Do You Understand your Firm’s DNA? What Are the Good and the Bad Bits?

The DNA acronym is sometimes used with reference to the inherent characteristics of a firm or a part of the firm. Unlike the originating definition of DNA – an organic chemical of complex molecular structure which codes genetic information for transmission of inherited traits – which is fixed, the important thing about this loose use of the term “DNA” to describe firms is that it can, with effort, be adapted.

I find this quite a handy concept and tool in discussions with clients, particularly where I am trying to persuade them to adopt certain principles, systems or practices – or make them part of their DNA. A handy off-shoot is that people invariably “get it” right away. It seems to gel.

I use “DNA” quite loosely to describe the intrinsic workings of the heart and soul of an organisation – i.e., what really makes it tick or, perhaps, not tick; what helps it succeed or not.

When something good truly becomes part of your DNA, it happens virtually automatically and becomes the way things are done with little or no leadership or management intervention. In this sense it is closely linked to culture (“how we do things around here”) but I like to distinguish between them, as culture, coupled with leadership, really determines whether some things become part of your DNA or not.

This DNA concept is important and has significant ramifications for every law firm. This is because what comprises your DNA will determine your success, failure or mediocrity.

Bearing mind that a firm’s DNA can comprise good and bad bits, let us consider briefly some of the advantages of making certain principles, structures, practices and so on positive parts of your DNA:

• People who come into the firm become quickly inducted into the way things are done;
• People see existing people doing things in a particular way and follow suit;
• This saves on leadership and management time, cuts back on training, and avoids micromanagement or the need to follow up;
• In some respects, these things become a type of ritual, therefore automatic and requiring little or no discipline to get them done;
• It saves time, which is a precious commodity;
• It means these principles, concepts or systems walk around in the heads of everyone in the firm;
• This sets semiformal but very powerful guidelines and standards;
• As noted above, it is an easy way to discuss such concepts and inculcate them in a firm, as people almost immediately “get it”.

On the other side of the coin, what are some of the disadvantages of having less good things as part of your firm’s DNA? Every firm has these “bad bits”:

• It is very difficult (if not, at times, impossible) to get rid of negative attributes, particularly if your culture is not conducive and leadership is not forceful. Getting rid of them takes some guidance, structure, possibly new systems, good leadership and management, and the right culture, and these are not always easy to source at the same time;
• Because they are part of your firm’s DNA, the downsides are not always obvious because the firm has “always done things this way.” This can be dangerous. An obvious example would be an unconscious bias towards hiring from a particular ethnic group or gender, or even a range of schools;
• Invariably, when steps are taken to address negative attributes regarding how you conduct business, there will be pushback from some partners who may be loathe to change how things have always been done. This is particularly true where the change may be uncomfortable for them.

What are some of the really important things you should try to make part of your firm’s DNA? Obviously, this will differ from firm to firm and jurisdiction to jurisdiction, but here are some examples that should apply to most firms:

• Every person in the firm, whether fee earner or support staff, has a particular person who is responsible and accountable for their personal well-being and professional development and success. It is astonishing how few firms achieve this in practice and, as a result, too many people “fall through the cracks” and never reach their full potential, or perform to their potential for the firm;
• Everyone in the firm has a common and correct understanding of “brand,” and the role they can play in strengthening it. “Brand”, after all, is why people want to work at the firm, why clients want to use the firm, and why others want to refer people to the firm;
• Self-management, responsibility-taking and accountability are sine qua non for all firm personnel, from the most junior to the most senior;
• Every partner is responsible to build the capital fabric of the firm – i.e., contribute to what I call the foundational, long-term, fundamental and intrinsic strength and value of the firm. This is a massive challenge for most partners, who tend to think short-term and only about their practices and clients, without paying too much attention to the firm’s future or to leaving something of value behind when they one day leave;
• No compromise on ethical standards and practices;
• Cultural diversity in the workplace is, in the widest sense, the norm, so that the firm hires people from all sorts of different backgrounds regardless of race, religion, personal preferences and culture;
• Being strict about hiring the right people, putting them in the correct roles, and moving on the management of people who are not well situated;
• Everyone in the firm accepting the three key principles: accessibility, responsiveness and reliability. It is surprising how powerful these obvious attributes can be when they become part of the DNA in the way everyone conducts themselves in an organisation. It also makes for a much happier workplace;
• Outstanding support services and operations. Some may be surprised to see this one on the list, as these back-office functions are not normally given priority status or attention. However, every successful organisation today recognises the importance of ensuring that such services and operations form an integral part of their service or product offerings to clients and customers. How a law firm delivers in these areas is as important as the complex legal work done by fee earners.

