Walker Clark Worldview

The final demise of the British firm Halliwells, reported last week in the on-line edition of The Lawyer, is a good case study in the financial failure of a law firm.  The Lawyer summarized the factors that led to Halliwells’ failure earlier this month.

The failure and breakup of Halliwells is instructive for law firms anywhere that substitute wishful thinking for attentive management of operating costs and deepening debt.  From what I have read about the final days of Halliwells, they seem to me to have been about as orderly as the evacuation of the Titanic, with reports that more than 30 support staff were handed no-notice dismissals, apparently without any redundancy compensation or accrued vacation pay, at the end of the work day at a meeting that not one partner had the courage to attend.  (To be fair and tell the whole story, more than 460 staff found employment in one of the firms that acquired the surviving pieces of the Halliwells practice.)

A new post this morning in The Lawyer provides a glimpse of the “afterlife” for the parts of Halliwells that were acquired by other firms, who have created “firewalls” in the form of separate LLPs to protect the acquiring firms from the liabilities of the former Halliwells partners, as well as to enable a more reasoned pace of integrating the new partners into their firms.

Norman Clark

This is the final posting in a series about the characteristics of successful quality assurance programs in law firms.

How does one measure the success of a quality assurance program? When Walker Clark advises a law firm, we tell the partners to look for these indicators:

• Improved productivity by fee earners — because they can spend more time on billable work and less time fixing mistakes and responding to client complaints
• Higher collections realization rates — because the firm now manages the major reasons for fee write-downs and write-offs
• Higher levels of client satisfaction – because the firm meets or exceeds client expectations and gets things done right the first time
• Competitive advantage – because the firm can demonstrate quality, rather than just mumble slogans about it

As the previous parts of this series suggest, serious quality management is a challenge for most law firms.  People have to discard bad habits.  They have to sharpen their thinking about the routine work that they do every day.  In some instances, lawyers need to change some of their long-held, fundamental ideas about what constitutes quality in a legal service.

Quality management often involves a set of discrete journeys that a law firm must make…

• From considering errors and mistakes as failures to be hidden — to viewing them as data-rich opportunities to reduce or eliminate them in the future
• From assigning blame — to finding solutions
• From viewing quality in legal services as something that only a lawyer can define — to understanding quality in terms of the client’s needs, expectations, and perceptions

Each of these requires a profound cultural change for most law firms. It is a necessary change, as well; because law firms that are unable to manage serious cultural change are doomed to declining competitive performance and, eventually, irrelevance in the fast-changing, highly competitive legal markets of the 2010s.

The “quality assurance” culture also requires a seriousness of purpose and an ongoing commitment to the procedures and methods. Partners must be highly visible in their support for, and compliance, with the quality assurance program. They must reinforce among junior members of the firm that quality assurance is everyone’s job and is important to the business success of the firm.

Like most worthwhile investments, quality assurance sometimes is not easy, especially because of the cultural changes that it sometimes requires. But that effort produces profound and positive results that are:

• Long-term and sustainable
• Beneficial to almost every aspect of law firm operations
• Measurable in terms of dramatic improvements to profitability and financial performance.

Norman Clark

This is the fifth in a series of posts about the characteristics of successful quality assurance systems in law firms.

Previous posts outlined three important points that distinguish quality assurance from crisis-to-crisis after-the-fact improvisation:

1. Quality assurance is a firm-wide issue and everybody’s job.
2. The people who are best able to improve the work are the people who perform it everyday.
3. Quality assurance focuses first on stopping the pain — reducing or eliminating the problems that are weakening productivity and undermining profitability.

Today’s post points out a necessary element that is common to all three of these principles: data.

The accurate diagnosis of quality assurance problems and their causes requires accurate and timely data about the functioning of the processes that produce and deliver services to clients and internal customers.  What are the mistakes that are being made? What are the nature and causes of the rework needed to fix errors that we actually observe?  What are their practical results? Simple, but highly effective, reports such as missed deadlines, document errors, and service standards discrepancies, are critical.

