Leading success: How to manage change in your law firm

Three things you will learn from this Masterclass:

1. How change can be managed in law firms

2. The impact of exceptional individuals on their firms

3. How management strategy relates to organisational practice

 

The first three articles in this series laid the foundations for a paradigm shift in the way that people and performance are measured ?and managed in law firms. In the first article,¹ David Maister’s professional service firm profitability model was analysed, which uses a metaphor of the firm as a production line, churning out chargeable hours. In that analysis, it was shown that some management actions often have only a short-lived impact upon profits and many adverse side effects.

The second article² explored Jim Heskett’s service profit chain model. In this view, the firm and its partners, people and clients form a symbiotic system, in which value cascades in a waterfall-like flow of interdependent relationships.

The third article³ looked at the question of law firm metrics and sought to explain the six dimensions of law firm measurement that take partners beyond the flat view represented by the financial and management accounts and into the subtlety and complexity of a more systemic and holistic way of measuring the creation of value.

It’s clear that a fully-rounded philosophy of law firm management requires a synthesis of management science, psychology, economics and statistics. A people and performance strategy aims to contribute to such an effort (see Figure 1).

Furthermore, any philosophy of management is of no pragmatic use without a methodology for organisational change and some appreciation of the way in which theoretical strategy relates to practical behaviours.

Naturally, in a profession in which individual talent is prized, one should also address the question of the contribution of key individuals, as opposed to purely systemic models of value generation at ?firm level.

This final article therefore is a suitable place to pause the journey, in which some contingent conclusions are drawn, while acknowledging, in the words of Brian Walsh, that “the truth is stranger than it used to be” and no piece of management theory or metaphor of business life can ever fully capture the complexity and dynamism of a real firm in the real world.

Managing change

From as far back as ancient Greece, it has been argued whether, at the heart of things, everything essentially either exists in a stable state or happens in a continuous state of flux.

A people and performance strategy falls firmly on the side of constant change: everything is changing, all of the time. Law firms are no exception.

The volume and complexity of change in organisational systems is simply too much for any human brain to take in. As a result, according to evolutionary psychology theory, people have developed ways to filter, generalise and extrapolate patterns from the mess of data. These patterns are essential, in that they enable us to make some sense of the complexity of a dynamic system, but they can also ?be unhelpful.

We need to remember that the model is not the reality, and change never occurs as cleanly in the real world as might be suggested from an abstract management or accounting model.

Similarly, as participants within the system, we become blind to the strange normality of the status quo. The way things are currently done not only feels normal, but also quickly becomes to us the only inevitable way in which we see that things could be done.

There are therefore two types of change within organisations:

1. change within the system; and

2. change upon the system.

Change within the system

Change within the system is the stuff of day-to-day management. It is generally incremental, consistent and constrained by the limits of the system, which may be tacit or explicit.

There are three first-order modes of change within the system: ?

1.  stimulus response (make your play);

2.  remedial (improve your play); and

3. generative (up your game).

The stimulus-response mode of change describes the way in which we make most management decisions. We decide to do X and the result is Y. The change has only two elements: before and after. The relationship is linear and can generally be expected to be very predictable.

Remedial change is about fixing what is wrong, or lacking, in the current state of affairs. Remedial change is at a slightly higher level of abstraction than stimulus response, as it requires three conceptual elements: the starting point; the desired end point; and the route between them.

Generative change is similar to remedial, but it does involve a more creative step of the imagination. Rather than restoring a broken element to a previously-known ‘good’ level, generative change requires you to imagine a new level and then map the route towards it.

To do good remedial and generative change in a firm, you need partners and managers with decent management ?skills. They need to be able to ?understand the present workings of the firm, both qualitatively and quantitatively, and to implement rational plans in an efficient manner.

Most of the work of applying and implementing the people and performance strategy operates at this level, whether it be changing the charge-out rate (stimulus response), coaching a fee earner to improve his utilisation rate (remedial change) or recruiting a new fee earner to improve client service and leverage (generative change).

The limitation of stimulus response and the remedial and generative modes of change is that they are constrained by the norms and expectations of the current system. This is a good thing in one respect, in that it enables decisions to be quickly made and the business to continue without too much thought.

It is of course a trap too. It has been said that, if you always do what you’ve always done, you’ll always get what you always got. In the absence of external market changes, that is true, but these are turbulent times.

The answer is to not only manage change within the system, but to also manage change upon the system.

Change upon the system

There are two modes of second-order change upon the system:

1. innovative change (play the game at a higher level); and

2. integral change (change the rules of the game).

Innovative change is about doing things in a radically different way. In order to do innovative change, you need a higher level of perception to recognise the limits of operating within the traditions and habits of the status quo and a dissatisfaction ?with them.

Integral change requires an even further leap of the imagination, to see the firm and the market from a new paradigm. It also calls for greater risk taking, to embrace the opportunities presented.

Innovative and integral modes of change are relatively rare in the professional services sector and ?often driven by external forces ?such as legislation.

Those firms and partners that do master second-order change often get ?a significant economic advantage for ?their risk-taking before the innovation becomes everyone else’s ‘new normal’, and before the early adopters and fast followers in the rest of the market realise the same benefits.

Impact of exceptional people

What is the impact of exceptional individuals upon the people and performance equation? Management models, such as Maister’s and Heskett’s, and the measurements that flow from them, tend to use averages and ratios to describe the statistical relationships between the various elements that contribute to the creation of financial value.

At one level, this is really useful – even essential – as it helps you see the bigger picture and observe the flows and blockages. Ratios and averages also enable you to identify above-average and below-average performance on a comparable basis in the firm. It can be said that, in management, most of the time, being mostly right is mostly good enough.

