A Six-Step Path to Increased Profitability for Local Firms

by Marcus Ollig

In May 2006, The American Lawyer¹ published its annual "Am Law 100,"² which rated the nation's top 100 firms in 2005 in various categories, including size and profitability. The Am Law 100 firms achieve their size and profitability largely by dominating a variety of high-level niches; playing in the largest corporate markets in the world; wooing clients and matters that support the highest legal fees; limiting the number of equity partners; and delivering superb productivity.

But how can a small-or even a large-leading local firm improve its profitability and build a stable, growing organization in a smaller legal market? Obviously, the key is for these firms to bill more hours at a higher rate. This article proposes six key actions that law firms in any given market can take to maintain and raise their billing rates as they more fully leverage internal human capital:

1. Differentiate the firm by understanding and communicating its value proposition.
   
   
2. Focus on strengths in terms of practice areas, service delivery, and niches.
   
   
3. Hire well and train attorneys at all levels; stress to attorneys that service and rainmaking are fundamental to the practice of law.
   
   
4. Leverage compensation and rewards programs at every level.
   
   
5. Employ efficient decision-making structures.
   

6. Leverage associates—productively employ at least three associates for every one partner.

Differentiate

By far the most difficult question for many law firms to answer is how to differentiate themselves from their competitors. Simply put, why would a potential client choose your firm as opposed to a competitor? What makes your firm unique in addressing your prospective clients' needs? Part of the difficulty in determining your differentiator stems from the very relationship-based nature of lawyer-client interactions, and because every lawyer in a given area practices within the same framework of common and statutory laws.

Although a strong ability to build relationships and trust with your clients is important, today's increasingly competitive marketplace demands more in terms of value creation, which means that opportunities for firms to distinguish themselves from other firms are growing. This leads to the single most important marketing question that every law firm needs to answer: How can we approach the marketplace for legal services differently and, most important, in a way that truly matters to our existing and target clients?

As many leaders of successful firms recognize, the legal profession is as much a service business as any company seeking to attract customers. As a service business, you must create value for your clients that will be recognized and appreciated as superior to what competitors offer. There are countless books on differentiation,³ and this article does not attempt to fully address this key issue. However, the guidelines that follow can help you begin differentiating yourself and your law firm:

Identify Your Target Market

When identifying your target market, start with the types of law your firm emphasizes, then identify key metrics for potential clients, including size, industry, profit versus non-profit, synergies with your existing clients base, etc. Try to gain a deeper understanding of your existing clients, their ongoing needs and their businesses. Identify your most significant client relationships over the preceding one,- three,- and five-year time horizons. What are the areas of similarity? What components of the relationships are valued most highly by you? For example, is it how your clients work with you, the amount of work they provide you, the consistency of the work, the level of trust, or the timeliness of payment? Identifying the common themes among your best clients can help you identify the metrics of an "ideal customer."

Choose Your Value Proposition

Next, work to understand why these customers chose your firm. Besides having a relationship with a key person or persons in your organization, what makes each customer happy with your services? Why do they stay with your firm? How and where do their needs and your delivery of services intersect?

It is difficult to answer these questions, but doing so will help you identify your "value proposition." Don't hesitate to ask them why they chose your firm; you may be surprised to discover that many of your clients have a very clear idea of the reasons. Engage in a meaningful conversation about what they would like to see from you, how you can be more effective on their behalf, and how you might improve your service to them. The objective is to find the central idea or overriding theme that is truly unique with each client.

Integrate and Focus

Develop the key attributes that set your firm apart from your competitors for your target market. Make sure you integrate what you have learned from your clients and the resulting value proposition into as many of your firm's internal processes as possible. Incorporate your differentiator into your marketing and emphasize it. Finally, discuss your differentiator consistently and stress your value proposition with every stakeholder in your organization.

Communicate

Better products or services do not necessarily win clients. You need to work to create a unique and better perception of your differentiator in all of your communications with clients and prospective clients. Every type of communication — your letters, brochures, business cards, website, client pitches, and so on — needs to reflect your "difference" and how that difference makes your firm better.

