Perhaps the single most challenging question to answer cogently—from
both the economic and intellectual perspectives—is what can law
firm managers actually do to increase profitability? You
imagine rightly, dear reader, that I have sacrificed more grey cells
to attempting to wrestle this thorny issue to the ground than have
many people, but it is a large topic. This will
be the first of what could well be many posts on this Ur-Question.
Let’s begin with the basics.
Most people—certainly including executives with significant
ownership of a private corporation or equity partners in law firms—would
probably view a high level of sustainable financial performance as
the metric of all metrics, but my view is that that observation is:
(a) tautological; (b) remarkably unoriginal; and most important, (c)
quite unenlightening as a guide to action in that no one has yet figured
out how to directly improve financial performance in a world of global
competition. I view “strong
financial performance” as akin to happiness in one’s personal
life: It cannot be pursued in and of itself (with apologies to the
Founding Fathers), but rather it’s the distilled end result or
expression of everything else one has been doing.
For anyone who aspires to being an astute and effective manager, this
poses a problem. The most important unitary measure of one’s
success cannot be directly controlled.
Of course I’m not saying law firm managers can’t or
shouldn’t
do things like:
- prudently control costs,
- try
to make smart hires, - quickly correct bad hires,
- invest in professional development for associates and partners
alike, - launch
targeted, credible, distinctive marketing campaigns, - invest
in or retrench from practice areas or even cities as conditions evolve, - employ robust and appropriate
information technology, - astutely analyze M&A opportunities,
- and so forth.
The point is that these toolkits are available
to everyone and we still have a long history of impressively
profitable firms alongside the Brobeck’s and Finley-Kumble’s.
So what are the winners doing right and the losers doing wrong—specifically,
what drives sustainable performance for a very high-end professional
service firm?
I’ve adapted this diagram from David Maister*. It’s
intended to address the question of what managers can have an impact
on that will in turn affect profitability.
*David Maister, Practice What
You Preach (The Free
Press, New York: 2001), Figure 7.1, p. 79 (correlation and causation
coefficients omitted, diagram inverted).
This diagram strikes me as both intellectually and
emotionally astute. Intellectually correct because Maister derived
it from real-world empirical data and structural equation modeling,
and emotionally correct simply because it has the indisputable ring
of truth. Of
course a long-term orientation, respect, professional development,
and (perceived to be) fair compensation are the foundation on which
all else rests, and of course lawyer and employee satisfaction drives
quality delivered to clients which determines profitability.
In Built to Last (HarperBusiness, New York: 1997),
James Collins and Jerry Porras make a similar, in some ways stronger
point (p. 8, emphasis supplied):
“Contrary to business school doctrine, ‘maximizing shareholder
wealth’ or ‘profit maximization’ has not been the
dominant driving force or primary
objective through the history of the visionary companies. Visionary
companies pursue a cluster of objectives, of which making money is
only one—and
not necessarily the primary one. Yes, they seek profits, but they’re
equally guided by a core ideology—core values and sense of
purpose beyond just
making money. Yet, paradoxically, the visionary companies make more
money than the more purely profit-driven comparison companies.”
So what, precisely, am I saying here? Merely this: "Profitability,"
Holy Grail though it be, is not something even the world’s most gifted
management team can control. (If we could directly control it,
we could repeal Chapter 11 forthwith.) In sophisticated, global,
high-performance professional service firms, getting a direct grasp
on it is even more elusive. However, we can control
the most important conditions and prerequisites conducive to profitability.
How do we control those prerequisites? My candidate is:
Practice Group Management
Stay tuned.
