Why Operational Reviews in Law Firms Are a Must

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By Yarman J Vachha | Dec 31, 2018

Written on the basis of my two decades of work as a manager and consultant with international and local law firms across APAC and the Middle East, this article provides insights into operational reviews (ORs) – explaining what they are, and why all firms should consider embarking on them periodically.

What Is an Operational Review?

An OR is a full scope “audit” of a law firm’s operations and its operational strategy, and an examination of how they interact with the firm’s overall strategy. The purpose of an OR is to determine if a firm’s operations are “fit for purpose” for the existing business, and to provide a stress test to determine if the operations are fit to support future growth – or, in some cases, future contraction.

Why Is It Important to Perform an OR?

An independent and full-scope OR provides a law firm with a “report card” showing where its operations currently stand and what is required in terms of investment and resources to ensure it “future-proofs” itself.

Should the OR Be Performed Internally or Externally?

My answer to this question is that it depends – on the circumstances of the business, and on the motive for performing the OR. The key to an effective OR is independence.

That said, in my view there is much more benefit for the OR to be performed externally, to avoid preconceived notions about the business operations, and to mitigate the influence of underlying politics or individual agendas.

If a firm decides that the OR is to be done internally, the review should be undertaken by someone independent within the business – preferably from another office or region – so that there is an element of independence in the findings and in the recommendations.

The critical factor is that the review be independent and the findings and recommendations reported on are done without fear or fever, so as to achieve the desired effect of assessing the operational health of the firm and recommending practical remedies.

What Are the Most Common Issues in Getting “Buy-In” for an OR to Be Commissioned?

The most common issues surrounding the decision to undertake an OR are: costs; the changes in management and investment that may be required as a result of the review; the risk of pushing people out of their comfort zones or exposing “skeletons in cupboards”; apathy; and the existence of “no burning platform.”

Whilst these are all reasonable and understandable reactions, it is my view that a well-performed OR without limitation of scope is very much like a “health check” of the operations of the business. Unless you perform this health check periodically, a firm can never be sure if its operations are efficient, set up adequately for its existing business, and able to support future growth.

However, it must be noted that ORs are not only beneficial in times of growth or boom markets. They are also very useful when the firm is considering rationalisation or downsizing. An OR under these circumstances will provide the firm with an independent view and strategy as to how best to downsize the business, the potential knock-on effect of this strategy, and how best to mitigate any potential fallout. Without an OR, I have often seen firms experience a “knee-jerk” response to worsening market conditions. In my view this is a dangerous and possible a costly strategy in the long run.

What Are the Most Common Findings Arising out of ORs?

Having performed 25 to 30 ORs internally and externally of firms and offices in many jurisdictions throughout my career, I have found that several common themes emerge.

Particularly small firms and small offices within larger firms that have grown rapidly often find that they have invested vast amounts in the revenue side of the business in terms of hiring lawyers. Whilst this is an understandable strategy, there is more often than not an inadequate corresponding investment in support and IT infrastructure and hiring of quality professional support to advise the firm as to how its operations can be made “fit for purpose” and help drive it to the next level. In a majority of cases this investment in infrastructure and people is viewed as an unnecessary cost, rather than as an investment that is much needed to protect the quality of the firm and to sustain growth.

Quite often this lack of investment in operational infrastructure will come to the surface when the firm can no longer manage the growth of the business effectively. The consequence of this is that over time, client service starts to suffer and staff retention and morale deteriorate. In an attempt to rectify this, firms often need to make immediate large-cash-investment decisions to respond to the situation. This puts a strain on the partnership finances and it impacts directly on the pockets of the equity partners. More often than not, the consequence of this pressure is that the required investments are “half baked” and at times, are costly and ineffective. Firms can avoid this situation if they periodically invest in the support infrastructure at the same rate as the growth of the revenue of the business.

I often get my clients to visualise the building of a house, in which a solid roof (revenue) is built before a strong foundation (support infrastructure) has been constructed. Without sufficient investment in infrastructure and support, the house is likely to collapse. Bottom line is that the investment in support infrastructure needs to keep pace with the growth of the business.

What Are Some of the Pitfalls in Implementing the Recommendations of an OR?

The most common challenge in implementing the recommendations of an OR is to find champions to assist in promoting the change that is required, and to deal with the necessary change-management issues.

As we all know, human beings are very averse to change, and this is especially true in law firms. It is therefore important to have a well-designed change-management strategy to implement the changes.

To successfully move forward with the implementation, firms must also differentiate between “cost” and “investment.” Strong arguments need to be made as to the reasons why the investments are required, and how the return on investment is going to be measured. To do this, a roadmap needs to be designed and milestones need to be articulated and measured.

Throughout the process of the OR, it is important that regular, transparent communications are made to the appropriate stakeholders, informing them as to the progress of the review, the resulting recommendations, and how they are to be implemented. Lawyers and staff want to know what the impact of such a review will be on their daily working lives. A lack of open communication is often problematic when it comes to the implementation of recommendations, as it means that many of the staff who will be impacted have been in the dark during the OR. In my view, it is very important to take the affected people on the journey of change to ensure that the change takes place smoothly.

Conclusion

It is never easy to decide when or whether an OR should be conducted. In my estimation, however, firms that do not perform these periodically are missing a trick. No matter how big, small or sophisticated the firms, I would encourage them to review their operations on a periodic basis. The industry and markets continuously change, and it is important that the operational infrastructure changes in step with the business so as to help support it, to mitigate risks and to maximise efficiency and profitability.

Yarman J. Vachha’s nearly four decades of professional accounting and management work across Asia, Australia and the Middle East includes senior leadership and executive roles with global law firms Allen & Overy and Baker McKenzie.