This is the second of a two-part series by Kenneth Imo. See part one here.
Although the economy is strengthening, law firms still need to become more innovative to retain and gain market share in today’s hyper-competitive legal market. However, the approach to diversity remains stuck in the pre-recession world. If law firms’ approach to diversity does not evolve, they will lose the opportunity to use diversity as a strategic intangible asset that can help advance a key objective: getting and keeping paying clients. The alternative approach proposed here will make diversity and inclusion efforts more impactful and sustainable, because it shifts the goal away from merely emphasizing headcount to looking for opportunities to leverage diversity.
Because looking at diversity through the lens of client engagement may not be typical for most firms, it may be helpful to use a process called strategy mapping to clarify how this lens can enable law firms to excel. Harvard Business School Professor Robert S. Kaplan and the CEO/cofounder of the Balance Scorecard Collaborative, David P. Norton, created strategy mapping to give business leaders a comprehensive tool to assess the value of intangible assets (such as, for example, diversity) to their business. Strategy mapping helps organizations identify how to create value by focusing on the following perspectives: financial (how do we look to shareholders?), internal business (what must we excel at?), innovation and learning (can we continue to improve and create value), and the customer (how do customers see us?). The scorecard is useful because it enables leaders to assess how diversity can positively impact their business through any of the perspectives. This article we will focus on the customer/client perspective of the scorecard, because many of the changes law firms made during the recession were mostly in response to client demands.
The Citi Private Bank 2015 Client Advisory (the Advisory) is helpful for identifying how best to use diversity in an evolving legal marketplace. The report provides an overview of the 2014 legal industry and a list of strategies that, if implemented, will help law firms succeed in 2015 and beyond. First, the legal market experienced stronger demand growth in 2014 than in 2013, which is mostly attributable to the Am Law 50 (who had the most growth at 2.4 pe rcent), followed by the Am Law 51-100 (who grew 1.1 percent) and the Am Law 2nd 100 (who grew just 0.5 percent).
Second, to succeed in the current year and beyond, firms will need to innovate and structure themselves around client needs. According to the Advisory, successful firms will set themselves apart from their competitors and be seen favorably by clients by getting a handle on the following: (1) An increasing focus on margin growth vs. just revenue growth; (2) Growing sophistication on how to price and manage the delivery of legal services; (3) A different leverage model; (4) Leveraging technology; (5) An increased focus on partner performance and skillset; (6) A strategic approach to practice and client succession; (7) Differentiating the brand; (8) Client centricity; (9) Leveraging the platform (i.e., getting the most out of having a global firm with multiple practices); (10) Management of the talent pipeline; (11) Leadership in a volatile market.
While diversity is not mentioned among the 11 trends, it can be a factor in how firms approach some of them. Specifically, diversity can play a role in distinguishing the brand, client centricity, leveraging the platform, managing talent, and in leading law firms in an economically uncertain environment. Let’s look at these trends and how best to use diversity in each.
Distinguishing your brand: Using diversity to set your firm apart from competitors
In a soft demand environment, it is increasingly more difficult for clients to distinguish between firms. Further complicating things is that preexisting relationships with law firms matters less now than they once did to clients. Consequently, firms are carving out niche specialties and creating brands around them, touting their abilities to deliver cost effective and efficient legal services through various pricing options and matter management. Diversity provides another way for clients to tell firms apart, beyond each firm’s representation of diverse lawyers.
In “Examining the Link Between Diversity and Firm Performance: The Effects of Diversity Reputation and Leader Racial Diversity,” Professors Quinetta M. Roberson and Hyeon Jeong Park state that corporate reputation—how organizations are perceived to create value relative to their competitors—is among the most important intangible business assets. Because buyers and sellers have asymmetric information in market transactions, selecting a seller with a positive corporate reputation gives buyers comfort in their decision. In short, corporate reputation is a signal about an organization that consumers use to infer positive or negative attributes to a certain good or service.
