ZG Alert: The Times They Are a Changin', So Must the Metrics

November 2011

The Times They Are a Changin’

So Must the Metrics

 

“Come gather ‘round people

Wherever you roam

And admit that the waters

Around you have grown

And accept it that soon

You’ll be drenched to the bone

If your time to you

Is worth savin’

Then you better start swimmin’

Or you’ll sink like a stone

For the times they are a-changin’”

 

 -Bob Dylan

 

Dollars to donuts says that if you ask the chair or managing

partner of an Am Law 100, 200, or Global 100 law firm what

he sees as the biggest challenge his firm faces in the post2008

recession era, more often than not his answer will be

“building top-line revenue.” This response neatly aligns with

what every Big Law partner would say is his top priority:

“building a book of business.” The exhortation to “build the

top line” isn’t just coming from firm chairs and managing

partners. It has been echoing through the conference halls

at COO, CFO, and CMO legal industry gatherings for 12

months, ever since coins started jingling again in Big Law’s

recession-emptied cash registers. Even the soothsayers

of gender diversity are calling for the creation of a level

playing field on which the under-represented in Big Law’s

partner ranks can “build their books of business.”

 

Strategically driven top-line growth will always be a sign of

financial health. But, changing times are calling for law firm

leaders to pivot and address a more pressing and vexing

challenge than building the top line: how to increase the

stickiness of their platforms for talent and clients. Industry

editors and academics have spent three years navel-gazing

over whether the traditional law firm model is dead, the

golden era is over, or the re-set button has been pushed. Very

sorry, but time is wasting. What matters is that simplistically

incentivizing, admitting, and rewarding partners for building

their books of business breeds behavior that will inevitably

lead to failure in an industry increasingly driven by clients

under cost pressure who can avail themselves of widely

available cheap labor and low production costs.

 

The time-honored easy-to-measure metric of revenue

per lawyer, frequently hailed by The American Lawyer,

belongs to a time gone by as the most important measure

of a law firm’s health. The world of Big Law has gotten

more complicated. Just like providing quality work and

extraordinary levels of client service once sufficed for

making partner and climbing the compensation schedule,

building a book of business is no longer enough. It is only

a piece of the pie.

 

The “new normal” in which law firms find themselves

today calls for a new, double-barreled test for measuring

partner potential and success. First, to make it as a partner

today, leadership must require the firm’s lawyers unfailingly

to meet or exceed client expectations on quality, service,

cost, and results on each matter as measured by the

client’s desire to come back for another matter and to refer

additional clients to the firm. Second, each partner must

do that and deliver the work at a level of matter profitability

high enough to enable the firm to generate profits sufficient

to attract, train, and retain more talent capable of consistent

performance at that level.

 

Executing on this “new normal” double-barreled metric

for partner success will require wholesale change at most

firms. For starters, partners and firms will need to measure

and know how well they are satisfying their clients and

how profitably partners are delivering matters to clients.

Too many firms and far too many partners have simply a

hunch or nary a clue about either. And firms will have to

make hard decisions about partners, practices, and offices

that don’t, won’t, and can’t be re-structured to meet the

metrics.

 

This may seem like tough medicine. It is. But inexorable

and accelerating industry trends have triggered change

faster than expected. The Global 25 predicted by Steve

Brill in 1983 is rapidly emerging. Most, if not all, of them

have already taken the medicine. The big, hairy monster

firms are those with $2 billion a year or more in revenue or

$2 million or more in profits per partner, or both, and are

approaching or passed $3 million and $3 billion. As predicted

by industry pundits and noted by McKinsey a decade

ago, these firms have gone on a tear of unprecedented

cherry-picking. They aren’t cherry-picking the “average Joe”

partner. Convergence, one of the most relentless trends of

the past quarter century, is producing an ever-growing class

of elite mega-rainmakers with $25 and $50 million-plus

books of business, and the Global 25 are clawing them in.

This phenomenon has driven the Am Law 100 and 200 to

adopt soaring average 10:1 partner compensation ratios,

double what they were five years ago, sometimes tearing a

firm’s cultural “fabric” in an effort to hold onto partners with

ultra-large portable practices. The American Lawyer has

reported ratios as high as 30:1, and nobody is arguing with

the number. The lock-step is collapsing or is near collapse

at the few remaining holdouts. For the firms that find

themselves among what we might call the “N75” (for “next

 

75”), or the emerging second-tier, all of them competing

ferociously to occupy one of the few remaining slots left

in the Global 25, a $25 to $50 million hit in revenue is a

material loss. This is especially true in the face of another

powerful margin-corrosive market force: unbundling and

off-loading to non-law firm legal service providers some of

the highest margin, high-priced associate work, once the

sole province of Big Law. Know it or not, and some do and

some don’t (the latter the proverbial frogs in boiling water),

these firms are in the midst of a crisis, and no good crisis

should be wasted.

 

The time is ripe for changing partner behavior. To draw an

analogy to inside the beltway politics, firms need to “eat their

peas.” The best place to start is with adopting, educating,

and communicating with partners (at appropriate times and

in appropriate ways) about the new metrics for success.

