Governance in a Law Firm: Poisoned Chalice or Opportunity?

I have recently done much work in assisting law firms to develop their governance structures. What I see are many common traits and misconceptions. It is no wonder that law firms are, more often than not, poorly managed, failing to maximise their potential due to poor governance or lack thereof. Many of the larger international law firms have recognised the opportunity to maximise efficiencies and have built sound structures, strategies and teams to improve governance. Small- and medium-sized practices are still grappling with this, though some are more advanced than others in recognising that a strong governance structure will make them much more efficient and profitable in the long run.

The most common trait that I see is that lawyers want to be professional managers but are generally ill-equipped and inexperienced to perform these functions without proper guidance. There is also often a tendency, partly driven by ego and/or lack of trust, of not being willing to let go. There is often an ill-conceived view that the operational and administrative functions of running a legal business “can’t be that difficult!” so why spend money on these activities? This is false logic in my view, as the time spent by lawyers inefficiently muddling through these functions detracts from fee-earning work which adds much more to the bottom line of the firm than do operational activities.

Let’s briefly examine the common traits that I have seen in setting up governance structures within law firms:

1. Often there is no clear distinction between the responsibility of a management committee (MC) and an executive committee (EC). In firms where there are two committees, there is often confusion and much overlap between the day-to-day management of the firm and the strategic direction of the firm.
2. In firms where there is only an MC, all members of the MC want to get involved in every single decision the firm makes, and often there is a tendency to second-guess the decisions of the managing partner (MP). Even some of the smallest decisions which have no significant impact on the direction of the firm are discussed to the minutest details. This is just a “time suck” for everyone concerned, as every decision ends up being made “by committee”. This is highly inefficient and reflects a lack of long-term vision and sound governance structure.
3. Partner egos often play a big part in running the firm. As most firms are partnerships, the management of the firm is only as strong as the support received from its partners. Hence, at times senior management positions become “popularity contests” rather than being based on what is right for the firm. Often the elected or appointed MP or MC is not left to get on with what they have been appointed to do, as the entire partnership wants a “say” in every decision. Again, in my view, this culture is partially due to a lack of established governance structures.
4. Competing interests of the various practice / industry sectors often have a significant bearing on the strategy and direction of the firm. For example, if there is a particularly strong individual in a practice group who is a rainmaker, it often means that the direction of the firm will gravitate towards the needs of that practice group. This is not future-building, as personnel and markets change; hence, there is no long-term plan or stability being built into the direction of the firm. Again, this is reflective of poor governance.
5. I believe many firms are not sufficiently focused on what they are trying to achieve. They have a vague idea of the direction they would like to take but often this is akin to having a scatter-gun approach to a wide target, with no clear direction or purpose. Therefore, I always stress to my clients that they need to have a “laser-like focus” on what they’re trying to achieve, and this focus needs to be directional, with alternatives for changing markets, clear budgetary strategies and a clear succession plan.

What firms should be doing with governance structures to set and achieve their strategies and manage on a day-to-day basis.

1. The very first thing the firm should consider is to separate the supervisory and high-level direction of the firm from the day-to-day management. If the firm is big enough, it should have an executive committee (EC) that looks at the high-level strategic aspects of the firm, and the committee should be client-facing rather than internally focused. The day-to-day operational management of the firm should be entirely the responsibility of an MC and/or the chief operating officer (COO) and their team. The MC, in my opinion, should be headed by the COO, should be a sub-committee of the EC and should report to the EC periodically on the operational aspects of running the firm.
2. There is not much that can be done about the egos of partners and the fact that rainmakers often forge the direction of a firm. However, this does not future-proof the firm. It is important that the EC work to change the culture so that it is all-inclusive and takes into account changing markets and economies, and has an eye on succession planning. Many firms are vulnerable to losing teams to competitors. Such eventualities should feature in the strategic planning of the firm, and ample safeguards should be instituted to protect the goodwill that has been built and safeguard the legacy of the firm for the future. This is only achieved through a strong governance structure that includes appropriate checks and balances.
3. Finally, it is very important that a particular focus of the firm’s governance be to establish a very clear vision of what it is trying to achieve and how it is going to get there. A great way of doing this is by doing periodic SWOT analysis and continual evaluation to determine whether the direction of the firm is still relevant. This is particularly important in the current disruptive market environment. In my view, a governance structure that is nimble is of paramount importance in this day and age. Firms can no longer make decisions by “committee” and “compromise” to try and appease requirements of all the partners in the business, as this utopian dream is not applicable in a very fast-paced market and industry.

