Nick J-K's Strategy for Law Firms

August 4, 2011

Nick J-K’s Blog has moved

Filed under: Uncategorized — Nicolas Jarrett-Kerr @ 11:53 am

To view Nick’s new Blog Click Here

To view Nick’s Blog post on Goodwill Hunting – Are law firms starting to acquire a value?

To view Nick’s Blog post on Mind Over Matter

To view Nick’s Blog post on Tackling Underperformance part 2 click here

To view Nick’s Blog Post on ‘The Lost Lawyer’ Revisited click here

To view Nick’s Blog Post on Alternative Business Structures – The long pregnancy click here

To view Nick’s Blog Post Leveraging Strategic Metrics click here

June 7, 2011

Structurally obsessed

Filed under: Uncategorized — Nicolas Jarrett-Kerr @ 2:55 pm

My Blog is in the process of being moved over to my website .  This will be one of the last posts here and if you wish to subscribe to my new blog please do so by clicking here.

It has always been rightly said that structure should  follow strategy and not drive it.  And yet with the current rash of liberalisation in law firm models – such as the UK’s Legal Services Act 2007 – we are seeing many firms contemplating alternative business structures without first considering what strategy they are trying to pursue.  In this newsletter, I look at how to avoid the temptation to prefer form over substance, and I propose three elements which investors of all types want to see when assessing a law firm.

As always, I welcome your comments and feedback.

Structurally obsessed – the lure of the make-over

There is something irresistible about changing or enhancing appearances. We live in an age of make-over in which new houses, cars, fashions, hairstyles, face-lifts – and even new body shapes – all have instant appeal to many.  Law firms are not exempt from the temptation to titivate.  Thirty years ago, it seemed very modern and up to date to form a management committee, for no better reason than to follow fashion.  Having computers on everyone’s desks was the next craze – undoubtedly a good thing in the long run but an expensive mistake unless supported by training and the refinement of processes.  A few years on, the fad was then to change from a general partnership to a limited liability partnership which many firms seemed to embrace just to follow the crowd or because it seemed a good thing to do.  In more recent times – but before the recession – it became an imperative for some firms to move to smart new (and expensive) premises.

Please don’t think that I’m suggesting that these changes and investments were just cosmetic or wrong per se. My proposition is, however, that firms should be clear about their strategic options, their positioning and their overall client propositions and then try to figure out what structure and infrastructure is best suited to assist in the fulfillment of such strategies.

In the UK, I have talked to scores of law firms and lawyers about their plans following deregulation and the possibilities of Alternative Business Structures heralded by the Legal Services Act in October this year.  There are some interesting and innovative ideas out there, some of which, in the right hands and with the right strategies, might do well.  But in the wrong hands, disaster awaits.   For example, many firms in the UK are focusing on what structure might be best for them in order to attract external investors – not necessarily now but in the future.  A better exercise is to consider on a holistic basis what overall attributes an investor might look for in law firm.  It seems almost a truism to suggest that an investor essentially wants to see firms being run as progressively managed businesses and it is vital to drill deeper to see exactly what this means.   It also follows that if an investor might want to see a law firm run as a business, this is a requirement that law firms ought to espouse for their own benefit,  whether or not they are likely to want to seek external investment at any time in the future.   It is also worth remembering the fairly obvious point that law firm partners, present and future, are all investors in their firms.

Running a firm as a business requires essentially three elements.  Although these elements are all fairly obvious, they are worth repeating if only because many firms seem to have lost sight of them in the pursuit of style over substance.

1. A compelling strategy and a plan for profitable growth

It has often been said that the pursuit of profit is not in itself a strategy.  I prefer to see profitability as one of the most important – indeed critical – success factors that enable firms to measure their progress and accomplishments.  It is worth dusting off your firm’s strategic plan and check whether or not it is focused on profitable success and whether or not it is defined in terms of coherent and simple long term goals which are both aligned to the right choice of business model and also which factor in any threatening competitive pressures which the firm is likely to face.  A compelling strategy also understands and harnesses its core capabilities and seeks to develop deeper and strategically important capabilities and elements of intellectual capital that are competitive in the firm’s chosen markets.  An investor will also want to see abundant evidence that the firm’s strategic plans are being competently executed.

2. A track record in managing cash and profit growth over a long period

The next requirement of investors is that the firm should be able to evidence a good track record in managing its growth (in substance rather than just size) and its cash over a long period.  It is important to be able to demonstrate the achievement of sustained financial performance that is stable, predictable, and (allowing for the recession) capable of further growth.  This requires three elements.  First of all, the firm needs a strong and balanced portfolio of clients and referrers to give comfort that the firm will continue to enjoy a sustained flow of work.  Panel appointments help also to show continuity of instructions.   A structure and discipline of pipeline management and business development competence are also vital.  Perhaps most important of all, an investor will want to be convinced that the firm is competitively positioned (both now and in the future), enjoys a good reputation and displays a meaningful brand.

3. A structure and culture of progressive management

Finally we come to structure and the need (if at all) for a make-over.  What an investor wants to see is that the firm’s structure is intelligible, and that it is coherently arranged in terms of the firm’s management and governance in order for the firm to be best organised for and aligned to the pursuit of the firm’s strategic and economic goals.  Any firm which wants to be run as a business also needs a discipline and structure for proper and professionally run performance management.  The firm also needs to display consistency of service and operations – a complete firm and not just a set of silos.  An outside investor would want to see an element of external or non-executive presence on the firm’s management board or committee.  Many firms are now seeing the benefit of appointing non-executive members to their boards – as a mild plug for my services, I am often used as a ‘corporate coach’ on a retainer for similar purposes.

These factors go much deeper than a superficial or cosmetic make-over and avoid the wastage of large sums of money in pursing structural diversifications and distractions.  These are also long term projects on which law firms of all shapes, sizes and jurisdictions would do well to work, even if they have no requirement for external investment.

May 17, 2011

Tackling Partner Underperformance in Law Firms

Filed under: Uncategorized — Nicolas Jarrett-Kerr @ 10:08 am

This is the first of two posts on the issue of
partner underperformance in law firms.
The second part will suggest a process and procedure which firms can
follow.

Partner performance management systems attain
their sharpest focus in how they cope with the issues of non-performance and under-performance.

There is hardly a law firm of any substance in
the world which has not at some time had to deal with the issue of partner
underperformance.  As I have reviewed
best practice in this area I have found many more examples of poor practice than
best practice, although it is also becoming clear that some leading firms are
learning to deal with these issues more sensibly.  Examples of current and wholly avoidable bad
practices include:

  • Failure to set firm standards and manage the
    firm’s expectations of partner performance generally.
  • Criteria based on financial performance alone
    with all other contributions under-valued or ignored.
  • Unacceptable partner behaviour and poor
    standards tolerated and indulged by the firm’s leaders for long periods of time.  This is often followed by sudden and
    precipitous over-reaction, with partners finding themselves suddenly out of a
    job without any warning.
  • Underperformance issues not being confronted
    with any degree of openness and candour.
    Instead there is often a whispering campaign behind the back of the
    underperformer.
  • Hasty and sudden departures without warning and
    without the underperformer being given an opportunity to address the underlying
    issues.
  • Partners are over-promoted and should have
    never been made an equity partner in the first place.

Whilst some of these issues derive from poor
management skills on the part of the firm’s leaders, there are three essential
infrastructure elements which will help firms address this difficult problem
area. First, time must be spent on constructing and agreeing a comprehensive performance
management system  for partners.  This should address how partners will be
monitored and managed on a year to year basis, and how they will be expected to
develop over time.  Second, the firm must
manage the expectation of partners by setting out both the constant standards
and the baseline partner criteria which they expect partners to achieve.  Third, the firm should give special
consideration to the process by which they not only monitor and support
struggling partners, but also, ultimately and in the event of failure, manage
partners out.

