Archive for September, 2007

Why do some law firms fail while others succeed?

Sunday, September 30th, 2007

Janet Ellen Raasch

Janet Ellen Raasch is an author/ghostwriter who works with lawyers and other market-savvy professional services providers to research and produce reader-friendly manuscripts that are suitable for publication as articles or books. She can be reached at (303) 399-5041 or jeraasch@msn.com.

When brand-name law firms like Brobeck (San Francisco), Arter & Hadden (Cleveland) and Altheimer & Gray (Chicago) bite the dust, legal industry pundits are quick to offer their post-mortems. “Over-extended on leases and salaries,” says one. “Over-dependent on the technology industry,” states another. “Spent too much money on national advertising,” claims a third.

“My colleague Mark Greene and I are both committed to research, and we started to ask ourselves: should the nation’s leading law firms be making important management decisions based on the opinions of a few ‘wise guys?’” said Burkey Belser. “In no other industry are business decisions made with less hard data than the legal industry.”

Belser is president of full-service design firm Greenfield/Belser Ltd., located in Washington, D.C. He was in Denver July 13 to discuss the results of a research project that compared successful law firms with their failed counterparts. The presentation was given at the Law Firm Leaders Forum, held at Holland & Hart and sponsored by the Rocky Mountain Legal Marketing Association (www.rockymountainlma.com).

“We decided that we would conduct a scientific survey in an attempt to sort fiction from fact. We started our research by combing the law-firm and business-management literature and developing 140 hypotheses – variables that we thought might ‘make a difference’ in whether a firm was destined for success or failure,” said Belser.

“We included the ‘proven’ wisdom of the usual law-firm and business gurus,” said Belser. “The results surprised us. Of the 140 factors, only 60 proved to be associated with success or failure. And of those 60 factors, none was predictive in and of itself. Law firms, like human beings, usually do not die from a single cause but from a combination of systemic failures.

“Having a CEO and a CFO, for example, made no difference,” said Belser. “However, having other non-lawyer C-level executives (like a COO, CMO, CIO and CKO) — and empowering these individuals with decision-making authority in their areas — made a striking difference. Our results indicate that law firms that adopt a more business-like model are much more likely to be successful.”

Belser and Greene used the results of their research to create a tool that law firms can use to create their own profile — a profile that can be compared with those of the typical successful and failed firm. “This tool by no means predicts success or failure, but provides a solid prescription for law-firm self-analysis and change,” said Belser. “Law firms can recognize danger signs and set a course for healthy growth.”

The study’s “success” group (N-47) included AmLaw 200 firms that had posted a five percent growth in gross revenues two years in a row. The “failure” group (N-27) included firms with 50 or more attorneys that failed within the three years preceding the study. The survey, in which law firm leaders were interviewed by phone, took place in late 2003. A summary was published in The American Lawyer in April 2004.

“Successful firms were united under a strong brand identity and a common vision,” said Belser. “This factor was huge. Once, law-firm partnership was a career-long covenant. Today, partnership is perceived as a contract that can be broken by either party. In fact, lawyers know that they can often make more money if they ‘hop around.’ A shared vision and culture – not money — is the glue that will bind partners to your firm.”

This unified vision must be part of a strategic plan and must be communicated throughout the firm by skilled leaders. “Failed firms were much more likely to adopt an old-fashioned, autocratic leadership style,” said Belser. “Those with a democratic – one partner/one vote – style were somewhat more successful.

“But the most successful management style by far was consensus-driven,” said Belser, “a style in which lawyers agree to cede decision-making authority to leadership. Many of these leaders are much younger than the law-firm leaders of two decades ago. They fill their roles on the basis of merit and business acumen rather than longevity.”

The key to building consensus is communication. “Lack of communication leads to suspicion; suspicion leads to fear; fear leads to failure,” said Belser. “Ninety-two percent of the successful firms had a strategic plan and communicated this plan all the way down the chain of command to associates as well as staff. This number drops dramatically to 43 percent in failed firms. Plus, successful firms have systems in place that solicit and incorporate feedback from associates and staff as well as partners.”

Another factor that differentiated successful from failed firms was the willingness to embrace innovative change and manage risk. “Strategic diversification, for example, improves the chances that a firm will weather downturns in business sectors and geographic areas, as well as the loss of key clients,” said Belser

“A narrow or niche focus can have strong short-term benefits, but those strengths appear to diminish over the long term as markets converge or mature,” said Belser. “In addition, risk-taking must be strategic. Opening a new office in Fort Myers or Aspen just because a senior partner wants to semi-retire there – that’s just loosey-goosey management.”

“Ownership” of clients was also a key differentiator. In highly successful law firms clients are much more likely to belong to the firm – a “we” culture — rather than to the firm’s individual lawyers – a “me” culture.

“Client-hoarding creates an inherent conflict and significantly increases a firm’s likelihood of failure,” said Belser. “Whether generated by a firm’s compensation system or by the lawyers’ lack of confidence in each other, it is toxic. An ‘eat what you kill’ system is one of the most persistent problems facing law firms,” said Belser.

Successful law firms pay attention to the numbers — realization, prompt billing and collections. Ninety percent of successful firms have a business plan – which is implemented and tracked. Accomplishments are acknowledged and rewarded.

“Billing rates are so high and income so strong in most law firms that poor management can be disguised under a cloak of cash,” said Belser. “As long as the firm is making money, no one looks at the details. Then, one day, it is too late. Financial planning must be constant and centralized; partners should never manage their own financials.

“Finally,” said Belser, “successful law firms reinvest more of their profits in the firm than their failed counterparts. Too many law firms are fixated on profits-per-partner and how this number affects their various listings. It is time to break this mental lock!

“Mark Greene and I are pleased that we have been able to create a portrait of the changing legal industry — providing the hard data that will allow law firm decision-makers to sort fiction from fact as they chart their futures,” said Belser.

This research on law firm success and failure was a joint project of Greenfield/Belser Ltd. (www.greenfieldbelser.com) and its affiliate, The Brand Research Company (www.brandresearchcompany.com). For more information, please contact Belser at (202) 775-0333 or burkeyb@gbltd.com or Dr. Mark Greene at (703) 408 0512 or mgreene@brandresearchcompany.com.