A new report delivers more bad news about US large law firm performance. What should management do? 

The just-released Hildebrandt Institute Q2 Peer Monitor Report observes “warning signs are emerging that the remainder of the year could pose numerous difficulties… A combination of lethargic demand, weak rate growth and struggles to restrain costs will make it challenging for firms to achieve meaningful revenue and profitability growth.” The report suggests that in this market, “strategy and execution are becoming more critical than overall market conditions in determining individual firm performance.”

What does it mean for a law firm to have a strategy or to execute? Four recent items news items suggest some answers:

DEPLOY TECHNOLOGY STRATEGICALLY. Law firms must use technology strategically to improve client service. For example, they can invest in business intelligence, legal project management, practice productivity tools, and delivering service via the Web and mobile devices. I was pleased to read in the opening sentences of a recent UK survey of law firm tech spending: “With no prospect of a rise in chargeout rates, lawyers are searching for a new way to jump-start their profitability, and technology is increasingly the answer. While firms have slashed spend in most other areas, IT budgets are on the up as they search for software solutions that will allow them to pull into the outside lane and cruise past the competition.” See “The IT Crowd” in The Lawyer Business Technology Guide (emphasis added). The article quotes observers who say tech spending is shifting to the strategic; alas, I see no unambiguous survey results supporting this conclusion. Nonetheless, I agree with the sentiment.

ACHIEVE OPERATIONAL EXCELLENCE. On the topic of execution, read Paul Lippe’s Want Quality? Learn to Operate in the ABA Journal New Normal series. He compares the skills of a top brain surgeon versus a doctor running a giant healthcare organization to support his conclusion that most legal problems are “not ones that yield to marginally superior individual expertise, but are systemic problems that require systemic and operational solutions.” Lippe offers as an example a legal process outsourcing provider that produced “a 75-page proposal [that reflects] a deep and specific knowledge of how to get legal work done well beyond anything I’ve ever seen from a law firm.” He observes that “LPO is… materially better at process because they focus on outcomes”. The lesson: while it’s great to have top lawyers, it is just as important if not more so for law firms to focus on how they do the work. That means process improvement, budgets, and matter management.

MANAGE OVERHEAD TO RATIONALIZE LAWYER SUPPORT. Execution is also about how firms support lawyers. Last week, two firms announced staff lay-offs (see Star Tribune article on Dorsey & Whitney and Above the Law post on Fulbright). This sad news reminds me that overhead in many large law firms exceeds $200,000 per lawyer (and $250,000 in NYC) and that secretarial ratios range from below 3 lawyers to 1 secretary to 6:1. Given both high cost and high variability, more lay-offs are no surprise. The question is whether lay-offs reflect mere cost-cutting or deliberate process engineering of support functions. Good execution means the latter but the evidence I typically see suggests the former.

EMPLOY THE SCIENTIFIC METHOD. Three Cheers for Scientific Backbiting in the Wall Street Journal (28 July 2012) explains that scientists arrive at truth by trying to disprove others’ theories. “Confirmation bias”, a deeply ingrained human trait, makes it very hard for an individual scientist to disprove his or her own theory. This holds an analogous lesson for law firm management. Excellence in operations and strategy requires testing. If management relies only on its own experience and opinion, failure is more likely. Management must learn to test their plans and accept feedback from multiple quarters. Just because management thought of an idea does not make it right – let clients and others provide feedback and prove or disprove the plans.