The actual experiences of law firms with credible quality assurance systems have been quite consistent. Collecting data on the nature and causes of quality problems is not complicated, time-consuming, or burdensome. In legal service organizations in which I have actually measured the time required to complete and submit reports, the amount of time per fee earner has always averaged less than 10 minutes per day.  Over time this average investment of time usually decreases.

This is due to two reasons

1. People become more alert to problems and more efficient in reporting them.
2. As the firm collects this information, it begins to correct quality problems, thereby reducing the frequency and number of error reports.

Without this information, however, you are only guessing at quality, rather than managing it.

Norman Clark

This is the fourth of a series of posts about the compelling business case for quality assurance in law firms.

The third characteristic of successful quality assurance programs in law firms is that they focus on the greatest risks and attack the biggest quality problems.

We favor a practical approach.  The best methods do not seek to perfect each and ever task, function, and process in the firm.  Unlike methods such as ISO 9001, we do not recommend detailed documentation of each and every process.  However, we do recommend intense focus on the ones with the greatest risks. In law firms, most quality assurance issues can be isolated to one or two critical weaknesses. Our approach focuses on these “significant few” issues, rather than every possible one. In particular, we recommend that a firm start by improving the processes that are currently causing the greatest problems. Focus on problems that annoy the clients the most, such as missed deadlines, errors in documents, and untimely or inaccurate bills. In our experience, most of these problems can be mitigated substantially, and sometimes even solved entirely, with relatively simple, low-cost improvements.

Norman Clark

The people who do the work are in the best position to improve it.

This is the third in a series of posts about the characteristics of successful quality assurance programs in law firms.

Many law firms assume that the installation of an effective quality assurance program will require hiring a platoon of expensive external consultants to set up and administer the system. Actually, this is the wrong way to do it.

Law firms already have the internal quality assurance “experts” that they need — their own people.

Quality assurance requires a firm-wide approach and enthusiastic executive-level leadership. However, the “real work” is done by fee earners and support staff in the practice groups and project teams. Most risks arise from a relatively small number of specific weaknesses in the way that work is performed every day.

The people who do that work every day are usually the ones who can best diagnose the causes of problems in work processes. Therefore, a major component of a successful approach to quality assurance is to provide knowledge, tools, and methods to people working in departments, practice groups, and teams. This empowers them to take responsibility for improving the quality of their work.

Although we recommend firm-wide infrastructure and consistent procedures to manage quality, the intense focus must be at the working level. The key persons in are the lawyers who are managing client matters day to day. This working-level approach is almost always more successful and less expensive than solutions imposed by senior management or outside consultants, who arrogantly believe that they “know the business” better than the people who work in it every day.

When Walker Clark, LLC, assists a law firm with the development of a serious quality assurance program, we contribute tools, methods, measurements, and program management structures. The real improvement comes from the people who do the work.

Norman Clark

It only takes one hole to sink a ship, not a hole in every compartment.  If one practice group — or even one lawyer — has a vulnerability, the same or similar weaknesses probably exist elsewhere in the firm. A firm-wide approach to quality assurance therefore usually produces the best return on the investment of time, resources, and attention.

To carry the maritime analogy forward, we observe two principal types of “leaks” in law firms with poor quality assurance. Like many leaks, each one can go unnoticed for months or years while it does major damage to a law firm’s financial seaworthiness.

Reduced productivity

“We can always find time to fix our mistakes, but we can never find time to prevent them.”

Most law firms rely primarily on after-the-fact inspection to catch and correct mistakes, particularly in documents. Such rework can consume as much as 40% of the time of fee earners and staff. Since most clients are unwilling to pay the law firm to correct its own mistakes, every hour spent in rework represents a revenue-producing opportunity that is lost forever.

Law firms that have introduced serious, systematic quality assurance systems and procedures have found that the resulting improvements in productivity can produce substantially increased fee revenue without proportional increases in staff. This results in dramatic improvements in profitability.

Loss of clients

“We get only once chance to get it right.”

