Maximising profitability while adhering 'to your firm's core values

One of the primary jobs of a managing partner or leadership team is to maximise profitability, but the strength of any firm's desire to make profit varies between firms. At one extreme are firms where the profit and loss account and hard work ethic dominate the agenda. At the other extreme are firms whose sense of purpose is weighted towards social responsibilities, lifestyle choices, academic excellence or the desire to make the firm a better place for partners and employees.

Arguably, the leaders' responsibilities are much more complex than the drive for better financial performance and should be aligned to the firm's core values. The trouble is that, when most firms talk about core values (if at all), the words that are used are frequently bland and meaningless (such as 'honesty and integrity' and 'excellence and client focus').

There are typically eight areas that leaders should take into account in decision making, based on their firm's core values (whether written or unwritten). Financial considerations are vital, but ethical considerations, the need for transparency and the duties of good faith all come into play in each of these areas.

1. Financial management

The short-term interests of the partners can be protected by reducing the level of write-offs or financial provisions, thus enhancing the profit. If profit is the only motive, prudent financial accounting may suffer and unprovisioned future obligations may fall unfairly on the shoulders of future partners. Suppliers may be hounded ruthlessly and clients overcharged.

2. Allocation of resources

Most firms rightly project the likely return on investment in making resource decisions. However, every time partners pull associates out of training sessions or cancel appraisals, they are essentially favouring one core value over another. In many firms, time resources are highly attuned to the attainment of financial and time-recording targets and can be an important cue to staff about the firm's real values.

3. External and internal conflict

Some firms operate in a grey area when
it comes to client and confidentiality conflicts, seemingly preferring the lure of a fee over professional integrity. Internal conflicts can be obvious (such as covering up bullying) or more subtle and unresolved (such as undermining colleagues or retaining work for which other partners are better qualified). Fairness and short-term pragmatism sometimes do not mix well.

4. Coping with ambiguity

Decisions become tricky when the data is incomplete, vague or unconvincing. Pessimism over the future economic environment might, for example, prompt a prudent downward revision of partner drawings but may also risk damaging younger partners' motivation or upsetting the managing partner's constituency. The choice between financial stability and inter-partner trust and confidence can sometimes be contradictory.

5. Profit sharing

Where the leaders have any discretion over profit shares (including bonuses), it can be tempting to appease powerful and demanding members of the firm to the disadvantage of a silent majority.

6. Risk management

Hiring teams, starting a new practice area, or investing in premises or knowledge management involves elements of risk and entails a choice between entrepreneurship and caution.

7. Hiring decisions

A frequent ethical dilemma is whether to continue investing in an existing but moderate member of staff or to hire a
better replacement - sometimes a choice between loyalty and commerciality.

8. Client service

Firms often cite client focus as a core value, but then seem to resist investing heavily in initiatives that benefit clients but do not immediately improve profitability, such as alternative fee arrangements,
legal project management or legal
process improvement.

A balanced approach

It is tempting to answer any of the above areas by preferring short-term financial considerations over all other core values. To do so, however, creates the risk of choosing moneymaking as the only realistic core value. Some justify this stance by arguing that, in order to improve profits, firms need to maximise efficiency, be nice to staff and caring to clients.

The alternative, however, is to argue that the primary core value should be to pursue profit, primarily so that the firm
can achieve something more or better.
This needs the creation of a methodology that allows decisions to be influenced
or shaped by a holistic set of ethics
and values that engages the majority of
the partners.

Establishing a detailed statement of a firm's core values can be a time-consuming and complex process. But, there are two steps that can be taken fairly speedily.
The first is to define the firm's position on the maximisation of profit. As an example, one senior partner told me that his firm's aim was a balanced one; "to make as
much profit as possible, consistent with
our overriding duties to our clients and staff". The second step is to compile possible scenarios in the eight problem areas (and any others) and to try to achieve some feeling of consensus on how the
firm ought to approach these and similar ethical dilemmas.

Nick Jarrett-Kerr advises law firms worldwide on strategy, governance
and leadership development
(www.jarrett-kerr.com)

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