Rainmaking

Now leverage what you have learned to identify, target and pitch new client relationships. The communication of your message, i.e. your value proposition and differentiator should be a central part of everyone's role in your firm. Delivering great service and leveraging that service to gain referrals is key to building your firm. Discuss rainmaking regularly, allow young associates to get their "feet wet," (by allowing them to shadow more senior team members when they visit clients and handling small parts of a client presentation) and provide training to them in this important area while encouraging your more senior people to make it part of every workday.

Focus

You cannot be everything to all clients. Once you know why clients chose you, who your best clients are and, therefore, who your target future clients should be, it is time to focus your message and focus your practice area or areas.

According to Differentiate or Die, by Jack Trout, more information has been produced in the last thirty years than in the previous 5,000.⁴ In fact, one weekday edition of The New York Times contains more information than the average person was likely to come across in a lifetime in seventeenth-century England.⁵ Your clients are bombarded with information. Therefore, it is important that your differentiating idea be simple and that it be focused on your clients' needs. Try to eliminate anything that your competitors could easily claim as well. Next, remember that repetition is important. You need to stay on message and deliver that message on a consistent basis. Your work processes, the types of people you hire, all marketing communications, and the way you practice law should reflect your unique differentiator. The more you repeat your message, and the more meaningful your differentiator is to your target audience, the faster you will create the perception you want. That perception, in turn, enables you to charge what you are worth helping you to raise billing rates appropriately.

Back this up with internal processes like bolstering key practice areas and hiring appropriate partners, laterals, and first-year associates. Become a specialist in your area of differentiation and you will become known as one. Specialization is the fastest and best way to build a brand.

Hire Well

Hiring the right people is important for two reasons. First, you cannot provide effective service to your clients and improve profitability (or sleep soundly, for that matter) without hiring the right people. Second, turnover is incredibly expensive. According to an internal study completed by accounting giant Deloitte & Touche, the firm lost approximately 150 percent of the annual salary of each professional that quit.⁶ There are significant operational similarities between accounting firms and law firms. If that figure is applied to the average local salary of an attorney in Denver, the average cost of turnover locally is in excess of $160,500.⁷ That figure does not take into account recent pay increases, instituted at many Denver firms in 2006. A study by William M. Mercer found that for every one percent increase in employee productivity, profits can swing as much as 5 percent.⁸ In an industry where you sell your time, that statistic likely is conservative. Better employees are more productive. Reducingturnover even slightly also boosts productivity tremendously.

So how do you hire the right people — those who will be with you long-term and who will stay productive? Again, it starts with knowing who you are and how you differentiate yourself. That understanding needs to be strengthened by identifying "star performers" and the traits that made them succeed in your organization. Star performers are the people who have performed at the highest level over time, who have been promoted, and who are widely seen as vital to your firm's present and future success. Understanding these issues allows you to develop an interview process and questions that will assist you in recognizing people who are a stronger fit for your vision and organization. Record the traits of star performers in the organization so you can recruit candidates who possess these key traits. People hired this way likely will stay longer with your organization, and lead more productive careers while there.

Bringing the right people in is only part of the solution. New hires need to be immersed in your differentiator, focused on delivering results for your clients, and trained to be effective attorneys who can sell. This last item often causes discomfort and there are many misperceptions surrounding it. Let me explain. You now have a great differentiator, with people and processes focused on your value proposition and on your client's needs. You still need to sell, i.e. get the word out. You may remember Betamax video cassettes. They were smaller, and in most ways, technically superior to VHS video cassettes. Who got the word out more effectively? If you still have any Betamax tapes, chances are they are gathering dust in your garage! The point is that people have to get to know you and understand how your value proposition impacts them. Use the metrics for identifying your "ideal customer" as a guide for the types of prospective clients your marketing will target. Discuss rainmaking in your firm, bring it front and center, and have your strongest rainmakers be mentors for your associates to teach them effective rainmaking strategies.