Clearly there are many financial indicators
which can be measured in law firms.  One
indicator which is not commonly measured is the true cost of
underperformance.  The problem is that,
not unlike the assessment of the true cost of replacing a departing partner, some
of the issues are hard to quantify.
Whilst it is possible, for example, to measure the cost of clients lost
due to negligent or inefficient work, it is less easy to measure the cost of
lost opportunities, or the effect on staff morale of an underperforming partner
who is continually allowed to get away with blue murder.  Equally, the presence of an underperforming
partner may cause others to leave, or block promotion and recruitment
opportunities.  Here, a “back of the
envelope” calculation can be as useful as a long-winded attempt at empirical
analysis. But the true cost of underperformance of a single partner almost
always can reach six figures and sometimes amount to several millions of
pounds.  I spoke to one firm where a
partner had been identified as underperforming but the cost of severance was
considered too high.  Two years later,
the underperforming partner was still there and the cost had, if anything,
increased, whilst at the same time, the partner concerned had been paid a
profit share far in excess of her contribution.

It is important to ensure that issues of
underperformance form a part (but not the whole) of the performance management system.
Firms do need to address those parts of the performance management system which
manage aspects of behaviour and contribution that are not in keeping with the
firm’s objectives.  This part of the
overall performance management system must emphasise the importance of
providing a positive supporting role.  It
would be detrimental to the partnership ethos of the firm if it were regarded
as a disciplinary procedure and nothing else.

The framework needs to be responsive and
flexible.  The ability to operate the
framework rapidly and without delay will be crucial to the firm’s success and
its ability as a whole to operate efficiently.

It must also avoid operating with any element
of a ‘blame culture’, recognising that there may be partners trying hard to
achieve the firm’s standards and objectives but struggling to do so efficiently.  However, there may be situations where the
framework needs to allow approaches to be made to partners who have adopted a
policy of quiet subversiveness and are therefore undermining the firm’s efforts
to achieve its strategic objectives or are in danger of losing trust and
credibility within the firm.

The
link with the firm’s Governance and Partnership Compensation/Remuneration
Scheme

It is important to draw a distinction between
conduct and professional ethics on the one hand and partner performance on the
other.  Most partnership deeds will make
provision for misconduct and will therefore deal with matters such as the
contractual duties of partners and the provisions which relate to termination
for breach.  These provisions should
provide a proper remedy with regard to partner misconduct issues.  The focus of this book is, however, primarily
upon performance issues, although it must be acknowledged that ultimately
performance issues could form the subject of misconduct allegations within the
scope of the misconduct provisions of the partnership deed.  Many partnership deeds make no provision for
expulsion for underperformance and, when revising their governance, many firms
are seeking to address this issue.  There
is trend towards the firm being able to enforce compulsory retirement without
cause upon attaining an overwhelming resolution (say 75%) of the equity
partners to expel the underperforming partner.
Some firms even have put in place more draconian provisions to allow the
Board to expel a partner without taking the matter to the equity partners.   In many cases, the provisions will call for
more generous notice to be given to the underperforming partner than expulsion
for misconduct.

Partner performance also is extremely relevant
in the context of the firm’s scheme for partner remuneration or compensation. I
have, however, noticed that some partner remuneration schemes avoid focus on
negative aspects of Partners performance; there is a widespread but mistaken
feeling in these firms that to do so could jeopardise the effectiveness and
validity of the remuneration scheme.

However, in setting criteria for admission,
promotion and the evaluation of partners, it is important that the firm
enunciates some standards which the leaders of the firm are prepared to
enforce.  Clearly therefore, the firm
needs some recognised means of managing situations of underperformance against
the firm’s standards and criteria.

Setting
Criteria and constant standards

 

To confront a partner with an accusation of
underperformance often evokes the response, “what is your evidence?”,
or “against what standards am I being judged?“.  It helps here to agree performance criteria
– in the financial context for chargeable hours, the targets, credit control,
and work in progress control — both for the partnership as a whole, but also,
and perhaps more importantly, for each individual partner as part of his or her
business plan.  If a partner has agreed
his or her proper level of performance, then issues of underperformance become
easier to monitor.  Financial criteria
are easier both to agree and to monitor than other key skills and
behaviours.  Selfishness, rudeness, staff
intimidation, intolerance and disruptive behaviour all fall within a more
difficult area to police.

I observe that some firms draw up specific
underperformance criteria whilst others prefer to rely on the criteria for
incoming equity partners as a guide to the minimum baseline indicators of
acceptable performance.  Where specific
‘elimination criteria’ are preferred, great care must be taken to draw them up
across all the Critical Areas of Performance and – as with all performance
metrics- to ensure that they are measurable or assessable in a fair and open
manner.  Thus, elimination criteria in
the area of Financial and Business performance might appear as follows:

  • Consistently records less than the chargeable hours
    per annum expected at his level of the partnership.
  • Fails to manage engagements to the firm’s
    standards for engagement profitability.
  • Fails consistently to adhere to firm’s
    financial disciplines.
  • Fails to manage projects, time or priorities
    adequately or cost effectively.
  • Fails to leverage work to an agreed level
    (technology as well as people).

April 7, 2011

Base Salaries in Lockstep Firms

Filed under: Uncategorized — Nicolas Jarrett-Kerr @ 3:03 pm

Fixing Partner Salaries

Many so-called ‘lockstep’ law firms have introduced variations and hybrid models to give greater flexibility to their profit sharing arrangements, to allow better management of partners, and to reward high performers.  One fairly common variation is to introduce a three tier system.  Under this, part of the total compensation package is made up of a base ‘salary’, part is a lockstep element and a further part is performance related.  From the individual partner’s point of view, this gives the comfort and security of a fixed level of reward, a safety net which is not subject to the tides of personal good and bad fortune within the firm.  Partners know that this fixed base will allow them to pay their mortgages and living expenses. 

It is very important to fix these salaries at an appropriate level.  If it is fixed too high, the fixed base element may give partners too much security and may also become a disproportionately high focus of attention in the compensation setting round. If fixed too low, it can become somewhat meaningless. The experience of a number of firms is that the aggregate level of such base salaries should be targeted to be around half of the total compensation package, thus leaving a realistic proportion of total compensation subject to both performance related and proprietorship aligned factors.

How do you fix such salaries?

A number of different models can be employed to arrive at the appropriate amount for these base fixed salaries, although many firms do not have any systematic methodology in place, and some firms will consider combining a number of these methods to arrive at an overall result.  Once these base levels have been set, there is a trend not to reconsider them annually but regularly to apply an inflation element to them.

Here are some of the methods currently in use. 

 

Method One – Conversion of Drawings

The first method in common use is to convert existing monthly drawings levels into a ‘salary’ sometimes grossed up for tax purposes (although only the net sum would of course be paid).  This has the advantage of providing only a minimal change but, depending on the firm’s drawings policy, may not necessarily draw fair distinctions between partners.  Some firms have a flat drawings policy under which all partners receive an equal monthly sum irrespective of seniority or performance, whilst others adopt a very conservative monthly drawings policy which bears no relation at all to the sort of fixed or flat base sum upon which partners would expect to rely for their basic needs.

Method Two – Converting part of Compensation Package

Another method sometimes used is to convert a part of the overall compensation package from the previous year into a fixed base salary for the current year.  This has the advantage of preserving the existing differentials between partners and also forms a small and therefore uncontroversial change.

Method Three – the ‘Salaried Partner Plus’ model

Another method is to look at the market salaries and compensation packages currently paid to very senior lawyers and attorneys below equity partner level.  New incoming equity partners or members would start at a base salary level around the same as the salary level as a salaried partner, and the base levels would rise proportionately from there for all other equity partners.

Method Four – Market Salaries

This method is not dissimilar to method three in that the firm makes an attempt to fix market salaries for all its equity partners or members, having regard to salary levels in both the private firm market and for in-house lawyers and general counsel.  In theory, this sounds sensible and logical, but it can be quite difficult sometimes to obtain meaningful benchmark salary levels and even more difficult to set a level for, say, a generalist partner in his 50s.  It is however an attractive way of differentiating between partners in high cost and low cost offices, particularly in a firm with international offices.

How do you pay Laterally Hired Partners?

 

Base level salary or compensation packages are brought into stark relief when considering the introduction of lateral hires whether at shareholder/equity level or as a non-equity partner.  Firms will want to draw an appropriate balance between offering a seductive package (which therefore will often contain a high fixed element) and the creation of flexible compensation which is tied to the performance and success of the laterally hired partner. The overall package needs to be sufficiently attractive to persuade the partner to leave his or her current firm but the hiring should never be carried out without reference to those who – perhaps as a remuneration or compensation committee – have the responsibility for the firms partner remuneration and compensation setting for the whole of the firm.  It is worth noting that the level of fixed or base salary set for the new laterally hired partner will ultimately affect the base salary structure for the rest of the partners – too high an introductory package can destabilise the firm and lead to key existing partners leaving the firm.

