Edge International


Fulfilling The Three Main Requirements Of Investors In Your Law Firm

Partners or members of a law firm are all investors in it, however the firm is structured. Typically, before ploughing money into any venture, an investor needs to see three essential components: a compelling strategy; successful cash and growth management; and a structure of progressive management. Even if the firm has no intention of attracting external investment, these three criteria should nevertheless dominate the firm’s agenda and its overall strategy.

1. Compelling strategy
The firm should be able to demonstrate a compelling strategy for profitable growth focused on the future. This breaks down neatly into three subsidiary propositions (all of which are easier said than done).
First, the strategy must comprise coherent commercial goals aligned to the right choice of business model. It is not sufficient to have profit or growth as the firm’s only goals, and the quest for best practice and general improvement – whilst worthy aims – are convergent objectives that drive all firms and will rarely lead the firm in a different direction to competitors.
Second, the firm must be able to harness and exploit resources, capabilities and services that are competitive in its chosen marketplace.
Third, the firm must have the drive and resolve to adapt to the changing needs of clients as time goes by. Lawyers are by nature cautious, reactive and resistant to change; leaders of law firms sometimes lack the power base or the determination to force the pace.

2. Growth and cash
Any investor would want the firm to demonstrate successful management of growth and cash over long periods of time. This requires not only efficient and effective cash management, but also that the ability to meet long-term objectives on profitability, efficiency, stability, liquidity and shareholders’ returns.
A further element is the existence of a balanced client portfolio that provides sustainable and repeatable work. Much of the work done by broad-based commercial and consumer firms is episodic; only a small percentage gain the majority of their revenues from regular annuity-type work. Hence, the building of a secure and loyal client and referrer base is a worthy aim for all firms.
The ability to both fund growth and to grow the business profitably is also important. Growth requires constant supervision, as it puts a strain both on the firm’s working capital and the firm’s ability to train and supervise new joiners. Equally, some firms have found, to their cost, that growth in size has not been matched by growth in profitability and that the partners have merely become busier and more stressed.

3. Progressive management
The firm should demonstrate a structure and culture of progressive management. Failure in this area is almost certain to impede the other two investor requirements. Three jigsaw pieces are necessary to fulfil this stipulation.
First, the firm needs to have a clear decision-making structure that is aligned with its strategy and enables it to be implemented. The firm’s strategy will fail if the firm is somehow unable or unwilling to make – and more importantly stick to – the sometimes tough decisions and choices which are needed to bring the plan into effect.
Tough decisions become pointless in firms where partners are able to ignore, undermine or subvert the implementation project. The aim must be to develop an environment and a structure in which individual partners identify themselves as part of a group in which they have pride, feel a sense of belonging and demonstrate in-group loyalty.

The second piece of the jigsaw is that the firm must have in place a progressive and enlightened performance management system that promotes a culture of discipline. It is sometimes (but not often) the case that firms have a strong but unwritten performance culture where everybody knows what is expected of them and behaves in accordance with the firm’s unwritten norms. Most firms, however, need performance to be policed, coached and monitored, albeit with a light touch.

The final price of the jigsaw is that the firm must aim to move away from the historic model of the highly individualistic ‘motel for lawyers’ in which it is hard to get a unified decision-making structure, particularly where vetoes prevent any decision which goes against the personal interests of small blocks of partners. Instead, the firm should work for greater integration by encouraging positive group behaviours in which the needs of the firm are placed before the rights of the individual.

Interlinked requirements
All three requirements are linked in the sense that one cannot have one without the others.
It is all too easy for firms to focus just on short-term performance at the expense of succession strategies for future partners/investors. Overall, the firm should resolve to be a complete firm, pulling together and prepared to invest and adapt.

Stewardship for the future requires a mindset in which partners regard their firm as being in trust for future generations. This may sometimes mean that partners not in favour nevertheless have to support the feelings of the majority or to accept responsibly-made investment decisions.

This article first appeared in Managing Partner Magazine for July/August 2015 and is reproduced here with their permission

Nick Jarrett-Kerr

LL.B is a specialist adviser to law firms and professional services firms worldwide on issues of strategy, governance and leadership development as well as all-important business issues facing firms as they compete in difficult market conditions. In the last twelve years, he has established himself as one of the leading UK and international advisers to law firms. He has been involved full-time in professional service firm management for over twenty years.