Adventure of Strategy

I’ve just finished reading Nobel Prize laureate Joseph Stiglitz’s new book Freefall: America, Free Markets, and the Sinking of the World Economy, which has been an educating albeit somewhat disconcerting experience. A proponent of New Keynesian Economics, Stiglitz joins the long, long queue of people who over the years have pointed out the dangers of compensation systems that over-emphasize production, in particular with stock options: 

“In many sectors where “performance pay” had been tried,” Stiglitz writes, “it was abandoned long ago. If workers are paid on the basis of a piece-rate and they have any discretion – which they almost always do – they produce the shoddiest products they can get away with. After all, they are paid on the basis of quantity, not quality.  [my underlining] This phenomenon occurred throughout the financial chain" [in the disaster that befell global financial markets in 2007-2010.] pp 151-152

It is not too many years ago that associates in one of the larger offices of a premier global law firm drafted a memo to their partners, that found its way into the press, in which they complained that their extremely high billable hour targets may have caused clients to be double-billed and otherwise overcharged. This firm found itself in the spotlight not because the situation was unique but because it was a memo from within that firm that was leaked and many a managing partner in other firms no doubt looked on aghast and thought to themselves “there but for the grace of God go I ….”

The fact is that very high salaries to newly minted attorneys (in some cases salaries higher than those earned in other professions after decades of experience) coupled with “money in must exceed money out” coupled with client intolerance for paying high rates for inexperienced lawyers and also the rapid commoditization of many legal services and so pressure on fees generally …. is a very toxic mix. Nor is the problem restricted to the ranks of the newly minted.

So what to do? 

I wrote in another recent post of the problems that result where the measures of performance are complex and subjective to specific circumstances, as they almost always are with top-end legal services, yet firms use oversimplified general performance metrics. At the top of the list of these generic metrics, traditionally, has been “hours billed,” followed by “fees billed,” and then the different and somewhat more relevant “fees collected.” All of these are examples of the production-based metrics about which Stiglitz warns. The billable hour is so prevalent in the market though, despite its lack of logic, that its very prevalence is used as its primary justification. Quality is accommodated in this model only by implication, through the assumption that if a firm produces a poor quality service, then clients will stop using its lawyers and the production-based metrics will suffer. This is true, of course, but given the human species’ propensity to take care of the short term first even at the expense of the long term (especially if incentives actually drive that behaviour) I’d argue quite strongly that it is better to align the firm’s performance measurement and reward systems more explicitly on the behaviors required to drive quality, not just short-term production. 

“Quality,” though, is quite difficult to define in specific terms. Dictionary definitions are inadequate. Even the fathers of Quality Management like W. Edwards Deming and Joseph Duran tiptoe around defining the term. There are, however, a couple of key points that transcend their inability to wordsmith the concept into a precise and comprehensive definition.

One key point that is undisputed is that quality is interpreted from the customer/client perspective. Juran talks of "fitness for intended use" and “meeting or exceeding customer expectations."  Deming makes similar assertions, stating that the customer's definition of quality is the only one that matters. A law firm can be producing service that they quite sincerely believe to be absolutely stellar but if clients disagree then that service is .... poor quality. Adopting a client perspective also unavoidably introduces the aspect of pricing and what clients perceive to be fair value. If one accepts that the firm surviving and continuing to provide services to the client is also in the client’s interests, then so too is the economic sustainability of the firm itself introduced to the quality equation.

One can therefore distill three essential ingredients to quality legal services:

• Providing legal services that meet the needs of the client and lead to high satisfaction and …

• Providing those services in the most cost effective manner while …

• Ensuring that the firm remains sustainably profitable.
  

Does your law firm build significant client satisfaction metrics overtly into its performance management model? If your answer is “no,” then you are in very good company. Few law firms do, although there are several excellent firms where such metrics feature very prominently. If yours does not though then the brutal truth is that by definition, your firm’s business model is less interested in quality than in the internal priorities of your firm and the professional desires of its attorneys regarding how they want to practice, irrespective of what the client wants. Any person with business sense would realize that is a model doomed ultimately to failure.

There have been many attempts to integrate quality-based metrics into partner performance systems and compensation systems in professional service firms. Perhaps the most ironic example of the concept is not from a law firm but from the ill-fated accounting firm Arthur Andersen. In that firm, which collapsed in the aftermath of the Enron disaster in 2001, the culture of the firm was founded on founder Arthur Andersen’s own motto:  "Think straight, talk straight" and his so-called "four cornerstones:  provide good service to the client; produce quality audits; manage staff well; and produce profits for the firm.” Over the years, as the internal emphasis moved more and more to profits, an internal quip reportedly became quite widespread in the firm that the “four cornerstones” were really “three pebbles and a boulder.”

Balanced Scorecard systems translate well into law firms and are a very good framework indeed for capturing the range of activities that a firm should expect of its fee earners to ensure its economic sustainability and prosperity; not just this year's production. It is probably fair to say that the Balanced Scorecard is now the most widely used business tool for balancing performance and reward in a commercially sensible way in the world. Dating back to the mid 1980s, the concept was made popular by Robert Kaplan and David Norton in with their 1992 book The Balanced Scorecard and the later (more practically focused)  The Strategy-Focused Organization. In the law firm context, Balanced Scorecards usually establish four kinds of performance metrics namely:

• Those related to finances and profitability

• Those related to client satisfaction and retention

• Those related to improving the firm’s structures and systems, and

• Those related to improving the standard of the substantive service being sold.
  

Almost always, the metrics related to finances and profitability attract the most weight and the others run the danger of becoming "pebbles," being paid little more than lip service. Money in must exceed money out, of course, otherwise all else becomes irrelevant. My own view is therefore that although the intellectual ideal may be to give equal weighting to all four "cornerstones" it is sensible to make the primary metrics financial and then pay an appropriate amount of attention to the other three, recognizing their critical role in driving the financial performance.

If you are rethinking your performance management and reward systems in your law firm at the moment (and many, many law firms are) then the final message is that you really do need to think deeper and further than just how to find creative ways to crack the whip yet harder. Difficult though it may be, it is ESSENTIAL to move from a production focus to a more comprehensive, client orientated quality focus in the way that you measure and reward performance, if your firm is to remain relevant and competitive with the changes currently sweeping through the market.