Furthermore, the possible introduction of a lateral hire can usefully test the viability and purity of the firm’s compensation system.  If the system is quirky, inexplicable, over-complex or thoroughly outdated, it is unlikely to be attractive to a new joiner.

 

Paying and protecting those who manage

In order to attract the best internal candidates for positions of management, firms are finding that they at least have to match the compensation of top equity partners and in some cases to supplement it.

The financial cost of losing a partner from fee earning can be extremely high.  In addition to the direct financial replacement costs, such as recruitment fees, the intangible costs at partner level should not be under-estimated.  Core skills, knowledge and experience can be difficult to replace, and the extraction from a team of a key partner can threaten stability, morale and growth internally.  Externally, key client relationships can also be put at risk. In addition, the loss of team or departmental management or leadership skills can create long-term problems.

Against all these expenses, the huge advantages of an internal appointment have to be weighed.  The risk to the business in appointing an unknown outsider is, after all, considerable.  Unlike an internal appointee, the external appointee will need to take time to understand the firm’s culture and behavioural characteristics. He or she will have to gain intimate knowledge of the dynamics of the business, its history, and its strengths and witnesses.  Whilst the external appointee will bring objectivity, lateral thinking and advanced management competencies, he or she will have to earn the respect of the partnership, particularly after the honeymoon period is over.  In contrast and from day one, the internal appointee will understand intimately the dynamics and politics of the Partnership, and will have detailed industry, market place and competitor knowledge.  The internal appointee will also know the firm’s strengths and the opportunities to be exploited as well as being acutely aware of the firm’s weaknesses and the threats and challenges which need to be addressed.

It is somewhat easier to gain a balance between all these factors both culturally and economically in firms which have a lockstep background than in firms which have relied on individual fee-earning performance.  Having said that, many firms are managing to provide fair packages for their managing partners and group heads that combine personal measurable performance related objectives with the attainment of group and firm objectives.  It is however sometimes difficult to reward (or at least protect from penalty) the managing partner whose excellent work is let down by the rest of the firm or a group of underperforming teams and partners over whom the managing partner’s impact will be seen in the long term rather than in the current year’s profits. 

The ultimate cost of re-integrating the managing partner at the end of his term of office must also be factored in, and some security has to be given as otherwise partners will not be attracted to take up the role of managing partner. This will involve re-training and the rebuilding of a client base, and the ex-Managing Partner’s remuneration and compensation arrangements should be protected for a reasonable period whilst this takes place.  The ultimate cost of this should be taken into account from the outset of the appointment.  Many firms are allowing at least a two or three year period for this protected re-integration.  The exit package should also recognise the possibility that the ex-Managing Partner may no longer wish to return to full time fee-earning at the end of his or her term of office, and provision should be made for the possibility of an alternative career plan.

March 30, 2011

Control or Consensus? The Stifling Points in Law Firm Decision-Making

Filed under: Uncategorized — Nicolas Jarrett-Kerr @ 1:04 pm

This article first appeared in Managing Partner 28th Feburary 2011

I have recently been involved with two quite different mid-sized law firms, each of which is managed very differently.  I cannot, of course, mention any names.  Firm A has around 60 partners of whom less than 20 are equity partners, and has just less than 200 lawyers in all.  Firm B has around 40 partners, but only five (all founder partners) are equity and the firm has around 150 lawyers in all.  In Firm A, the Managing Partner has many responsibilities but seemingly little authority; all decisions of any size are dealt with at monthly partners’ meetings.  Firm B has maintained a very tight equity and one of the equity partners has combined his fee-earning with a role as managing partner.  He is trusted by his Equity Partners and has a great deal of decision-making authority.  Interestingly, decision-making is equally slow in both firms.  In firm A, decisions often get deferred from one meeting to another through lack of agenda time with the result that even quite minor decisions can be made to wait for two to three months before being resolved.  At Firm B, the Managing Partner has presided over a period of strong growth in which decisions used to be made nimbly and entrepreneurially but the size of the firm now means that the Managing Partner is completely snowed under.  Issues needing a decision pile up on his desk to await his attention whenever he can get to them 

What is clear in both cases is that the governance and management system which worked well five years ago does not so work well now.  In both firms, some degree of decentralization of power is needed.  In Firm A, the Equity Partners need to recognise that they cannot be involved in all decisions and need to entrust some of the decision-making to a Managing Partner and Management Committee.  In Firm B, the benevolent embrace of the founder partners has become an iron grip and they need to consider what is needed to manage a firm which has grown considerably in size. 

All law firms – all organisations, for that matter – go through a maturity cycle as they develop over time.  The growth curve shown in the table illustrates how a firm can emerge, develop and then start to fade through its eventual lifetime.    Firms such as Firm A can find that their development becomes stunted before they reach their prime and in some cases premature aging starts to happen and the firm begins to go downhill.  Firms such as Firm B find that their progress comes to a sudden halt as decision-making becomes paralysed.  Such firms may find that they enter the “Founder Trap” in which their rapid emergence and growth turns into decline and sudden death. 

Not all firms are like Firm A and Firm B but it is important to understand that there are four phases of development for any firm to try to work through – the creative phase, the directive phase, the decentralized phase and the institution  phase, the last phase being difficult to attain.

Creative Phase

During the creative phase a firm emerges, is born or, in some cases, becomes rejuvenated.  Firms may start up or start a period of renewal and revival.  Such firms are almost always very entrepreneurially oriented at this stage of the growth cycle, and the firm is generally driven by an individual or a small coalition of individuals.  A hard work ethic drives the firm’s momentum, and management activities tend to be ad hoc, flexible and uncodified.  There is often a random patchwork of decisions and processes which emerge as needed and in response to the opportunities and demands which the firm faces.  Policies tend however to focus on what not to do, rather than the enforcement of consistency and quality.  This also tends to be a phase of heavy investment with the partners or members sacrificing immediate income in order to see the firm develop.  During this phase the baby firm heads into infancy, usually accompanied by a growth spurt.   A tipping point then occurs when the firm realizes that it needs a measure of discipline, coordination and systems in order to control the growing organisation. 

Directive Phase

The firm then enters a directive phase, in which the firm’s leaders (usually the founding coalition) impose some structure and order.  At this stage the founder partners are unwilling to relinquish control and – like Firm B – concentrate power into the central control of a Managing Partner or the equity group itself.  These leaders now, however, have a dilemma.  The firm has developed thus far largely through their entrepreneurial and client-facing efforts.  They are the partners with the client relationships and they are the partners with the specialist reputations.  In the larger firm, however, the leading partners steadily become obliged to spend more and more time on management rather than fee-earning and they find this shift hard to assimilate.  For a while, hard work and long hours allows the founder partners to continue both their client facing  and management activities.  Niche or boutique firms often  decide at this stage in the cycle to remain the same size in which case the founder partners can continue successfully to direct operations for long periods of time – their crisis point may come when the founder partners grow old or tired and wish to retire.  Some growing firms acquire professional management staff to assist with the increasing burden of management, but the founders generally only allow those managers to make the decisions which they themselves would have made, and this leads to frustration, duplication of effort and very little saving of time for the founders.  This gives rise to further issues as the strategies first employed by the firm to get it to its current state may not be sufficient to enable it to grow further.  Not only does the firm need a grown-up governance system, it may also need a more advanced and mature strategy.  It is at this stage that the firm also risks losing its good people as profits start to plateau or slip.  In essence, this directive phase can tip from a period of adolescence( in which the firm’s body seems constantly to be outgrowing its clothes) to a period of stagnation and decline.

