April 18, 2006
Growing a Law Firm by Cutting Clients
It was a slightly different view than the 80/20 rule that has been around almost since the advent of modern management. The 80/20 rule states that in just about any activity, 20% of that activity produces 80% of all the value. The remaining 80% of activity, for all practical purposes, is a drag on the rest. From an accountant’s standpoint, when costs are fully allocated, 80% of a law firm’s clients are likely to be losers.
The 80/20 rule is a useful management concept, but those who latch on to it as a management mandate take its implications to the extreme with unintended negative consequences.
I believe firmly in the “rule of the fewest”. When you consider your objectives, the rule of the fewest implies that you should not have any more clients than necessary to achieve your objective. You should not have more legal professionals and support employees than necessary to accomplish the objective. Nor should you spread the firm over more practice areas than necessary, etc.. Why? Because “things” create work, friction, overhead or whatever. The more “activities” you are involved in, and the more “things” you have involved in those activities, the more wasted energy and cost you incur.
However, we have all seen the consequences in the consumer world when management latches on to the 80/20 rule to minimize inventories and maximize profits. Thanks to the internet, we now have a nearly unlimited number of sources to choose from; however, the choices they offer are all the same. In the apparel industry, if you are outside of the center area of the bell shaped curve because you’re are a little too round, too tall, too short or too thin, you are out of luck when it comes to finding your size.
The fact is law firm clients (even the unprofitable ones) begat even more clients. Professional work creates valuable reusable work product and experience when the work itself is done at a loss—Etc. Etc Etc.
So while the 80/20 rule is a useful concept and the rule of the fewest is even better, a firm that decides to grow its profits by chopping off clients, offices, and talent may just wind up with a smaller firm and a smaller future. So be careful when applying the concept—consider carefully the ancillary or indirect value of activities (values that may not be apparent to the accountant) before you start chopping.
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