This comment by one of our firm’s clients, a practice group head in a mid-size firm in the United Kingdom, summarizes what law firms everywhere are experiencing.  Clients today have decreased tolerance for poor quality. By the time the client actually complains, it might be too late to save the firm’s credibility with the client.

This leak is more subtle than the client who fires the law firm midway through a case or matter. One of the most important diagnostic indicators of a systemic quality assurance problem is the relatively low percentage of clients who return to the firm for subsequent legal services.

Interestingly, there also appears to be a correlation between poor quality assurance and poor recovery. Firms that lack a quality assurance system also tend to be inept at responding promptly to client complaints. At best they tend to placate the unhappy client for the moment, but do little if anything to prevent the problem from arising again.

Norman Clark

Quality assurance will be one of the most important factors in law firm business strategy in the decade of the 2010s. It will have profound effects on law firm profitability by reducing the causes of poor productivity. Law firms that do quality assurance well will also have a powerful competitive advantage over those for whom “quality assurance” is little more than crisis-to-crisis improvisation in response to client complaints.

The current state of quality assurance

As my colleagues in Walker Clark, LLC, and I work with our clients in law firms, we observe six serious deficits in quality assurance. These are particularly acute in small and midsize law firms, but they can apply to law firms of any size. They also appear to be worldwide.

1. The lack of a consistent, firm-wide quality assurance infrastructure in the firm and in practice groups
2. Little or no awareness of the basic principles of service quality in the delivery of professional services
3. Inadequate data upon which to make risk management decisions
4. Inadequate practices and procedures to delegate legal work and manage its quality
5. Over-reliance on after-the-fact inspection of work product as a quality management procedure, rather than reducing or eliminating the causes of error
6. Inconsistent project management skills and practices

In tomorrow’s post, I will begin a six-part overview of the core elements of an effective quality assurance program.

But for now, ask yourself: “How many of these six deficits exist in my law firm?”

Norman Clark

Once upon a time, only 15 years ago, law firms could learn many valuable lessons from all aspects of the Toyota management model. Toyota showed us how to identify and focus on our core business, understand how internal business systems operated, and — above all — the importance of quality management. Law firms that adapted principles of total quality management from Toyota and other leading Japanese companies saw remarkable improvements in client satisfaction and long-term profitability.

Now Toyota has another important lesson for law firms everywhere — the importance of not sacrificing quality to profitability and growth. To do so is a fool’s choice, as the recent Toyota debacles demonstrate. For every thousand dollars saved by cutting corners on quality assurance, a business can ultimately lose millions of dollars in customer goodwill and market reputation.

An article in this morning’s Washington Post provides interesting insights about what happened inside Toyota to produce the recent quality fiascos. As Blaine Harden points out in his article “‘Toyota Way’ was lost on road to phenomenal worldwide growth,” the blunders were not isolated mistakes, but the natural result of a long-term deterioration in the quality mind-set that accounts for much of Toyota’s success in the 1980s and 1990s.

But now, as the company recalls millions of flawed cars around the world, there is an expert consensus that growth itself derailed the Toyota Way, blurring its focus on quality, thinning its stable of expert mentors and undermining its capacity to respond to consumer complaints.

This one paragraph presents an excellent checklist for law firms of any size:

• As your law firm has grown, have you blurred your focus on consistently delivering “best-in-market” levels of professional quality and client service? Quality assurance is not “nice to have” or a sideline. It should be at the core of your operations.
• Are you making a serious resource commitment to quality assurance? Quality assurance is more than having “spell check” on your computers. It requires probing into the operations of your firm to identify and prevent the causes of errors, rather than trying to catch them and fix them after they happen.
• How do you respond to client complaints? The real test of a law firm’s commitment to quality is not their slogans, but how they respond to client complaints. Unfortunately, most law firms do not have any systematic procedure to address client complaints, but instead rely on crisis-to-crisis damage control, which is much more expensive and usually much less effective.

