Sustaining the Ethical Law Firm

Key Success Factors

These are leading indicators that show what is going to happen based upon the best soft data available.

Client loyalty is a clear indicator of firm success and the enforcement of positive core values. If the client is loyal to the firm and not just to an individual lawyer, the firm is on the right path. That does not mean that individual lawyers do not attract clients, but it does mean that the client lawyer must build a team that supports the client. Second, a law firm must look at reducing the client load by eliminating clients based upon pricing, timing, stress, risk level, referral rate to top clients, and overall satisfaction with the firm. Some clients cannot keep up with price increases that come with growth and, inevitably, a firm will outgrow some of its clients. See The Journal of Accountancy, 'Letting Go: Evaluating and Firing Clients,' January 2008.

A law firm cannot be viable without the support of all personnel. According to several articles by McKinsey & Company, a collaborative culture drives profitability and success in the market. As firms get larger, they tend to lose the glue that comes from a collaborative culture. Such firms tend to gravitate to statistical measures of performance such as the size of the book of business and individual profitability. This may lead to unethical or inefficient behavior such as fogging time into files; rate transfer, which means partners billing themselves out for the hours lower rate personnel could perform; and churning, running too many people through the file.

Leadership credibility is critical, but many law firms still expect their managing partners to maintain a client base while trying to carry the load of leading the firm. That is like asking a bank president to manage a large portfolio of loans while trying to lead. Very busy days and constant interruptions do not allow a leader to deal with critical leadership matters such as vision execution and core value reinforcement on a firm-wide basis.

Key success factors are those measures that answer the following questions:

• Are leaders of practice groups and sections conducting meetings to train young lawyers, assess client needs, and seek ways to improve the effectiveness and efficiency of delivering services?
• Are personnel in the firm identifying and dealing with the jerks that do not follow the values of the firm?
• Are jerks allowed to operate in the firm just because they have a big book of business?
• Are committee leaders identifying their objectives and accomplishing them instead of just saying they are working hard at their tasks? Can we measure their performance in the future?

Critical Performance Measures

These are lagging indicators that can be obtained from data available in the firm. They include:

Realization on billing rates is a critical issue in defining the efficiency at which a law firm delivers legal services. There should be an expected rate of return on a lawyer's time given his or her overhead and compensation. Starting with that rate, realization implies that the firm is seeking to get 100% of that rate from the time and the pricing agreement made with the client through the collection of that rate. If the firm gives the client a 10% discount and then writes-down time by 10% and then writes-off time at the time of collection, realization is about 80%. Efficiency in the practice allows a higher realization. A higher realization goes straight to the distributable income. In a $10 million law firm, a 10% increase in realization will generate $1 million in distributable income. Increasing billable hours to achieve higher income will not work in the long-term.

Lawyers who have leveraged the firm's time, talent, expert systems, and processes produce a higher realization and a higher esprit de corps among the lawyers and staff. These people see their workload burden decrease while profits are going up. Although the measure of hours worked and billed is important, the key will be the most efficient and effective use of that time. More efficiency will make the way for leadership to devote more time to firm direction, client relationship building, training, and lawyer retention.

Client turnover is also measurable and a reflection of the view of clients of the ethics and culture of the firm. By listing the top 100 clients in each of the last five years, a law firm can see who are the core clients for each of those years. Those that have been around and profitable for multiple years are core to the firm. Those that have only been on the list one year and are profitable should be nurtured as future core clients.

Transforming the Firm

To set the core values and the foundation for the ethical law firm, a firm must start with a base. The foundation base-stone is collaboration. Collaboration is defined as a group of people bound by common vision and accountable to one another for the accomplishment of the vision. Collaboration has three components. The first is mutual trust and accountability. The second is innovation and constant improvement in a learning environment. The third is a vision and set of core values identified and followed by the law firm. With collaboration as the foundation stone, the next stone in the pillar will be demonstrated internal improvements and benefits where people will see the increase in effectiveness and efficiency in the firm ' a better working environment. As a third pillar stone, clients will soon see the increased commitment and energy of firm lawyers and staff and become more loyal. Finally, the top pillar stone will produce the financial rewards that will reinforce the underlying support structure. Any firm that starts with trying to push fees from the top will crush all the stones underneath. Core values will be crushed and the firm will go into a destructive, eat-what-you-kill culture.

What are core values? These are the philosophies and the approach toward the people in the firm. Examples are set forth below.

Philosophy:

• Operating ethically as individuals and as an organization;
• Leadership and teamwork in meeting and exceeding client needs;
• Dedicated to a high level of professional conduct.

People:

• Open, honest, and direct communication;
• Accepting and respecting people for their individual contributions;
• Giving and receiving meaningful encouragement and recognition.

What is the vision of how the firm wants to be perceived? This is a short statement of how the firm would like to be seen by the community and the clients and is for external use. It must be a reflection of the core values of the firm. Karl Albrecht in his book The Northbound Train did a great job in describing a vision.

