A radical break from the lockstep system is needed if firms are to survive in a new tougher marketplace. Nick Chaffey, Harriet Oppenheimer and Zorana Bull look at how the lessons learnt in other sectors can be applied to the legal profession.
Law firms are facing many challenges. Clients’ commissions are increasingly complext, requiring integration of capabilities from across the firm.
The traditional style adopted by firms, whereby independent practices acquire and resource new commissions, is under threat and will be exarcebated by the proposed opening up of the market. To alliances and partnerships.
Clients are already cost conscious and this is increasingly becoming the basis upon which to compete. They are also looking for legal firms to take a greater stake in the successful resolution of cases, and be able to demonstrate the value added to the business. This demands effective management of commercial risk, often a new skill.
Professionals are demanding better growth opportunities and career prospects, which requires a new approach to people’s skills development – particularly in the face of competition for the best staff.
The advent of e-commerce is driving the commoditisation of some services and an increase in the channels taken to market, often removing much of the volume oriented work as sources of revenue.
To meet these challenges and thrive in the emerging business environment, law firms must embrace radical change across the firm.
Adopting a professional services business model
Lessons learnt in other industries experiencing comparable change, such as finance and consultancy, give us a proven way forward. Each of these industries has invested considerable time and effort in building a new way of working, which has been a key driver of profitability in responding to dynamic markets and client needs.
A model for professional services business must contain the key elements below:
- A new business framework
- Systems to underpin performance and knowledge management
- Project based working as a core competence
Applying a new business framework
The current business model for many legal firms is based on two assumptions that must be challenged in this new environment, namely that profit will be sufficient to satisfy partners’ expectations (and hence is only measured directly at the firm level) and that all partners are able to maximise the value of their work to the firm.
As the legal profession becomes ever more competitive, and commissions become more complex, these will become dangerous assumptions, not because the lawyers will become less committed but because without the appropriate, accurate and up-to-date information, the firm will be flying blind.
This may mean that the firm could end the year making a loss, which could then destroy the partnership model. Similarly it will be impossible to know which client engagements are making a profit and which are a hidden burden on the firm.
By directly tracking the profit contribution at an engagement level, it is possible to manage client engagements far more effectively. Partners can take profit and loss responsibility on a job-by-job basis, and the commercial management of the firm becomes far more transparent and robust. This also provides valuable information to the management group of the firm who will, perhaps for the first time, be able to directly assess the contribution to profit of each member of the partner group.
This contribution can then be made a significant criterion in allocating rewards. Such an approach would represent a fundamental shift toward a performance-oriented model for the profession, enabling the highest performers to be identified quickly and rewarded appropriately. By helping to retain and motivate the most successful within the firm, this approach would clearly be a radical break with the traditional lock-step model, but does provide the basis for rewarding those staff at all levels in the firm who are contributing most to the firm’s successs. This would act as a motivator to encourage other staff to do so.
PA assisted one financial sector client to realise savings of around $8 million in the first year by adopting such an approach, whilst building a highly efficient, business-led and commercially focused service.
Underpinning performance and knowledge management
Such a revised business framework requires accurate and up-to-date management information, as without it partners would find managing their engagements rather like driving a car by looking in the rear view mirror. Hence a powerful management information and engagement management system is required. This provides the firm with not only the engagement management information but also that needed to manage performance and hence rewards within the firm.
As the market becomes ever more competitive, the insight the firm can bring to resolve a client’s problem will increasingly become the key to competitive advantage. In most firms today knowledge is locked into the heads of a few partners rather than readily accessible to the firm, and hence is difficult to manage and exploit successfully. If the most powerful insights are to be brought to bear on a particular issue, wherever it is in geographic or organisational terms, then mechanisms must be found to share the knowledge around the firm and deploy it for the benefit of clients. This is where many professional service firms have successfully employed knowledge management systems to codify, enhance and communicate best practice. This enables the firm to maximise the value delivered to clients, by helping to ensure the best solution is always provided; it also maximises the value delivered to the firm – through improved efficiency, increased fees and enhanced relationships.
Project management as a core competence
If engagements are to deliver complex solutions to clients’ expectations, and these are to be achieved profitably, then project management has to become a core competence. This does not simply mean that lawyers need to be trained in project management, but that the firm has the necessary infrastructure and behaviours to support delivery.
This would encompass a defined process for engagement management, a resource management approach and training in project working skills for all staff, all underpinned by the management information systems that provide the base data against which to manage.
Such an approach has delivered significant financial benefits in many industries, and the resource management approach can also enable far more effective use and development of staff.
By rotating people onto and off client engagements appropriately, key expertise can be better utilised and, more importantly, staff development can be enhanced. This in turn helps develop skills more quickly, delivering greater opportunities for people and enhanced retention for the firm.
As pressure from clients intensifies, legal firms will have to respond or face reduced levels of profitability with the associated pressures this brings to a partnership structure. The professional services business model described above shows a way forward that can not only deliver enhanced value to clients but also to the firm, and can provide a basis for long-term profitable growth.
