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September 01, 2019

Optimizing the Law Firm Ecosystem

Keeping tabs on the business drivers that can move your firm ahead.

Timothy B. Corcoran

Managing a business can be a complicated affair. There are numerous financial and operational levers to push and pull, and buttons to press, each in turn accelerating or decelerating some aspect of the business. There are few black-and-white certainties, except perhaps for a handful of fairly obvious maxims: “Nothing happens until we make a sale,” say, or “The customer isn’t the enemy,” or “If we never turn a profit, we’re running a hobby, not a business.” Otherwise, management science is awash in uncertainties. Which button should I press? For how long? What if I move this lever up and move this other lever down? Which should I move first? Will I improve my outcomes if I prioritize these objectives and dial back our efforts elsewhere?

How a manager prioritizes and acts on the available business drivers is a function of the organization’s strategy, which in turn is a function of its resources and capabilities and how well these are poised to address the available market opportunities. Since these are all perpetually moving targets, it should come as no surprise that prioritizing and reprioritizing these variables is a challenging, stimulating, frustrating and time-consuming exercise. And yet many law firm executive committee members and practice group leaders maintain full-time, or nearly full-time, law practices. So how do they do it? How do they maintain their focus on the numerous variables for driving business performance while practicing law as their day job? The simple answer is they don’t. They try. They mean well. They certainly work tremendously hard for what is often a thankless (and incentiveless) role. But they’re often not keeping an eye on all the variables necessary to effectively manage the business.

Success, Without Really Knowing Why

So how do we explain the impressive performance of most law firms, particularly the large ones? Simple. There are three easily observable reasons why law firm managers can dabble in management science and yet achieve success:

  • Timing. Many of today’s senior law firm managers grew up in a business climate where there was near unlimited demand for legal services. Almost irrespective of price, clients with legal needs would hire lawyers year after year. Good timing is everything. And good timing doesn’t just occur when a market is expanding. The last business standing in a market that has moved on can also generate pretty substantial profits because there’s no competition. While demand for legal services has certainly shifted—not decreased, necessarily, but adjusted to include alternative suppliers and approaches for buyers to address legal needs—running a law firm remains a viable business because of ...
  • Unsophisticated Buyers. Whether a multinational business or a local farmer, traditional buyers of legal services have been notoriously uneducated when it comes to assessing the quality and value of legal services. This was reinforced when the last recession spawned procurement and legal operations professionals who were, at least initially, simply waking up to the fact that buyers have a choice of suppliers and price points. We tend to buy legal services like consumers buy cold medicine: We substitute more features, confusing jargon and fancy packaging as indicators of value, and we view high price as a proxy for quality.
  • Apathy. Law firms make a lot of money for their partners, the shareholders. Almost without exception law firms could generate a lot more profit for the partners, but the partners don’t know any better. Of course, few partners would decline a larger annual profit distribution, but when faced with the uncertainty and risk of changing the business model to access it, many are content to stay the course.

Falling Prey to Billable Hours

This risk avoidance is really the source of the misinterpretation that lawyers are resistant to change. Lawyers are extraordinarily creative in finding new solutions to their clients’ legal challenges. The market may have found ways to replace lawyers with technology and artificial intelligence for access to case law, regulations and statutes, but it’s a long way from replacing the creativity of lawyers to interpret these sources to achieve a desirable legal outcome. This is why the relative paucity of partners in senior management roles tapping into this well of creativity in the furtherance of their business is so startlingly myopic.

Instead, the dashboard of interrelated business drivers facing law firm managers sits in the corner, largely unattended, its backlit dials and multicolored indicator lights blinking patiently, awaiting the command that causes it to thrum into life, generating insights on its screens and sending chattering printouts that are then run down the hall and put into action. The opportunity facing law firm managers calls to mind the science fiction movie trope in which the military takes possession of a crashed yet still functional UFO, but instead of deploying legions of scientists to decipher and reveal its capabilities, it’s locked away in a hangar.

To be sure, there are a number of business variables that law firm managers observe and tweak as appropriate to run the enterprise. After all, a law firm can’t function unless its lawyers are meeting billable hours targets, client fees are collected, building leases and staff salaries are paid, and new clients are constantly being brought into the fold. But these are merely scratching the surface of the drivers available to improve the performance of a modern law firm.

It’s time for law firm managers to master the many business drivers at their disposal. For too long we’ve taken an easy shortcut, substituting the maximization of billable hours as the primary objective of the firm. It’s not. It never has been. No client wakes up to new trade tariffs, a threat from a former-supplier-turned-competitor, the loss of a key client, the discovery of significantly noncompliant factory emissions, a labor strike or a notice of claim from a jilted joint venture partner and declares, “What I need is some billable hours from a lawyer!” And there is no law school, accredited or otherwise, offering coursework in How to Sell Hours.

The predominant business model employed by law firms everywhere is to stockpile capacity in the form of billable hour potential and then to deploy that capacity by selling as many hours at the highest feasible rate to the largest number of clients who have a limited understanding of how to quantify the value of legal services. The fatal flaw in this formula is that it requires unsophisticated buyers.