• 'A focused concept ' something beyond platitudes; a value creation premise that people can actually picture existing.'
• 'A sense of noble purpose ' something that is really worth doing; something that can create value, make a contribution, make the world a better place, and win people's commitment.'
• 'A plausible chance of success ' something people can realistically believe to be possible and, if not perfectly attainable, at least plausible to strive for.'

From the above, the firm can set the norms of behavior and the compass for determining its direction.

Strategy sets up where the firm will invest its time, talent, and other resources to focus on clients and services. Clients will be identified as:

• Core to the firm, requiring nurturing and development because they are loyal to the firm and are currently profitable;
• Investment clients who need a full-court press to move them into the set of core clients. These clients are profitable but have little loyalty to the firm;
• All others will have to be dealt with as investment choices or as clients that need to be abandoned over time unless they are key to the referral business.

Services will be identified as:

• Those services that are supported by a depth of experience and expertise and produce a high realization on rates are core to the firm;
• Those services where the firm has enough credibility to build a practice but does not yet have the depth;
• Those services that were great in the past but need to be abandoned over time.

Action Steps

Document the culture of the firm. What is the lore of the firm that made it successful in the past and carries it into the future? Who made the firm successful and established the baseline for behavior in the firm, and what did they do to create the personality of the firm and culture.

List the philosophies and standards that will drive the Key Success Factors of the firm.

Set up the Critical Performance Measures. What measures will support the values and focus on team contribution to the firm's success?

Conclusion

The performance of a law firm is based upon ethical governance and leadership supported by a collaborative set of values. That will create the baseline for performance, client loyalty, and personnel support. The key to long-term performance will depend upon a law firm's ability to transform itself.

William C. Cobb is the managing partner of Cobb Consulting (WCCI, Inc.) based in Houston. He has been a consultant throughout the United States, Canada, and Europe on strategic issues affecting law firms and general counsel since 1978. His consulting includes the impact of trends on the legal profession; pricing legal services and alternative billing; practice management; firm governance and structure; partner review, evaluation, and compensation; and other subjects of critical importance to law firm and legal department leadership. E-mail: [email protected]. Web site: www.Cobb-Consulting.com.

Ethics have been and will be an integral part of law firm and corporate governance. The leadership sets the tone from the top down, basing it on the firm's culture and values. This article discusses the key issues in establishing and maintaining a culture of ethical behavior through governance, leadership, and strategic direction.

What Is Governance?

Governance is a reflection of strategic direction, vision, and purpose of a firm. It sets the tone for leadership with transparency and accountability. Transparency requires information, and that information must be able to measure leading and lagging indicators of performance. A McKinsey Quarterly Report dated April 2005 on transforming company values reported leadership development jumped from nothing to 34% of the respondents, corporate growth went from 29% to 31%, and empire building and bureaucracy dropped off the list after sessions on culture and value based on ethical behavior. A constructive and collaborative culture is critical to a law firm's success.

Key Success Factors

These are leading indicators that show what is going to happen based upon the best soft data available.

Client loyalty is a clear indicator of firm success and the enforcement of positive core values. If the client is loyal to the firm and not just to an individual lawyer, the firm is on the right path. That does not mean that individual lawyers do not attract clients, but it does mean that the client lawyer must build a team that supports the client. Second, a law firm must look at reducing the client load by eliminating clients based upon pricing, timing, stress, risk level, referral rate to top clients, and overall satisfaction with the firm. Some clients cannot keep up with price increases that come with growth and, inevitably, a firm will outgrow some of its clients. See The Journal of Accountancy, 'Letting Go: Evaluating and Firing Clients,' January 2008.

A law firm cannot be viable without the support of all personnel. According to several articles by McKinsey & Company, a collaborative culture drives profitability and success in the market. As firms get larger, they tend to lose the glue that comes from a collaborative culture. Such firms tend to gravitate to statistical measures of performance such as the size of the book of business and individual profitability. This may lead to unethical or inefficient behavior such as fogging time into files; rate transfer, which means partners billing themselves out for the hours lower rate personnel could perform; and churning, running too many people through the file.

Leadership credibility is critical, but many law firms still expect their managing partners to maintain a client base while trying to carry the load of leading the firm. That is like asking a bank president to manage a large portfolio of loans while trying to lead. Very busy days and constant interruptions do not allow a leader to deal with critical leadership matters such as vision execution and core value reinforcement on a firm-wide basis.

Key success factors are those measures that answer the following questions:

• Are leaders of practice groups and sections conducting meetings to train young lawyers, assess client needs, and seek ways to improve the effectiveness and efficiency of delivering services?
• Are personnel in the firm identifying and dealing with the jerks that do not follow the values of the firm?
• Are jerks allowed to operate in the firm just because they have a big book of business?
• Are committee leaders identifying their objectives and accomplishing them instead of just saying they are working hard at their tasks? Can we measure their performance in the future?

