At the helm: The fundamentals of good law firm management

Good leaders look at the reshaping of the legal market as an incredible opportunity. They embrace the old sports cliché that '?when the going gets tough, the tough ?get going'. Down markets, dwindling clients, reduced hiring, heightened competition for clients and fights ?over profits and margins create tremendous opportunities for well-run firms that have a good strategy and execute it well.

What can law firms do to win more clients and generate greater profits in today's tough times?

Cost management

First, firms need to give up on their austerity programmes. No doubt expenses need to be controlled. The steps of 2008 and 2009 that created partner profits through expense-cutting ran their course in 2010 and 2011. Firms deferred raises and laid off staff and lawyers to create profits. But, by 2010, the expense line had approached its old level. Austerity programmes, or saving your way to success, rarely survive more than ?a year or two.

Expense-cutting alone will not guarantee success, but innovative expense-cutting helps. To really save on expenses, firms must change cost centres into profit centres. This process begins with understanding overheads and each lawyer's cost to the firm. Add on a profit component and the firm can use this base line to analyse the performance of non-equity partners and associates. If they come up short, they are a cost centre. If they exceed the numbers, they are a profit centre - it's pretty elementary.

Then comes the hard part: change your compensation model by reducing salaries and putting non-equity partners and associates on incentive bonus programmes. Use the overhead plus profit number as the threshold to determine bonus levels. Pay the bonus from the 'profits' generated by the excess over the costs and returns to the firm. Make the bonus larger than the salary reduction. Only profitable lawyers will earn it.

Salaried lawyers and rent make the biggest impact on a law firm's balance sheet. Changing salaried lawyers' expense items to profits by paying bonuses out of profits will dramatically impact the bottom line. The firm will see a greater increase in profitability than it generates from focusing on lawyer/secretary ratios, deferred staff increases and morale-busting plans that reduce marketing and other expenses.

Finally, on the expense side, recognise that too much capacity really means that the firm either has too many lawyers or too few clients, or both. To solve the problem, either increase the number of clients or reduce the number of lawyers. Again, it's pretty elementary.

Client development

How can firms increase their client base? First, it's important to have a plan. That plan should include understanding the firm's market, what it does well and what it doesn't do well. Be honest in this assessment. If gaps exist, the firm needs to fill them or give up on those lines of business.

Then, go after clients with a three-pronged marketing plan: ?

1. practice groups;
2. industries; and
3. local marketing. ?

Practice group marketing embraces the traditional law firm marketing strategy: individuals or groups selling their ?expertise to clients.

On the industry front, pick two, three or four industries in which the firm excels with both clients and experience. Sell to those clients based on industry expertise (what they do, not what you do). By necessity, these marketing efforts cut across practice groups.

Finally, market on a local level. Local marketing involves everyone. Pick out local prospects and develop a plan for them. On the soft marketing side, the firm builds its brand and visibility through community involvement. Create marketing expectations for younger lawyers. Community involvement fulfils the lawyer's professional responsibilities, while increasing the firm's visibility.

Fewer clients means less work and more competition. Embrace the opportunity to compete. Firms should begin by interacting more with their clients. Understand what clients value and want. Know their hot buttons: Fixed fees? Lean staffing? All of the above?

When you understand the client, attracting new work becomes easier. Flexibility and innovation separate today's successful firms from the mediocre ones. One-size-fits-all marketing no longer works. Sell firm strengths to client needs.

Leadership imperative

The firm with the most clients wins. All of the pieces to the puzzle lay on the table, but this puzzle needs assembly. How does your firm motivate its partners to execute?

Compensation drives behaviour. The firm's compensation system must reward lawyers who attract clients. Many firms ?talk a lot about getting clients but, at the end of the day, they pay people to stay at their desks.

Very few clients wander in off the streets. Lawyers have to pursue clients and work hard to generate business. Firms must recognise the value of those efforts and compensate people accordingly. A system that rewards only billable hours will fail, as will the firm.

Attracting clients brings success. Strong, effective leaders show others the path to success and ensure continuing prosperity. Today, strong leadership matters more than ever before. The current conditions challenge the old approach of slow and steady.

Law firms run by committees or by the partnership as a whole find themselves at a tremendous disadvantage. Whether an individual or a group, let the leaders lead. Firms that allow the partnership to second-guess all decisions will struggle in today's environment.

Streamline the process. Partners should vote only on very important matters. Decide what they are and let ?the leadership make the rest of the decisions (and thereby set the direction of the firm). If that does not work, ?choose new leaders; but do not ?encroach on their power.

These leaders must understand and use financial reports. Numbers mean more today than ever before. Firms struggle to be profitable. It can be achieved, but not without knowing what it takes financially. Get good numbers, strong reports and financial people that can understand them. If the firm lacks this expertise, hire outside help.

Today's leader must understand what is important to the firm. While bemoaning declines in profitability, many lawyers continue to resist change. Managing partners need to talk to their constituents or get someone else to do so.

Find out what the partners value. How important is profitability? Is culture vital to the success of the firm or just an excuse to avoid change? Identify three or four important goals. Then convert those goals into a mission statement. Make sure everyone understands the goals and works to achieve them. If the firm's leader has to go to a second hand to enumerate the firm's priorities, he has too many.

Convert those priorities into a message that resonates with people, one they can repeat and believe. That makes success a lot easier to achieve. Measure the success of the firm against the priorities it created. Keeping score makes everyone a better player.

Good leaders will continue to test the priorities and adapt to change. Use a pencil with a sturdy eraser to list the firm's changing priorities. The firm needs to understand these changes and adjust priorities accordingly.

Look at the challenges of today as an opportunity to build a strong, well-run firm. In order for it to be an opportunity, the firm has to be (or become) strong and well run.

It's time for the tough to get going. Times change, but the fundamentals remain the same. Strong leadership, a simple, concise plan and a marketing culture still separate the good firms from the also-rans. Make the changes talked about above, focus on marketing and getting clients, and dramatic positive changes will follow.

 

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Key considerations for new managing partners

During and after the recession, more law firms changed managing partners than I can remember in a similar timeframe. In some cases, poor performance dictated the change. In others, firm embraced a Winston Churchill-like feeling at the end of World War II, that it was time for new leadership. Whatever the cause, many managing partners will now find themselves in their first or second year at the helm. There are five things to keep in mind.

1. Understand the numbers. Historically, understanding firm finances would be low on the list of prerequisites for a successful managing partner. Not today. Cost, margin and profitability take on new importance in today’s law firm. Spend some time with your head of finance. Understand how the firm makes money.

2. Go slow. Quick fixes rarely last. Talk to partners. Understand their problems and concerns. Get all the facts and then make changes.

3. Develop a plan. Lawyers expect success, but initially they will settle for a roadmap to achieve success. Keep it short. Talk in sentences, not paragraphs. Keep the goals in front of your partners.

4. Be visible. Spend time with lawyers and staff. Get out of your office and talk to everyone. Ask opinions and listen to the answers. Make sure you remember what you ask and how they respond. Repeating a question belittles the question and the answer.

5. Be a leader, not a manager. Leaders empower; managers control. The kiss of death is trying to control lawyers. Use leadership skills to achieve desired results.

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Julious P. Smith Jr is chair emeritus at US law firm Williams Mullen (www.williamsmullen.com)