business Review states, “A downturn opens up rare opportunities to outmaneuver rivals. But first you need to put your own house in order.” The article, “Seize Advantage in a Downturn,” by David Rhodes and Daniel Stelter, both global partners with Boston Consulting Group (London and Berlin respectively), highlights ways for organizations to assess and minimize current vulnerabilities. Getting your house in order today sets the stage for planned and aggressive rival out-maneuvering.

Many global law firms manage their budgets well, and have trimmed excesses so that overhead cost is streamlined and efficient. Firms who are seeking ways to cut further often target marketing and business development. A margin quote of the authors reads, “Companies that injudiciously slash marketing spending often find that they later must spend far more than they saved in order to recover.”

Resist the temptation to take the easier route of wholesale budget slashing. Rather, take a 30,000-foot view of your business model and get closer to Law Firm 4.0 strategies. Innovation that results from this rethinking will not only help you manage your top and bottom line better today and in the future, it will ensure you a leader-of-the-pack spot when compared to your rivals.

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Praise for Bright Ideas:  Insights from Legal Luminaries Worldwide:

"This collection of 26 impressive essays, skillfully edited by Leigh Dance, creates a superb textbook for leaders as they consider current and future strategies, whether as global law firms or corporate law departments.  A unique compendium of global perspectives and ideas, it makes very useful reading for all working to chart a course in these unprecedented times."

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