Decentralized Phase

If a growing firm is to move out of adolescence into adulthood, some decentralization of management soon becomes necessary. In Firm A for example, the tight-knit band of equity partners need to loosen some of their iron grip on the firm and entrust management powers and authority to others.  This can sometimes be an emotional period for a firm during which there is a struggle for power and direction between the firm’s old guard and the firm’s ‘young Turks’.  What is often seen here is the emergence of an executive group, with a decentralized structure of office heads, practice group leaders, accompanied by the development of a more empowered ‘C-Suite’ of COO, CFO, Heads of HR, Marketing and IT.  Some autonomies at local, practice group and individual level remain, but the firm starts to develop a greater consistency of service and specialist capability.  Partner responsibilities and accountabilities become more defined and focussed.  The founders often begin to take a back-seat but find this hard to do.  At the same time, the firm struggles to retain its partnership ethos.   Partners remain insistent on the retention of ownership rights over significant matters like mergers and the admission or expulsion of partners, but more and more of the key decisions are now made by the Managing Partner and the Executive Group.  As the firm’s profitability and success becomes more and more reliant on the joined-up effort of the firm and its groups and teams, and less on the performance of key individuals, the whole issue of partner rewards becomes extremely sensitive as partners come to terms with the notion that compensation decisions may be decided by peers.  It is at this stage that so-called lockstep firms (where partners share equally after a period of progression to equality) come under challenge. Unless great care is taken, burgeoning bureaucracy can also start to stifle enterprise; partners are no longer under the same entrepreneurial liberty to take hiring and financial decisions themselves or on the hoof.

The future of the decentralized firm is highly dependent on the quality and competence of the Executive Group.  In previous phases, management and leadership tasks have been driven more by the availability of people rather than by their competence.  The group of professional managers hired a few years back may not have the ability to take the firm to the next level.  Whatever governance structure has been agreed, the danger is that firms in this phase can easily plateau or even go into a period of decline and premature aging. 

Even firms with strong and capable leadership, excellent decision-making and compelling competitive strategies, find it hard to ensure lasting success for the firm as an enduring institution.  Hence, some firms remain as mature firms in their prime for many years without ever managing to take on a degree of permanence which will enable the firm to outlive its current generations of partners.

The Institution Phase

The holy grail of organizational success is to become an enduring institution – that is, a firm with a set of traditions and time honoured structures and norms, with a distinctive way of life, a stable and reputable brand and a long-term client base.  These are firms which are more like clubs than commercial organisations but where a pronounced passion for excellence has become part of the firm’s DNA.  The firm is often governed and managed with a light touch.  The management structures have become less formal and partner discipline is self-imposed by the firm’s culture rather than driven by performance management regimes.  Leadership is statesmanlike rather than authoritarian.  Membership of the firm is more of a psychological contract than a commercial agreement.  Roles are flexible and contextual rather than rigid and contractual.  Long term success becomes sustained rather than episodic.  Very few law firms manage to achieve this status.

Stifling Points

During the firm’s creative phase, the danger is that the founder group’s loving embrace becomes a stranglehold which stifles continued growth.  The sudden departure of a founder – even temporarily – can cause paralysis.  The firm can at this stage become ensnared in the ‘Founder Trap’ and decline.  During the firm’s directive phase, delays caused by the constant need for consensus or which result from the need for a decision from a leading coalition can easily stifle the firm.  During the decentralized phase, firms can become equally stifled by a burgeoning bureaucracy or by the needs of the firm advancing beyond the level of competence of its managers.  Both Firm A and Firm B are becoming stifled and need to work out where they are in their growth cycles.  After mature reflections and discussions they need to develop some studied and deliberative decisions about their strategies, governance and decision-making for the future.

March 7, 2011

Conference in Delhi 12th March

Filed under: Uncategorized — Nicolas Jarrett-Kerr @ 11:41 am

I am one of the main speakers at a conference in Delhi this coming Saturday 12th March.

With the remarkable development in the Indian economy, the legal fraternity is facing intense competition from within and from international peers to leverage their profitability. In this situation it is difficult for a law firm to follow traditional ways of business. In today’s world the emerging trend of Law Firm’s business management is to approach/connect to potential clients and offer them before they seek your assistance.

The day-long Legal League business workshop — “Creating Sustainability and enhancing profitability through Business Development” — will be inaugurated by Mr. Lalit Bhasin, President, Society of Indian Law Firms (SILF). The workshop will explore the ways by which a law firm can develop their business, build long-term enterprise value; and provides the tools that a law firm require to survive in high competitive market, strengthen client relationships, mining existing clients and secure long-term performance.

See the link here

March 2, 2011

Facing Even More Facts

Filed under: Uncategorized — Nicolas Jarrett-Kerr @ 3:58 pm

Dear Friends and Associates Towards the end of last year, I wrote an article called Facing Facts in which I exposed seven of the most common fallacies and dangerous half-truths evident in law firms today. In this newsletter, I propose three more to add to the list to make up the top ten tendencies for self-deception that I see in law firms today. As always, I welcome your comments and feedback Facing even more Facts My “Facing Facts” article highlighted the following delusions and dangerous half truths

1. “We only do High Level work”

2. “When the recession is over, all our work will come back”

3. “All our clients remain loyal”

4. “We are efficient at using Technology”

5. “We are well-managed and Disciplined”

6. “Commercial law is our route to success”

7. “We are well-known and highly regarded”

 Here are three more typical fallacies or half-truths to make up my top ten!

8. “The normal rules of economics don’t apply to us!”

Even despite the recession and growing pricing pressures from clients, many law firms still continue to base their budgets and business recipes on an old-style hours-times-rate basis. Under this cost plus methodology, the firm works out its probable overheads, calculates the profit it wants to make and then assumes that it can then target the resulting revenue figure by multiplying available hours by a set of market-based hourly rates. If the resulting calculations fail to produce the right results, the big discussion then turns to how the firm can improve utilization, increase rates, improve margin by cutting overheads, or somehow further develop leverage. The debate is usually entirely internal and inward looking and begs all sorts of questions such as how the firm is going to try to develop competitive and compelling strategies, increase its market share or provide true value to clients. What should be clear is that the laws of supply and demand, as well as the relationships between the challenges of value, pricing and profit are faced by all businesses and law firms are no exception. . The problem is that the old profit-making formulae for law firms have served the profession so admirably for so many years, that some partners find it hard to adjust to the fact that law firms are businesses like any other, and may need to plan more strategically in the future.

 9. “Clients always want a personal and partner-led service”.

There is absolutely no doubt that clients continue to value a strong relationship with their lawyers and the role of ‘trusted adviser’ is still a vitally important one. It is a mistake however to feel that any single partner is ever indispensable to any client. Clearly in many routine and commoditized areas or work, clients are more interested in efficiency and process than a strong partner-led relationship but even in complex matters, clients are very ready to be transferred on to someone who is more specialized or more cost effective to deal with their matters. Indeed, research shows that larger clients often become more tied in to their law firms where they have a relationship with more than one partner. The problem is that partners use this half-truth in order to justify client-hogging, as well as lack of delegation and cross-referral. In other words, every time a partner utters the words “this client needs me and nobody but me”, this can be a sign of partner paranoia rather than partner wisdom.

 10. “The best business development is to do good work for satisfied clients.”

 There is of course a lot of truth in these words, but at best it is a half-truth and a possible comfort zone issue of self-delusion. Many years ago I was a trainee lawyer at a firm in a suburb of London. It was the leading firm in its locality. I am sure it has continued to do excellent work for satisfied clients but the fact is that the firm has shrunk in size and has certainly failed to grow in substance over the last thirty years or more. It is now a very minor player in its market place. If a firm is to grow in stature and reputation, then it has to do more than serve an existing client base. Growth for growth’s sake is not a strategy. However, every firm needs to consider the minimum amount of growth necessary for the firm both to retain its existing market position and to develop its strength and ability to perform or survive. Clearly, all firms need to have a viable market standing. In a consolidating market, most firms therefore need a high minimum growth rate in order merely to stand still, or maintain existing competitive advantage and levels of profitability. Business development is one means of achieving such growth.

What can be done?

In my original Facing Facts article I suggested that the way forward for firms was to take three essential steps – working through what their foundation is for their competitive strategy, deciding their overall strategic direction and finally deciding the methods by which the firm might pursue its strategy. However, I am clear from many conversations with Managing Partners that they are fully aware of the dangerous half-truths and fallacies which I have listed. It is mainly back bench partners who are tempted to delude themselves with any rationalisations by which they can justify a ‘do-nothing’ attitude. Managing Partners may therefore still be left with a “hearts and minds” issue as they seek to persuade their partners and staff to face the facts and move out of their comfort zones.

Nick Jarrett-Kerr (nick@jarrett-kerr.com) is one of the leading advisers to law firms on leadership, management and strategy. Nick is Visiting Professor to Nottingham Trent University where he leads the strategy modules on Nottingham Law School’s MBA in Legal Services. For information and contact details please visit http://www.jarrett-kerr.com.

