Most law firms are run by the numbers: This year’s numbers. Afterall, “At the end of the year, my PPP must be bigger than your PPP.” While this measure is fine for reporting to the legal press, current year profit per partner is a poor management tool. This is because PPP is no indication of whether the firm can sustain its profits long-term, just as current year earnings per share are no indication of future profitability for a publicly-held company. Future profits come from the management of invested resources, and the most significant invested resource in a law firm is its Intellectual Capital (IC).

Since intellectual capital does not appear on a balance sheet (and profits on it do not clearly appear as a part of PPP), IC is often managed poorly — if at all. Because IC is intangible, finance directors and managing partners view it with suspicion. We suggest that this suspicion is misplaced and outdated. Like it or not, law firms are managed more and more like businesses. In particular in Europe, a firm’s ability to manage its intellectual capital effectively will soon be at the top of every managing partner’s mind. When the Clementi reforms take effect in the United Kingdom (anticipated in 2008) and eventually across Europe, non-lawyers will be allowed to own or invest in law firms. Law firms will be able to attract venture capital and private equity investments. Invariably, financial investors will be keen to invest first in those firms that manage their resources best — and a firm’s primary resource is its intellectual capital. In the meantime, the wisest firms will seek to increase PPP by managing IC using financial and non-financial indicators. In this article, we explain how to do this.

Management in law firms often struggle with the implementation of agreed strategies. After an elaborate review that led to a much celebrated declaration of the firm’s future direction, the demands of everyday business on most professionals put the new strategies on the backburner. It is back to business as usual.

Arguably the most successful approach to aligning a business’s activities to its strategy and vision is the Balanced Scorecard (BSC), developed by Robert Kaplan and David Norton in the 1990’s. More than 75% of multinational businesses are said to be employing the BSC in some form. The large auditing and accounting firms were among the first PSFs in the late 90’s to employ the BSC; a good number of law firms followed since then and a number of learnings can be derived from their experience.

Anyone involved in law firm management should be able to answer the ultimate question: “What’s the purpose of your job?” During the last ten years, finding the right answer grew more complex as law firms became incredibly busy, mushroomed in size and turned into what some perceived as “factories” or “sweatshops.” Sometime in that hectic age, firms may have lost their answer for what management’s job actually is. Many firms declared their sole ambition to be maximum partner profits and told management to figure out how to get there.

Isn’t it time we stepped back for a moment and remind ourselves of the purpose of management?

The fundamental function of any organism or organization is to increase its ability to survive in the future. If we are hungry, injured or in danger, our biological autopilot kicks in to ensure that we maximize our chances of survival. An organization does not have a biological autopilot; it has management.

A firm’s chances of survival in the future are entirely dependent on its ability to satisfy clients. If, one year from now, a firm is able to make more clients more satisfied, it increases its chances of survival. It is management’s sole purpose to put the firm in a position to accomplish just that.