What are the things you don’t want as part of your DNA?

• Avoidance – that is, not addressing important or damaging aspects of the firm’s operations or practices. Unfortunately, this a common trait amongst law firms, even successful ones;
• Poor working capital and data management. How many times do firms do analysis around cash flow or working capital management, report on this and get partner agreement around the need to “tackle debtors” – only to find that six months later matters are not only not improved but may be even worse?
• Lack of diversity;
• Lack of genuine interest in the firm’s most important asset: its people – or in the success of others in the firm;
• A primary focus on money.

I hope this article prompts you to do an exercise whereby you try to identify the DNA of your firm. Be brutally honest about the good things and also about the not-so-good things. This exercise can form a powerful starting point to planning the future you want for your firm.

True Practice Management

In many law firms it is politically incorrect to say that any practice area is of greater value to the firm than another.  But the truth is that there are some practices that, by the nature of their position in the marketplace and how they react with client’s businesses, deserve a greater allocation of the firm’s resources and attention than others.  The kinds of practices in which a firm has strengths has a huge impact on the firm’s strategy and business model.

For starters, there are three distinct types of practices.  The first, and to my mind the most valuable, are the Feeder practices.  These are practices that, by the nature of what they do and the level in the client organizations at which they work, provide the greatest potential of feeding work to other practice areas (please note the use of the word “feed” rather than “cross sell”; there will be more on that later).   A second type is Free Standing practices.

These are practices that attract their own clients but rarely spin off significant work for other practice areas.  The third type is Dependent practices.  As the name implies, these are practices that, without a strongly dominant competitive position, are unlikely to attract much business on their own and, therefore, depend on feeder practices to provide their work.

Feeder Practices – As noted, feeder practices are by their nature in a position to feed other work to the firm.  Feeder practices typically work directly with the board of directors or the owner of a business or, at least, at the General Counsel level.  They also tend to be practices where the business objective of the legal activity is to further the client’s strategic objectives rather than to remediate a problem.

The king of feeder practices is corporate, both at a transactional and governance level.  In the transactional practice, corporate lawyers deal with issues that spin off work to almost every other practice group but, equally important, a successful corporate practice is likely to consistently fill plates to maximize utilization.  For example, we worked with a firm that had a strong corporate relationship with a large, closely held company.  “Eli” was the firm’s lead corporate partner with the client and also sat on the client’s board of directors.  Every time a project was mentioned at a board meeting or during any other communication with the client, Eli would write the subject on a file folder and toss it on the couch in his office.  When associates were short on work they were advised to “work Eli’s couch” where they could always find something in their area of practice to absorb their time.

Every practice offers the opportunity to cross sell another practice to a client.  Feeder practices go beyond cross selling by their ability to morph a project from one discipline into another.  It is a rare corporate transaction that does not require some input into the clients employment contracts, pension plans, environmental liabilities, tax concerns, real estate holdings, pending litigation and almost every other area of practice.  There’s a hierarchy of Feeder Practices and every practice probably has some feeder opportunities in it.   I think the top feeder practices are (in rough order of value of work spun off):  corporate M&A, corporate governance, real estate transactional, health care, corporate securities, bankruptcy (debtor) and IP transactional.

To make a Feeder practice pay off two things must be present.  Most importantly, the responsible partner must be constantly on the lookout for feeder opportunities.  For example, a transactional attorney may be able to fit a boilerplate environmental clause into a purchase agreement on her own.  But not involving an environmental lawyer both underestimates the value of the intellectual capital invested in that clause and it misses the insight of an environmental attorney who might point out several other issues the client should consider that would spin into additional work.  At the same time, the lawyer who receives the feeder work must be sufficiently aggressive to present to the client other observed problems or needs rather than simply performing the task assigned.