Corporate reputation includes a law firm’s diversity commitment and ability to build and maintain an inclusive environment. Law students use reports that track law firm diversity statistics to help them distinguish firms and clients give outside counsel exhaustive surveys that include detailed questions about diversity and the composition of lawyers working on their matters/deals. Likewise, the American Lawyer A-list ranks firms based on their law firm culture (diversity and pro bono) and financial performance, and organizations such as the Association of Corporate Counsel, Minority Corporate Counsel Association, the National Association for Law Placement track diversity statistics and performance.
The examples above—that is, the way law firms currently showcase their diversity commitment—require law firms to be reactive in how they present their diversity and inclusion efforts. The next step in using diversity to distinguish a firm is to determine how they can proactively demonstrate their diversity commitment to clients (and, by extension, law students and other organizations). One example is client pitches. Not only should firms be mindful of diversity on pitch teams, but firms should research the client’s diversity commitment and proactively use this information during the meeting as one way to demonstrate shared values. Another example is to follow up with clients after the pitch to discuss how to better address their diversity needs and expectations, and to provide them with additional information about your law firm’s diversity program. These are but a few examples of how firms with a compelling diversity story could use it to help clients distinguish them from their competitors
Client centricity: Don’t just tell them you value diversity; partner with them on it
The Advisory reports a significant shift in how law firm leaders think they should best respond to client needs. As previously discussed, a great deal of emphasis is put on how best to respond to pricing pressures while maintaining and (hopefully) improving margins. Firms also have created industry groups and client teams to better support cross-practice services for clients.
The Advisory also states that successful firms will seek to learn as much as they can about their client’s industry and how general counsel and law departments measure success. They will use this information to find additional ways to be helpful to clients, that may include targeted training programs or news summaries focused on specific industries or markets that may interest clients. The expansion of the global legal market will create a situation where diversity can and should play integral role in how law firms assist clients in global markets that will be quite different from each other.
According to a report by Jomati Consultants, “Civilisation 2030: The Near Future for Law Firms,” the growth of megacities—cities with populations in excess of 10 million people—will have a profound impact on clients and law firms. In 2014, just under 30 megacities existed, representing 530 million people, most in the developing world. By 2030, these half billion people will represent some of the key markets in countries such as Brazil, China, India, Nigeria, Pakistan and South Africa. The emergence of these non-Western cities will profoundly impact business and, as a result, the legal market, and how law firms use diversity to engage clients.
The growth of megacities will affect clients in a number of ways. First, companies with shareholders will expand their global footprint by further investing in and setting up or expanding their operations in these cities. Second, global companies will grow in tandem with global megacities, which could also result in larger more diverse legal departments. Additionally, these cities may see an intensified battle for talent, resulting in an increase of imported foreign professionals.
Law firms will follow their clients into megacities, which will changes the composition and activities of these firms. First, it will become standard for firms to have more than 50 percent of their staff and revenue outside of the “home nation.” Second, the split between firms that can service clients with multiple international in-house legal teams and firms who cannot will widen, making entry into the global market insurmountable for some firms. Finally, barriers to foreign lawyers practicing in China, Brazil and India in particular will likely lessen, resulting in a need for global clients to have law firms that reflect the global network of the clients’ business bases.
Succeeding in a multicultural environment will require law firms and their clients to work together on how best to navigate an incredibly diverse marketplace. This will require leveraging inherent and acquired diversity, according to a report by the Center for Talent Innovation. Inherent diversity refers to the differences that people are born with (e.g., race, gender, sexual orientation, etc.) that impact our world view and how we navigate within it. This type of diversity will increase significantly when clients and law firms expand multi-nationally with the amalgam of people of various racial, cultural and ethnic backgrounds bringing various perspectives and approaches to addressing legal issues.
Not only will the effective use of inherent diversity benefit diverse lawyers—by allowing them to proactively leverage their differences to develop relationships with existing and prospective clients of similar backgrounds—it also benefits law firms. As stated by the examples in the next section, cognitive and racial/ethnic diversity can drive economic results. However, effective client service in these environments will not be limited to those with some level of inherent diversity. It will also require people to tap into their acquired diversity.