Partners will have to be educated about how to improve

matter, client, and their own profitability. These metrics are

poorly understood by vast numbers of partners; not only

that, the levers that drive them are rarely measured and

addressed in conversations between management and

partners. Some will undoubtedly raise the old arguments

that measuring and talking about partner, practice, and

office profitability is divisive. But how can partners improve

matter management if it isn’t measured, or if it is kept

secret from them? Quaint. Big Law firms are run more like

businesses every day. It shouldn’t be a struggle to educate

the managers and line workers on how to produce widgets

more profitably while, at the same time, creating a healthy

“one-firm” environment in which competition to achieve it

is encouraged.

 

Techniques for measuring profitability have long been

debated at firms. Most have come to accept realization as an

acceptable measure, and it is a good one. Communicating

to partners how much more or less profitable the firm

would be if the realization rate on every matter were the

same as for a matter just completed would be a step in

the right direction, as would informing the partners of how

 

the realization rate could be improved. The same analysis

should be applied to clients. Likewise for profit margins.

Practice group, sector, and office leaders should engage in

post-matter debriefings with client team and engagement

leaders to discuss how to improve margins by adjusting

staffing and improving utilization. In many firms, it would

serve to highlight the margin-eroding effect of relying on

the bloated ranks of high-priced, non-equity partner talent

to do associate-level work.

 

A generation ago, partners at scores of firms endlessly

debated how to load costs for measuring matter and client

profitability. The big, hairy monsters got over the hump by

making and refining rough estimates. They recognized that

satisfying GAAP wasn’t necessary. And they devised many

of their own software apps. Today, off-the-shelf software is

widely available. Most firms have it. They just aren’t using

it. Or management uses it secretly. That needs to change.

 

Joined at the hip with the priority of improving profitability is

measuring, meeting, and exceeding client expectations on

service, cost, and results. Robust client feedback programs

are the only way this can be accomplished. Lawyers

regularly need to seek client feedback on how well they

are meeting and exceeding their clients’ needs by asking

clients themselves, surveying them using tools like the Net

Promoter Score (NPS) at the conclusion of every matter,

and seeking in-depth feedback using independent experts.

 

Once partners and firms measure, communicate, and turn

to improving the profitability of their client work and how

satisfied their clients are, they need to focus their resources

on growing their most profitable and promising client

relationships. Firms must continuously reduce the billable

and non-billable lawyer time and firm resources devoted to

less-profitable (save, of course, pro bono), less-promising

clients. Growing the most profitable relationships should

be brought about by rewarding partners who successfully

lead and manage client teams that deliver high levels of

client satisfaction and profitability. We have entered an era

 

in which firms have to be proficient at and disciplined in

winnowing out the wheat from the chaff when it comes

to clients. Deploying the right metrics is a prerequisite to

making that happen.

 

Measuring and rewarding performance based on client

satisfaction and profitability will encourage originating and

relationship partners to put the best team on the field,

for it is the best team, the team with the right expertise,

that will generate the best result most cost effectively. By

doing so, client teams are expanded across the platform,

and clients become more reliant on the firm’s platform

of expertise than on any individual partner, which is,

after all, the end game. The quality of hours expended,

rather than the quantity, becomes more important to the

partners working the matter. And it dissipates the desire to

discount and it puts the incentive instead on devising fee

arrangements aligned with the client’s interest in driving

results and efficiency and the firm’s interest in higher levels

of profitability. These incentives will lead to greater time

and attention devoted to matter staffing, planning, and

budgeting and, in turn, more and better communication

between and among the lawyers working on a matter and

the client.

 

As an industry, we have long known that exhorting partners

to build the top line produces invidious partner demands

to hold rates down, permit greater discounting, and take

whatever work comes over the transom, however badly

it may erode the bottom line and the brand. It flies in the

face of client demands for value in lieu of the billable hours

partners connote with building their books. Growing the

top line by attracting strong talent and clients is certainly a

competitive imperative, but it is all for naught if the platform

isn’t “sticky.”

 

None of this is to suggest that firms make short shrift of, or

cast aside, other important compensation metrics relating

to client origination, working attorney hours, collections,

and other important firm initiatives, or subrogate them in

importance to a new double-barreled test for success. But it

is to suggest that firms measure, communicate to partners,

and attach great importance to the extent to which matter

origination is driven by exceeding client expectations for

cost, service, and results (in addition to quality) in making

partner admission and compensation decisions. For most

firms, this would be a radical new partner compensation

and admission metric. Partners who have succeeded by

meeting a simpler standard of producing revenue will likely

argue that client satisfaction is implicitly accounted for by

the “stickiness” of clients to a partner and the firm. This

is hard to refute, but hardly any argument for not making

it explicit. And it doesn’t address the issue of profitability.

Indeed, the Achilles heel of too many firms is that they

achieve high levels of client satisfaction with cost in large

part by discounting, but without paying sufficient attention

to eroding margins.

 

Globalization and the battle for market share among the

world’s most elite law firms isn’t going to go away. The

unrelenting pressure to do it faster, better, and cheaper will

 

only accelerate. As has happened across every sector of the

economy, globalization is driving and will continue to drive

law firms to reduce the cost of production and increase

what is referred to in the retail industry as “same-store

sales” by exceeding customer expectations on value. The

growing availability of off-shore, on-shore, and outsourced

providers will force firms to manage teams of lawyers

exponentially more complex and diverse, and beyond their

own. The times demand that success be measured in a

way beyond the simple metric of hours times lawyer rates

and that firms turn to measuring and rewarding partner

success in terms that account for today’s challenge to

exceed client expectations for service, cost, and results at

the highest levels of profitability. Ipso facto, the firms that

do so will be more “sticky.”

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