As a manager, how do you balance the imperative of long-term strategic focus with the exigencies of day to day "incoming?" As a practitioner, how do you balance the demands of clients and deals with your well-intended resolutions to be a better "firm citizen," contributing to associate development and training, pro bono work and firm management, and positioning your practice group for more high-value work from better clients?
For many of us, of course, the answer is too often that the urgent wins over the important, and we’re tempted to neglect the long-term health of the firm for the sake of responding effectively to more immediate demands. (And admit it: These demands can be seductive, not just distracting. "I’m important! People need me! I’m the best one to handle this!")
The fact remains that nothing takes a back seat to the long-run health of the firm. According to McKinsey’s "Anatomy of a healthy corporation," here are the traps that take our eyes off that ball:
- What they call "mindfulness," or the temptation of succumbing to the press of daily business rather than doing the truly heavy intellectual lifting of contemplating (say) the competitive landscape your practice group will face five years hence.
- Cognitive traps: Thinking that organizational health is soft and fuzzy and will take care of itself. Or that short-term performance will ensure long-term health (guess again). Or that impaired firm health exists only in some dimly imaginable future, not today in the here and now. (Checked your cholesterol lately?)
- The self-knowledge trap: A/k/a our weakness for saying or believing one thing and doing the opposite. McKinsey cites this example, but we can all come up with many too many closer to home: "The managing director of a North American chemical manufacturer we know talked a good game about regenerating and replacing assets—and then promptly promoted and lauded two site managers who had met their short-term financial targets by starving the facility of maintenance capital."
We recur, then, to how to achieve organizational health—knowing the traps enumerated above are in our way.
First, we need to define what organizational "health" means. Lovely as it may be as a metaphor for our bodily health, we need to clarify its dimensions. Fortunately, McKinsey has done the work for us, with their characteristic exhaustiveness. I’ll let them explain the methodology:
"First, in an effort to mine what was already known about the question, we reviewed more than 800 empirical-research papers, journal articles, and books published from the 1950s to 2005. Second, we analyzed 60,000 responses to an organizational-health survey we have administered to employees and managers at hundreds of companies over the past five years. Last, we distilled what we learned from a series of executive forums and more than 30 in-depth interviews with functional leaders across all disciplines.
"We winnowed the resulting insights to find those that had support from empirical evidence; were broadly applicable across companies, industries, and geographies; and could be acted upon in a practical way. Then we distilled the survivors into five overarching characteristics of business health: resilience, execution, alignment, renewal, and complementarity."
Fine; so what do each of these five characteristics of "health" entail?
Resilience: Is simply the ability to gracefully recover from unexpected disruptions. Be it as simple as good IT backup and disaster-recovery hygiene to planning for the sudden loss of a key client or partner, healthy firms quickly recover their balance after being knocked down.
Execution: Means getting the basics right. Rising markets, lucky bets, and indulgent clients can mask sloppy execution for awhile, but the healthy firm pays attention to execution constantly, just as the winning sports teams drill on the basics relentlessly.
Alignment: Without doubt one of the most abused terms in all of managerial literature, "alignment" is actually an inarguable good. It means cohesiveness of purpose across the firm—partners, associates, staff, marketing, IT, finance, etc. With today’s international firms, this can be difficult to achieve unless there’s a compelling, consistently articulated vision for the firm, communicated to one and all, and reinforced by incentives and conscious measurement in performance evaluations.
Renewal: Sounding dangerously fuzzy, "renewal" simply means investing in the future of the firm, grounding forays into new areas on well-established beachheads with existing clients and practice groups. For example, your firm might try to extend expertise in mutual fund formation to expertise in hedge fund formation, or familiarity with representing LBO takeover artists to representing private equity acquirers.
But there’s also a cultural component: The future can quickly overtake your firm if your firm isn’t prepared to change. McKinsey cites an iconic brand, now long dead: "Markets and industries move quickly; most companies do not. Smith Corona was a peerless and highly successful typewriter maker until the electronic age overtook it."
Complementarity: This is a perhaps overly fancy word simply meaning that every element of the firm should act in concert. Your associate recruitment techniques should reflect the strategic vision you have for the composition of your professionals ten years hence, which should in turn be incorporated into the compensation system, reflected in the makeup of the staff you hire, and expressed in bricks and mortar in the cities where you seek to build or to withdraw your presence.
A Suggestion: Two Sets of Books?
Coming back to the tension between short-term demands and long-term health, rather than trying to sweep it under the rug, why don’t we confront it directly and set up, as it were, two sets of books, at least when it comes time to divvy up compensation?
I’m suggesting a first set of books for immediate performance: Hours billed, quality of technical proficiency, imagination and innovation in transactions, clients satisfied, matters successfully concluded. And then a second set of books for long-term orientation and good firm citizenship: Associate mentoring, contributions to strategic planning, building practice group management, pro bono commitments and general firm brand-building efforts, etc.
We can do this both in terms of the income statement and the balance sheet.
For the "income statement" categorized by personnel, consider something like this (I’ll focus on the expense side, since that’s where investments in "health" will obviously appear):
| Performance | Health | |
|---|---|---|
| Lawyers | Compensation for billable hours | Compensation for mentoring, pro bono, firm management, general business development |
| IT | Expenses of routine systems, maintenance, upgrades | R&D, development of new KM or client relationship systems: Strategic initiatives |
| "Back office" | "Keeping the trains running on time:" Billing, collections, HR, facilities, etc. | Exploring creative off-shoring/"right-shoring" alternatives. Moving from paper to online. Reducing cycle times. |
| Executive Committee/Chair | Developing consensus around key performance metrics and their relationship to the compensation system | Strategic planning; M&A; client and potential client outreach; community involvement; programmatic lateral recruitment; focused associate recruitment and retention. |
And for the income statement categorized a bit more conventionally, consider:
| Performance | Health | |
|---|---|---|
| General and Admin. | $X | $0 |
| Depreciation/Amortization | $Y | $~1% of Y, if that |
| Innovation | $0 | $Z |
| Reputation/Capability | $0 | $W |
Needless to say, you aren’t necessarily discussing these alternative financial statements with your CPA’s, but I do suggest them as management tools.
Let’s return to where we started.
How do you deal with the incessant pressure between temptation, and the demands, of short-term performance, and the long-term health of the firm? A good start is by recognizing that the only way to produce impressive results on a sustained basis, and for the long run, demands attention to the fundamental health of the firm be embedded in all you do. Including compensation.