Acquired diversity comes from experience. It gives people an appreciation for differences that run deeper than nationality, culture, gender, race, socioeconomic background, etc. People with this type of diversity have, for example, cultural fluency, gender smarts, and/or a global mindset. Client-centric law firms will effectively deploy both types of diversity to develop and bolster relationships with clients. This could be accomplished by partnering with clients to create mutually beneficial programs that facilitate an exchange of ideas and a better understanding of how (as a Western-based law firm) to work most effectively with clients in emerging markets. Law firms could host and/or co-sponsor programs with clients that could address cultural competence, navigating the business communities in these markets, emerging trends on the client’s radar, relevant local associations/organizations to partner with, or a variety of other topics most useful to the client-outside counsel relationship. These programs could be the foundation of creating sustainable diversity partnerships with clients that furthers centricity and helps law firms distinguish themselves from their competitors.
Leveraging the platform: Seeking difference and getting the most out of it
By expanding their range of practice and their footprint to remain in step with clients, law firms are well-positioned to offer clients an array of services. But firm leaders recognize that it may be challenging to determine the most effective way to get partners and associates from various offices across the globe working together in way in that best services the client. As previously mentioned, firms are addressing this by establishing client and industry-specific teams to enhance their client service and to give their lawyers a better understanding of the skills and expertise within the firm. The goal is to help partners improve their ability to cross-sell their colleagues’ practices and to effectively deliver legal services on a multi-disciplinary platform. Doing this effectively is challenging, and law firms that view diversity through a strategic lens will recognize its importance in helping the firm get the most out of having (or striving to have) a global firm with many practices.
According to “Rethinking the Baseline in Diversity Research: Should We Be Explaining the Effects of Homogeneity?” an article published in Perspectives on Psychological Science, it is well-documented that cognitive diversity—the variety of approaches brought to problem solving by diverse groups—improves business outcomes and prevents groupthink. However, diverse teams may also result in greater conflict when team members don’t know how to build inclusivity. According to research by psychologists on homophily—the idea that people naturally associate with people similar to them, including similar in race/ethnicity—people are more likely to give opportunities to members of their particular group. Studies also have shown that in-group preferential treatment is a stronger motive driving group conflict than out-group opposition. This preference for in-group members can also manifest in outcomes that may be harmful to clients.
One example that highlights the detrimental effects of homophily is captured in “Ethnic Diversity Deflates Price Bubbles,” an article published by the Proceedings of the National Academy of Sciences of the United States of America (PNAS). Researchers selected participants who were randomly assigned to ethnically homogenous and diverse markets. The study revealed that in the homogenous market scenario, traders were more likely to accept speculative prices. Consequently, overpricing was higher and these markets suffered more severe crashes when bubbles burst. In ethnically diverse markets, market prices fit true values 58 percent better than in homogenous markets and, as a result, market crashes were less severe. The researchers concluded that in addition to human errors and economic climate, price bubbles may also be a consequence of the social context of decision making. This is because ethnic diversity may foster friction resulting in beneficial skepticism. Conversely, a characteristic of homogeneity is overwhelming confidence that translates into a “herd mentality”—which is often associated with pricing bubbles.
Further making this point is an independent evaluation by the International Monetary Fund (IMF) assessing its role in not foreseeing or preventing the global financial crisis. In its report, the IMF accepted responsibility for its role in the crisis, and concluded that its leadership suffered from its own homogeneity—all men from developed economies with similar credentials, who did not think large Western countries could trigger a financial meltdown.
These examples are relevant for leveraging the potential benefits that come from having a law firm with a global footprint, because despite having one name, law firms are comprised of lawyers from different backgrounds working in multiple domestic and international offices with distinct cultures and biases. Getting the most out of the firm’s platform will require firm leaders to proactively seek out the opportunities present in all of these differences and use them to bolster its client service. To succeed at this, law firm leaders at every level will need to demonstrate inclusive leadership.
