Refocusing priorities: How to get a clear picture of your firm's market position

Consultant Tony Williams explores how managing partners can reorganise their firms to increase efficiencies

Law firms are encountering a continued downturn and it seems that a rapid return to normal is now a forlorn hope. The UK legal market grew impressively from the late 1980s until 2007. It was truly a golden age when many, particularly the larger firms, managed to achieve annual compound growth in revenue and profits of at least ten per cent. There were downturns in the early 1990s and 2000s, but these were relatively short lived for the legal sector and growth soon resumed its upward trajectory.

For lawyers who have only known a growth environment, this is a difficult and challenging time. It is now clear that law firms need to examine every aspect of their business model, market position, client proposition and the place in the market that they can credibly establish and defend. Ducking or delaying this review is not a credible option and is indeed an abrogation by the firm’s leadership of their responsibility to lead the firm.

Look in the mirror

The review process is difficult. It requires a hard look at every aspect of the firm’s business, client base and market position. It also requires a systematic review of how the market will develop over the next few years, including as a result of new or invigorated entrants under the alternative business structures regime.

This may necessitate the preparation of a few realistic but challenging scenarios as to how the market will develop. Such scenario planning is, in itself, unknown territory for many law firms. The key '¨issue is to examine your firm’s client '¨base to determine:

• Who uses us?

• What do they use us for?

• How are their needs changing?

• Who else are they using?

• Do they or will they have a panel system and how profitable is this work?

An effective client survey, whether conducted by the firm (but not the relationship partner) or a third party, can provide a comprehensive and sometimes stark picture of the strength of the relationships and the opportunities available. But, it raises an expectation '¨in clients, so feedback received must '¨be acted upon.

Another key step is to clearly identify the firm’s market position. Firms are '¨often in denial as to their peer firms, '¨but it is necessary to be brutally '¨realistic and to understand how your '¨peers are developing.

The market is now more dynamic than ever: some firms will merge, others will fail and some will limp along. In such an environment, one is either gaining market share from others or losing market share '¨to others. It is as simple as that.

The next part of the review is to '¨really understand the underlying profitability of each business line of the firm and each major client relationship. Profitability can vary widely within a '¨law firm or between clients, so having the real numbers is essential.

Linked to this is a comprehensive understanding of how the business can be revised to produce an acceptable and sustainable level of profitability. This may include the greater and more proactive use of IT, such as intelligent drafting tools, case management and just-in-time training, but all of these may have an initial upfront cost.

Other moves may be a review of the use of paralegals, trainees, contract lawyers and onshoring or offshoring. '¨Also important is the effective unbundling of work into its constituent parts and strong project management to push the work down to the cheapest level of competence, while providing an enhanced service to clients.

A significant part of this review will be the partners. What is the role of non-equity and equity partners, what performance metrics will they have, how will they be reviewed and what will be the consequences of over and underperformance?

Focus on strengths

If applied honestly, this process will create a clear picture of the current position of the firm and the opportunities available to it. The firm then needs to invest time and money in the areas that provide the best scope for profitable growth.

Equally important is the need for the firm to address the areas in which it is unable to achieve or maintain an acceptable return. A firm’s strategy should not be akin to a UN resolution, with something in it for everyone. Rather, it should be a hard-nosed, credible and executable plan for the future.

If the firm identifies areas of work or locations that are not strategic to it, then it needs to seek an exit as quickly, cleanly and cheaply as possible. It may be possible to effect a transfer to another firm or enable the lawyers affected to spin off into a specialist boutique.

Given the cost of premises and redundancy, an orderly transition is preferable. It also has the effect of maximising the likely recovery of existing work in progress and debtors, while reducing the possibility of professional liability claims arising during the '¨transition period.

Some firms have achieved this transition very effectively, such as the '¨spin off by Linklaters of some of its '¨Central European office to form '¨Kinstellar (an anagram of Linklaters) or Allen & Overy’s movement of its private client and partnership team to Maurice Turnor Gardener.

