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THE LEADERSHIP ISSUE

 Table of Contents

October/November 2008 Issue | Volume 34 Number 7| Page 50
BUSINESS

Profitability

Melding Leadership and Management for Star Performance

Business guru Peter Drucker offered this brilliantly succinct description of the difference between managing and leading: Management is doing things right; leadership is doing the right things.” Makes sense—but can you measure the cost-benefit tradeoff of one against the other in a law firm, in both qualitative and quantitative ways?

The authors have dealt with hundreds of lawyers and law firms in our years as practice management advisors. When asked to perform confidential evaluations, it becomes apparent fairly quickly when we’re working with a firm that falls into one of four areas in terms of leadership and management. We fancy those four areas as being like elements of the cosmos, so indulge us while we spin that metaphor to explore leadership in qualitative terms. Then, we’ll pitch some benchmarking data for a more quantitative perspective.

 

A Law Firm Cosmology in Four Parts

In the universe of law firms, management and leadership—be they strong or weak—intersect to produce the following types of firms.

Stars are law firms that shine. They have strong leadership and strong management. They know where they are going, they exude confidence and display vision, and they light a pathway for the firm’s people. Importantly, they ensure that the systems of the firm revolve around the firm’s people in a gravitational pull, reinforcing what they do in ways that ensure that the firm excels at client service, lawyer and staff career satisfaction, and profitability. Having a strong vision and a strong management foundation, this kind of firm can seize opportunities and properly adapt its business systems to ensure success.

Planets are steady types of firms. They have strong management but are weak in leadership. They provide great client service (in fact, technically they’re wonderful firms) but they lack a real vision of where they are going. They are content to keep moving in the same way each year—continuing to do what they have always done, the way they have always done it—and as far as they’re concerned, there is no reason to change. Profits, while not stellar, are dependable as a result of strong underlying management—dependable, that is, as long as the conditions under which the firm operates (such as the economic circumstances of its major clients) don’t change very much.

Comet firms are the opposites of planet firms. They have strong leadership but weak management. These firms often have a great idea for entering a new practice area or seizing a new opportunity. The problem, though, is that the firm lacks the underlying management structure to rein in the visionaries and translate their ideas into solid business systems for the delivery of quality legal services. These firms can be exciting and dynamic—until such time as the lack of any real management foundations causes the firm to flame out. Profits are unpredictable, as befits a firm that doesn’t have management strengths.

Black holes are weak in both leadership and management. These firms are really an aggregation of solo practitioners, with the partners sharing costs and overheads but little else. There is no real vision of where the whole is going or how it is going to get there. The management systems in place tend to support each person as an individual and provide little incentive to share work or knowledge. These firms are characterized by an extremely short-term focus. This kind of environment can be confusing for people accustomed to working in a stellar firm, often leading them to ask the question: “Is there anyone in charge around here?” The answer is: “No.”

 

Four More Parts: A Metrics Comparison

If it’s fairly obvious from a subjective perspective whether a firm is a star or a black hole, then can you also tell from an objective perspective? We think there is data that correlates key financial metrics with performance and allows one to draw some interesting conclusions. Of course, the results are open to interpretation. However, we present the following and leave the conclusions to you.

LexisNexis’s Juris Law Firm Economic Survey is an excellent source of financial benchmarks for comparison purposes. In its most recent, 2007 edition, the editors studied the key financial metrics for all firms surveyed and ranked them according to top quartile, second quartile, third quartile and fourth quartile. In most of the key metrics, the differences between the top and fourth quartile results are astounding. For example:

Billed hours per lawyer in the top quartile firms averaged 1,581; in the fourth quartile firms, the average was only 1,314 hours.

  • The effective blended standard rate (billed hours) for top quartile firms was $236; for fourth quartile firms, it was $150.
  • Operating margin for the top quartile firms averaged 50.8 percent; for fourth quartile firms, the average was 28.9 percent.
  • Operating profit per partner in the top quartile firms was $564,028; it fell to $117,593 for the fourth quartile firms.

And the differences are repeated in other metrics. For example, while the time to collect an invoice averaged 72 days in top quartile firms, the figure was 110 days in the fourth quartile. This difference has big implications in terms of the firm’s financing and cash flow.

Now then, when it comes to key leadership positions, here’s some other data of interest: 81 percent of firms in the top quartile have a chief operating officer, a legal administrator or an executive director, as opposed to 70 percent of the fourth quartile firms. And when it comes to employing a CFO, controller or finance director, the difference is 46 percent for the top quartile versus 25 percent for the bottom quartile.

Turning to look at how firms prioritize goals (the lower the number here, the higher the priority), real-time information for fee earners is assigned a priority of 2.8/10 for top quartile firms and 3.5/10 for fourth quartile firms. Expense management is assigned a priority of 6.4/10 for fourth quartile firms and 7/10 for top quartile firms. (Recall, the lower the number, the higher the priority.) This appears to indicate that bottom quartile firms worry more about expenses than top quartile firms do—perhaps because the top ones follow the advice of -Arthur Greene, in the ABA’s The Lawyer’s Guide to Increasing Revenue, to worry about increasing income instead!

 

And the Inference?

So where does our exploration of the qualitative and the quantitative leave us? Reasonable minds may differ, but we hold to the proposition that profits, career satisfaction and excellent client service are the result of a combination of both good management and excellent leadership—in other words, excelling at both doing the right things and doing things right.

If your firm is not quite in that top quartile yet, then you might want to consider the words of Cassius in Julius Caesar: “The fault, dear Brutus, is not in our stars/But in ourselves, that we are underlings.” We submit that farsighted leadership, combined with excellent management, can turn a firm into a shining star.

About the Author

David J. Bilinsky is a practice management consultant who focuses on enhancing law firm strategy, finance and technology initiatives. He blogs at ThoughtfulLaw.com.

Laura A. Calloway is Director of the Alabama State Bar’s Law Office Management Assistance Program and Chair of ABA TECHSHOW® 2009.

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