Leadership: The importance of inclusivity
The Citi 2015 Client Advisory states that today’s law firms demand the highest leadership capabilities because they are incredibly complex organizations. Law firms are less hierarchical than corporations, which requires managing partners and practice group chairs to lead the firm by influencing rather than directing behavior. In an increasingly diverse marketplace that requires leaders to be diplomatic influencers, it is important that partners exhibit inclusive leadership. Inclusive leaders are open to understanding diverse perspectives, are aware of unconscious bias, and see their role as enabling and inspiring others.
A study by the Center for Talent Innovation states that inclusive leaders demonstrate at least three of these six inclusive behaviors: (1) Empower decision-making by team members, (2) Take advice and implement feedback, (3) Ensure everyone speaks up and gets heard; (4) Share credit for team success, (5) Give actionable feedback; (6) Make it safe to risk proposing novel ideas. The use of these behaviors fosters innovation by encouraging a broad range of perspectives and opinions by diverse people. Inclusive leadership is particularly useful in client and industry teams, but it can also have a significant impact on leadership at the highest level of an organization. It sets the tone for creating a firm that proactively seeks opportunity in diversity, which may positively impact how law firm colleagues interact with each other and their clients.
Talent management: Developing future partners and/or future firm ambassadors (clients)
Another feature of successful law firms is their ability to manage the talent pipeline at each lawyer category (e.g., associate, of counsel, partner, etc.). Because law firms now compete against investment banks and start-ups for the best and the brightest law students, it is essential that firms can articulate what a first-year associate’s career path might look like regardless of whether they pursue partnership or eventually move elsewhere.
Firms separating themselves from the pack will invest in the professional development of their lawyers and will proactively seek to identify high-performing associates who have clearly distinguished themselves. Global firms committed to diversity will raise awareness about the importance of acquired diversity and how to gain an advantage from it in a diverse, global legal marketplace. Law firms that are committed to having a more diverse partnership will recognize the potential for homophily (in-group preference) to negatively impact the career progression of diverse lawyers. To combat the influence of homophily, these firms could create sponsorship programs as an intentional method of identifying high performers and promoting greater diversity within the partnership. Firms striving to leverage diversity in a multicultural legal market may see these initiatives as steps toward avoiding the IMF’s mistake—i.e., falling victim to its own homogeneity.
Further, it is no secret that the law firm business model is built on attrition and that many junior lawyers do not aspire to be partners, so part of the talent management strategy could be to cultivate a loyal alumni base. According to the Advisory, successful firms will work proactively to place lawyers with clients to ensure an ongoing relationship. Taking this one step further, cultivating diverse talent and then strategically looking for client opportunities for diverse talent increases the likelihood that people leave the firm as ambassadors who will someday be in a position to hire their former colleagues as outside counsel.
Conclusion
Just to be clear, this article does not call for the end of increasing the representation of women, lawyers of color, and LGBT attorneys in the profession. As this article and so many other reports reiterate, the legal profession as a whole is not very diverse. And while progress is being made, this progress is slow and incremental and, unfortunately, will probably continue at this pace for the foreseeable future. The good news is that diverse groups of students will always be interested in obtaining a legal education, so there will always be lawyers who are women, of color, and/or LGBT.
But based on the many of the factors outlined here (e.g., disparities in primary education, law school admission practices, etc.), it will be a long time before the profession reflects the diversity of the country. As a result, it will also take generations for Big Law to replicate the national demographic shifts currently underway—and that will only intensify in the coming years. By focusing on headcount alone, it is easy to lose sight of diversity as another intangible asset that could and should be used as an additional tool to further a law firm’s key objective: keeping and acquiring paying clients.
While diversity as a strategic business asset was not addressed during and after the Recession, it is not too late for firms to shift their diversity approach and begin identifying ways to leverage their diversity and inclusion efforts. Doing so may not only give your firm a competitive advantage in expanding its market share, but may also improve your ability to compete with other firms to obtain a greater share of diverse lawyers.
About the Author
Kenneth Imo is the director of diversity at WilmerHale. He can be reached at kenneth.imo@wilmerhale.com.