Walker Clark Worldview

On Monday 14 June 2010, I had the privilege of moderating a panel discussion about the adoption of a business approach to law firm strategy.  This was part of the very successful Managing a Modern Law Firm conference, organized by the Law Firm Management Committee and the Latin American Forum of the International Bar Association, and was held in Buenos Aires.

As part of my comments, I discussed three general lessons that many law firms worldwide have learned from the economic crises in 2008-2009 (and continuing into 2010 for some countries).

1. The need to be alert to emerging economic and geopolitical trends before they arrive in the form of a crisis
2. The need for a more intense focus on profitability, particularly with respect to lawyer productivity and efficiency
3. The need for fully-informed business decisions, based on facts, not hunches or hopes.

Norman Clark

While attending the mid-year officers meetings of the International Bar Association last week in Copenhagen, Denmark,  I had an opportunity to conduct my informal, unscientific semi-annual survey of some of my  colleagues in the IBA Law Firm Management Committee. I relied on the time honored methodology of casual conversations among professional friends.

Although it was expressed in a variety of ways, the top concern of these law firm managers and leaders was how to protect — and maybe even improve — the profitability of a law firm’s internal operations in increasingly price-sensitive markets. This concern prevailed among law firm managers and leaders from law firms on every continent, from small firms to some of the largest in the world, and in a broad range of practice specialties.

There was also a recognition that one of the most cost-effective methods of managing the profitability of internal operations is through an increased emphasis on quality assurance. This was expressed in a number of interesting and insightful ways.  For example:

Clients are no longer willing to pay us to fix our own mistakes.

Clients won’t subsidize our learning curve.

We have to start looking inward to improve our profitability; continuing to raise fees no longer works.

We have to find a way to avoid making mistakes in the first place, rather than relying on fixing them after we make them.

We get only one chance to get it right.

Quality assurance is Walker Clark terminology for the application of Total Quality Management to the practice of law. It affects both back-room and support operations, such as clerical support and billing, and the actual delivery of legal services by lawyers and paralegals. Members of our firm, including me, have been advising and assisting law firms, corporate law departments, and government legal agencies about quality assurance concepts, tools, and methods for more than 20 years. Our experience demonstrates that quality assurance is the most cost-effective profitability tool that a law firm can use; because it works in the core operations of a legal practice, where the great majority of waste, inefficiency, and unnecessary costs are to be found.

For more information about quality assurance programs, please contact me by email or telephone at +1.239.466.8370.

Norman Clark

Prague

Last Friday we launched our new Central Europe Group, to deliver global experience and local expertise to law firms practicing in five dynamic legal markets in Central Europe:  the Czech Republic, Hungary, Poland, Romania, and Slovakia.

The Central Europe Group originated from suggestions and comments by Walker Clark clients, as well as professional friends in the region, who are seeking a multidisciplinary approach to business strategy, management, and operations, that is not readily available from traditional consulting firms at a reasonable cost.

The Central Europe Group delivers country-specific services in:

• Strategic planning and implementation
• Profitability analysis and improvement
• Establishing clear competitive advantages
• Evaluation of mergers, networks, and other growth opportunities
• Improving the marketing performance of the firm and each of its lawyers
• Building the firm’s national and international visibility
• Law firm governance and partnership structures
• Compensation systems
• Performance management to get the best results from each person in the firm

The Central Europe Group has also published a series of country pages with up-to-date news and analysis of the major business and economic trends affecting the business of law firms in each of the five countries. We are also publishing a series of in-depth Background Papers on each legal market. The first of these, Foundations of the Modern Czech Republic, by Daniel E. Miller, Ph.D., one of the coordinators of the Central Europe Group, was published this past weekend and is available for download from www.walkerclark.com.

If you would like a complementary consultation about how the Central Europe Group can assist your law firm, please contact me by e-mail or by telephone at +1.239.466.8370.

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

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

With so many smart people who make their livings by intellect and analysis, why do so many law firms have so much difficulty with profitability?

I think it is because they don’t know where to look, or how deeply to probe, for the causes of poor financial performance.  This is why even in good times, some law firms — particularly small and midsize ones — struggle to remain profitable.

Law firm profitability is different.  Some traditional accountants — even ones who are experienced in other professional services businesses  — tend to overlook or minimize the special factors and forces that must be understood and addressed in order to improve the profitability of a law firm or of a particular practice in the firm.

You can’t take a generic profitability analysis, cross out the words “accounting firm” or “architecture firm” and write in “law firm.”

To be fair, there are a lot of excellent accountants and other financial specialists who understand this. I have had the great professional pleasure to work with a number of them. Not surprisingly many of them have in-house law firm experience.

Our firm’s experience advising hundreds of law firms and specialized practice groups throughout the world has confirmed the classic “six drivers of  profitability,” which have the greatest impact on the profitability of a professional services firm:

• Price
• Productivity
• Realization
• Cost management
• Fee earner compensation
• Leverage

This is nothing new. These apply to most professional services firms.  However, in most law firms these six factors interact in ways that can be subtly, but profoundly, different from other professional services. Someone who does not understand the practice of law might not notice these subtleties. Here are five of the more frequent examples:

• The price sensitivities and quality expectations in different types of legal services
• The nature of the various constituencies and business sectors in the firm’s client base
• The seniority, market reputation, and equity interests of the owners of the firm, who usually also are expected to produce a disproportionate amount of the fees
• The availability of partner capital to respond to short-term cash-flow issues or to take advantage of investment opportunities
• The degree to which a practice area or service line is heavily dependent on the management of sophisticated intellectual capital

From a profitability perspective, most law firms actually compete in a number of economically distinct legal markets, not just one. This is why a “one size fits all” profitability strategy — particularly dramatic ones such as across-the-board cost cutting or massive redundancies — might produce desired results in one practice area, but sometimes also can be impotent or even counterproductive in others.

