Law Firm Models: Improving Diversity and Performance

Women comprise less than 20 percent of equity partners on average at the 200 largest law firms, the large majority of which will not even report data about their compensation of men and women. The statistics for minority lawyers are much worse.  The good news is that most lawyers in private practice, approximately 85 percent, are working in smaller firms. While good news, we can’t overlook additional problems with our legal system models, such as the surplus of law school graduates, the lack of employment opportunities for many, and the tremendous need for legal services by many in our country who cannot afford the high price of legal services. Indeed, this is the focus of an ABA Presidential initiative. Why is achieving career and compensation parity at the largest firms so slow, and where within the legal system are the opportunities for change?

Law firm business models: Could they be to blame?

The traditional business development and compensation model may be a significant obstacle to change. Stephanie Scharf, founder of the NAWL Annual Survey on Retention and Promotion of Women in Law Firms and lead author of the 2014 Survey Report, notes that the “traditional model in law firms for rewarding business development follows the “first touch” rule – by designating one lawyer as the originating attorney.  The lawyer who first brings in the client often remains the originating attorney as long as he or she is with the firm – sometimes for decades.”  In almost all law firms, origination credit affects pay and promotion, often to a very substantial degree.  If origination credit is not broadly allocated, then those partners who actually service the client and bring in new business may not receive credit for their contributions to the firm’s profitability.

Under newer business development models, “client credit is shared among several partners in a team approach.” Credit may be shared by the partner who first brings in the client, the partner who brings in a new matter from an existing client, the partners who work on the matter, and the partner who markets and does not actually work on the matter. “A shared credit approach allows firms to align their compensation system with the values of the firm – such as the value of advancing women and minority lawyers. Shared compensation fosters better succession planning, as well – with the recognition of younger, yet very active partners, who are more likely to be women and minority lawyers than in more senior cadres and who help to grow the business,” Scharf told me. The traditional approach empowers the lawyers with control over the clients who generate substantial revenue each year.

Even with the best training, many lawyers, like the best surgeons and academics, are never going to excel at bringing in new clients.  Developing new clients demands a robust, personal network of referral sources and empowered decision-makers, who hire lawyers for the type of work the firm does. Even if everyone had similar access to decision-makers, despite the obvious bar because of socioeconomic differences, differences in thinking and personality also affect whether a person will feel excited and energized or exhausted and overstimulated when marketing and networking (see Susan Cain’s book Quiet for more details on the differences between introverts and extroverts on the Myers-Briggs Type Indicator). The best lawyers are not necessarily the best rainmakers, nor should they be. Further, the multiple processes after the first touch that keep a client coming back to the same firm involve the best lawyers, who are quite capable of one-to-one conversations in contrast to the one-to-many conversations that characterize the very early stages of marketing and networking. Wouldn’t it be better to have the best lawyers practicing law, and the best people, lawyers or not, focusing on marketing and developing new clients?

Despite best efforts from well-intentioned law firm leaders over the past decade, the types of organizational changes that have the best chance of creating parity, like the newer business development models, are not experiencing wide-spread adoption. Instead, many firms stop at offering a variety of trainings, mentoring programs, and affinity groups, perhaps necessary changes; however, not sufficient to bring about parity in status and compensation.

The two challenges with change initiatives in law firms.

First, the empowered leaders who could change business development and talent development – including compensation – models, do not feel any need to do so in the largest firms. Changing a business model and culture requires three factors:

  1. leadership,
  2. a “felt need” among empowered leaders, and
  3. motivation to make specific changes, for example changing the business development and compensation model.

Second, change depends on people changing their thinking. Change always feels like a loss. Our brains seem to be wired to like the comfort of the familiar and to dislike change, even for the better. Nobel Prize-winning economist and author Daniel Kahneman calls it, “the asymmetric intensity of the motives to avoid losses and to achieve gains.”

Change requires a particular way of thinking that is contrary to how lawyers typically think. Successfully leading or navigating a change initiative requires suspending or rebalancing the following:

  1. skepticism in favor of seeking new information and brainstorming new solutions, without judgment;
  2. debate to find a single right answer in favor of being open-minded to new possibilities;
  3. dependency on an expert to provide advice or the right answer in favor of self or group reflection on what has not worked and what might be worth trying;
  4. the need to be perfect in favor of a willingness to make mistakes, learn from them, and bounce back to try again;
  5. directive leadership in favor of leading engagement and buy-in; and
  6. individualism and independence in favor of collectivism and collaboration.

Leadership does exist.

Some large firm leaders are different.  They are responsible for the outstanding VAULT scores that measure the degree to which women and minority lawyers report a positive work atmosphere. They monitor the diversity of client teams and attempt to influence the purposeful addition of women and minority lawyers to these and other career-making opportunities. Some may be showing diversity in the newest classes of equity partners; however even in these firms, the highest earners are not diverse.

