March 31, 2006
Realistic View of Law Firm Management
David Maister says he is giving up on law firms and has written an article for the April issue of the The American Lawyer to explain why. In an earlier e-mail, he noted “the observations are not new (indecisive, avoid risk, bad at teamwork, don’t allow managers to manage, don’t respect anything except hours and origination, etc.)” The article titled Are Law Firms Manageable will not be available on his web site until April 6, but yesterday Maister posted highlights on his blog, David Maister-Passion, People, and Principles
While all of us would like to see more management emphasis within the law firm, the issue of law firm management has to be viewed realistically. If you are expecting a Jack Welch to assume the management reigns of a midsized law firm, you are going to be looking for a long time. Law firms do not need a Jack Welch at the helm to be successful. Midsized law firms (even the mega firms) aren’t attractive venues for world-class professional executives.
The fact is law firms are easier to manage than most businesses of comparable size. Their business model is simple. They generate rather than consume cash. They operate in an environment of high demand, low fixed cost, and pricing flexibility. Most entrepreneurs only dream of owning a business with such favorable attributes. It is these intrinsic favorable attributes and the simplicity of the business model that contribute to the high rate of accidentally successful law firms. Nevertheless, law firms have a handful of characteristics that, without more management attention, set them up for a fall.
Law firms are thinly capitalized business enterprises with little dry powder. Profits are generally fully distributed to the owners—i.e., the firm partners. Without sufficient forward-looking systems (and due in part to over reliance on the cash method of accounting), law firms often don’t see a train wreck that is just around the corner. It takes a typical firm 120 days for the impact of a slow billing month to hit the firm in terms of a cash shortfall. It can hit as a total surprise to the partners, and it has contributed to the fall of many a law firm. The solution is improved financial modeling—a system that looks ahead to anticipate rather than merely measure what happens.
Second, unless the firm plans for succession and avoids creating an unfunded liability (continuing payments to retiring partners), they are likely to eventually self-destruct.
Third, law firms have traditionally not addressed the issue of efficiency from a process standpoint. Increasingly sophisticated consumers of law firm services are selecting firms based on the efficiency of their processes. Law firms that become more efficient are going to get business, and those that don’t will be on the losing end of the economy.
Finally as Maister notes in the The American Lawyer article , most firms are not guided by (and its members are not held accountable to) a core set of beliefs. Yet study after study identifies a unifying core set of beliefs as one of the most essential ingredients for success. Businesses, including law firms, don’t survive for long if numbers and financial performance are the only measures of success.
While no one can guarantee the future, law firms that invest more management effort in the above four areas are far more likely to enjoy long-term success.
Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.
Related posts
Filed under Planning by Tom Collins