In conclusion, what I have said above is not only applicable to large- and medium-sized firms: it applies to small practitioners as well. The advice that I have provided needs to be adapted to suit the purpose of the individual firm, no matter what its size. The bottom line for good governance is a clear separation between “church and state” – i.e., a distinction between what is strategic and what is operational, a focused vision for what is best for the firm and a structure that is nimble in its decision-making.

To answer the question as to whether governance of a law firm is a “poisoned chalice” or an “opportunity”? Well, it all depends on whether the firm is willing to run itself as a well-managed business or wants to be a collection of independent contractors pulling in different directions. I believe the future of successful law firms lies in the former approach.

The Cultural Lenses through which We Examine Law Firms

Cultural differences define and influence every aspect of law firms’ operations, reputations and financial success. Describing a law firm’s culture is difficult, even for people who know the organization intimately. When asked to describe a culture, people typically resort to words like “collegial” or “democratic.” While terms like this may convey a general sense of a culture, greater definition is necessary to begin to clearly differentiate various law firms’ cultures, and use knowledge of those cultures to contribute to the management of the firms.

We have created and evolved a “Law Firm Cultural Assessment,” designed to recognize discrete differences among individual law firms and provide a more precise vocabulary to describe what those differences represent. Those differences can be be examined through these four lenses:

• Collegiality: The manner in which people within a law firm deal with each other.
• Strategic Focus: The degree to which the firm has a clear identity, both to itself and in relation to other firms.
• Governance: The manner in which the firm deals with its people, and the way that its lawyers and staff deal with the firm.
• Values: The belief systems that represent the collective aspirations of the members of the firm.

Details about law firm culture

Each lens examines a number of components, some of which are more complex than others. In fact, the comparative weight of these factors in the make-up of a culture becomes a feature of that culture.

1. Collegiality

• Group collaboration – the ability and willingness of groups (practice groups, offices, client service teams, etc.) to work together.
• Individual collaboration – the ability and willingness of individual lawyers to voluntarily work together on client matters.
• Egalitarianism – the willingness of lawyers to support actions of others that are in the best interest of a client or the firm but may not be in the lawyer’s own immediate best interests.
• Social interaction – the degree to which firm lawyers seek out opportunities to participate together in social situations.
• Deviation – the degree to which behaviour in violation of firm mores is accepted.
• Generationalism – the degree to which the firm’s value systems, approaches and vision differ according to age.

2. Strategic Focus

• Horizon – the relative importance of short- and long-term implications in decision-making.
• Ambition – the importance placed on maintaining and improving the firm’s reputation and recognition.
• Execution – the importance placed on meeting goals and fulfilling expectations.
• Vision – the importance placed on conveying a clear picture of the future.
• Self-image – the importance placed on having an accurate and positive perception of the way the firm is viewed by outsiders.
• Confidence – the confidence that members of the firm express as an institution in the accuracy of their vision and the correctness of their decisions.

3. Governance

• Decision-making – the methods employed by the firm in reaching decisions.
• Structure – the degree of institutional involvement in the management of individual lawyers’ practices.
• Risk aversion – the firm’s willingness to accept risk in return for appropriate reward.
• Communications – the degree to which lawyers are informed about the firm’s activities and issues.
• Expectations – the degree to which lawyers and staff members have a clear understanding of what the firm expects from them.
• Motivation – the firm’s ability to influence behaviour.