Do these leaders have a “felt need” to change the culture?

We read and hear about clients leaving law firms, revenues dropping, and ineffective leaders.  One might think the felt need for a change is obvious. Consider the following:

According to the ABA:

  • In 2013, Altman Weil reported that 47 percent of law departments were decreasing their outside counsel budget, an increase from 39 percent in 2012 and 25 percent in 2011.
  • Tymetrix reported a 5 percent drop in demand for hours.
  • Citibank reported that 39 percent of law firm managing partners expected profits to decrease or remain flat.

The Cornell University Law School Legal Information Institute website reports:

  • According to Altman Weil, 85 percent of partners think client love them; however only 35 percent of clients would recommend their counsel, only 17 percent would give an “A” rating to their firms, and 87 percent think their law firm is inefficient.
  • 77 percent of participant in the Altman 2012 Legal Officer Survey terminated their relationship with at least one firm in the prior year.

ALM Legal Intelligence offers these statistics:

  • 37 percent of firm leaders want more work from existing clients and 28 percent want to improve client relationships, yet only 22 percent say they are “extremely knowledgeable” about their clients’ businesses. This should come as no surprise, since only 56 percent have a plan to track client loyalty and satisfaction and of those, 47 percent  track this data only “episodically.”
  • 96 percent of firm leaders intend to pursue growth by acquiring laterals, yet only 28 percent think that their lateral strategy is very effective.

You may be surprised to discover that despite these dire statistics, they do not matter to many of the largest “super rich” firms’ empowered leaders.  Steve Nelson, managing principal of the McCormick Group, looked at the five-year history of revenues and profits among leading law firms and concluded that most have not faced difficult times at all. The statistics reported by Steve and Above the Law show that profits per partner, the chosen measure of performance for these firms, has remained stable or risen over the past five years. If the worst-case scenario for these firms is that average annual profits per equity partner of approximately $700,000 remains flat, what exactly is the felt need to change any aspect of the business model?  Cutting costs seems sufficient to maintain the profits of the most powerful equity partners. Indeed, these empowered leaders get their power and profits from the traditional model, and fighting for and controlling the client relationships. Instead of a “felt need” for a different business model, they feel the need to maintain the status quo.

Perhaps a leader of an AmLaw 200 firm feels the need to become a member of the elite AmLaw 100. Gianmarco Monsellato, head of the TAJ law firm in France, wanted to transition his firm from a second-tier to a first-tier firm, and was open to solutions based on the organization performance research literature. He personally ensured that the best assignments were distributed evenly among men and women, tracked compensation and promotions for parity, and asked for reasons when gaps were evident or client permission if the client is the source of resistance. That talent development model transitioned the TAJ law firm from a second-tier firm in France to one of the top five firms (see the Deloitte case study on the firm, and this Harvard Business Review blog post).

Perhaps a few of these empowered leaders recognize the difficulty of changing the culture in a way that will affect the highest earners, and are seeking other meaningful options. If so, aim intentional change where change is already happening, at the beginning and ending of one’s legal career.

First, newer lawyers – those without any originations and limited experience developing new clients and new matters —  are ripe for training and practicing what they learn. Carve out an exception to the business development and compensation model for this group. Second, develop a succession plan to transition clients of retiring partners to the firm and not to an individual lawyer, and carve out an exception to the model for these clients. The exception in both instances is to encourage a collaborative approach to client relationship management, new matter development and cross-selling, and working on client matters.

Among the largest group of practicing lawyers, many feel the need to change. They simply aren’t the leaders of the largest law firms. Some work in those firms, others work in midsize and small firms, and yet others are not in private practice. Some develop new clients or new matters, and under their firm’s business development and compensation model are not receiving the support to do the work. Some are excellent lawyers but not excellent rainmakers.  Law schools with unemployed graduates, and law school graduates who can’t find opportunities to develop their legal skill and expertise, also are feeling the need for a change. Some are in-house lawyers, who want to work with firms that can show diversity at the highest levels. And let’s not forget clients — including people who need lawyers, but who under many pricing models can’t use their first choie of lawyer or cannot afford any lawyer.

Motivation to change: The more modern model is better for the organization

Although traditional models may be better for the individual lawyer with control over a few clients that generate a large book of business, recent research by Michelle Rogan on client loyalty and retention shows that the traditional law firm model for business development and compensation is not the best model for developing organizational strength, client loyalty, and client and lateral retention. She reports that when multiple people and groups within a professional services organization were not competing with each other for client control, and instead formed multiple ties with multiple individuals and groups within client organizations, client retention and organizational stability improved, even upon the departure of individual leaders and rainmakers.

