Open Books: An Open-and-Shut Case                   

By Ed Poll

History will likely term this era the “Age of Scrutiny.” A combination of intense media investigation and demand by the people for accountability has opened up for public inspection the lives and business of politicians, CEOs and other officials. Is this likewise the Age of Scrutiny for law firm financial systems?

Some time ago, I wrote of two contrary financial systems for law firms. The first model represented full transparency. In other words, this model provides full and complete financial information to the members (attorneys) of the law firm. The second model is a closed system, in which all financial information is retained within the hands of a select few people.

Recently, each of these systems has come under scrutiny. For example, Jones Day has retained a closed system. Generally speaking, members of the firm do not know what other members are earning, nor do they know how profitable the firm is. Other law firms, such as K & L Gates LLP, are very open in the presentation of their financial information. Some of the law firms in this latter category have been motivated by the fiasco of Dewey LeBoeuf and the collapse of a number of large firms in the same category.

Many current thinkers conclude that it is better to be open and aboveboard with your members as well as prospective lateral partners. In today’s world, the words law and business are used in the same sentence, contrary to 1995, when The Business of Law® became my trademark. Talking about money is no longer taboo. Additionally, the legal press obtains key financial information from many of the large law firms. In many cases, the Am Law publications that focus on the data act almost as a stock exchange, with prospective lateral partners looking to this information before any other. Under these circumstances, it appears quite appropriate for law firms to have financial transparency. An open and candid approach to business can only result in greater support from all members. Not only will these members seek to do better on an everyday basis, but they are likely to pull together to ride out the worst in times of crisis.

Open Book Management: Law As Business

Open book management, when successfully implemented, teaches people to think as business-people, not as hired hands. The impact of this switch in thinking is enormous.

Most lawyers prefer to “practice law.” They want to do the research, prepare and conduct the trial, conduct the negotiations, and perform other elements of the practice. Lawyers are typically not enthusiastic about marketing their services or handling any of the other myriad business activities needed to run a law practice. Why, then, should lawyers be concerned about the financial side of the practice? Why should lawyers care about the open book management theory?

The answer is simple: If more lawyers conducted themselves not just as lawyers but as businesspeople or as owners of the practice, the law firms would more likely experience the same type of success as businesses in other industries.

Focus groups conducted by the state bar of California and other organizations have highlighted clients’ opinions that lawyers are arrogant, fail to understand the simplest of business principles in the operation of their own law practices, and do not practice the simplest of courtesies required by any successful business (an awareness and appreciation of the consumer’s (i.e., client’s) concerns and needs). All of these shortcomings are examples of lawyers who are not acting as business-people, and opening the firm’s management is one good way to turn things around.

Traditionally, law firms have been reluctant to disclose information to anyone. An element of fear surrounds this information — fear that if associates know too much, they might steal clients and open up their own firms, or fear that the staff might “sell the firm out” by trading confidential information with a competing law firm.

This fear is usually unfounded. In most cases, the associates and staff generally know how a firm is performing even though they may not know the exact financial information. They know whether the firm is successful or is struggling to meet its obligations; they know whether the industry considers the firm a leader in its field or a “me too” operation; and they know whether people feel pride and joy in working at the firm. These are not secrets or knowledge requiring an advanced business degree.

In reality, law firm management’s reluctance to open the firm’s information banks creates a lack of trust by its employees, and that lack of trust creates a vicious circle in which neither staff nor management trusts the other.

A classic negotiating principle taught to business students is to get the other side to sit shoulder-to-shoulder with them so that both are on the same side of the table rather than face-to-face in a confrontational style. Similarly, in running a law firm like a business, if management can get the associates and staff to look at the firm in the same light as the firm’s management, trust will be established, and the firm’s chances of success will be improved.

How to Open the Firm

The following are some practical suggestions for opening the management of the firm:

  • Prepare monthly financial information, especially summaries of revenues collected and expenses paid. Share these summaries with all of the staff, including secretaries. If the secretaries feel as though they are an important part of the firm and valued for their contributions, they may refer their friends and acquaintances to the firm as potential clients or future staff members.
  • Explain financial information to everyone in the firm. Some people do not know how to read and understand financial documents. With the power of today’s word processing and spreadsheet computer applications, charts can be created to help explain the information.
  • Once people understand the firm’s financial information, ask for suggestions either to increase revenue or to decrease costs. Make the associates and staff part of the team.
  • Discuss goals for associates and each staff member on a monthly basis; at the end of the month, analyze their performances. Goals should be reasonable and specific, written in terms of numbers such as hours worked or dollars collected.
  • Create a reward system that recognizes attainment of goals for both associates and staff. Goals have little value if the person has little or no control over reaching the goals. Make sure that any rewards are at or near the time of performance.
  • Create an overall year-end goal for the firm, and set up a bonus/reward for achieving the goal. This will help individuals look beyond themselves to the larger good of the firm.

Conclusion

Long-lasting improvement can come only from the commitment of everyone in the firm. Having everyone in the firm behave as a businessperson will have the greatest long-term impact of any management theory. Although no single approach can be a panacea for all ills, opening the management of the firm to greater awareness and understanding will go a long way toward inspiring more of the firm’s personnel to “pull in the same direction,” unifying the law firm and allowing the firm to reach greater heights of success and prosperity.

 

About the Author

Ed PollEd Poll is an attorney and the founder of LawBiz, a law firm management consulting company. He can be reached at (310) 827-5415.

Send this to friend