16 Jul How to Create a Culture of Profitability at Your Firm
How to Create a Culture of Profitability at Your Firm
The solution starts with changing behavior at the partner level.
Once we accept that the legal industry is in a scoping crisis, we need to do some soul searching as to how we got here to find a way forward out of the unprofitable mire. Lawyers have been trained to deliver the best service, and this has made them price-blind while the industry has shifted the definition of client value. Firms need to institutionally prioritize value by scoping and managing to the expected price.
How can resistant partners be made to think about the profitability of their matters?
At most firms, radical change is out of the question. Compensation is not typically linked to the financial performance of individual matters, and in any case, salary distribution is typically determined in three-year cycles. That’s a slow ship to turn, even for firms willing to do so. At an individual level, partners don’t like to think of themselves as accountants; they’re disconnected from the math that runs their organizations. And they don’t like to be ‘managed’ from below by dedicated project manager.
So, how do you change culture and behavior to orient around profitability without using compensation as an incentive? Lean into the shared interests (and psychology) of the partners. What do partners share? A competitive nature and a vested interest in their firm’s success.
The Price-Blind Problem
You can’t change what you can’t see. The problem is the price-blindness of partners. Individually, partners tend to be unaware of the full effect of their discounted rates and write-offs; collectively, the partners and firm won’t see the compounding impact of their choices.
Say, for example, partners are allowed a $6,000 maximum allowable write-down per invoice before pricing gets involved. That amount of money is likely negligible compared to the total budget, but not if those write-downs occur over the entire lifetime of the matter. If multiple partners take advantage of this budgetary flexibility, the consequences can be severe to the firm at large. As matters become unprofitable, a firm’s margin for error collapses.
This means at a firm level the first step is to look at how matters miss their quoted budget. Staffing issues represent a common stumbling block. An arrangement might specify that a third-year associate should be assigned to a matter, but only fifth-years are available. Or a partner might disregard the staffing model to help a counselor make their hours. These types of staffing substitutions make write-downs inevitable.
The Peer-Pressure Solution
Partners need to see the financial impact of the choices they and their colleagues are making. What percentage of matters are performing to plan? How many write-downs are occurring? Who has the best record? Who has the worst?
This is where the power of peer pressure shines. It worked on the playground before bonuses were ever at stake, and it still works today in the boardroom. According to some new research, peer pressure within self-managed teams is actually more effective at changing individual behavior to benefit the group than salary incentives.
For lawyers—A-student, type-A personalities— competition is natural. No one will want to be at the bottom of the list, or feel as though they’re stealing from the rest of the partnership through unplanned write-downs. Firms can even gamify the system, create a leaderboard, and track whose matters are performing to plan. Think of it as a Fitbit for profitability.
The beauty of peer pressure is that it’s both effective and free. It can alter behavior without spending a dollar or demanding a major change-management initiative. But for this system to be effective, firms need to clear several hurdles: data landmines; staffing issues; and learning to judge profitability. appropriately.
For partners to see the effect of their unplanned write-downs, the firm needs to have a plan in place to track invoice variability. Many organizations don’t distinguish between planned bottom-of-the-bill
discounts and surprise concessions. Or the original arrangement may have been bad, always necessitating extra discounts by the invoice phase.
The firm needs a way to identify the source of its discounting. Blaming an individual partner for a systemic issue is inappropriate.
If you were going to round up the usual suspects for a budget overage, you’d be looking at staffing issues. All too often, matters are made unprofitable by poor staffing. There must be a system for finding the appropriate, available staff. If there isn’t a way for partners to identify who is available to staff a matter, they can’t be held responsible for exceeding the budget.
Though we don’t want partners to be price-blind, we also don’t want to judge the profitability of all matters as if they should be the same. Mixed
profitability is inevitable and important—and crucial to client relationships. One department may handle a client matter at a loss on purpose to maintain a highly profitable cross-sold matter for another division. It’s also important to remember that some matter types are inherently more profitable than others. Judging them by the same standard would be counterproductive. The firm needs a system in place to track expected profitability by matter type.
No matter how firms choose to focus attention on profitability, the most important thing is to do it. No partner wants to make damaging deals or invite financial risk through write-downs. There needs to be visibility to how individual matters affect the bottom line of the firm. Firms need a system, even if it comes via the playground, to help promote profitability.
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