Even the smallest law firms are very complex, sophisticated business entities.  The causes of problems in financial performance frequently can be found and understood only by drilling deeply into the operations, client base, and professional culture of the firm.  There is seldom an easy, quick fix to chronic profitability problems.

Norman Clark

During the past eight years, my colleagues and I in Walker Clark, LLC, have had the privilege of working with some of the most successful law firms in the world.  We have also had the challenge of advising law firms who want to turn around chronic disappointing performance.

One of the common elements in both types of law firms is performance objectives.

Successful law firms typically use them. Unsuccessful firms usually do not.

Properly managed performance goals produce clear, measurable benefits to a law firm’s financial performance and market reputation. These usually include:

• Higher fee revenue per lawyer
• Lower operating costs
• Improved quality assurance
• Higher lawyer and staff morale
• Lower lawyer and staff turnover rates

The bottom line is the bottom line: substantially improved and sustainable profitability.

This is why I continue to be amazed by otherwise intelligent, sophisticated law firm partners who say that individual performance goals, and the ongoing coaching and feedback that are needed to make them work most effectively, are a waste of time. This curious, old-fashioned notion is refuted by the real-world experiences of progressive law firms that have introduced performance objectives and manage them well.

Norman Clark

I have noticed in the past 12 to 18 months a renewed interest in quality management in law firms. Clients are asking me questions about things that I have not heard mentioned in most law firms for almost ten years:  phrases like “TQM,” “process reengineering,” and “ISO 9000.”  (Even ten years ago, when I was working with another management consulting firm, one of my partners advised “Whatever you do, don’t mention total quality management.  It scares the lawyers.”)

Part of this renewed interest is driven by the changed profitability circumstances in which most law firms find themselves today.  Consider:

• The demand for legal services is down for many law firms.
• Costs have already been cut as deeply as possible, and in some cases more deeply that was probably prudent.
• Price resistance has increased, even in some practice areas that previously appeared to be fee insensitive — i.e., the client was willing to pay whatever we charged (provided that it was not too outrageously high).
• Clients expect more. As one partner told me, “In today’s legal market, we only have one chance to get it right.”

The old profitability strategy that many law firms used — “All we have to do to be profitable is to charge the highest fees that we can” —  no longer works.

Quality assurance is not just as a means to keep clients happy.  It is also a very powerful profitability method.

• For example, with quality assurance it is possible to improve fee earner productivity dramatically by reducing the causes of errors and rework.   In some firms where I have actually measured it, rework can constitute as much as 40% of a fee earner’s time — correcting mistakes that could have been avoided and which the client probably will not pay extra for the firm to correct.
• By eliminating the causes of errors, missed deadlines, rework, and waste, law firms can improve productivity dramatically without any significant increase in staff or resources.  This improved productivity translates into pure profit.
• By changing quality from a slogan to a system, a law firm can create a significant competitive advantage over competitors who merely talk about quality but do nothing to assure it.

In future posts, I will explore some of the rediscovered concepts, methods, and tools that law firms can use to build higher levels of consistent quality into the delivery of services to clients.

For now, however, it appears to me that the 2010s could be the decade of a quality renaissance in law firm.

Norman Clark

What can law firms expect in 2010? Here are two points to factor into your planning for the new year.

• Most of the world will see economic recovery in 2010. Most Latin American economies will recover to, and surpass, 2008 performance — especially in GDP growth. We also expect to see recovery by the end of the year in every other region of the world. Recovery will be significant and sustainable, even in the United Kingdom and the European Union; although it might not be until 2011 that some national economies see a return to 2007 levels of performance.
• The picture is not as optimistic for the United States, however, where business failures and personal bankruptcies are likely to continue at record levels. Recovery in the U.S. will also be hampered by the dysfunctional economic policies of the Obama government, and its stubborn failure to acknowledge candidly and address honestly the issues that have decayed the foundations of the American economy and the American political system over the past 30 years.

What will this mean for law firms?  The answers will be highly firm-specific and will vary by jurisdiction, law firm specialty, and size.   There are four issues, however, that I am hearing discussed frequently among our clients and professional friends in law firms worldwide:

• Profitability.  Small and midsize corporate and commercial firms in the United States will continue to struggle with profitability issues, particularly on the revenue side.  Cash flow and management of working capital will continue to be problems for many firms.  We also expect to see continued business failures, downsizing, and partner departures, especially in local firms with fewer than 50 lawyers.
• Outsourcing.  There will be a renewed interest in outsourcing of administrative, marketing, and some lawyer functions in order to control costs.  Some of these efforts will work very well; others will be disappointing.
• New players in the international market.  2009 was a year of retrenchment for large international law firms.   In 2010, we expect to see a renewed interest in carefully selected international expansion. Look for some significant international law firm mergers, some of them involving firms that have not previously been considered to be major international players. We also expect to see regional firms, particularly those based outside North America, enter the international market.
• Quality assurance. There will be renewed interest in the quality of client service and in the efficiency of internal client service operations, not only as competitive advantages but also to reduce operating costs.

These are not the only things that we expect to happen in law firms in 2010, but they are interesting examples how progressive law firms are planning their responses to the economics of 2010, as we perceive them now.

Norman Clark