Finally, you are in the service business. A large part of building a successful practice is the referrals that come from delivering superb service to your clients — especially in smaller markets, as they tend to be more relationship driven. You need to stress service delivery from every member of your organization in every interaction they have with your clients.

Compensation and Reward Programs

How do you reward your people? Here are a few things to think about in terms of compensation:

1. Your compensation structure should match your goals, culture, and differentiator.
   
   
2. It needs to reward the key behaviors that help your team excel on behalf of your clients.
   
   
3. Compensation should help drive growth and profitability, including balancing credit for personal collections and credit for rainmaking, to build more leverage than you enjoy today.
   
   
4. Your compensation structure should set you apart from your competitors; that is, it should help attract the types of candidates you need to build your firm.
   
   
5. It should help you reduce turnover.
   

Your compensation program should reward the mentoring of associates in the practice of law, servicing clients, and rainmaking.

This takes us beyond the old argument between those supporting various "eat what you kill" models of compensation versus those who favor more traditional pay schemes. In a perfect world, your compensation structure itself becomes a key differentiator in your competition for the best talent in the marketplace. Along with the first step of identifying what makes you unique, it can be a key attribute driving profitability.

Efficient Decision Making

The emphasis on consensus building necessary when involving partners or shareholders in decision making can be a strength in a number of significant ways. However, many lawyers leave firms out of frustration with unnecessary administrative work, or unnecessary delays in decisions regarding their clients or their careers. Allowing your attorneys-especially your star performers-to practice law as much as possible is imperative. Consider the following questions:

1. What strategic decisions require full consensus, and which decisions can be decided by a small group of people designated for the task?
   
   
2. Is there a time limit for every meeting and a requirement that every meeting of your decision-making bodies yield results?
   
   
3. Who makes day-to-day business decisions? Can those be left to professionals such as a firm administrator or, in a small firm, to a long-term support employee who can focus on assisting you in running your business?
   
   
4. Is there a partner (or partners) who would be willing to give up a part of his or her practice to make these decisions, and would that be more advantageous financially than hiring someone to perform these tasks?
   
   
5. How much oversight do you and your partners really want, and what do you want to oversee? Are you willing to manage results but give up direct oversight of every decision if it would free you up to spend more time with your clients (not to mention family and friends)?
   

Running a successful law practice requires focus. In many growing firms, managing the business issues becomes a distraction, which may keep your best people from focusing on their practices and developing their client base.

Conclusion/Leverage

Following the above steps will improve your bottom line, create a stronger work environment with less turnover, and allow you to focus on the most important aspect of any law practice—your clients. Not coincidentally, once your firm has internalized the first five steps, achieving your ideal partner-to-associate ratio and your desired level of profitability becomes a realistic possibility. By creating a service-oriented culture that rewards the behaviors your clients value most, your current and future partners will increase the firms' number of clients and the work each of those clients generates. It also will enable you to hire associates who better help you maintain productive leverage, and therefore, the long-term health of your firm.

Marcus Ollig is president of The Advocates, a legal search, staffing and consulting firm. His practice focuses on mergers, consulting and lateral partner placement. Phone: 303.825.2600; email: mollig@targetedlegal.com.

NOTES

¹Available at http://www.americanlawyer.com.
²See http://www.americanlawyer.com/contents0506.shtml.
³See e.g., Jack Trout, Differentiate or Die: Survival in Our Era of Killer Competition (New York, NY: John Riley & Sons, Inc., 2000).
⁴Id. at 74.
⁵Id.
⁶Chanow, "The Business Case for Reduced Hours," available at http://www.pardc.org/Publications/business_case.shtml (last visited Oct. 30, 2006).
⁷U.S. Department of Labor-Bureau of Labor Statistics, May 2005 Metropolitan Area Occupational Employment and Wage Estimates, Denver-Aurora, CO, Legal Occupations (2005), available at http://www.bls.gov/oes/current/oes_19740.html#b23-0000.
⁸Randstad North America, L.P., A Fresh Look at Employee Retention (1999). Contact Randstad N.A.,for copies.