The Birth of the Inclusionary Firm

The recent death of Peter Drucker, one of America's greatest business philosophers ' a man who substantially changed the practice of American management ' brought forth an abundant burst of adoration and glorification from all corners of the business and journalistic world. Articles and memorials quoted extensively from his works.

Find the Message for Law Firms

Drucker wrote primarily for corporations, whose line management structure is very different from the professional firm's vertical structure. The question, though, is whether Drucker's sayings, valuable as they may be, truly inform us of his value to today's managers, and particularly those who manage professional firms. In other words, can you learn to manage from a litany of quotations? Or do you have to go more deeply into not only his message, but the traditional management of your firm as well?

How, we must ask, can Drucker's underlying philosophy and observations help better manage law firms in today's environment? How can we apply Drucker's principles to help law firms function more effectively and more productively, and to compete better in today's highly competitive environment?

'Because the purpose of a business is to create a customer, any business enterprise has two, and only two, basic functions: marketing and innovation.'

How many law firms see themselves that way? Most firms see themselves as purveyors of skills and wisdom in using those skills. But in the professional world, that perception is fostered by the concept that professional skills are crucial to the business and social worlds, that they are scarce, and that it's always a seller's market because the complexity of the economic and regulatory environment demand professional skills to navigate through the shoals of that environment.

But is this true in the dynamic world of the 21^st century? Is this true in a world in which it frequently takes more than one law or accounting firm to serve all the needs of a company, or even an individual?

Not any more it isn't. The right to frankly compete ' a right only a few decades old ' breaks the old paradigm. Competition made it so.

The purpose of the professional firm is to get and keep a client. No getting away from it, particularly in a competitive environment.

'What is the value to the customer?'

The world of the billable hour emerged at a time when the traditional firm, virtually unchanged since the 19^th century, was still the accepted norm. Changing from the undocumented fee to the hourly billing fee was practically painless, and hardly diminished the latitude given to the firm, which was usually entrenched with the client.

But in this new competitive environment, and with the help of competitors, clients have become more sophisticated. They ask more searching questions. They are better educated in legal practices. They no longer blithely accept as received wisdom the words and instructions of the professional.

In other words, the clients now think in terms of value. And so too, then, must professionals begin to think in terms of value offered and received. Not the traditional 'Here's my advice, ignore it at your peril,' but rather, 'How does my professional service contribute to helping you and your business?' A very difficult question to answer, it seems, but worth the effort.

And when you can answer that, and quantify it, then you can bill for the value to the client, and not for the hours spent (or wasted) on client matters. You can use time that's not billable to a client for firm advancement, such as practice development.

It's been often noted that the billable hour is too profitable to the professional firm for the firms to ever give it up. But count on it ' the clients, not the professionals, will make that decision for you. It's now called negotiation.

'Leadership is the lifting of a man's vision to higher sights, the raising of a man's personality beyond its normal limitations.'

To those professionals who rose in the firm's hierarchy the old-fashioned way, reaching the top is achieved by 'paying one's dues.' But law firms are not college fraternities. They are serious and complex businesses.

There are two major factors that dictate rising in the hierarchy of a professional firm ' rainmaking and outstanding performance. Too often, rainmaking ' bringing in business ' trumps all else. So, we have firms (with notable exceptions) run by the best salespeople ' not necessarily the best managers or leaders. We have leaders who are trained in neither leadership nor management skills. We have firms led by good lawyers but poor managers, and even poorer communicators. And we have firms run so completely from the top that potential leaders within the firm are denied the opportunity to grow and thrive.

Where, one might ask, is the inclusionary firm? That, Drucker is telling us, is the firm that will best thrive in the future.

I should note here that there are inklings of a trend to build the inclusionary firm, as described by the estimable Bruce MacEwen (Adam Smith, Esq., https://www.bmacewen/com/blog), who reports that an increasing number of firms are now using a two-tier system in which those lawyers on a partnership path are distinguished from those not likely to become partners, but who are cherished for their particular skills. There are also a few accounting firms using the system. He reports that the relationship between partners and associates, at least in law firms, is changing.

In that first quarter of the 20^th century, employees were so isolated from the larger function of a business and its markets that a company's growth was impeded by management limitations on vision and effective competitiveness. By the second half of the 20^th century, with the beginning of globalization, our labor-intensive economy became a knowledge-based economy. In a knowledge-based economy, knowledge is no longer a commodity, but the lifeblood of a company. With no history of dealing with knowledge workers or intellectual capital in this context, new rules had to emerge. The midwife was Drucker.

Making a Customer

Drucker took a new look at corporations in the attempt to fathom their nature. 'What business are you in?' he asked everybody from the top of the company down. Few gave the right answer. 'We're in the steel business,' or, 'We're in the hotel business.' Lawyers were in the law business, and accountants in the accounting business.

Not so, said Drucker. The purpose of the corporation ' and by extension, the professional firm ' is to make a customer. This simple sounding concept is at the core of Drucker's philosophy.

It runs counter to the traditional concept of the professional. The first lesson for the professional, then, is to recognize that you are in the client business. Without a client, you can be the smartest lawyer ' but for whom is your wisdom?