February 18, 2011

Praise for “Facing Facts”

Filed under: Uncategorized — Nicolas Jarrett-Kerr @ 11:31 am

I was delighted to get an email recently from a Managing Partner who had read my article “Facing Facts” (see earlier posting). The email said “I do not want to go over the top, but I just wanted you to know that I thought it was one of the best management articles I have ever read and that I am adopting it as a text to prepare this year’s business plan.”

February 15, 2011

Stress Testing Strategic Plans – the Seven Essential Elements in Strategic Planning

Filed under: Uncategorized — Nicolas Jarrett-Kerr @ 10:53 am

In my view, there are at least seven elements which must be covered in any planning exercise.  These elements can be used as a checklist for stress-testing an existing strategic plan or to inform a strategic planning review. 

First the strategy must be futuristic – it should look at the future and consider trends and developments which may affect the Firm for better or worse. To be able to compete in the future, someone somewhere in every law firm (hopefully more than one) is going to have to form a view of the opportunities and threats out there.  This analysis ought to be radical and forward thinking, but is more than just a brain storming item at a partners retreat – there needs to be careful and painstaking research and information gathering.  It ought to be a mixture of blue sky thinking and visioning  – daring to dream, if you like – and painstaking research into markets and trends.

And you need to look at what others are doing both in our profession and outside it, in this country and further afield.   I would go so far as to say that more than 50% of what law firms are going to have to learn in order to face the future will have to come from outside our own profession – other service industries, High Tec, Manufacturing and so on.

Finally, so many strategies talk about moving from where we currently are to a place where we might be in the future – ‘from here to there’ philosophy. I believe this to be the wrong way round.  We should try to stand at some point in the future and work backwards from there.  If, for instance we had known in, say 1999, what we now know about the market place and working practices, how would we have changed our attitudes, actions and the way we practice?  The sort of questions to be asked will include ‘do we have to practice in that way?’ ‘Is there a different way of doing things?’  and ‘what demands can we contemplate from our clients –present and future – arising out changes in the way they will be doing business?’

 Second, to be any good, your strategy must address what your firm is currently doing to be successful, and the areas in which it is likely to be successful going forward. When a client is choosing a single law firm, there are no prizes for coming second.  A good starting point is to think about the things you are good at – a reality check if you like.  This should also focus on the areas where you need to improve in order to win, as well as the areas where you have a chance of adding value to clients. 

 The triangle or pyramid shows three dimensions,  at the top the internal ‘ecology’ of the firm, then what the clients, your referrers and the market think of you and finally – left hand bottom – what the reality of your situation is.

 1.     The reality check should be internal and external. The internal examination may entail a certain amount of navel gazing but it is important to keep this within limits. What sort of Firm are we?  What is our culture?  How do we do things?  What structures and systems do we have and what are our skills?  How do we behave to each other?  How are we financed?  The answers to these questions will help identify how (internally) you are different from the other firms round about you.

 2.     Next, how does the market see us?  What is our reputation?  Are we trusted?  Do we have credibility?  Are we seen as cheap or expensive?  Do we have a strong brand?  What do our clients say about us?  Who would the market say are our competitors and our natural boundaries?

 3.     Finally, what is the reality?  What is our list of core clients?  In what practice areas can we really claim to be strong and where are we weak?  Whom do we regard as our competitors?  How do we deliver our services – in person, on the telephone, electronically and so on?  And where do we deliver our services – what is our geographical reach? Do we rely extensively on our Partners to do the work or do we have an engine room of other fee-earners with case management systems which do most of the work?

 The point about the pyramid or triangle is to assess whether or not all three areas are balanced or aligned.  If, for instance the perception of the firm in the market place is better than the reality of your clients and service quality, then the firm can be said to be ‘punching above its weight’.  So often it is the other way round and then you know that some of you objectives and goals need to be centred upon the improvement of your market perception.

Finally, this examination should enable you to define your core focus – those things which make or will make you famous, and the areas where you have strength in depth

 The third essential element to a successful strategy is that it must include a set of goals and objectives.  Unless your strategy is firmly rooted in action, it will be ineffective.  And the objectives must be action-based too.  Consider for example an objective such as ‘we must win better clients’ or ‘we aim to continuously improve profitability’   – unless it can be refined down into a task or series of tasks, these are meaningless aspirations.

 The fourth essential element is the area of sharing and ownership. The plan delivered from on high just does not work. To stand any chance of success, the strategy must be contributed to and owned by all the partners.  Much of the work will of course be done at a high level, and leadership, inspiration and vision needs to be evident from the firm’s leader or leadership group.  But if the strategy of the firm is seen as an iterative, ongoing process, it may not matter exactly how long it all takes as long as the rubber has already hit the road as the process is gone through. 

If involvement and engagement has been achieved throughout the firm, then the task of implementation and follow through becomes easier.

 The fifth essential element is that the Law Firm must figure out how it is going to stand out from the crowd – the issues of differentiation.  The whole area of market positioning and differentiation is dealt with in an article of mine which was published in Law Business Review in 2009, and which, for ease, I am reposting here.

The sixth  essential element in any Law Firm Strategy is that it must focus on profitable growth, rather than growth for growth’s sake. To gain growth in profit, four key levers have to be methodically applied – margins, leverage, utilisation and realisation – and technological solutions are key to all these, if integrated with the overall strategy for the business.  The majority of law firms still have a lot to do to clean up their financial disciplines.  There are very few firms who can claim to be working with maximum efficiency and full productivity.  Chargeable Time is still lack-lustre.  Write-offs and leakage occur all too frequently.  Billing disciplines almost everywhere can be improved.  Lock-up in debtors and Work in Progress are still too high in most firms.  Overheads and budgetary controls are often not rigorously in place.  What is more, issues of underperformance, both at Partner level and below that, are tolerated and not confronted.

Strategies for law firms should, therefore, include some measures for better financial disciplines, firmer accountability and stronger management of the Key Performance Indicators. 

A greater focus on Leverage, also, is essential.  Leverage can be defined as ‘any measure which gets things done at lower aggregate cost’ – through technology, ‘packaging’, or people, with less partner time on matters and more time at a non-partner level.

Finally, the Business Development Strategy should be focused on gaining higher rate, more profitable, work, whilst the less profitable work is dumped.

The seventh and perhaps the most important element is that the strategy should add value to clients, is aimed firmly at the fulfilment of their latent and blatant needs, and provides the necessary resources and  capabilities to enable the firm to obtain the most lucrative work possible during the lifetime of the plan.

Market Positioning – A diagnostic guide for law firm development

Filed under: Uncategorized — Nicolas Jarrett-Kerr @ 10:25 am

(A slightly shorter version of this article was first published in Law Business Review, Summer 2009)

 At first sight, a recession may not seem the best time to overhaul radically a law firm’s strategy.  It seems more intuitive to batten down the hatches, trim overheads, tighten up the operation and wait until the recessional storm clouds recede before attempting any dramatic change of direction.  If, however, past recessions are anything to go by, this is just the moment for bold and agile firms to make any move which can perhaps give them some sort of advantage over their competitors.  There are three possible attacking moves which a firm might want to consider during a recession.  In the first category, some firms may feel that their survival strategy is best served by going for further growth or by becoming part of a bigger enterprise where the advantages of scale, critical mass, and deep teams will allow them to maintain or improve their financial and competitive positions.  For the second type of move a firm may elect to follow a strategy that allows them to avoid all the disadvantages of growth and to remain niche (or at least small) by competing in a restricted set of markets or services and specialisations, and by occupying specific strategic positions relative to competitor firms in terms of quality, or cost, or client focus.   This strategy is not as easy as it sounds as it may require the firm to discard irrelevant or unprofitable offices, departments and partners. These two attacking moves have at their heart a desire to improve or change the firm’s competitive positioning in the market-place.  Similarly, a third category of move means a firm might therefore seek dramatically and radically to change the firm’s market position in other ways, and this article examines what this might mean and how such a venture might be approached.

 The nature of market positioning in the legal profession

 Put at its very simplest, strategic choices can be distilled into two basic parts.  The first is the firm’s choice as to where it should compete (positioning) and the second is the firm’s strategies to address how it should compete (gaining and sustaining competitive advantage). 