Clearly, the ability to achieve such '¨a move may depend on market conditions and the viability of the business to be divested. Faced with difficult decisions, firms may be tempted to keep the '¨income the group produces and at '¨least accept that it is making a '¨contribution to firm overheads.

If the relevant partner’s income can be suitably adjusted, this may be a necessary short-term solution but is not credible in the medium term. The practice will continue to be under pressure, consume resources and take management time. More importantly, it impedes the ability of the firm to reposition itself in the market and increases tensions within the firm.

Sometimes the argument is made on behalf of a practice or an office that it is essential that the firm has it in order to provide a full service to its clients or retain certain clients. This view needs to be tested. But, even if it is substantially true, it does not mean that no action can be taken. The practice or office needs to be reviewed and, if necessary, restructured so that it can provide a more credible contribution to the firm.

Metrics may be necessary to show the wider contribution that the practice or office makes to the firm. Indeed, simple office or practice group metrics can be misleading, so overall client or industry group metrics should be prepared to give a more balanced picture. Care will need to be taken so that consistent metrics are used across the firm, rather than becoming a mix and match option.

But, if an area is not contributing, the firm needs to ask itself: if we cannot make this more profitable, then how small can '¨it be to still meet our strategic needs?

Often it is not a wholesale exit from '¨a practice area or location that is needed, but rather a fundamental reorganisation of the practice or office. The market may have changed, so a degree of reinvention may be required.

It is necessary to be realistic as to what is needed and how credible the end result will be. For partners, this may be challenging, as some may need to be refocused or reclassified or even exited and new laterals brought in.

Some firms have been achieving this by stealth over the downturn with, say, one lateral hire matched by one or two managed partner exits as they seek to reinvigorate and reposition the practice.

Moving partners on

When selecting partners to address, it is essential that the firm proceeds with clarity and fairness and ensures that any necessary exits are as orderly and civilised as possible. It is in both the firm and the partner’s interests for any movement from the firm to be effected professionally and in an orderly manner.

If the firm can help the partner move on, whether by providing outplacement support or waiving non-compete clauses, this can help. But, a need for tough action is essential.

Managing partners often assume that they are the only people aware of partner performance issues. This is naïve. Ask a few secretaries, trainees and junior lawyers, and they will give you a frighteningly accurate assessment of the firm’s performing and non-performing partners.

If a firm wishes to demonstrate a clear sense of direction and commitment to performance, these issues need to be addressed or the leadership’s pronouncements will, quite rightly, be treated with cynicism.

Indeed, some larger firms have now gone beyond the stage of addressing major problems in practices and offices. They have clearly articulated what they expect from partners and have partner plans and objectives that are effectively reviewed. They also provide support for partners to develop and reposition their practices. But, if the partners are unable to achieve an acceptable level of performance over a reasonable timescale, they are reclassified or asked to move on.

Some firms have changed their member’s agreement to make it easier and cheaper to exit partners. In many firms, partner exits are part of the normal management of the business and not a great trauma. This is easier to achieve in larger firms.

However, it does mark a sea of change in the relationships of partners among themselves. Partnership is no longer a job for life on either side. Partners will stay if they like the work, think the firm is moving ahead and believe they are being properly treated and fairly rewarded.

Firms will keep partners who are developing the business, keeping clients happy, managing their team, treating their colleagues properly and, over the medium term, producing a credible financial return having regard to their profit share.

Lead like never before

All this may appear daunting for a firm’s leadership. But, quite simply, you have to address these issues robustly but fairly. If you do not, then pressures will build within the firm, good partners may be lured to other firms and the firm may enter a spiral of falling profitability and poor morale.

However, these decisions need to be based on hard information and a clear and coherent strategy for the firm. Knee-jerk reactions based on the current year’s or, even worse, the current quarter’s figures, will rapidly destroy confidence and trust in the leadership. So too will the firm’s leadership being seen to protect their friends or the ‘usual suspects’.

Clear communication of the strategy, the opportunity it presents and how it will be implemented – not just to partners but to all in the firm and to the market – will also be necessary.

In a more challenging legal market, for many the status quo is not a sustainable option, so the firm’s leadership now need to lead like never before.

tony.williams@jomati.com