Litmus test: How law firms compare to other PSFs in client focus

How does the management agenda of law firms compare with that of other professional services firms? Our research has revealed some interesting findings.¹

On the issues of remuneration models, whether, how and when to change the partnership model are questions occupying many management teams across professional service firms in accountancy, real estate, engineering and HR consultancies. Law firms in particular have diagnosed themselves as weak in ?this area.

On the positive side, internal organisational alignment appears to be significantly better in law firms than in other professional service firms. A better sense of the 'what' and 'who' in the sector helps; delivery and business development activities are principally targeted towards general counsel and in-house legal teams.

By contrast, the 'big four' firms aim to service a much broader set of client audiences (CEOs, CFOs, COOs, CIOs, HR directors and non-executives) with a much broader set of service offerings (auditing, business strategy, transactional services and IT consultancy).

As a result, these firms struggle more than law firms to achieve organisational alignment to client needs.

Regional differences

There are sharp regional differences in the strategic agendas of management teams around the globe.

In India, for example, law firm leaders are focused on addressing issues of governance, talent retention, scalability and brand. The Indian legal market has the unique heritage of having many players organised around high-profile practitioners and family-run units. The strategic questions for such firms relate to ?how they transition successfully from a phase of phenomenally-fast organic growth to becoming scalable, sustainable businesses with 'brands' distinct from those of their founders.

In North America, the leaders of many international firms are asking themselves tough questions about how they can derive tangible value from their years of investment in international networks and non US-based offices. They recognise that UK-headquartered global firms are perceived to have executed international strategy better. The results can be seen in the latter group's revenues, which are now more globally diverse and better hedged.

Law firm leaders in Latin America are focused on sustaining their local difference in a market attracting attention from global legal brands. In the competition between local firms and international 'newcomers', LatAm firms are sharpening their plans to hold onto corporate clients and retain ?local talent. The evidence suggests that, ?at present, they are doing the former ?better than the latter.

Current priorities

The areas in which many law firm management teams diagnosed themselves as requiring the most attention are:

1. reward and remuneration;

2. implementation of strategy; and

3. clarity on the firm's market proposition.

?Let's take a look at the challenges in each area and how firms are tackling them.

1. Remuneration

The litmus test for a firm's client ?centricity is its remuneration model. In public, a firm can describe its strategy or its aim to provide excellence in standards of client service, but its 'true' strategic direction is determined by the partnership model it chooses.

However, there is a dissonance between firms' remuneration approach and their stated goal of improving performance and profitability through being more client focused. This gulf is where firms rate themselves weakest.

Comments from partners suggests a reckoning is well overdue. Many wonder for how much longer they can postpone measures to tackle this most complex and controversial element in their business model. "Our culture encourages cooperation, whereas our structure sometimes inhibits it," says a practice leader at a US law firm.

Nowhere is this more marked than in those law firms servicing institutional and corporate clients. In regions and industry sectors with low growth, fees can only come from a firm increasing its share of an institutional client's existing legal spend. That requires a combination of deeper knowledge of the client organisation, business development at multiple entry points and a sharing of contacts among the firm's fee earners. Most remuneration models tend to encourage the opposite.

Most partnerships have a reward structure that sits on a spectrum between 'eat what you kill' and lockstep, but with mixed results. As the senior partner at one law firm put it: "The truth of the matter is that, whatever you said to people in this firm about anything, people are judged on their fee-earning performance. This is what drives action. This is a real barrier to becoming more holistic and client-centric as a firm."

The 'eat what you kill' model served many professional firms well during the 'years of plenty' when growth in demand for legal services left room for partners to build their practices individually. But, in the 'new normal' of low growth, the behavioural consequences of such a model may prevent client centricity.

There are two areas in which firms are focusing to avoid this:

1.  improving transparency: to some partners, the calculation of their drawings remains opaque; and

2.  reducing volatility: partnerships are unsettled if individuals experience spikes and troughs in drawings, so smoothing these is a priority.

2. Implementation issues

Poor implementation is another weakness in law firms' quest to make their businesses more client focused. Those experiencing the most success in driving change and getting partners to follow the plan often point to a common factor: high-quality research of the needs and opportunities in the firm's client base. Firms that leverage these insights appear better able to make the case for change. In the diffused and weak governance which exists in many firms, showing colleagues what clients want weakens the natural internal resistance to change.

Firms which capture insights regularly and in great detail from current clients are not only using them to drive action but are also shaping a more profitable product ?and service offering. Growth opportunities are identified by building a 360-degree view of key accounts and other priority client segments.

To increase the quality of the information from clients, successful ?firms are pioneering innovative techniques and research methodologies across a greater proportion of their client base. The result is a virtuous circle of better analysis leading to revenue opportunities and in turn, greater confidence in the ROI of client research.

A vital ingredient to the recipe for success in this area also stands out. Many management teams fail to implement change well because they delegate the task of internal communication to others with less authority or because they drastically underestimate how frequently and for how long they will need to communicate the planned change. It is clear that commitment by senior management to internal communication is vital.

"We need to identify top strategic issues and then follow through … with the main board steering it. That would be more successful than the piecemeal way we implement strategy at present," said a respondent at a top-50 global law firm.

3. Market proposition

Firms in all markets face competition for the provision of legal services, not just from other law firms but also from the growth in capability of in-house legal ?teams and legal process outsourcing providers. Many firms consequently recognise the need to define their value propositions more clearly. That means articulating a credible message about what they do, how they do it and the value that it provides to clients.

A rigorous process here involves higher quality 'outside-in' information to decide what the message should be, rather than just relying on the firm's internal views. Those successfully addressing this spend time helping fee earners to articulate that message consistently, to make it credible and appealing.

A partner at a magic-circle law firm noted that "poor self awareness within the firm impedes development of a clear strategy. Very few firms really understand how clients perceive them. Some have got this image of themselves that is just not an image that is out there in the market."

Other firms tacking this complex ?issue appear willing to acknowledge that they often get stuck on deciding what their point of differentiation is or what it means to describe themselves as 'the trusted advisor' in an era in which 'trust' isn't always the strongest card with which to lead.

USPs for firms

It's questionable whether there are sustainable unique selling points in professional services. The firms that are defining their value proposition with more success are moving beyond debates about 'uniqueness' and towards a more fruitful and client-centric articulation of the value they bring to clients.

A lack of strong client focus is a fundamental organisational problem in many leading law firms. Many have admitted to failing to put clients at the heart of their business. This has been their single most important strategic mistake - and the root cause of almost all subsequent difficulties in their business and across the sector.

Addressing this lack of client focus at the institutional rather than the individual level is however the path to recovery for these firms. Aligning the business to the needs of its clients and markets is the way to repair a business model which had developed some weaknesses and to re-establish growth (see Figure 1).

Many firms are approaching the ?issue of strategy - and even the need for it - with renewed attention and rigour. Their starting point is almost always from the outside in - from the perspective of their clients.

As the managing partner of a mid-sized UK law firm put it: "The truth of the matter is that [the strategy document] used to go in a drawer and nobody referred to it. One of the things that came out of our staff focus groups was that they didn't know what the strategy was, which was worrying."

?James Edsberg is senior partner at Gulland Padfield ?(www.gullandpadfield.com)

Endnote

1. Based on over 36,000 self-diagnostic assessments by advisory firms in the US, Europe, Latin America and Asia ?(www.clientcentricindex.com)