And those days are over.

Truly, even an unsophisticated buyer now has access to enough data points to ascertain the “going rate” for certain types of commoditized legal work, so even without the ability to translate legal fees into precise business value, a buyer can still determine when a price is higher than market. I may not know whether this cold medicine that treats cough, fever, aches and runny nose is better than these other cold medicines that also treat cough, fever, aches and runny nose, but I most assuredly know when one carries an inexplicably higher price than the others.

It’s easy to focus on maximizing the billable hour. Doing so, by default, narrows our focus to producing short-term results, which is also easy. But if our goal is to maximize long-term profit, then billing a client as many hours as possible at higher-than-market rates is foolhardy because it tends to limit repeat engagements.

Alternatively, it’s easy to pour money into opening new offices, to entice lateral rainmakers with multiyear compensation guarantees and to buy numerous sponsorships to secure the firm’s logo on cocktail napkins at a client conference because these long-term “investments” can’t be readily measured in real time. Business guru Jack Welch is credited with saying, “Management is all about managing in the short term, while developing the plans for the long term.” So how do we manage both simultaneously?

Business Drivers and Their Impacts

It starts by recognizing that there are multiple business drivers, each of which has an impact on business performance. Some drivers are helpful for impacting short-term performance, some for long-term performance. Some drivers generate revenue, some generate profits. Some business drivers appeal to clients, some to internal stakeholders. Management is about balancing these competing interests to find the most useful path to success. In mathematics we call this optimization. The Oxford Dictionary defines optimization as “the action of making the best or most effective use of a situation or resource.”

So let’s review some of the available business drivers and the potential impact each might have.


The legal market is most assuredly an elastic or price-sensitive market. This means that for many legal services, as the price drops, client demand increases. As the price increases, client demand drops. By maintaining high prices, incumbent providers in very profitable markets not only foster an environment in which clients begin to seek alternatives, but also they literally create the demand for alternatives and substitutes. If hiring outside counsel were always less expensive than adding lawyers to the payroll, few corporations would employ a large legal department.

Most law firms don’t even price their services; they price the production of their services. Those of us who purchase an automobile know that buried somewhere in the sticker price are the costs of materials and the costs of labor to design, assemble, test drive and ship it, but these aren’t meaningful indicators of quality or value, so we don’t feel underinformed when these details aren’t shared.

Of course, in most markets there are a handful of luxury brands that enjoy inelastic pricing, or high prices that don’t dampen demand. Indeed, the object lesson brought to us by the good people at Grey Poupon, who raised the product’s price to position it as an extravagant luxury purchase and saw sales skyrocket, is that sometimes a high price can increase demand.

Law firm managers must have a more nuanced understanding of the relative perceived value of their services (not merely the costs of production) in order to price more strategically. Some services might enjoy high prices; some might need lower prices. By tweaking prices, managers can increase demand and improve lawyer utilization, offsetting the sunk costs borne by the firm whether a lawyer is working or not. General practice law firms offer a dizzying array of services, so it’s astoundingly unsophisticated to price everything as if it has the same perceived value to the client.


Few law firms proactively pursue the productization, or packaging of routine services, absent price pressure. However, managers can improve the salability and profitability of repeat services by studying them, eliminating unnecessary variability and finding innovative ways to deliver these services. If the client is comfortable paying a high price, the increased profit resulting from reducing unnecessary waste in the delivery of these services drops right to the bottom line. And if the client is pressuring the firm to lower prices, this re-engineering can maintain or even improve margins in the face of declining revenue.

Think of it this way: When a self-important partner claims that no client has ever pushed back on his rates, the clear signal is that the partner is underpriced. When managers scold partners for long-established patterns of discounting rates yet continually demand annual rate increases, the clear signal is that management hasn’t a clue how to read the market. By productizing their offerings, law firm managers can exploit their lawyers’ deep experience and generate handsome profits while operating simultaneously at both ends of the market.


Managers have begun to embrace profit calculations at the matter, timekeeper and client level. Ultimately, what shareholders take home aren’t billable hours but the profits remaining after the law firm’s costs are deducted from the client revenue received. But it would be extraordinarily unlikely, bordering on statistically impossible, for each of a law firm’s product lines to have equivalent profit potential. The varied mix of services offered, and the variable economics of the competitive markets in which law firms operate, mean that different services will generate different profit margins. A deeper understanding of profitability will reveal that some services with high revenue generate low profit margins, and some offer high profit margins from relatively low revenue. Managers must consider each service offering in isolation and then decide which mix of offerings best optimizes the firm’s expertise.


While there’s significant movement, finally, to address the insufficiencies of traditional partner compensation plans, there’s a risk that managers will replace the blunt instrument of rewarding billable hours (or the cash that ensues) with the new blunt instrument of rewarding profit. Without a nuanced understanding of profit contributions, partners with high-rate practices will inevitably feel entitled to a greater share of the pie than partners in lower-rate practices.