Harden’s article also reminds me of something that a senior partner in a large, international law firm in London told me about 12 years ago, as his firm was embarking on a campaign of dramatic international expansion:

No matter how big we get, we still get only one chance to get it right with our client.

Norman Clark

This is how a partner from a mid-sized law firm described the departure of several of his firm’s highest-billing partners to competitors over the previous six week, who collectively took almost one-quarter of the firm’s potential billings with them.

“We knew that they weren’t happy with last year’s distributions, but none of us were. They seemed to like practicing with us. We never expected this. It was like a time bomb that was so quiet that we didn’t even hear it ticking.”

Over the past 14 years, I have spoken with many newly-arrived lateral partners. Whether in good financial times or difficult ones, when I ask why they left the their former firms, three words almost always come into the conversation: recognition, opportunity, and fairness.

• Recognition – “My former partners did not adequately value my contributions to the firm.”
• Opportunity – “I didn’t have the incentive or the opportunity to earn what I can earn and deserve to earn from my practice.”
• Fairness – “The compensation plan at my former firm produced results that weren’t just unfair. They were bizarre.”

Each of these points involve more than money. Partners seldom jump ship because they are unhappy about a single year’s pay or profit distribution. Money is only a measuring stick that suggests fundamental flaws in the way that the firm rewards and incentivizes its partners.

Is your law firm’s compensation system a time bomb that could someday blow apart your partnership?  Here are some questions to help you listen for the faint ticking:

1. How long has it been since you conducted a thorough review of your partner compensation system? If you haven’t examined your partner compensation system within the past five to ten years, this could be a good time to do so. My colleagues and I have worked with some partnerships in which not a single active partner had any role at all in the creation of the partner compensation system years ago. Also, business priorities sometimes change. If you have a compensation system that is largely performance based, does it still reward the activities and behaviors that your firm needs today?
2. Have you increased the size of your partnership by more than 20% in the past five years? Some of your newer partners might not share the same priorities that are implicit in your compensation system. A new partner  – particularly one who is being promoted from associate status — sometimes agree with almost anything in order to be admitted; but acquiescence can quickly deteriorate into resentment.
3. Does your system produce wide disparities in compensation? What is the ratio of the total cash compensation received by your most highly-paid partner and the lowest-paid partner.  If the ratio is approaching 3-to-1 within the same class of partners, your system might need adjustment.
4. What do your partners really think about compensation? Some law firms avoid any serious discussion of partner compensation for fear of hurting their collegiality or teamwork. One of the best ways to manage this sensitivity is a confidential partner compensation survey, conducted and reported by a third party such as Walker Clark, LLC. It can confirm the level of consensus and support for your current system and define the few critical issues that might need attention.  A sensitive issue can be defused, in that, as presented by the survey results, it is no longer “George’s issue” or “Maria’s complaint,” but an issue for the entire partnership.

A comprehensive review of partner compensation at your law firm need not be expensive, complicated, or divisive. Instead, it is a prudent investment to manage a quiet but potentially explosive risk.

Do you hear a faint ticking in your partnership?

Norman Clark

There are an interesting discussion and several related links in this morning’s National Law Journal posting “Spotlight on Laterals.”

The panel discussion focuses primarily on large law firms; and some of the comments and observations might not be entirely applicable to small and midsize firms. Also, as appears to be customary with the National Law Journal‘s American focus, none of the discussions take into account local market situations for law firms outside the United States. With those caveats in place, “Spotlight on Laterals” might be interesting and worthwhile reading for those of you who are NLJ subscribers.

Whether to bring in a lateral partner is one of the riskiest business decisions that most law firm partnerships will ever make. The opportunities can be very attractive, but like most things with the potential for great rewards, admitting a lateral partner also carries high risks, which much be identified, defined, and managed in advance.

I recommend to my firm’s clients that they use a methodology that is similar to that used to evaluate the business case for a law firm merger, and that they be satisfied that they have solid, factually supported answers to all of the questions.

We sometimes have to make business decisions based on a large component of faith and goodwill. Admitting a lateral partner into your law firm should not be one of them.

Norman Clark