Though its benefits may be modest at best in many cases, the lateral recruiting boom of recent years shows no signs of slowing down. And while most large law firms identify revenue growth as their top priority, many are falling short when it comes to monitoring the loyalty and satisfaction of the clients that produce that revenue.
Those are two of the key findings of a report, “Thinking Like Your Client: Strategic Planning in Law Firms,” released Tuesday by LexisNexis and Am Law Daily affiliate ALM Legal Intelligence. The underlying question at the heart of the report, which summarizes the results of a survey of 79 leaders of Am Law 200–size firms, is how well large law firms are faring in terms of operating as businesses. The answer is not overwhelmingly positive.
“The level of commitment leading law firms are showing to strategic planning is moving in the right direction, but the rate of substantive progress is still frustratingly slow,” the report states. “There is genuine cause for concern.”
While most firms cite increasing revenue, improving profitability, and acquiring and retaining talent as their top priorities, the survey found that only one out of eight have a strategic plan in place to achieve those goals. And even among the firms that have developed such plans, few have adequate the tools in place to assess issues of profitability.
Firms also diverge in terms of who is involved in devising and executing their respective strategic plans. The survey found, for instance, while more firms are turning to nonattorneys, particularly business and marketing officials, for help with strategic planning initiatives, only about one in four have actually given those individuals an active role in making decisions.
The report cites Dechert, which hired a consultant to formulate a five-year plan aimed at getting attorneys to focus more closely on business issues, as moving in that direction. The firm generates monthly reports that track, among other things, productivity and timekeeping and are widely available. Additionally, firm leaders emphasize this numbers-driven approach to the rest of the attorneys.
“Some of them make the transition right away; they get it, and fundamentally know how to leverage client relationships, identify cross-sell opportunities and easily win new business,” David Cybulski, Dechert’s director of business, said in response to the survey. “For others, it takes a little more work and effort. We try and make it as easy as possible for everyone because in the end we all have a role to play in the sales process.”
On the talent front, a whopping 96 percent of survey respondents indicated that their firms plan to hire laterals over the next two years as a means of growing, while nearly three out of four said their firms expect the increase in lateral hiring to extend over the next five years. The ongoing reliance on lateral hiring is somewhat surprising given that only 28 percent of survey respondents described such efforts as being “very effective” over the past five years and 10 percent labeled them either neutral or negative.
Citing the role that lateral churn played in Dewey & LeBoeuf’s demise as an extreme example, Russ Haskin, director of consulting and services at LexisNexis, says a slavish devotion to such hiring is not a sound long-term strategy.
“The number one priority is to generate revenue, and the quickest way to generate short-term revenue is to bring in a lateral partner with a good book of business,” says Haskin. “But it doesn’t always work. Look at Dewey [& LeBoeuf].” He calls the reliance on lateral partners a “knee-jerk reaction” to the economic downturn, a period during which firms deequitized partners and hired fewer associates. “If firms aren’t grooming that next group of partners, then who will take the reins once current partners leave?”
At the same time, firms appear to be homing in on their poor performers. Nine out of 10 survey respondents said their firm has “unprofitable” partners, and seven out of 10 said their firms have partners at risk of being deequitized or “put on performance plans.” As one survey respondent put it: “There are too many partners without sufficient billable work. Our attorneys need to be become client development experts rather than expense-cutting experts.”
Indeed, the report suggests that many firms could do a better job of minding their client relationships. While just over half of survey respondents said their firms have plans aimed at tracking client loyalty and satisfaction in place, almost half of those firms (47 percent) act on those plans only “episodically.” The survey also found that while every respondent could name his or her firm’s top five clients, only about one in five said they were “extremely knowledgeable” about key business drivers for their top 20 clients. “Clearly there is room for improvement in the client relationship management arena, for both existing and potential clients,” the report states, “particularly when the majority of firms claim that knowledge of their clients’ businesses is a source of competitive advantage.”
As for profitability, survey respondents identified their long-term goals as cross-selling, investing in technology and acquiring practice areas. The report spotlights Stinson Morrison Hecker’s strategy for increasing profitability, sometimes at the expense of generating revenue. “We are relentless in our focus on profitability; I admit it,” said Doug Doerfler, Stinson’s chief financial officer at Stinson. “We don’t make compromises, we don’t do one-offs for special discounts, and we won’t accept work just to keep timekeepers busy. That approach has cost us clients and work; but, it has also kept the firm’s productivity, growth rate, profitability, and profits per partner all heading in the right direction, which is up.” Doerfler said the approach forces the firm to be more honest with clients about fees and pricing.
Ultimately, the survey recommends, firms should commit to long-term strategic planning and make it clear who in the firm will take the lead in executing the strategy. “When firm leaders are educated on business metrics, firm performance, and the financial health of the firm, we see transformation in overall financial and business performance,” Bo Yancey, director of consultants at LexisNexis, states in the report.