Recently I had the chance to sit down for a chat with a "lawyer’s lawyer" in that his practice revolves around matters such as partnership agreements (their drafting and interpretation), fee disputes and malpractice litigation, and professional ethics and professional responsibility overall. He and I both conceive of these topics as "risk management."
As loyal readers know, and as I’ve confessed before, these are issues dealt altogether too short shrift here on "Adam Smith, Esq." Focusing on strategy, finance, economics, compensation, and like issues often lets me elide whether we’re all playing by the rules in our pursuit of more visionary strategy, more effective and consistent management, stronger communication, and a more coherent partnership.
But my conversation with this fellow gave me new insight into how risk management in the ethical sense and risk management in the managerial sense are truly joined at the hip. And at that juncture is one of those subjects often relegated to the green eyeshades and the computer programs, namely: Client Intake.
First, why does client intake matter from a risk management perspective? And why should it be more–far more–than a perfunctory conflicts and credit check and we’re done here?
My friend observed that there are "bad clients and then there are dangerous clients." Bad clients are irrationally demanding, haggle over every bit of every bill, pay slowly, and are generally obnoxious to deal with. You regret the professional time you spend with them and on their matters. Dangerous clients are of another order.
Dangerous clients bring with them undisclosed multiple representations, are slow to reveal what they know (and what you need to know to represent them effectively, not to mention within the bounds of ethics), and can introduce unforeseen and unknown conflicts, which can later subject you to disqualification and other ugly fates.
But that’s not why I’m writing about client intake.
I’m writing about client intake from the economic perspective, which is very simple: Client intake determines your firm’s future pipeline of demand. (Associates and laterals are your future pipeline of supply, a topic for another day.) Now I ask you: What conceivably is more strategic than your firm’s future pipeline of clientele?
That in a word is why this is not a job for a gross level conflicts check (anything absolutely positively indisputably adverse?) and a quick D&B. Seizing control of client intake is the only way to move your firm, in the long run, from its current market position to a new and superior one. Some firms have never seen a dollar of revenue they don’t like, but that is not a strategy. Need I remind you that "Strategy means saying no"?
For example?
More than one Magic Circle firm that I know of turns down some clients in Asia who want them to represent them in IPO’s because the firms don’t want the imprimatur of their brand names to be borrowed for the shiny prestige value by clients potentially unworthy.
A major US firm is wary about launching in China because it does not discount rates, and rates in China are widely subject to great discounting pressure.
An AmLaw 25 firm is focused on three industries (these are not they, but assume for purposes of argument the industries are life sciences, high tech, and media) and therefore will not open offices, no matter how compelling the blandishments, in cities where those industries do not predominate.
You get the picture.
And another thing about client intake, which has to do with the flip side: Firing clients.
The typical law firm’s client distribution graph features the famous "long tail," with a tremendous concentration in value, expertise deployed, and hours billed, at the extreme left side of the distribution. The top 10% of clients by number may easily account for 50% of firm revenues, and the next 10% for the next 30%. Then we have the long tail.
Do you need those clients? Are they using your firm to their full advantage?
Studies have shown, among other things, that:
- Realization rates are highest among the largest and most loyal clients, typically comfortably higher than firm-wide realization rates.
- Conversely, realization rates among the smallest and most episodic clients are the lowest firm-wide, often to the point of making individual matters unprofitable.
Partners with those small clients will tell you (will they not?!) that "somewhere in here is the next Microsoft." Not true. Almost universally, small clients remain small clients. And experience has shown that those that grow into sizable enterprises are disloyal to their "starter" law firms and want to rapidly move up to more established and burnished brand name law firms as soon as they feel they have the stature to do so. How does it feel to be a money-losing doormat to greatness, which will decamp?
But this of course is not all there is to the story.
Would it were as simple as to impose discipline on client intake, manage it from a stategic and not an expedient perspective, and find all your partners falling into line behind you. The reality is of course that that runs headlong into partners’ need for autonomy.
And the answer to what happens when there is the inevitable, banging, noisy, cymbal-crashing collision between partner autonomy and strategic client intake is simply this: How strong is the fabric of your partnership culture?
If it’s all for the greater good of the firm (and, yes, its clients, who will be best served by a firm that is stronger and stronger, professionally and financially, into the future), then you have a prayer of imposing discipline and, over time, moving the firm towards higher-value engagements with clients who give more of their "share of wallet" to your firm, who work with you ever more intimately, and who come to treat you as the trusted advisor of lore.
But if it’s all for the individual partner (have you looked at how your compensation system rewards origination and billing credits, by the way?–just thought I’d ask), then your "firm" is never going to move in any strategic direction whatsoever. It will remain a prisoner of the endless chain, stretching out to the horizon and beyond, of the next new available client who can pass a credit and a conflicts check.
If that’s your firm, bonne chance. Just ask yourself once in awhile why it’s a "firm."