Free Standing Practices – There are some interesting characteristics that make up Free Standing practices.  Typically these Free Standing practices:

• are quite self-reliant and use little of the firm’s resources (library, IT, marketing, etc.)
• have little interaction with the rest of the firm in terms of exchanging work
• are sometimes housed in subsidiary operations
• may involve fee earners who are not lawyers
• are sometimes controversial and viewed as being at cross purposes with the rest of the firm’s practices
• sometimes bill on a different basis than the rest of the firm

The quintessential high-end Free Standing practice is government affairs.  Typically, the lobbying practice has little to do with the rest of the firm and, in fact, some of its highest fee earners may not even be attorneys.  It is probably the practice that is most frequently isolated into a separate business organization (although this is often as a means of sharing profits with non-lawyer fee earners).   Government affairs is among the most controversial of practices within law firms, both because of the general distrust in which lobbyists are held, and of its occasional representation of unpopular business interests.  However, any controversial aspects of the practice are usually mitigated by the immense profitability of many firms’ government affairs practices.   Other Free Standing practices include specialized regulatory practices, international trade, plaintiff’s personal injury, domestic relations, sports and entertainment law, and white-collar crime defense.

Interestingly, there is another group of Free Standing practices that operate at a much lower level of profitability.  These are highly commoditized practices.  As work becomes more price sensitive, it often takes on many of the characteristics of a Free Standing practice to the extent that it uses an exclusive group of people within a firm, exchanges very little work with other practices, is controversial within the firm and is often compartmentalized.  Practices such as insurance defense, bank loan documentation, individual tax return preparation, residential real estate closings and similar practices are examples.

Dependent Practices – The practices that are the beneficiaries of the Feeder Practices are Dependent Practices.  Dependent practices are incapable of generating sufficient quantities of their own work and, therefore, are dependent upon Feeder Practices.  By the same token, these practices are rarely able to spin work off to other practices.

Occasionally we see a Dependent practice transform itself to Free Standing.  For example, in most firms, employee benefits is the ultimate dependent practice.  But a few firms have been able to build reasonably self-sustaining ERISA practices where the bulk of the practice groups’ work comes directly from its own clients.  In such situations, it is almost always the case that the practice has achieved a level of dominance in its market place.  That is, the combination of its critical mass, name recognition, individual marquee lawyers’ brands and client base, permit them to attract a volume of work on their own.

Tax and environmental law are other examples of Dependent practices, but the most dependent practice is general commercial litigation.  And, unless a firm is able to build a dominant litigation practice, it’s going to get more dependent.

Here’s the problem.  On the whole, commercial litigation work in general practice firms comes from three sources: referrals from Feeder Practices within the firm, work generated directly from the client due to the firm’s reputation or aggressive marketing, and work referred from other law firms outside the marketplace.  Now, the difficulty is that, unless a litigation practice can differentiate itself based on its market dominance or special expertise, work directly from clients goes to dominant firms.  And, because there are so few cases going to trial these days, referrals from firms outside the marketplace have dramatically decreased (the lawyers in those firms would rather get on a plane and try the case themselves).   As a result, to maintain a strong and viable litigation capability, it is essential that a firm’s corporate practice refer a large volume of work.

Unfortunately, in many general practice firms the size of the firm’s Feeder practices are declining in proportion to the size of the firm’s litigation practice.  In the early 1990’s it was typical for a firm to have a mix of 60 percent transactional and 40 percent litigation.  However, the consolidation of clients, the movement of sophisticated transactional work to capital market cities, and the reduction of the number of transactional lawyers with each economic downturn has led us to a reversal of this proportion.  Indeed, many firms are now substantially more dependent on their litigation practices for ongoing revenue streams without maintaining the transactional practices to create the feeder work.  The result — substantial under-utilization (low billable hours) and the acceptance of increasing amounts of highly price-sensitive work.

Strategic Implications
So what does this say for general practice law firms?

1.  If a firm is contemplating expanding the number of lawyers in its commercial litigation practice through an acquisition or a merger, it ought to consider the source of future litigation work.  Unless the firm is growing its Feeder practices proportionately to the number of litigators, growing the litigation practice may yield a short term source of cash flow but is likely to be a long term disaster.

2.  If a firm is already in a position where its Dependent practices outweigh the volume of work available from Feeder practices, it has a couple of strategic choices.  It may identify areas in which it is close to having a dominant position through which it could reasonably expect to generate a significant volume of work directly from clients, and focus its resources in these areas.  The alternative is to seek out a merger with a firm that has a sustainable group of Feeder practices.

3.  Building an outlier practice, like insurance defense litigation, into a Free Standing practice is a tempting option to fill plates with billable hours.  The issue, however, is the impact on Feeder Practices which may offset any increase in utilization, i.e., don’t kill the firm’s brand with incompatible practice growth.

4.  Build Dependent practices with the objective of supporting Feeder practices.  That is, figure out what the Feeder practices need from a Dependent practice and focus on providing that rather than trying to develop direct client relationships.

The bottom line: understand the nature and role of each practice and build on that vision.