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TECHNOLOGY COSTS SPINNING OUT OF CONTROL?

Tech Experts' Tips for Cutting Back
(and What No Lawyer Should Do Without)

April/May 2006 Issue | Volume 32 Number 3 | Page 50
Features

Speaking with Authority

Law Firm Administrators Forum: "What the Managing Partner Doesn't Know Could Hurt You ."

John A. Cummens | Forum Organizer

In leading their law firms, managing partners have to focus on so many day-to-day needs—keeping the enterprise going and seeing that enough drops to the bottom line so the partners or shareholders are satisfied—that often this keeps them from focusing on the firm’s future. Here, four experienced law firm directors offer recommendations to MPs in midsize and small firms everywhere on guiding the firm to where it should be, or wants to be, in coming years.

The law firm administrator (or executive director, or COO) sees the firm as a whole business. Frequently the managing partner is distracted by issues related to partner contentment and compensation, client issues and the firm image. What are the management issues that you, as firm administrators, believe the MP should be paying more attention to, and why?

John Cummens: MPs should be concerned about creating the vision of what their firms should become in the next five to ten years. Sometimes when we do strategic planning we are merely doing more of the same. There should be consideration of “out of the box” alternatives and options, even as crazy as they may seem. It means asking, “If you could design a firm completely from scratch, and have it any way you want, what would it look like?” Vision involves seeing something that does not now exist, not just more of the same of what you have right now. It means, in a sense, breaking the mold. Of course, then there is the question of how to get there.

The reason this is so critical is that the vision “informs” the management structure of the firm and the approach that management takes in its day-to-day operations. If we want to become something quite different from what we are today, in order to do that we need to act, to manage, differently. And why would we need to do that? A law firm must keep up with the changing business climate and market of its clients. We cannot put new wine in old wineskins. The pressures of daily trying to address the issues just stated sap one’s energy and encourage patching the situations with “band-aids,” rather than restructuring the context itself. Other businesses have had to reinvent themselves or risk going under. They have had to completely rethink who their clients are, what they are providing to those clients, and how those products or services are to be delivered—which includes the management structure and internal operations of the firm.

William Migneron : In many firms, MPs are not paying attention to (1) strategic planning and the execution of a strategy, (2) trends analysis of the practice and marketplace, and (3) building organizations that will exist over the long run.

First, too often the view is short- term—how do I satisfy and keep people happy today—without looking at the future and how that person and her or his practice can be more productive, profitable and personally satisfying. These are questions to consider: Is this a practice area we should be maintaining? Is it growing? Will it grow? Are we finding and retaining marquee clients willing to pay our rates? Do we have the right skill sets among our lawyers? And, do we have experts who are in demand and can be marketed successfully?

Second, not enough time is spent analyzing the trends that reveal themselves within the firm and within the marketplace the firm serves. Are we taking an honest look at the opportunities available to us and at our abilities to take advantage of those same opportunities? Are our clients growing, and are we growing with them?

Lastly, are we planning and working toward sustaining the law firm as an economic and social entity, where people want to be and with whom they want to associate? Is it fun being here? What motivates people? What energizes them? Do we enjoy what we are doing individually and collectively?

Erica Tamblyn: MPs should pay more attention to strategic planning to grow and morph their firms to accommodate changing business and cultural climates. This is critical to the future success of law firms. Long- range planning should be focused

not merely on profitability but on what leaders want their firms to look like. How will we work differently? Who will work for us? How will we keep those workers happy and productive? In what type of environment will that occur?

Donald Williams: Until our firm changed its structure to co-managing partners four years ago, my answer to this question would have been that external client relations and marketing issues suffer because of the prevalence of internal issues that are more evident and pressing. The “tyranny of the urgent” often meant that strategies to enhance client service, to assist practice groups to expand their client bases, or to identify key marketing priorities were sometimes ignored or done as an afterthought.