4. Values

• Work ethic – the importance placed on how hard lawyers work in terms of time spent and hours produced.
• Meritocracy – the degree to which personal performance is rewarded in relation to overall firm performance.
• Responsibility – the level of control lawyers have over their client relationships.
• Client focus – the balance of the firm’s interests compared to client’s interests.
• Continuous improvement – the importance placed on the growth of lawyers’ knowledge and capabilities.
• Trust – the degree of confidence by an individual that peers will not take actions adverse to that individual’s interests.

Many firms for whom we do strategic assignments incorporate a cultural assessment into the process. Some firms choose to explore their cultures on a stand-alone basis and follow up that assessment with action plans to fine-tune their cultures.

If you would like to discuss your own firm’s culture, write to us at: [email protected]

Matching Authority and Responsibility

Many law firms remain acutely political organizations with much of the firm’s decision-making having to run the gamut of opinion-seeking, back-scratching and adroit manoeuvring before the management team can make significant progress. It has long been recognised that the extreme consensus model (whereby every major decision gets delayed until the achievement of positive ratification) is a highly inefficient way of running a business. There are many stories of how sensible and timely decisions have been delayed by several months because of the need to get the reluctant partnership in line. In some cases I have observed that the firm’s partners had forgotten that the governance structure of the firm in fact granted some fairly explicit powers and authorities for the leadership team to manage the firm and were resisting all attempts to implement decisions by demanding endless discussion on every issue – the way things have always been done. There are clearly still firms where the unwritten rules of the organization seem to be trumping the well documented governance arrangements – firms where the monkeys appear to be running the zoo.

In contrast, I can think of several other firms where the managing partners and the management boards or committees have tried to manage the firm by force of personality and the goodwill of the partnership, but without any explicit rules, provisions or authorities.

A balance is needed, and in achieving the right checks and balances between the two extremes of management anarchy and despotic rule, I suggest three checks.

1. The first check is to ensure that the firm’s constitutional documents reflect the actuality. It has often been said that every firm has two organisational structures – the formal codified one and the unwritten version in practice. The governance framework of many firms often starts with some initial provisions in the partnership deed or members agreement, and then develops through working practices, resolutions and protocols agreed or simply emerging over the years. Sometimes, the provisions in force vary greatly from actual working practices, and at times the written provisions contradict each other. Regular updating and consolidation reduces muddle and helps to identify gaps and outmoded provisions.
2. The second check is to diagnose if the governance framework is ‘fit for purpose,’ both to ensure effective and efficient operations and to enable the management team to lead the firm through the difficult decisions which may be necessary during both good and bad times. Does the governance framework operate well in promoting performance, building value and protecting against risk? Does it allow an appropriate amount of decision-making authority? Does it give the management team the power to make merger approaches, for instance? More contentiously, is the management team empowered to make partner redundancies as well as staff redundancies and, if not, should it be able to achieve this? Firms should also make some attempt to ensure that their management structures accord with best practice principles. As part of this check, it is sensible to examine how the firm’s governance compares with ‘best practice’ models or with peers.
3. The third check is to make sure that everyone in the firm understands and accepts the various management roles and responsibilities. All partners need to know where they stand, what is expected of them, and what they might expect from the management structure. It is difficult to hold partners and managers to account at the best of times and well nigh impossible if the rules of engagement are vague or wishy-washy.

Reliance on the goodwill and compliant nature of partners is not enough to guarantee a high performing firm. Firms with no enforceable rules or discipline and no system of accountability will not fare well in difficult times. To paraphrase Eric Fromm (Escape from Freedom Rinehart 1941), true freedom is not the absence of structure but rather a clear structure which enables partners to work within established parameters in an autonomous and creative way. Conversely, decision-making can become a worse nightmare if there is no clear governance structure, or where there is a mismatch between authority and responsibility.