A law firm derives its ability to compete from a number of different factors – its tradition and history, the market-place it is trying to serve, both in terms of geography and client types, where it fits into that market-place, what services it is offering and in what industry and market sectors, and its credibility in offering those services.   To a large extent, most firms’ market position – where the firm chooses to compete – is the result both of choices made by its partners many years before and evolution since then, as opposed to a recent decision to make a radical shift in strategic choices.  In assessing a firm’s ongoing strategy, it important to understand where it is now and what realistic decisions the firm can make to address a profitable future.  Radical changes to a firm’s current market position can only be made with enormous effort and large-scale investment.  A firm’s positioning also is aligned with its approach to market segmentation – the groups or segments of clients and potential clients who have broadly similar needs and perceptions of value

At the same time, we are beginning to see a number of generic market positions arising in the legal profession both nationally and throughout the world.   Although most firms will fall into one of nine generic types shown on Table 1, an important point must immediately be made.  This is, that every firm has its own unique history, tradition and culture and may well enjoy features from more than one generic type.   The table – or diamond matrix – is therefore offered as a diagnostic planning guide rather than a set of prescriptive ‘pigeon-holes.’  The table’s nine different generic types of market position, is also divided vertically into five segments of client demand.  The description of each generic type and its unique features helps to understand where firms might stand and how firms can develop their strategic choices. 

The table is contextual and applies to the relevant market for any firm, which will usually mean the domestic market within which the firm is practising.  Whilst the table can also be used to consider the global market-place, it is perhaps most relevant to think of it in terms of the market in England and Wales – the market to which the Legal Services Act will immediately or imminently apply. The diamond shows five different layers or divisions of law firm working from top to bottom. The first layer – Market Rulers – contains the premier division of law firms.  The second layer contains two types of firm which I have described as Challengers and Designer Labels and forms the first division just behind the premier division.  The third layer or division is made up of three different generic types of law firms – Bulk Suppliers, Local Heroes, and firms which I have described as Endowment Firms.  The fourth layer contains Agglomerations and Utility Players whilst the fifth division contains a large number of Minor League firms.  The typical profile of each generic type demonstrates their positions in terms of sustainable competitive capability, dominance characteristics (if any) as well as comparative performance and profitability. 

These five layers or divisions more or less match the segmentation of the legal profession, with the Top Tier work (complex transactions, financings etc) going mainly to Market Rulers and the top end firms in Tier Two, and the purely local and low grade work going to the lower tiers of firm.

Each segment in the diamond describes a typical market position for a law firm.  The diamond does not, however, seek to define the number of law firms in each segment, nor their relative sizes.  There will, for example, be very few Market Rulers and it is likely that they will all be very large law firms.  There will also be large numbers of Minor League firms but they will all be small in size.  There will also be large numbers of Utility Players of varying sizes.   

Market Rulers are the major national and global players.  They are often to be found as magic circle players in most capital cities and amongst the global leaders.  These firms apply the laws of dominance to attain huge critical mass.  This means that they can field deep teams across all or the majority of the heavy-lifting areas of corporate and commercial work and can resource major transactions and matters at a moment’s notice. It also means that they can provide leverage to all their transactions and matters by producing expert teams led by highly competent and leading specialists.  They also have a strong brand and name in their jurisdictions which command respect and credibility.  They tend to get the high profile mandates from an impressive list of top clients.  They also tend to be the pricing leaders in any area and they often have clout in government relationships and the corridors of judicial and regulatory power. Because of their resources and their investment capability they are often at the leading edge of unique new flexible capabilities.  Hence they are able to ward off or defend against attack by always being one step ahead of the competition.  Market Rulers are also preeminent in terms of superior profitability and performance. Their profitability is based on three main profit drivers.  First, they tend to be involved with the high value deals and the ‘bet the firm’ issues where premium pricing can be applied.  Second, they tend to be efficient in the management both of overheads where they gain huge economies of scale and the maximisation of productivity.  Finally, the application of leverage through the building of deep teams helps build and sustain an enviable profit model.

The second layer is made up of Challengers and what I have described as Designer Labels.  Whilst these firms differ widely from each other, they do share some common characteristics with each other and the Market Rulers.

Designer Labels.  This genus describes three distinctive types of firms who have some broadly similar positioning and competitive characteristics.  Two of these types have also been described by commentators as Focus Firms and Portfolio Firms.  The focus firms – also and perhaps better known as niche firms – are usually highly differentiated with narrow scope.  They tend to either specialise in one or a few particular areas of law or in carefully defined sectors of client types or industries.  In relation to a niche firm’s chosen markets, they share many of the same features as demonstrated by Market Rulers and may indeed be market rulers in their areas of fame.  They do not however enjoy the same spread of services offered, sectors served, nor do they usually have the same global geographical reach as Market Rulers. 

The third type of Designer Label firm describes firms which may be relatively full service but who exploit some other distinctive characteristic which appeals to certain types of clients – such as a range of unusual but strategically placed locations or an accentuated brand image – which helps to define them and give them a competitive edge. 

Designer Labels are usually extremely profitable and their specialist core focus makes them highly competitive.  They often have an impressive base of clients who value their extreme efficiency and their sector knowledge.     Niche firms with a client sector based approach include firms specialising in the Public Sector, Media, Shipping, Aeronautics, and Pharmaceuticals.  Examples of firms with specialist areas of law include firms focusing on such areas as employment law, IT, tax, white collar crime and personal injury. These firms have made a distinctive choice to avoid the temptation to become a full service jack of all trades but master of none.  They will seek instead their own areas of fame within some specifically defined areas.  Within those areas Designer Firms share some of the characteristics of Market Rulers.  The question becomes whether or not their competitive capabilities are sustainable over a long period of time.  The problem is that in legal firms no competitive capability can ever be permanent.  The more that a firm restricts its services or its sectors, the less chance of adaptability, diversification and innovation it has.

Challengers.  Challengers are firms who traditionally have been a bit behind the Market Rulers but are making a strong bid to climb into the elite club of law firms.  In short they are firms who are seeking to attack the position of the dominant firms by a combination of smart strategies, huge investment and driven leadership.   Often firms such as these operate from a traditional position of strength as they are usually highly profitable and often enjoy excellent client bases and heavy-hitting business development capability.  DLA Piper falls into this category.  Firms such as Eversheds and Berwin Leighton Paisner are also firms who would like to see themselves as challenging for elitedom.   Challengers also enjoy a lot of the same features as Market Rulers but their brands do not carry the same level of client assurance and credibility.  Their areas of core competence may also be similar but the experience base is often not as strong, and the development of experts with deep ‘guru’ status is not as pronounced.   Alternatively, a firm falls into this category if it is dominant in its own national market but, whilst having some international offices, cannot be described as a true global heavy-weight. Challenger firms are often also the first movers in trying to ‘break the mould’ so as to be at the leading edge of new law, new service methodologies and new trends.  Pioneering firms therefore include firms who are using innovation and new methods of service delivery (such as the outsourcing of back office IT and accountancy processes) as ways of breaking new ground.  Challenger firms can also be pioneers in developing services in emerging or growing areas and in time these developments can lead to the gaining of a strong or dominant market position.  

 Firms in the Challenger category are likely to include a number of organisations which would be keen to use the possibilities of the LSA to obtain external funding in order to fuel expansion and development.

The table then descends to a third layer, comprising three generic types of law firm.

Bulk Suppliers.  The Bulk Supplier is a fairly new phenomenon.  The philosophy is that the best way of making large amounts of profit out of commoditised work in the legal professions is to pile it high and sell it cheap, making use of technology and low cost employees.  In order to achieve a high volume low margin profitable position, such firms have to grow quickly to become big and to obtain much of their work by large amounts of marketing and selling in individual markets within one or more jurisdictions.   Thus the profit drivers of such firms are systems and leverage to take advantage of high volumes albeit at low margins.  The differentiating features of such firms are pricing and branding.  The problem with using pricing as a differentiator is two-fold.  First it is difficult to sustain a position of being the cheapest in a sector where somebody else will always try to undercut you.  There can be only one cost leader at any time in any profession or industry.  The second issue is that most buyers of legal services tend in the long-term to purchase on value rather than price.   

