Following
James' recommendation on
Twitter, I read
Patrick Lamb's blog entry about Big Law firms dealing with the downturn in a series of "slash and burn" exercises. He rightly raises the question - why were average profits reported being down by almost 20% (I assume he is referring to US law firms) while profit figures are actually down 3-5%?
Last month I blogged myself about UK law firms where there was an average rise in revenue for the top 50 firms but an average drop in PEP for the same group. The understanding that I took away was that law firms were poor at accurately assessing the downturn.
Patrick goes on to say that the "slash and burn" exercise - i.e. slashing costs by, generally, reducing head count and finding savings in expenditure (often by pressurising suppliers or reducing benefits) - which has been demonstrated to be unsuccessful, is simply repeated. He expresses surprise that Big Law firms seem unable to move to a different model.
I can't speak for US firms, although I had understood that they worked to a more corporate model that their UK counterparts. The the UK, however, I firmly believe that the Partnership model is the problem. Debra Weiss talks about this in her posting "
Most law firm reform ideas are insipid and inadequate", and points readers in the direction of Larry Ribstein, a law professor at the University of Illinois, who suggests
external ownership of law firms.
The issue in the UK is that, no matter how large the organisation seems - thousands of staff, and millions of pounds worth of revenue - law firms are small businesses. By that I mean that the governance model which is used in almost every firm I have analysed is the same - a board of lawyers headed by a senior lawyer who may receive advice from functional specialists employed as directors. These lawyers, in order to have reached the stage where they have achieved partnership and been considered for the board, will have put in a tremendous and impressive amount of work in order to build up a client base and an income for the firm. This will have required years of training and hours of practice - in preference, often, of many other parts of their lives. Eighty hour weeks are still considered normal for aspiring lawyers.
This is all well and good - but it does leave little time for the hot-shot lawyer to learn anything at all about running a multi-million pound business. Many firms will point to their internal training programmes (although almost as many will have been cut or cancelled altogether in the first "slash and burn" round) which they use to identify future partnership material. Some firms will even go to the lengths of sending senior associates or partners away on a week long course to a major business school to learn the skills to manage the firm. I have a number of issues with this approach. As a professional manager, I find it somewhat insulting that anyone should think that they can learn my job at a week-long course. I would have more regard for the idea if, having been on this accelerated learning programme, returnees were allowed to get involved in actually running the firm. Often this is not the case. Holders of certificates from Harvard may well be invited onto a committee but the chances of being in a position to see the business being run and to have a hand in it are very slim before achieving board level. They may well pick up some staff-management experience as they rise to Head of Department, but it is unlikely that they will engage in any strategic staff management or long term planning (I am often told by law partners that, since it is so difficult to forecast the requirements of the firm in the future, there was no point in trying).
This means that the first time they are expected to make a strategic business decision will be at their first board meeting. In most cases they are not ready for that moment and are not sufficiently trained for the task they undertake. That is why "slash and burn" exercises are undertaken so often - they are easy to start, easy to understand and a way of being obviously seen to be doing something. Setting up new governance systems with long term measurements and targets is difficult - and so often avoided. This is a small business mentality - and, in fact, some small business owners I know would be insulted at the comparison.
I agree with Professor Ribstein - external Board membership and external ownership is the probably the way forward. Law firms need to take the step to become large businesses and incorporate the expertise in running a business into their firm. Managing a business is a skill in itself and should be left to those trained to do it and with experience of dealing with upturns and downturns. By introducing an external view, firms will be forced to become more corporate and will benefit from a more diverse opinion, knowledge and skill set.
Moving towards being a large firm will be difficult. The first step, as so often, is to recognise the skills already available to the firm - i.e. in the current Board - and to equally recognise what skills are missing and so will be necessary. A full programme of training will be necessary for both this generation of "managing lawyers" and the next. Understanding of business must be introduced as early as possible. Trainees should have one "seat" with the firm's management and spend a rotation understanding how the firm actually works.
I believe it is possible to produce this new type of law firm - and that the firms which move away from the traditional model will be the ones to recover most quickly.