Plan B

The economic downturn has caused many businesses to reconsider the viability of their strategic direction.  This is especially true for law firms that primarily deal with business clients and are impacted by both the global decline in business transactions and clients’ overall desire to reduce costs by using less legal services.  For many law firms, having a valid plan for their success and profitability is the basis that holds together the partnership.  In such a situation, having an alternative direction in advance of need may be the factor that ensures survival.

There is an old story about the difference between a recession and a depression:  when your neighbor is out of work, it is a recession; when you are out of work, it’s a depression.  The same is true for law firms as we see firms in different parts of the country and with different practices reacting very differently to the economy.  Firms that never enjoyed the highly leveraged capital markets practices that have collapsed are barely affected, while major transactional firms in the largest cities are seeing their profits decline by as much as 30 percent.   But even the firms that are doing well and coming off of record years are concerned because much of their strategic direction was aimed at patterning themselves after the high leverage, high hourly rates of the industry leading law firms.  If that strategy isn’t going to work, a lot of partners are asking the same question of their leaders – “What is Plan B?”

What’s wrong with Plan A?
For many law firms there may be nothing wrong with their strategy.  If the firms are focusing themselves on practices, industries and geographic markets that have been unaffected by the recession, the answer may certainly be to do more of the same.  Even for firms that have focused their future on creating or expanding transactional dominance, their strategy may make sense for the long term, even if it does not appear to be thriving in the current economy.   But, at the same time, there are firms for which the past quarter felt like they tumbled down a mountainside while locked in a port-a-potty.  For them, life doesn’t get much worse than this and the future’s not looking all that much brighter.  They’ve had the wind knocked out of them and can’t quite recall what their strategy was.

The obvious answer is that a firm must take a deep breath and reconsider the conditions and assumptions on which their strategic plan is based.  If, by and large, those assumptions and conditions are still appropriate then odds are their strategy still makes sense and, more importantly, will probably work.  On the other hand, if your strategy is built, for example, on positive assumptions about U.S. auto manufacturers or certain bank holding companies, you may want to reconsider your options.

Now, it is only fair to note that for a significant number of law firms none of this makes any difference.  These are firms that have never really sat down to determine a strategy or have created a strategic plan that looks like a giant “to do” list filled with internal issues that have nothing to do with the manner in which the firm competes in the marketplace for legal services.  But for firms that have gone through a thoughtful process of evaluating their future, being able to shift their strategy without going back to the drawing board and completely recreating that process is a valuable benefit.  It makes good sense during a strategic planning initiative to ask the question, “What happens if our plan doesn’t work?”  It could be argued that having a Plan B demonstrates a lack of confidence and commitment in the primary strategy.  In reality, it is in the nature of lawyers to hope for the best, but prepare for the worst.

The real value of having an alternate plan, however, may be almost entirely subjective.  Law firm partnerships are very fragile.  In most firms partners operate highly independently, have very little contributed capital and are unburdened by contractual limitations on their ability to move to a different law firm.  Having partners who are footloose and fancy free is not good when a firm is undergoing an economic challenge.  There are all sorts of reasons that partners change law firms ranging from personality disputes to the inability to get the resources or staffing they want.   But in times of adversity, moving from one law firm to another becomes much more risky so all these motivations go out the window and there is one dominating theme to partners’ mobility:  their confidence in their current firm’s future prosperity compared to competitors.  Simply stated, in difficult times, having a clear strategy and having a predetermined alternative strategy is the most effective glue a firm can have to keep itself together.