With the change in governance made in 2001, one of two MPs now focuses on external and client issues while the other is responsible for internal issues such as lawyer compensation, financial performance, intrafirm communication and strategic operations. Many initially questioned whether this bifurcated arrangement would work, and it was implemented on a one-year test basis. Four years later, the results have been impressive. It has allowed two shareholders to maintain their practices while managing the firm and the key management issues are addressed on an ongoing basis. Our research indicated that more firms are trying this arrangement because there are too many issues that don’t get tackled if all of them fall on one leader.

What, from your perspective, is the most critical management issue facing U.S. law firms today?

Cummens: One issue that is facing law firms, large and small, is the issue of our method of billing. The use of billable hours and hourly rates, while important for internal costing, has little relevance to clients. My belief is that clients do not care much at all with respect to how many hours a lawyer works on their matter or what the billing rates are. Clients care about what result or service they receive and how much they pay for that (which is difficult because clients often do not know how to value legal services—a topic for another discussion). The rationale for setting hourly billing rates needs to be reevaluated (in a typical revenue/expense center approach).

I think that clients are uncertain how billing rates currently are determined, and it can tend to create a sense of distrust among clients, a perception that lawyers just charge what they can get away with charging. But however correct or incorrect a client’s perception may be, it forms the basis for the client’s decisions regarding legal services. Lawyers therefore need to find a new method of determining, communicating and justifying what is charged for the work done, a method that makes sense to businesspeople. Law firms must still know what it costs to deliver services to clients, and what a reasonable profit should be on the work performed (including the risks involved), but this analysis is mainly for internal purposes. With respect to clients, the firm must be able to justify what it is charging and why, and the billable hour approach has inherent difficulties in that regard.

Migneron: Pricing and value to clients are not understood by law firms. Typically, a client request for alternative methods of billing is grudgingly responded to. However, clients are becoming increasingly sophisticated and their expectations are changing. They have systems in place to judge the service and value the law firm delivers. Yet most law firms don’t recognize and embrace this—instead, they fight it.

Williams: The cost structure of today’s law firms and strictly relying on hourly billing will ultimately crush firms unwilling to address the issues. As the sophistication of clients continues to grow and methods of monitoring legal work expand (including electronic billing), efforts by general counsel to control legal fees and tap the competitiveness of the profession will escalate. Firms will see more requests for “most favored-client status,” fixed fees and cost-sharing arrangements.

While there is much lip service given to the idea of value billing, there is not an abundance of examples where it has worked effectively in its pure form. But this doesn’t mean that corporations are abandoning the quest to control costs. Firms need to identify the costs to produce various types of legal services, control their overhead and explore innovative fee arrangements, although they may still rely to a certain extent on some form of hourly billing rates in these fee arrangements.

Those who doubt this assertion should read Thomas Friedman’s The World Is Flat.

Tamblyn: Another critical issue for management is that generational differences are creating huge problems in the associate ranks. The mass defections that we see after annual bonuses are paid out in large firms (not life-style firms) are evidence of this problem. The baby boomers are the managing partners and practice group leaders of today, and they structure assignments for what they like, not what ensuing generations like. Associates of today want to work hard and do great work but they don’t want to work 24-7 like their predecessors. The challenge for MPs and PGLs is to manage the expectations of baby-boomer clients into Gen-Y-acceptable work styles. No easy feat. This will take a lot of creative thinking and adaptation of general business ideas into the law firm world. We should be asking associates what would make the workplace experience more enriching for them. Retention issues cost firms huge sums of money and can produce inconsistent work product for clients.

Obviously not speaking about your own firm, what is the most common management error you see being made by MPs and management committees in law firms today?

Cummens: Many, perhaps most, MPs do not understand generally how businesses work. They know how their firm, or the few firms they have been in, works. The error, as I see it, is that except for a few lawyers, they do not have the background of business experience to envision alternatives to how things have been done in the past. We tend to do what we know how to do.

