January 2012 | The Changing Practice of Law
Law Firm Management Science: Ignore At Your Peril
Imagine this business school case study: A global business is managed by part-time leaders with minimal business training. The business offers different products to different customers depending on the varying skills and interests of the local service providers, who also serve as the salespeople, project managers and product managers. Pricing is customized to each transaction and rarely follows a cohesive strategy, save for the fiat that prices must increase each year. Marketing consists of promoting the business’s capabilities, which are presented as vast and unparalleled. Customer demand has been a constant for as long as anyone can remember. The challenge: Customer demand shifts overnight from a constant to a variable, with immense competition for declining customer budgets. What should the leaders do first to ensure the survival of the business?
Clients Exert Their Will
Short Term Answers to Long Term Challenges
In the current phase, law firm leaders are exploring business process outsourcing in an effort to provide similar back office functions at a much lower cost and some are dipping their toes into legal process outsourcing and legal project management, which strike at the heart of legal service delivery. There is a reluctance to go too far down this path, as everyone knows that profitability is directly correlated with the production of hours, and it’s unclear how a law firm can make money by embracing efficiency. This uncertainty is usually wrapped in a concern for quality, as pushing work to young associates or to unskilled offshore lawyers is surely a recipe for shoddy legal work.
Trends That Will Have A Lasting Impact
Show Me The Money
The second financial lesson embraced by progressive law firm leaders is that the R.U.L.E.S. have changed. Anyone familiar with traditional law firm finance knows this acronym representing the pillars of law firm profits: realization, utilization, leverage, expenses and speed (of collections). By manipulating these factors, large law firms have achieved impressive profit levels. What’s missing from the equation is a fundamental component of every other business segment – the learning curve. In short, as businesses become more experienced at manufacturing a product, the delivery costs decline. This improves profitability even when (not if!) the product moves inevitably and inexorably from leading edge to commodity and the price drops.
Imagine a law firm that is able to capitalize on a wealth of experience in its practices, continually reducing the time needed to deliver legal services while simultaneously improving quality and reducing costs. Maximizing profitability becomes as much a function of delivery as of price. Law firms embracing these concepts understand that alternative fee arrangements (essentially all non-hourly billing) become profitable only when paired with business process improvement programs. Achieving better profitability while meeting client demand for improved predictability and accountability is a substantial differentiator in a competitive market for talent and clients.
Process Improvement Doesn’t Reduce A Law Practice To Making Widgets
By breaking down matters in this fashion, infinite variability gives way to flow charts and process maps of routine tasks that can be re-used and improved over time, while the components requiring thought leadership remain a premium service in which partners with unique and market-leading capabilities really can stand apart. Not surprisingly, clients gravitate quite readily to law firm service providers who speak their language of continuous process improvement and quality control. And simple math demonstrates that repeat clients purchasing profitable engagements is more lucrative than chasing one-off engagements delivered at a loss in the hope of winning future work at premium (and competitively over-priced) rates.
If You Make Money, They Will Come Around
With a savvier business mindset comes a shift away from the consensus atmosphere assumed in a partnership. It’s an amusing notion that a flat governance model in which every partner is an equal owner with equal authority is somehow a rational business choice, when in fact it’s an inefficient, extraordinarily dilutive and disruptive structure that persists due to inertia. Even the most progressive law firm leaders must still achieve consensus, but they do so by piloting the above concepts, measuring and promoting the results, relying on facts to earn buy-in. They also have a strong weapon unavailable to their predecessors: the cost of doing nothing has never been demonstrably greater.
Timothy B. Corcoran advises law firm leaders in legal project management, business process improvement and business development. He also advises legal vendors on market strategy and sales force readiness. He authors Corcoran’s Law Biz Blog.