Professional firm marketing can't produce clients where no need for service exists. A great marketing campaign by a matrimonial practitioner can't persuade a happily married couple to divorce. But if they choose to divorce, they will go to the lawyer or firm that best persuades them that they can do a better job. That's what professional services marketing is about.

This simply stated point of view, if adapted by a law firm, can radically change ' and improve ' the practice of law.

It places the emphasis not on the abstraction of the practice, but on the means to best serve client needs. It changes the focus from inward to outward ' to better understanding the prospective clientele, and how best to meet their needs. It means examining the structure of the firm ' its governance, its structure, its compensation methods, and the very meaning of partnership. It raises new questions about the two-tier system and billing structures.

The role of the knowledge worker ' in this case, the professional ' changes. In the old world, knowledge in a professional firm came from the top down. The structure manifested itself in the partnership. Three factors dictated the nature of the traditional partnership. Governance came from the top, and those not showing aptitude for a partnership were let go. Second, knowledge rarely went from the bottom up, resulting in shaping the practice on the limits of experience by the senior partners. And third, each partner functioned with his or her fiefdom, and shared very little knowledge with the other partners. Cross selling was a myth. Client relations were jealously guarded by each partner. And of course, internal communications became a clich', and not a reality.

The problem with this kind of structure was that not only was the firm deprived of the consummate knowledge of every professional in the firm, but so too was the client. But at the same time, the structure of the market changed. The Bates decision introduced frank competition into the professions, and the tradition of one firm for life for a client no longer applied. New structures were needed to meet the changing nature of the clientele.

Can we make these changes without causing too much damage to the traditions of the professional firm, without losing the objectivity and integrity of the professions? Yes, we can. And we are. It's the foundation for the professions' traditions of integrity, probity, skills and knowledge that are necessary for the value of the profession to the society they serve. With this foundation, there would be no law or accounting profession Chaos, maybe, but no professions.

(Editor's Note: For more on Peter Drucker (Nov. 19, 1909 ' Nov. 11, 2005), visit http://www.peter-drucker.com/, or read the Wikipedia entry on him at http://en.wikipedia.org/wiki/Peter_Drucker.)

Bruce W. Marcus is a CT-based consultant in marketing and strategic planning for professional firms. A member of LFP&B's Board of Editors, he is also a partner in the Bay Street Group LLC, the Editor of The Marcus Letter on Professional Services Marketing (http://www.marcusletter.com/) and the co-author of 'Client At The Core' (John Wiley & Sons, 2004). His can be reached at [email protected].

The recent death of Peter Drucker, one of America's greatest business philosophers ' a man who substantially changed the practice of American management ' brought forth an abundant burst of adoration and glorification from all corners of the business and journalistic world. Articles and memorials quoted extensively from his works.

Find the Message for Law Firms

Drucker wrote primarily for corporations, whose line management structure is very different from the professional firm's vertical structure. The question, though, is whether Drucker's sayings, valuable as they may be, truly inform us of his value to today's managers, and particularly those who manage professional firms. In other words, can you learn to manage from a litany of quotations? Or do you have to go more deeply into not only his message, but the traditional management of your firm as well?

How, we must ask, can Drucker's underlying philosophy and observations help better manage law firms in today's environment? How can we apply Drucker's principles to help law firms function more effectively and more productively, and to compete better in today's highly competitive environment?

'Because the purpose of a business is to create a customer, any business enterprise has two, and only two, basic functions: marketing and innovation.'

How many law firms see themselves that way? Most firms see themselves as purveyors of skills and wisdom in using those skills. But in the professional world, that perception is fostered by the concept that professional skills are crucial to the business and social worlds, that they are scarce, and that it's always a seller's market because the complexity of the economic and regulatory environment demand professional skills to navigate through the shoals of that environment.

But is this true in the dynamic world of the 21^st century? Is this true in a world in which it frequently takes more than one law or accounting firm to serve all the needs of a company, or even an individual?

Not any more it isn't. The right to frankly compete ' a right only a few decades old ' breaks the old paradigm. Competition made it so.

The purpose of the professional firm is to get and keep a client. No getting away from it, particularly in a competitive environment.

'What is the value to the customer?'

The world of the billable hour emerged at a time when the traditional firm, virtually unchanged since the 19^th century, was still the accepted norm. Changing from the undocumented fee to the hourly billing fee was practically painless, and hardly diminished the latitude given to the firm, which was usually entrenched with the client.

But in this new competitive environment, and with the help of competitors, clients have become more sophisticated. They ask more searching questions. They are better educated in legal practices. They no longer blithely accept as received wisdom the words and instructions of the professional.

In other words, the clients now think in terms of value. And so too, then, must professionals begin to think in terms of value offered and received. Not the traditional 'Here's my advice, ignore it at your peril,' but rather, 'How does my professional service contribute to helping you and your business?' A very difficult question to answer, it seems, but worth the effort.

And when you can answer that, and quantify it, then you can bill for the value to the client, and not for the hours spent (or wasted) on client matters. You can use time that's not billable to a client for firm advancement, such as practice development.