Critical Performance Measures

These are lagging indicators that can be obtained from data available in the firm. They include:

Realization on billing rates is a critical issue in defining the efficiency at which a law firm delivers legal services. There should be an expected rate of return on a lawyer's time given his or her overhead and compensation. Starting with that rate, realization implies that the firm is seeking to get 100% of that rate from the time and the pricing agreement made with the client through the collection of that rate. If the firm gives the client a 10% discount and then writes-down time by 10% and then writes-off time at the time of collection, realization is about 80%. Efficiency in the practice allows a higher realization. A higher realization goes straight to the distributable income. In a $10 million law firm, a 10% increase in realization will generate $1 million in distributable income. Increasing billable hours to achieve higher income will not work in the long-term.

Lawyers who have leveraged the firm's time, talent, expert systems, and processes produce a higher realization and a higher esprit de corps among the lawyers and staff. These people see their workload burden decrease while profits are going up. Although the measure of hours worked and billed is important, the key will be the most efficient and effective use of that time. More efficiency will make the way for leadership to devote more time to firm direction, client relationship building, training, and lawyer retention.

Client turnover is also measurable and a reflection of the view of clients of the ethics and culture of the firm. By listing the top 100 clients in each of the last five years, a law firm can see who are the core clients for each of those years. Those that have been around and profitable for multiple years are core to the firm. Those that have only been on the list one year and are profitable should be nurtured as future core clients.

Transforming the Firm

To set the core values and the foundation for the ethical law firm, a firm must start with a base. The foundation base-stone is collaboration. Collaboration is defined as a group of people bound by common vision and accountable to one another for the accomplishment of the vision. Collaboration has three components. The first is mutual trust and accountability. The second is innovation and constant improvement in a learning environment. The third is a vision and set of core values identified and followed by the law firm. With collaboration as the foundation stone, the next stone in the pillar will be demonstrated internal improvements and benefits where people will see the increase in effectiveness and efficiency in the firm ' a better working environment. As a third pillar stone, clients will soon see the increased commitment and energy of firm lawyers and staff and become more loyal. Finally, the top pillar stone will produce the financial rewards that will reinforce the underlying support structure. Any firm that starts with trying to push fees from the top will crush all the stones underneath. Core values will be crushed and the firm will go into a destructive, eat-what-you-kill culture.

What are core values? These are the philosophies and the approach toward the people in the firm. Examples are set forth below.

Philosophy:

• Operating ethically as individuals and as an organization;
• Leadership and teamwork in meeting and exceeding client needs;
• Dedicated to a high level of professional conduct.

People:

• Open, honest, and direct communication;
• Accepting and respecting people for their individual contributions;
• Giving and receiving meaningful encouragement and recognition.

What is the vision of how the firm wants to be perceived? This is a short statement of how the firm would like to be seen by the community and the clients and is for external use. It must be a reflection of the core values of the firm. Karl Albrecht in his book The Northbound Train did a great job in describing a vision.

• 'A focused concept ' something beyond platitudes; a value creation premise that people can actually picture existing.'
• 'A sense of noble purpose ' something that is really worth doing; something that can create value, make a contribution, make the world a better place, and win people's commitment.'
• 'A plausible chance of success ' something people can realistically believe to be possible and, if not perfectly attainable, at least plausible to strive for.'

From the above, the firm can set the norms of behavior and the compass for determining its direction.

Strategy sets up where the firm will invest its time, talent, and other resources to focus on clients and services. Clients will be identified as:

• Core to the firm, requiring nurturing and development because they are loyal to the firm and are currently profitable;
• Investment clients who need a full-court press to move them into the set of core clients. These clients are profitable but have little loyalty to the firm;
• All others will have to be dealt with as investment choices or as clients that need to be abandoned over time unless they are key to the referral business.

Services will be identified as:

• Those services that are supported by a depth of experience and expertise and produce a high realization on rates are core to the firm;
• Those services where the firm has enough credibility to build a practice but does not yet have the depth;
• Those services that were great in the past but need to be abandoned over time.

Action Steps

Document the culture of the firm. What is the lore of the firm that made it successful in the past and carries it into the future? Who made the firm successful and established the baseline for behavior in the firm, and what did they do to create the personality of the firm and culture.

List the philosophies and standards that will drive the Key Success Factors of the firm.

Set up the Critical Performance Measures. What measures will support the values and focus on team contribution to the firm's success?

Conclusion

The performance of a law firm is based upon ethical governance and leadership supported by a collaborative set of values. That will create the baseline for performance, client loyalty, and personnel support. The key to long-term performance will depend upon a law firm's ability to transform itself.

William C. Cobb is the managing partner of Cobb Consulting (WCCI, Inc.) based in Houston. He has been a consultant throughout the United States, Canada, and Europe on strategic issues affecting law firms and general counsel since 1978. His consulting includes the impact of trends on the legal profession; pricing legal services and alternative billing; practice management; firm governance and structure; partner review, evaluation, and compensation; and other subjects of critical importance to law firm and legal department leadership. E-mail: [email protected]. Web site: www.Cobb-Consulting.com.