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.

Local Clients, Local Work

The biggest factor in most law firms’ success is the quality of their client base. In large measure this is because different clients have differing volumes of work, complexity of legal needs and price sensitivity. Appropriately, therefore, many law firms’ strategic plans are built, at least in part, around improving their client base. Unfortunately, there is a lot of misinformation floating around about what constitutes a “top quality” client and many firms are blinded by incorrect assumptions about the kind of clients they want to generate. Firms naturally gravitate to large clients with high visibility and marquee names. But while such clients might look good on the firm’s representative client list, whether they actually represent an improvement to the client base may be an entirely different question.

Each firm has a “recipe,” a combination of capability, experience, quality of lawyers, geographic location, pricing and dozens of other features that make up its business model. The business model is the structure and way of practicing that provides the best value to the client while producing an acceptable profit to the firm. A law firm can either design its business model around its existing clients or it can create a business model and then seek clients that suit the model. It is therefore logical that, if a law firm’s business model perfectly fits its client base (just the right levels of services, prestige, pricing, etc.) and the firm desires to change its client base, it is likely that the firm will have to adjust its business model.

Here’s the surprise — in a lot of firms the business model is not particularly well suited to the firm’s clients. There are a variety of reasons for this incongruity, but frequently firm leaders have a myopic view of the type of work their firm is doing for their big name clients. We recently worked with a large law firm that boasted a major bank as one of its largest clients. The firm’s managing partner described with pride the large transactions and significant litigation matters the firm had handled for the client. But as we met with the practice group chairs it became apparent that such sophisticated cases were, at best, episodic, and really represented the work the firm had more routinely done five or ten years before. The bulk of their practice for the bank today was heavily commoditized at sharply discounted rates, while the sophisticated stuff was now going to firms in New York and Washington, DC.

The managing partner was not lying or purposefully mischaracterizing the work the firm was doing. Rather, there is a natural tendency to focus on the best work and forget about the less spectacular practices. As my golf pro recently pointed out to me, many golfers are subject to what is called “distance illusion.” This is where amateurs select clubs based on the farthest distance they have ever hit a club instead of the distance they normally hit. As a result, the majority of golf shots by amateurs are well short of their target. Similarly, many law firms have a business model built on the illusion of the practice they (a) used to have, (b) think they currently have, or (c) hope to have in the future.

Since change requires knowing both where you are and where you want to go, let me suggest a basic technique for analyzing and targeting a firm’s client base. Start by recognizing that in almost every law firm, 80 percent of revenues come from 20 percent of the firm’s clients. This means that 80 percent of your clients make up only 20 percent of your revenues, so it makes sense to focus on the clients where a firm makes most of its money and forget about the small potatoes. Divide the top 20 percent of your clients into two categories, local clients and non-local clients.

LOCAL CLIENTS

Local clients are those businesses located within the law firm’s primary geographic marketplace. This involves clients whose selection of a law firm is based almost entirely by the convenience of geography and, secondarily, by the firm’s reputation in that market. Local clients generally represent the middle of the market in terms of the size of the client’s business. Extremely large clients are likely to send much of their work to large, high-profile firms in capital market cities. Very small clients may seek legal counsel at the fringes of the marketplace, perhaps even the internet.

The same is true for the work being performed. The most sophisticated work in almost any practice area has the potential of being sent out of town to a non-local law firm, particularly if there is a third party involved such as an investment banker. At the other end of the spectrum, the lowest level of work may be so commoditized that it can be handled by specialty firms outside the local legal market.

Local work can create a strong tie between the law firm and the local client. While a common location may lead to a highly stable and loyal relationship, the billing rates charged are strongly dictated by the marketplace. Therefore, the ability to increase revenues from local work for local clients through higher rates or increased volume of work is very difficult. Further, the work is in jeopardy to firms moving into the geographic market or as the result of the client’s merger or acquisition. For most firms, local work for local clients makes up 70 to 80 percent of their work.

Firms may also have the opportunity of performing non-local work for local clients. Non-local work is in a geographic location where the firm does not have an office and comes to a firm largely as a result of the relationship built up with the client and the client’s appreciation of the firm’s capabilities and knowledge of their business. In giving a firm non-local work, the local client is saying that the value of the relationship and the client’s respect for the firm’s capabilities exceed the cost of travel involved in the representation.

Non-local work for local clients is often performed at rates the firm charges the client for local work, regardless of where it is situated. Therefore, pursuit of this work may represent an increase in volume but not necessarily benefit the firm’s profitability. For this reason, if the opportunity is sufficient, firms will often consider opening offices in locations representing higher rate opportunities, thereby changing the non-local work for one office into local work for another. In the process, the work is now billed at the new offices rates, e.g., if a St. Louis firm opens a New York office to serve a St. Louis based firm, they will presumably charge New York rates for that work. Nonlocal work for local clients represents about 10 to 15 percent of most law firm’s work.

NON-LOCAL CLIENTS

Non-local clients represent opportunities at the highest and lowest ends of the practice. In most situations, the most profitable opportunity for a law firm is non-local work for nonlocal clients. This normally occurs when a client has a matter in a jurisdiction and wants the best possible law firm to handle the case, regardless of where they are located. This may be because the firm is recognized for its expertise and capability or it may be its experience in handling similar matters for the client. For example, a Midwestern corporation may bypass its local legal counsel and select a Wall Street firm for a securities offering due to their expertise and reputation among investment bankers. The same company may choose a specific litigation firm for liability cases across the country because of the firm’s technical knowledge of the product and winning record.

In almost all circumstances nonlocal work for non-local clients represents the greatest opportunity for a law firm to enhance the sophistication and profitability of their practice. Because the work often permits premium rates, firms find the ability to attract non-local work as an attractive benefit of dominance in industries or highly specialized areas of practice.

The lower end of non-local client relationship is local work. This is work generated largely by the firm’s geographic locations. It includes serving as local counsel and doing commodity litigation cases including insurance defense. There certainly are cases where a client is seeking special expertise and experience for a sophisticated matter and may select a local firm where the work is situated. However, in such situations the firm is largely tied to local billing rates and opportunities for enhanced profitability are limited.

CLIENT IMPROVEMENT STRATEGIES

If a firm’s objective is to improve the sophistication and profitability of its practice by improving its client base, the most productive strategy is likely to involve non-local work. To obtain this work, a law firm must develop a very focused strategy.

1. Be Realistic A local firm, no matter how good their relationship with the client, is unlikely to wrestle away a billion dollar transaction from Skadden Arps. Therefore, it makes sense to focus on specific areas of work the firm has a realistic chance of obtaining.

2. Depth no Breadth To do local work for local clients you can get away with being an inch deep and a mile wide. That doesn’t work for non-local work. Even if a local client respects your capability to do sophisticated work, there is a common concern that local firms don’t have the horsepower to handle multiple deals at the same time.

3. The Guilt Card Most clients want to be good corporate citizens in the communities in which they are located. Assuming a firm can demonstrate its capability and depth, selling the value of hiring a local firm is a valuable tactic to getting non-local work for a local client.

4. Business Knowledge The worth of industry knowledge, particularly in a transaction or litigation matter that involves specific business issues, is invaluable. A firm seeking non-local work for non-local clients has two strategic options. One is being the leading law firm expert in a specific industry.

5. Track Record The other strategic option for getting non-local work from non-local clients is having a winning track record. Having successfully closed a lot of similar deals or won similar cases is a huge selling point. Improving a law firm’s client base is not just a marketing or salesmanship issue. It involves an understanding of both the type of client and type of work being targeted and designing the firm’s structure, business model and capability around the objective.