In fact, scientific research on organizational performance has repeatedly shown the organization and group advantages of models that embrace the more modern business development and compensation model and promote diversity and inclusion.

  • Relationships with clients, colleagues, and other strategic partners is at the heart of increases in client loyalty, revenue, and perception of good leadership skills.
  • The overall density of friendship relationships within an organizational group is positively related to client loyalty.
  • MIT’s Center for Collective Intelligence reports that the higher the proportion of women on a team, the more likely the team is to exhibit collective intelligence and achieve its goals.

The changes to the law firm business model that are best for the organization as a whole, coincidentally, are also best for building inclusion and diversity at the highest levels of power and earnings. Friendship relationships create trust and understanding across differences and discourage internal competition for client control. Collective intelligence depends on having a higher proportion of women within a group.

For midsize and smaller law firms, already feeling a need to build organizational strength and looking for a competitive advantage in the marketplace, this research may sufficiently motivate a wide-scale change in business model and culture. The more modern business development and compensation model encourages new thinking and behavior.

At Barran Liebman LLP, a niche employment, labor, and benefits law firm in Portland, Oregon, 50 percent of the attorneys are female or minority attorneys, 30 percent of the partners (including the executive director) are female, and all of those women are among the top 10 earners. The firm has no origination credit. The firm was founded with the value of diversity and inclusion as part of its DNA. The group of partners that came together to form the firm, led by managing partner Ed Harnden, chose a woman, Paula Barran, to be the first name partner. It goes without saying, as with all successful firms, its lawyers are the “best” at what they do.

What else does the firm do differently? It “ markets and sells” the firm as a whole team, not individual lawyers.  The firm has branded itself through its actions as committed to the Portland community, including by being a “family-friendly” place to work.  As Rick Liebman, also a name partner, says, the firm wants to be known as the law firm that “goes above and beyond in terms of public service.” He believes that business development goes hand-in-hand with diversity and inclusion.  The firm has built that reputation, being recognized with “many accolades in the state for both monetary donations and pro bono work for public service – including being named the best small company to work for in Oregon in 2013.”  The firm’s business model is to “really embody and relate” the firm and its people to its corporate clients, who are “known for diversity and equity, just like us”.

As Executive Director Traci Ray phrases it, “lawyers here enjoy practicing law and are able to focus on being the best lawyer for their clients.” She “focuses on client needs” and works to ensure “clients are getting the best service and representation in the industry.”  She also responds to RFPs, and uses her knowledge of the industry and the law to meet and exceed client expectations.  She “understands our practice and how cases are won,” and “enjoys client relationships and facilitating them,” explains Liebman.  She is an integral participant in strategic planning. She is a lawyer, who has chosen to be a business advisor and marketer.  She sees a growing “trend of lawyers becoming marketers” and says to be successful, a person needs to “choose” the role for themselves, and own it.  “Helping lead a law firm is about relationships, with the attorneys, staff and clients – it’s a role filled with many challenges, but with those challenges come opportunities to problem-solve and achieve success with innovative solutions.”

The firm promotes a culture of camaraderie. It was built and continues to grow on that philosophy; five of its founders, still working together, have practiced together for over 35 years.  There is no internal competition for clients. What makes this firm so interesting is that with no more than a gut feeling, its lawyers created a business model that research says is positively correlated with increased revenue and client loyalty.

Corporate legal departments and the power of the purse

Paul Dacier is the executive vice president and general counsel of EMC Corporation, president of the Boston Bar Association, and a panelist on the upcoming Magnitude 360 CLE Showcase Program. Diversity is a value for Paul and part of the culture he creates every day at EMC Corporation. At EMC, he leads a “world-class legal team” which also happens to be the most diverse department in the entire organization. Ninety percent of Paul’s direct reports are diverse. Serendipity did not create diversity at EMC; Paul did.

Values rise out of beliefs, and Paul believes that because our society is diverse, the leading institutions in our society, particularly law firms, should be diverse. He also believes that lawyers should be activists on legal and social principles. “We, as lawyers, should speak up” to bring about change, Paul says. He speaks up with his outside counsel firms because it’s only natural to “want to go with those who have similar DNA to you.” He uses his power of the purse to ask law firms what they are doing to build diversity, and if the answer he receives is unacceptable, “there are lots of [others]who want to do business with us.” Paul is a highly empowered leader who models the behavior he wants others to embrace, speaks up about injustice in the profession, and uses his in-house role to hold law firms accountable.

Conclusion

Law firms of all sizes have opportunities to create diverse, stronger, and more profitable organizations.  All that is required are leaders with a strong desire to create  organizational sustainability, and the willingness and the motivation to lead an intentional strategic culture change over time.

 

About the Author

Susan Letterman White is a consultant whose practice focuses on all aspects of strategic culture change design and management. She can be reached at 610.331.2539.

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