Creating Plan B
But creating a good alternative strategy is hard.  There are some things we have learned from firms with alternative plans:
1. The alternative can’t be a secret plan.  It has to be a completely transparent optional plan including the thought process on why it is believed that Plan B will work if the primary plan did not.  The best way to create this openness is candor as to the weaknesses and possible points of failure with the original plan.
2. The temptation is to simply water down the current direction and make Plan B kind of look like Plan A-lite.   In truth, the best alternative strategies are those that are completely different from the firm’s primary strategy.  That is, if the primary strategy is not viable, it is most likely because the conditions under which it was created have changed.  Therefore, to be effective, Plan B must be based on a completely different and, perhaps, opposite set of assumptions.
3. Plan B cannot compete with the primary strategic direction.  There may be partners who like the alternative plan better than the primary and they will attempt to pursue it together with the primary.  The argument will be that the firm is able “to walk and chew gum at the same time.”  Unfortunately, firms can’t handle competing strategies and the result of trying to do two conflicting things simultaneously will be that nothing is accomplished and both strategies will fail.

Case Study:  A mid-sized 95 lawyer Midwestern firm created a strategy to undercut market pricing.  Much of the transactional work and sophisticated litigation for major businesses in their city had been lost to law firms in New York and Chicago.  Most of the larger local firms were either focusing down-market on more mid-sized local clients or attempting to establish international positions.  Their efforts to compete for large client work mainly involved promoting their involvement in the local community and their Chicago level quality at a slightly lower price.
The mid-sized firm believed that they had quality that could compete with any of the large firms but recognized that their lack of depth would make it hard to compete for the broadest range of work.  So their plan was to focus on what large clients would view as non-critical matters with pricing set at 60 percent of the rates charged by the larger firms.   Their hope was that by deeply discounting work, they could skim some work, at least on an experimental basis.  They believed that, given enough volume, their strong work ethic and low overhead would allow them to perform profitably at the lower prices.  At the same time, the firm realized this would take a mindset change by clients and accomplishing that could be difficult.  They knew that the profitability and multi-office overhead of the larger firms would prohibit their competing on price, but they feared that general counsels would not be willing to take the risk, even with relatively unimportant matters.  They needed a plan B.
As a part of the original strategic planning process the firm decided that if they had not attracted a reasonable volume of work from their targeted clients within the first year, they would recast themselves.   One of their strengths was commercial real estate, especially involving some specific forms of mixed use developments.  Plan B developed into the firm becoming a boutique firm doing transactions and litigation for specific types of developers on a national basis.  They would probably become smaller and some practices would not fit but they openly presented the alternate strategy to the partnership together with the primary plan.  Both were approved.  The jury is still out on whether Plan A will succeed.

Creating a Burning Platform

When law firms go about attempting the implementation of strategies that involve some aspect of change for the firm, there is frequently a lot of talk about “burning platforms.”  The concept is that people, particularly lawyers, are resistant to change.  Therefore, even the most logical and rational justifications of change don’t seem to work unless there is some degree of urgency – a burning platform.

It should come as no surprise, therefore, that many law firm Managing Partners and COO’s see the current economic crisis as an ideal motivation to change partners’ performance, implement strategic initiatives, change the firm’s culture and generally solve all of the problems of the firm.  It should be equally unsurprising that many firms are disappointed in the lack of success they are having in using the recession as a burning platform even though it is roundly judged to be the most severe economic conditions since the 1930’s.

The problem is that each person’s definition of what constitutes a burning platform for them is different.  Consider smoking.  Even the three-pack a day smoker knows that smoking is bad for his or her health.   Anti-smoking advocates have supported efforts to raise the cost of cigarettes through high taxes, make it illegal to smoke in most public places and make it awkward and uncomfortable to smoke where it is permitted.  Yet, despite the best efforts of smoking opponents, roughly one out of every four Americans continue to smoke and 800,000 new smokers (mostly children) start smoking annually. I’m sure there are many people who quit smoking because they are convinced by the public health information, the cost or the inconvenience.  But most seem to find the motivation to quit after they have a heart attack, a relative dies of cancer or the birth of their first child — the urgency of a burning platform.