If a lawyer has never worked in another business besides a law firm, or has worked in only one firm, the perspective, and thus vision, is severely limited. The lack of non-law firm business experience hurts an MP’s ability to see other options for how to structure and manage a law firm’s practice and business operations. The solution is not to teach this in law schools but to have supplementary training in business management, perhaps through the business schools.

As an example, I know of one MP who grew up in his family’s furniture business, learning the ropes of the business. This MP understands the essentials of running a business, including how to use an administrator and the administrative staff appropriately and effectively. He knows the questions to ask, he knows how to envision a future different from what exists now, and he knows about assessing the various risks in pursuing that vision. He has a practical sense of what is important and what is relatively unimportant, how and why not to waste time on things that matter little in the bigger picture.

Migneron : Most lawyers have no clue about the economics of a business, and law firms are a sophisticated business. As a result, decisions are not made in an honest and forthright manner—and they are often made for the wrong reasons. Some MPs do have a keen business sense, and advise very successful clients in all phases of their enterprises. Yet when it comes to making the hard decision that seems so obvious from a business and economic perspective, the action is delayed until the results are not as helpful as they could be.

Tamblyn: Managing to the bottom line creates a culture where money is valued rather than people. Profitability is important, and we recognize that the goal is to make money for the partners, but it’s people who make that happen. Having a slightly lower profit per partner because a firm has invested in training and development for its people will result in a healthier, happier firm that is able to retain workers. Income is not the top motivator for everyone, especially younger workers.

Williams: In an effort to gain consensus and keep people happy, management often avoids making hard decisions, especially those involving problem personnel. According to the metaphor in Jim Collins’s book Good to Great, getting the right people on the bus, getting the wrong people off the bus, and putting the right people in the right seats is more important than first defining a new vision and strategy.

Instead of moving the “bus” forward at its maximum potential, firms often make an inordinate effort cajoling or resolving problems caused by a disruptive minority. As a result, some of the solid performers and stars in a firm are neglected or their full potential goes unrealized, and overall morale suffers. Firm management should develop a suitable and more expeditious exit strategy for those who don’t want to be on the bus.

You have the ear of America’s managing partners, so give them your absolute best advice about the business success of their firms.

Migneron: Talk to others in the business community about their businesses, and listen carefully to what they have to say. Organize a board of outside advisors—perhaps a mix of clients, business leaders, law professors and so forth—who can help bring a more businesslike focus to the firm’s operations.

Cummens: Assemble a group of business advisors who will be honest with you and to whom you will listen. These advisors should include financial and businesspeople outside of the firm who you can trust with internal and confidential firm information, sort of a board of directors, but without the power to determine directly what must happen in the firm. With this group analyzing the firm’s operations, mission and the like, providing you with information, options and advice from business sources outside of, and different from, a law firm, you can consider alternatives, courses of action, and solutions that your own partners could not have provided to you.

This would be a group that you can bounce your ideas off of, without many of the internal political issues involved in discussing ideas with your fellow partners. The rationale for the creation and utilization of such a group would have to be a sound business one, and one that is carefully communicated to the firm partners. Otherwise it could be seen as outsiders, non-lawyers, usurping the role of the firm partners. Many lawyers do need to get over their belief that non-lawyers cannot understand what they do or how a law firm operates.

Tamblyn: I agree about looking to the general business community for new ideas. In addition, do something that scares you. Be bold in trying new things that are alien to the legal community. Try radical solutions to people issues. Invest in your greatest resource.

Williams: Technology is one of the keys to both more cost-effective legal services and improved client service. Many firms have excellent technology platforms but management does not push for effective use of technology, leaving a major asset largely untapped. Education on the uses of technology is haphazard and often ignored by those who could derive benefit. Whether the application is client management databases, voice-over IP telephone systems, legal research or any of the many other tools, smart management will enhance its competitive position by strong support and involvement in its technology program and by pushing it forward.

Managing partners are also best served by advising their administrators to come in with a solution rather than just informing them about a problem!

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