One of the troubles with this approach, though, is the way the data handles outliers. In any natural system, there will usually be a line of best fit, an average of some kind. It is that line that we tend to manage, whether to manage it up, down or keep it steady. For much of management, it is the line that is more important than the underlying members of the data set.

When looking at the underlying data set for averages, attention is immediately drawn to the outlier. From the perspective of most management models, the outliers are irrelevant – mere statistical noise to ?be ignored.

The people and performance strategy outlined in this series, however, pays particular attention to the outliers as these (sometimes) represent the spark of innovation in the firm that could potentially highlight a new way of doing something that is both disruptive to the market and lucrative for the firm.

If you consider a chart with averages on how fee earners attract new clients to the firm – with some being pretty poor at it and others being a bit better at it – you are going to want to look very closely at the person with the outlying data point. What is it about his approach that makes clients so keen to do business with the firm? How can you make the most of his talents for the good of the whole firm?

Jim Collins, in his 2001 book Good to Great describes people who have an outstanding ability in the area of leadership. He calls them ‘level five leaders’ who have moved beyond the first four levels of capability, contribution, competence and effectiveness towards a new level of performance that transcends and includes all the others.

This performance is not merely just like all the rest, only more so, but is, in the case of leadership, a paradoxical blend of the opposite traits of strong ambition and personal humility.

It might perhaps also be argued that there are ‘level five’ professionals in all aspects of professional services. Most firms have individuals who are exceptionally good at business development, coaching their associates, advocacy or mastering an area of law.

We need to address both the generalities of the firm through statistical modelling and also the contribution of exceptional individuals. Excellence at the individual level presents the firm with two challenges, which are both opportunities.

First, the firm needs to find ways to maximise the impact of exceptional characteristics. If, for example, a partner is very good at generating new clients for the firm, it might make sense to devote more of his time to this activity and to reduce expectations of him in other parts of?his role.

The second important way in which the firm can maximise the contribution of outliers is by studying them so that their behaviour can be taught to others, at ?least in part, and over time installed ?as the ‘new normal’ in the firm’s system of value generation.

Strategy and practice

So, how does management strategy relate to organisational practice in law firms?

In his 2007 pair of articles entitled ‘What’s our deal’ and ‘Are we in this together?’, Maister mounted a strong and sustained critique of much of what passes for the language of strategic intent in professional services firms.

He challenged the current practice in two ways. First, he cautioned firms to seriously consider whether they are really ready to make strategy together and provided a conceptual framework for assessing such readiness.

Second, for those firms that are serious about having a strategy, he suggested a reversal of the traditional order in which strategic intentions ?are formulated.

In the earlier article, Maister suggested that many firms are simply not ready to embark upon a meaningful strategy together, as their key people lack either the preference for collaborative effort rather than solo performance or an orientation towards future investment rather than short term gain.

Without both of these factors in sufficient strength, he suggested, firms just won’t have enough commitment to the enterprise to make it work when push comes to shove.

He said: “You don’t have a purpose or mission or a set of values when you declare them. You have such things when you put in place processes that respond to each and every instance when the organisation or individual fails to adhere ?to [them]”.

Later, he portrayed the way in which most firms are recommended to create ?a strategy through a hierarchical elucidation of the firm’s mission, vision values and culture. Figure 3 sets out ?these relationships.

Tradition asserts that you must start with purpose: What is the firm here for? What is its grand sense of mission? Without purpose, it is argued, you cannot go on to generate direction and an appropriate culture and set of organisational norms to get you there.

However, Maister argues that, while such an algorithm may have a certain theoretical attractiveness, it is rare that a firm can pull it off in a credible and convincing way.
The problem is consistency with the stated mission purpose at the higher levels of the organisation.

“You cannot get your people to dedicate themselves to a cause you stick to only occasionally,” he noted.

Maister’s preferred starting point is to commence with the concrete rules of behaviour – usually expressed in the negative (i.e. ‘this is what we will not do ?or tolerate to be done’).

“When clear unambiguous decision-making rules exist there is the opportunity for a clear rallying cry for people either to buy into or to leave, and it makes delegation of decision-making upwards, downwards and sideways a lot easier – everyone knows the REAL rules,” ?he added.

 

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Key takeaway points

1. Understand (and model) how your firm creates value.

2. Manage change for immediate fixes as well as innovative improvements.

3. Recognise that value is created systemically, but some individuals make an exceptional contribution – so maximise the impact of your exceptional performers.

4. Be careful not to strategise ahead of the firm’s ability to collaboratively build for the future – mind the credibility gap.

5. Start with some concrete rules of behaviour, applied without exception, before forming grand statements of vision, mission or values.

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Profitable behaviours

The people and performance strategy outlined in this series seeks to model the creation of value in law firms and to guide the firm towards more profitable behaviours, which results in greater financial returns in the medium to long term.

In this series, we have seen the importance of:

• having a viable model of value creation;

• understanding the differential impact ?of different tactical choices;

• measuring what’s really important ?in a sophisticated and valid way;

• managing change for immediate improvement and also innovative impact;

• recognising and maximising the contribution of key individuals; and

• starting the strategic journey with some hard rules.

There is still much work to be done in law firms.

 

Simon Nash is the HR director at offshore law firm Carey Olsen

?Endnotes

1. See People and profits, Simon Nash, Managing Partner, May 2012, Vol. 14 Issue 8

2. See Creating value, Simon Nash, Managing Partner, June 2012, Vol. 14 Issue 10

3. See Metric noise, Simon Nash, Managing Partner, September 2012, Vol. 15 Issue 1