Upon closer analysis, managers often find that billing rates are a poor proxy for understanding profit. As one senior partner unironically lamented, “I’ve got the highest rate practice, with the largest team, and the most work in progress. It takes a lot to make my clients happy, and I expect to be rewarded for doing so year after year.” Despite his high billing rates, the significant operational footprint of his practice places him in the middle of the pack in terms of profit contribution. His partners might argue that his perennial position atop the compensation ranks is not fully deserved.

There are also strategic reasons to consciously eschew maximum short-term profits. For example, a pricing strategy that increases demand in order to grow market share in a competitive new space, while staffing the matters as if they were generating premium prices, might dilute short-term profits but may position the firm as the go-to provider and fill the workflow pipeline for years to come. Partner incentives must accommodate these strategic decisions.


A more nuanced understanding of pricing and profitability inevitability leads to an understanding that legal services can and should be offered in a variety of different ways. When we reward billable hours, we ignore technology and efficiency programs that increase speed. When we reward high rates, we ignore leverage and delegation to capable associates or paraprofessionals. The simple approach undertaken by law companies competing with law firms is to closely examine the desired output and identify how best to deliver that output at the lowest cost, with the highest quality, in the shortest time period. By contrast, law firm managers will cite vague notions of quality and pedigree to perpetuate staffing and delivery models that look a lot like what they’ve always done, that is, billing a lot of hours at high rates. A typical general practice law firm is a complicated multiline business, and it should therefore reasonably have at least a handful of distinct delivery models that take into consideration variable client expectations, economics and competitive market positions.

Take Control of Your Future

These are just a few of the many levers available to law firm managers as they consider how best to arrange their resources to remain competitive in a changing marketplace. Optimization in this context means managers must constantly choose between competing priorities, assessing and reassessing how well the results further the firm’s strategy and then make necessary adjustments and course corrections. It presupposes having a strategy, of course, but even without a formal plan it’s not too challenging to establish whether the partners want to be everything to everyone or to specialize; and within each area of specialty whether the partners want to be the low-cost provider, the premium provider or both. Having a clear line of sight to the desired objective allows for conscious choices to be made when adjusting the many interconnected business drivers.

There are recurring patterns of business challenges faced by law firm managers today. It’s the role of the lawyers in charge, and the dedicated business professionals who work alongside them, to step up and take the controls. It’s time to shift from a reactive mode to a proactive mode. The oft-discussed encroachment of law companies, Big Four accounting firms and technology isn’t somewhere vaguely down the road. It’s here.

The risk for most law firms isn’t complete obsolescence. There will always be a need for legal work. The risk is marginalization, being pushed to the side to fight with each other for crumbs as others deliver exactly what the market demands. And the market is speaking loudly to those who will listen.

The clients will inevitably own the price. The lawyers no longer have a vote. Buyers are becoming more sophisticated at an increasing rate. This means prices will continue to come down, starting initially with commodity services, that is, services that numerous providers can offer at commensurate quality, but eventually moving up the value chain. Law firm managers should not resist these price signals and instead lean into them. Proactively know which service offerings are declining in perceived value and target those for re-engineering efforts. Find different staffing models, embed process improvement and project management disciplines, and acquire technology to aid in the execution. This will require an adjustment to performance metrics. Rather than exhort lawyers to pursue billable hours at high rates, refocus them on maximum utilization and throughput of the resources they have and reward the ensuing profitability. Adjust the compensation system to allow for different contributions from different practices and proactively set goals that reflect these variations. One practice might be considered “at plan” when delivering 5-percent revenue growth, while another might be considered underperforming at 12-percent profit growth.

For the premium practices, especially those with relatively limited client price pressure and consequently where there may be a tendency to leave well enough alone, engage in scenario planning to identify which services are most likely to be (and inevitably will be) targeted by new market entrants or disruptive technology. An old rule of thumb in business strategy is to worry less about the markets where you can readily observe active competition and worry more about the clients and services that appear to be humming along nicely without a discernible threat. Once identified, become the first mover, and take a page from Apple and disrupt your own market. Proactively adjust your pricing, staffing and delivery models to delight the clients while internally rewarding innovation and disruption as if they’re more important than billable hours—because they are.

Managers of law firms struggling to keep pace with a fast-moving market don’t need a reminder that things are changing. Ironically, it’s the managers of established, successful and profitable law firms who might need more of a catalyst to master their own business drivers. It’s far easier to drive change from a position of strength than to invest in change efforts in the face of declining financial performance. An old proverb variously cited as Chinese or African in origin states, “The best time to plant a tree is 40 years ago. The second best time is today.  Why wait?” 

Timothy B. Corcoran  is principal of Corcoran Consulting Group, a trustee and fellow of the College of Law Practice Management, was 2014 president and is a member of the Hall of Fame of the international Legal Marketing Association. A former CEO, he advises law firm and law department leaders through the profitable disruption of outdated business models. Based in New York with a global client base, he authors Corcoran’s Business of Law blog.