It also has to be remembered that the power of advertising and branding has only become evident in the legal profession in England and Wales within the last twenty-five years, and due to the large number of law firms in being and the relative fragmentation of the profession, we have not yet seen the sort of branding phenomenon experienced in the financial services sector.   In the short-term, however, the advent of a small number of heavily marketed bulk suppliers has already proved to be a massive challenge for the High Street practices and these challenges are likely to grow stronger and to threaten to a more worrying extent.  The advent of the LSA will affect the market in two ways.  First deregulation could well see non-legal organisations such as Tesco and the Coop making a bid for volume work by establishing their own law firms.  These firms have no particular uniqueness in their sales proposition and rely on their assurances to clients that they can do the job quicker, cheaper and with the minimum of fuss.  Hence, they rely on efficiency, systems and processes to enable them to take cost out of each matter.  The second threat is from the existing leading Bulk Supplier law firms.  In the field of personal injury litigation, a number of firms such as Irwin Mitchell, Russell Jones and Walker and Lyons Davidson have grown enormously and by implementing systems, processes and the features of commercially run businesses have begun to erode the ability of the Utility players and Minor League firms to compete.  Yet none of these firms seems to have more than a 5% share of the available market for such work.  The advent of the LSA will enable these firms to introduce external finance in order dramatically to build market share and further to dominate the market for personal injury services.

Local Heroes.  Almost every country, city and town has a firm which has achieved national, regional or local fame and even dominance.   Examples in the UK include Wragges in Birmingham, Walker Morris in Leeds and Burges Salmon in Bristol. 

Local heroes also share many of the features of Market Rulers.  Indeed they are usually Market Rulers in their own fiefdoms.  Their client bases are strong and the depths of their teams and strength of their specialised core competencies is usually huge.  Their profitability is also good, although not as high as the Market Ruler firms, because of their inability to charge premium rates. 

The drivers of profitability for these firms are usually a combination of factors which place them in a strong position of profitability relative to their local competitors.  Thus pricing, though lower than the premium pricing obtainable by Market Rulers, and leverage, can be applied to their strong local client bases.  Whilst these firms might not be able to aspire to the very top tier of complex global transaction, they nevertheless enjoy a good selection of high value work.  Some Local Heroes also have Designer Label status in such areas as private client and public sector, and some have niches to rival higher tier firms in corporate law, commercial property and commercial litigation.

Local Heroes however suffer from their lack of geographic reach.  They will not often have strong offices in more than one jurisdiction and indeed within the United Kingdom are very often to be found in only one major city.  The question for these firms in terms of their own positioning is where they go next.  The options for them are to stay as they are or to try to challenge for the next tier by becoming a Challenger Firm or even Designer Label Firm.

Endowment Firms The final type of firm in this third tier of firms is what I have described as the Endowment Firm.  Whilst almost every law firm depends to a greater or lesser extent on the client bases and traditions which they have inherited from the past, the generic Endowment Firm type relies predominantly or exclusively  on history and inheritance for their competitive position and profitability.  They are often yesterday’s Market Rulers.  Whilst their position remains strong, it is in danger of waning.  The strategy of the Endowment Firm is largely to continue doing what they have always done.   Such firms rely on the loyalty and inertia of their established client base.  Although it can be relatively easy and inexpensive to switch suppliers of legal services, clients will often continue to tolerate their existing lawyers rather than go to the trouble and risk of changing to a new firm.  Much of their client base is ‘old money’ individual clients and old-established corporate clients.  Endowment firms are often slow to move and averse to change.  The culture and routines of the Endowment Firm tend to be hierarchical, bureaucratic and risk averse making such firms slow to react to market changes. Innovations are largely client driven, and the development of new services, new clients and new markets tends to be reactive rather than proactive.  Such firms tend to be pillars of the establishment which helps them to be listened to in the corridors of power and to retain premier tier clients and partners.  Hence their competitive positions are based on their status as known quantities and client perceptions that they remain thoroughly safe hands.

Utility Firms.  Every geographical market contains a host of small and medium sized and even quite large firms which are general practices offering a broad range of services to a broad range of clients. These firms have few differentiating features except for their relationships with their clients and convenience of location.  Utility Firms have also been described as ‘Vanilla Firms’ to describe somewhat ordinary firms who are simply part of the pack.  Utility Firms rely on conformist copycat strategies to ensure they do not fall too far behind their competitors in terms of specialisms, services and processes.  Profitability is largely based on maintaining high productivity and efficiency with a carefully controlled overheads base.  The existence of a few loyal star partners and staff often help to carve out a niche or degree of fame and expertise in particular sectors or specialisms.  Utility Firms share some of the characteristics of the next tier up.  They will often have a department or niche dealing with bulk commoditised services, or they may have some niche specialisms which are characteristic of Designer Label Firms.  In their particular locality, they may be one of the firms challenging for Local Hero status.

 

Agglomerations tend to be consolidations of firms nationally or regionally whose strategy is to create bulk and critical mass in order to challenge for their market position. Such firms are often created by unrelated acquisitions and consolidations and spend significant periods of time trying to shed old inefficiencies and unprofitable clients and are guilty of over-partnering and inefficient working practices.  Hence their profitability is often unremarkable and their specialist areas can often be wide rather than deep.  Many agglomerate firms remain large but mediocre and rather amorphous.  Increasing size as such is not a strategy as it is based on the theory that you have to be big to be credible, and because by getting bigger, the firm will be able to compete.   There is no doubt that in the minds of clients, a large firm provides a greater comfort factor than a small firm.  To clients, size can be a proxy for excellence, deep resources, expert teams and tough punching power.   The point here is that an agglomeration can only give a temporary competitive advantage and should therefore be seen as a launching pad for swift transition into a higher bracket. These firms will usually therefore make their way into one of the other higher profitability brackets.  If they fail to achieve such an upward move, they will generally see contraction in size as partners leave or are pruned, and will often slip back into their former market positions. 

Minor League players form the majority of small and medium sized firms throughout the country who are struggling both to provide something unique to the market and to provide profitable performance.  The competitive characteristics of a Minor League firm tend therefore to become factors like convenience (locality of office), local knowledge and price.  The competitive disadvantages are however formidable – lack of investment capacity, low profitability, succession issues and competitive pressures from above.  The Minor League firm cannot compete on price with the Bulk Suppliers nor does it often enjoy the specialised experiences and resources of the Local Heroes with whom it is usually trying to compete for the better value work.     For the minor league player the positioning opportunities are restricted.  It is not easy on any part of the diamond to move directly or diagonally up.   Exploiting any particular strengths the firm may have may enable the firm to become a Utility Player, but whilst this might improve the firm’s position a bit in terms of performance and profitability, the firm is still exposed to an uncertain existence in an increasingly competitive market.   In the face of these issues, it is not surprising that many Minor League firms are taking refuge by becoming subsumed – where they can – into larger firms. 

 Choosing the right firm to join

 The diamond matrix can be a useful diagnostic tool for a lawyer choosing to join a new firm.  A number of research projects over the past few years have demonstrated again and again the importance of work quality for the young lawyer, as well as career prospects.  Clearly, the quality of work available to a lawyer is likely to be higher towards the top of the diamond, whilst the early prospect of partnership is more likely at the lower end.  Extreme specialists in any discipline are likely to choose firms which at least have Local Hero or Designer Label status, whilst all rounders may find life more comfortable in a Utility Player Firm.

The first challenge is to try to identify in which segments any short-listed firms actually are placed, and then to decide whether the firm’s position and characteristics match the individual’s ambitions and aspirations. In the second place, the matrix can help frame the questions which need to be asked about the firm’s current position and prospects – whether the firm is on the rise or the wane, and whether it has a firm grip on its direction and future. Warning lights should flash if the firm appears to be in more segment than one.  Although it is possible for a firm to overlap segments, nevertheless the business recipe, culture, structure and pricing models vary enormously in different parts of the matrix.  Firms have, for instance, found it somewhat hard at the same time to operate high volume low margin services and low volume, highly priced services within the same firm.  Finally, and maybe most important, the matrix can help candidates to consider whether the firm which seeks to recruit them has a competitive future in which it appears well placed to beat its rivals.