It's been often noted that the billable hour is too profitable to the professional firm for the firms to ever give it up. But count on it ' the clients, not the professionals, will make that decision for you. It's now called negotiation.

'Leadership is the lifting of a man's vision to higher sights, the raising of a man's personality beyond its normal limitations.'

To those professionals who rose in the firm's hierarchy the old-fashioned way, reaching the top is achieved by 'paying one's dues.' But law firms are not college fraternities. They are serious and complex businesses.

There are two major factors that dictate rising in the hierarchy of a professional firm ' rainmaking and outstanding performance. Too often, rainmaking ' bringing in business ' trumps all else. So, we have firms (with notable exceptions) run by the best salespeople ' not necessarily the best managers or leaders. We have leaders who are trained in neither leadership nor management skills. We have firms led by good lawyers but poor managers, and even poorer communicators. And we have firms run so completely from the top that potential leaders within the firm are denied the opportunity to grow and thrive.

Where, one might ask, is the inclusionary firm? That, Drucker is telling us, is the firm that will best thrive in the future.

I should note here that there are inklings of a trend to build the inclusionary firm, as described by the estimable Bruce MacEwen (Adam Smith, Esq., https://www.bmacewen/com/blog), who reports that an increasing number of firms are now using a two-tier system in which those lawyers on a partnership path are distinguished from those not likely to become partners, but who are cherished for their particular skills. There are also a few accounting firms using the system. He reports that the relationship between partners and associates, at least in law firms, is changing.

In that first quarter of the 20^th century, employees were so isolated from the larger function of a business and its markets that a company's growth was impeded by management limitations on vision and effective competitiveness. By the second half of the 20^th century, with the beginning of globalization, our labor-intensive economy became a knowledge-based economy. In a knowledge-based economy, knowledge is no longer a commodity, but the lifeblood of a company. With no history of dealing with knowledge workers or intellectual capital in this context, new rules had to emerge. The midwife was Drucker.

Making a Customer

Drucker took a new look at corporations in the attempt to fathom their nature. 'What business are you in?' he asked everybody from the top of the company down. Few gave the right answer. 'We're in the steel business,' or, 'We're in the hotel business.' Lawyers were in the law business, and accountants in the accounting business.

Not so, said Drucker. The purpose of the corporation ' and by extension, the professional firm ' is to make a customer. This simple sounding concept is at the core of Drucker's philosophy.

It runs counter to the traditional concept of the professional. The first lesson for the professional, then, is to recognize that you are in the client business. Without a client, you can be the smartest lawyer ' but for whom is your wisdom?

Professional firm marketing can't produce clients where no need for service exists. A great marketing campaign by a matrimonial practitioner can't persuade a happily married couple to divorce. But if they choose to divorce, they will go to the lawyer or firm that best persuades them that they can do a better job. That's what professional services marketing is about.

This simply stated point of view, if adapted by a law firm, can radically change ' and improve ' the practice of law.

It places the emphasis not on the abstraction of the practice, but on the means to best serve client needs. It changes the focus from inward to outward ' to better understanding the prospective clientele, and how best to meet their needs. It means examining the structure of the firm ' its governance, its structure, its compensation methods, and the very meaning of partnership. It raises new questions about the two-tier system and billing structures.

The role of the knowledge worker ' in this case, the professional ' changes. In the old world, knowledge in a professional firm came from the top down. The structure manifested itself in the partnership. Three factors dictated the nature of the traditional partnership. Governance came from the top, and those not showing aptitude for a partnership were let go. Second, knowledge rarely went from the bottom up, resulting in shaping the practice on the limits of experience by the senior partners. And third, each partner functioned with his or her fiefdom, and shared very little knowledge with the other partners. Cross selling was a myth. Client relations were jealously guarded by each partner. And of course, internal communications became a clich', and not a reality.

The problem with this kind of structure was that not only was the firm deprived of the consummate knowledge of every professional in the firm, but so too was the client. But at the same time, the structure of the market changed. The Bates decision introduced frank competition into the professions, and the tradition of one firm for life for a client no longer applied. New structures were needed to meet the changing nature of the clientele.

Can we make these changes without causing too much damage to the traditions of the professional firm, without losing the objectivity and integrity of the professions? Yes, we can. And we are. It's the foundation for the professions' traditions of integrity, probity, skills and knowledge that are necessary for the value of the profession to the society they serve. With this foundation, there would be no law or accounting profession Chaos, maybe, but no professions.

(Editor's Note: For more on Peter Drucker (Nov. 19, 1909 ' Nov. 11, 2005), visit http://www.peter-drucker.com/, or read the Wikipedia entry on him at http://en.wikipedia.org/wiki/Peter_Drucker.)

Bruce W. Marcus is a CT-based consultant in marketing and strategic planning for professional firms. A member of LFP&B's Board of Editors, he is also a partner in the Bay Street Group LLC, the Editor of The Marcus Letter on Professional Services Marketing (http://www.marcusletter.com/) and the co-author of 'Client At The Core' (John Wiley & Sons, 2004). His can be reached at [email protected].