The questions before the house, then, are how does one elevate the current economic downturn into a burning platform and successfully use it to motivate change?  Consider the following five truisms about using burning platforms.

1. The partners must accept the issue as being legitimate.  Lawyers are professional skeptics.  They get paid for finding faults in other people’s arguments and they bring that skill to partnership matters.  This is precisely the problem Al Gore and environmentalists are having in drawing attention to global warming — before they can worry about a burning platform, there is the problem that a significant number of people whose support is necessary to take action don’t quite believe the problem exists.  In law firms we often find this problem in dealing with practice areas that are under-profitable or inconsistent with the firm’s strategic direction.  The proponents of the practice simply don’t accept the justifications for action presented as being valid.

The biggest problem with legitimacy issues is that the partners who accept the truth of an issue have difficulty accepting the fact that someone else might not agree with their position.  The assumption is that opponents are just being stubborn or have a vested interest that influences their opinion.  While both of these things may be true, it doesn’t change the fact that, before you can sell people a better mousetrap, you have to convince them that they have mice.

In many law firms, precedent seems to lend credibility to an argument.  A managing partner of a 300 lawyer Midwestern firm set the strategic objective of shedding an under-profitable medical malpractice defense practice.  He used a comparison of the profitability of similar firms that performed med-mal work with those that did not.   By documenting his case with precedent rather than supposition, he was able to gain a reasonable level of acceptance among his partners.

2. The partners must attach an urgency to the action.  Urgency is at the heart of a burning platform yet many firms attempting to drive change fail to make the argument that time is of the essence.  The recent stimulus package passed by Congress is a perfect example.  Polls show virtually unanimous acceptance of the legitimacy of the problem — people understand and accept that the U.S. is in a deep recession and support government involvement.  Yet, the polls also show a much more mixed willingness to support a stimulus program without further study.  The position of many Americans was, “What’s the rush? Let’s take our time and do it right.” In selling the package, the proponents failed to convince some people that there would be a negative result if action was not taken today instead of a month from now.

For many law firms, this problem is the personification of their difficulties in dealing with under-productive partners.  People in general, but lawyers specifically (and especially litigators), have learned that many problems resolve themselves over time and it is usually wise to adopt a “wait and see” attitude.

The whole concept of a burning platform is the message that, “If we don’t take action right now, we will be consumed by the fire.”  The best support of this message is to demonstrate the consequences of not taking immediate action.  A client firm recently did a large lay-off of associates and staff members to reduce costs and “right size” staffing to the level of work available.  This was the first layoff in the firm’s history and was considered incredibly controversial among the partners.  The Management Committee gained consensus by showing a timeline of the notice and severance time required before any savings would actually occur and impact on profits for each week’s deferral of a decision.

3. The change must be viewed by the partners as being an appropriate response to the problem.  As the saying goes, “When you’re a hammer, every problem looks like a nail.”  Often leaders attempt to build a burning platform to support their own objectives which may or may not be responsive to the problem at hand.  For example, a client has undergone a 25 percent dip in billable hours for the last couple of months due to a fall off of their bank lending practice.  The plan of action announced by the managing partner was to jettison the firm’s insurance defense practice.  Getting rid of the insurance defense practice (which represented about 20 percent of the firm’s revenue) had been on the agenda for years.   The partners accepted the fact that the firm needed to urgently stop the bleeding but rejected the proposal as being unresponsive to the problem.  As one of the firm’s partners put it, it made as much sense as having a child to save a marriage.

Old responses ring false when they are repeated in the context of urgency, yet we frequently see law firm leaders try to use new crises to justify old agendas.  Law firm managers need to recognize that the action and the urgency need to make sense independently.

The bottom line is that the recession is a natural burning platform that is uniformly acknowledged as being an urgent problem to which all businesses must respond.  The key for law firm managers is to not squander the opportunity to make meaningful strategic changes in their firm and its operations by failing to provide decisive leadership in addressing immediate problems.