Repositioning and Gravitational Pull

 It is important to appreciate that a firm can dramatically improve its performance and competitive position within the positioning segment that it already occupies.  The increase of competitive capability in no way requires a firm to change its basic positioning or to become a very different type of law firm.  Whilst it is difficult to move upwards in the diamond, gravitational forces will tend to pull a firm down by an increase in competition, or by the firm’s own default and incompetence.  This gravitational pull is usually into one of the three boxes on the south-eastern side of the diamond – the Endowment, Utility and Minor League boxes.  Hence a Market Ruler firm can lose its dominance and become an Endowment Firm through complacency.  The Utility Firm, long enjoying medium profitability and competitive capability, can find itself elbowed into the Minor League box by Bulk Suppliers, Local Heroes and even by Agglomerations.  Here, again, the advent of the LSA produces an extra area of threat through the advent of new competitors and the increase of competitive resources of existing firms through external investment capacity.  The strategic response to such competitive responses must be for firms not only to improve performance within their overall existing market positioning, but to consider whether repositioning might be part of their ongoing strategy and aspiration.  Thus a Utility Player firm may well build a strategy to become a Local Hero or to try to become a Bulk Supplier.  A Local Hero might choose by one means or another to become a Designer Label or to challenge the national elite by trying to take up the position of Challenger.  There are at least four steps a firm has to consider in order to address the improvement of its competitive position, either by repositioning or by becoming more competitive or differentiated within an existing competitive positioning.

 Repositioning Step One – Understanding the importance (or irrelevance) of geography, location and size

 The diamond matrix has some geographical overtones.  The Market Rulers at the top of the diamond will certainly be nationally elite and will usually also have international or global capability and profile.  At the other extreme, the Minor League firms at the bottom of the diamond will be primarily reliant on their local client bases and markets.  There seem to be an increasing number of firms describing themselves as ‘regional’ or even ‘national’ and whilst the diamond does not factor in the number of offices, the location of the firm or its size, certain competitive characteristics of so-called ‘regional’  and ‘national‘ firms will usually bracket them into one of the diamond segments.  Regional firms can be defined as a firm either with more than one office in a particular region or one whose reach of services and client base extends across a whole region.  Thus a ‘regional’ firm can be a Local Hero, an Endowment Firm or one of the lower categories depending on its competitive capabilities.   In the same way, a ‘national’ firm is one with national reputation and reach.  The three segments at the top of the diamond – Market Rulers, Challengers and Designer Labels – will all have national characteristics.  In the same way, Bulk Suppliers can also be national.  Agglomerations often aspire to national status due perhaps to a proliferation or network of offices, but unless those networks improve their competitive capability by coordinated and integrated services and nationally organised practice areas, these firms will remain Agglomerations – their national geography is not meaningful to clients.

In the same way, size tends to become a consequence of strategic positioning rather than a cause of it.  Market Rulers, for example, will tend to be large, not least because they will have deep teams across many practice areas.  In addition, the rules of dominance are predicated upon, amongst other things, an increase in market share in chosen markets.  But size is far from being everything.  There are some fairly modestly sized Designer Label firms who are extremely famous and competitively eminent.  Equally, there are some very large firms who remain mediocre in terms of quality, competitiveness and performance. 

Whilst therefore the importance of size can be overstated, scaling up the firm can provide some important advantages and can be part of a repositioning exercise.  The question needs to be examined first from the clients’ point of view – how important is the issue of size to a firm’s chosen client types and sectors.  In this context, it is certainly true that size usually means that the firm has critical mass and resources, with the possibility of large specialised teams and strength in depth.  Size can also be taken by clients as a proxy for excellence and quality.  An internal analysis of the size question should additionally concentrate on the building of resources and capabilities and the firm’s investment capability to hire people, diversify into new markets, or improve the value of services to clients.  The size question often dominates merger discussions, for example.  Here the diamond can help.  If the merger of two Utility Player firms is merely likely to lead to either a larger Utility Player firm or a sideways movement into the Agglomeration box, then at first sight the merger is pointless.  The rationale for such a merger always has to be that a sideways step into Agglomeration forms an important stepping stone towards becoming a Local Hero.  Equally, the merger of two Local Heroes merely creates a larger Local Hero, but may provide a route into becoming a Challenger firm.

 Repositioning Step Two – Aligning Resources and Capabilities to the firm’s Value Drivers

At the simplest of levels, the job of a lawyer is to provide solutions to problems and issues which the client faces.  The victim wants redress, the house buyer wants to move, the disputant wants a successful result (or at least a good compromise) and so on.  The main challenge for any law firm is to satisfy its clients that it can give them the successful outcomes which they perceive that they require at a cost which the clients feel to be value for money.    The diamond helps to establish some of the drivers of value for each segment.  Top tier work requires high levels of expertise and specialisation across many areas of legal service as well as deep resources, and sound reputation and credibility.  A premium price becomes an inevitable concomitant.  Smaller clients may require the convenience and personal attention of a Utility Firm or Minor League player with whom they feel comfortable.  Conveyancing and personal injury client may simply require the job to be done cheaply and efficiently.  Hence the value-price equation for any law firm is to a large extent determined by its market positioning on the diamond and the perceptions of value formed by the client types in the relevant market segment in the context of the work which those clients require their lawyers to do.  It is important to appreciate that the features, functions and processes of law firms that the clients perceive are of value to them can be developed and moulded into capabilities which can be appraised against two key criteria – strategic importance and relative strength (against competitors).   The exercise of analysing resources and capabilities – carried out at practice group level – helps each department or group to work out what it is that benefits existing and potential clients and which they find useful in their lawyers.    The assessment of competitive strength compared to competitors forces firms to analyse in some depth the competitive environment in which they operate.   The resulting blends of organisational capabilities that are both strategically important and which place the firm at a strategic advantage become the main drivers of value for the law firm in its competitive strategy.

 Repositioning Step Three – Planning for Action

Much of the work set out in Step Two will be carried out at departmental or practice group level.  The outputs from this work need to be brought together to create an overall understanding of the firms current and desired positioning and competitive advantage.  By this time, the firm should be fully and sometimes brutally aware of its competitive strengths and weaknesses, the aggressively competitive market-place in which it is operating, where the firm currently stands in that market-place and the resources and capabilities (both tangible and intangible) available to it both to defend existing positions and to attack the competition.   There are two further elements which need to be considered.  The first is to establish some agreed goals and objectives.  The second is to consider implementation.  It might at this stage be fairly argued that an agreement over goals and even vision should be the first step in any strategy formulation.  The problem is that most partners in most law firms have a very disjointed and vague idea of what a realistic, credible attractive future for the firm might be.  They often seem to talk of being a top 50 law firm, or a regional law firm or a firm preeminent in a certain area or a leading commercial firm.  While such thoughts may give some basic clues, they do not really help the firm to decide its direction and strategy in ways which will help the firm to be successful.  Added to this, many partners of law firms are more focused on their personal career objectives or the goals of their office or practice group than of the whole firm.  Hence, by leaving the creation of goals until step three, it is possible to have a discussion which is grounded in analysis, cognitively reached insights and realistic appraisals rather than gut reaction. 

What is vital, however, is to achieve some goals which are simple consistent and long term and which reflect the ambitions of the firm and its partners and reinforce the firm’s values.   In setting goals, it helps to be able to identify the spectrum of conditions and opportunities available to the firm as well as the areas where the firm is best placed to focus its attention and resources in order to develop new clients, new markets and new revenue streams. 

To accomplish this, the partners need to review, discuss and digest the information and then develop observations about the firm and its environment.  The result will be a variety of different pathways for the firm’s future which can be developed into strategic objectives

Summary

Changing or maintaining a firm’s winning position is hard.  It is not enough to do nothing and rely on past traditions and glories to enable a continuance of a successful business recipe, as all market positions tend to erode over time.  Competitive advantage is at best temporary and can rarely be sustained indefinitely.  Any review and analysis of a firm’s competitive positioning should start and finish with an image of the possible and desirable future state for the firm that is in some ways better than what currently exists. This image can then be boiled down into a brief statement – short and simple – that can be used to develop both a shared commitment by the partners to the firm’s desired goals, and also as an impetus to a period of sustained and deliberate action plans aimed at enabling the firm to beat its competitors.

Nick Jarrett-Kerr (nick@jarrett-kerr.com) is one of the leading UK and international advisers to law firms on leadership, management and strategy. He is also is a module leader for the Nottingham Law School strategy modules and a core MBA faculty member.

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