What's your RSTLNE?

Smart people do their homework, rely on past experience and pattern recognition to guide future behavior, and practice. But really smart people often "wing it," preferring to use their towering intellect to smoothly navigate thorny situations that would frighten lesser mortals. And so it is with many law firm partners who face the same client questions and objections again and again, and who fail to think through, memorize, and practice their responses.

A cultural touchstone in the U.S. and numerous countries around the world is the game show Wheel of Fortune, in which contestants compete for the opportunity to solve a word puzzle one letter at a time. In the final round, the contestant may select several consonants and a vowel, and then the clock starts. Contestants correctly guessing the word puzzle before the clock stops win the grand prize. The odds of winning are largely influenced by the letters a contestant selects.

Over time contestants learned the most common English letters are R, S, T, L, N, and E, so these became the default guesses by every contestant in every episode. Eventually the producers conceded these default letters, so now the final puzzle starts by plugging in these letters and then allowing the contestant to select an additional three consonants and one vowel. The lesson to be learned is that we can increase our odds of winning in any business setting by seeing patterns and understanding the key differentiators. In your world, what is your RSTLNE?

I've managed quite a few sales teams, and one exercise we've always completed for every product or service, at least once a year, is to review our most common client objections. "Your product costs too much" or "You lack feature X but your competitors have it" or "Your organization is too small and we're afraid our needs will tax your support infrastructure" or "We can't secure buy-in from senior management to proceed" and many more. We've all heard the same challenges and one of us, or collectively all of us, can articulate a reasonable response to address each concern.

To be clear, the goal isn't to develop some smarmy verbiage to hide our shortcomings or mask our price point. Our goal is to focus on the value we deliver, how prior clients have derived quantifiable benefits from our offerings, and offer suggestions for how similarly situated clients have overcome these same obstacles. Nothing demonstrates experience like acting as if you've been there before. Pithy responses to real concerns won't cut it. So we work on this, we write simple, accurate, effective responses, and we practice, even role-play, our interactions with clients.

And then there are really smart law firms partners who engage with clients and potential clients as if it's the first time they've faced client concerns:

Corporate procurement officer (interviewing law firm partner, who hopes to win the designation as a "preferred lawyer" for the company's legal needs): "What makes you different than the other lawyers we're evaluating?"

Lawyer: "Well, I have a great deal of experience in this industry segment, we hire only the finest lawyers, and we put our clients' needs first."

Procurement: "Okay, but everyone else we've interviewed says the same thing. What makes you different?"

Lawyer: "Um, we've worked extensively with companies like yours and we really care deeply about our clients."

Procurement: "Thank you, but you've really just repeated your earlier remarks."

Lawyer: "Did I mention that we can offer preferred rates?"

Procurement: "We expect preferred rates from all of our providers. Don't call us, we'll call you."

What's your RSTLNE? In your practice, your business, your domain, what challenges do you face every day? Have you written them down? Do you have a scripted response? If I were to ask each partner in your practice group how to respond to a handful of simple questions about price, quality, communication, service delivery, responsiveness, change management, project management, or billing, would I receive the same response? If not (I'm being gentle, the answer is of course not), I recommend you schedule time to gather the partners in a room with a whiteboard or a flip chart and work on this together. It's a simple process.

1. Ask everyone to list the objections or concerns they routinely hear from clients or prospective clients.

2. After capturing a couple dozen responses, have everyone tick off their top five selections. Add up the votes and focus on the top five, or at most the top ten.

3. For each objection, identify the root concern. For example, "Your rates are too high" could have a number of meanings, e.g., comparable firms offer substantially lower rates for the same services; this is important to us but we have no remaining budget this year; this is not a high priority or we'd find the funds; you haven't proven that you're experienced enough to warrant high rates, and many more. Many objections are smokescreens. What is the real underlying concern?

4. Begin listing elements of your response. Focus on benefits, not features. "We're global" isn't a benefit, it's a feature. A benefit answers the client's question, "So what?" A potential client with a global footprint with similar needs across borders and time zones might find a global law firm offering consistent services and rates to be a cost-effective alternative to hiring numerous local counsel to reinvent the wheel, so position it that way.

5. Avoid statements you can't prove or that everyone else can state just as easily. "We care about our clients" is nonsense. So does everyone. "We care about our client's legal spending, so we've adopted a rigorous approach to matter budgeting with a 5-step process to communicate in the event the scope of the matter materially changes our cost or time estimates" conveys the same sentiment with detail. Capture a handful of statements to address each of the objections or concerns.

6. Delegate the work of writing up a concise narrative for each. Spread the work around. Ten objections can be handled by ten different people, or teams. Ask a valued member of Marketing to be the editor. Every first draft will be too long, too lawyerly, and simultaneously too detailed and too vague. Count on it. Get over it. You write well in legal documents. You're not a good writer for crisp, effective, responses to common objections. This takes practice. Trust that none of the partners is a good proxy for a client's perspective, so whether an individual partners despises the draft or loves it is meaningless. An objective observer, potentially even a valued client, or a friend who's not a client, or of course your credentialed Marketing professionals, have a better ear for this than the partners do. Trust me on this.

7. Reconvene and practice. Set up simple role plays where one partner plays the client and raises the objection and the other partner shares the prepared response. Even better, video record these role plays and review them for brevity, sincerity, and body language. Implement some gamification, set up a Shark Tank panel and vote on who does it best, who's prepared, who's polished, who's sincere, and give prizes for achievement. Then schedule extra help for those who don't get it right away. Most won't. It's like taking a dance class, it feels like you have three left feet until you get the hang of it.

This checklist is a simple process. Yet, sadly, too many practice group chairs will discard the exercise as unnecessary, or too time-consuming, or possibly even insincere. The grand prize in the game show of business development typically goes to those who work the system rather than try to beat the system. Partners are busy people, to be sure, but when there is limited time, budget, and resources to generate new clients and new revenue streams, it's worth putting in the extra effort. Smart people do it. Super smart people tend not to. Which calls into question whether we've been too generous with that label.

Timothy B. Corcoran is principal of Corcoran Consulting Group, with offices in New York, Charlottesville, and Sydney, and a global client base. He’s a Trustee and Fellow of the College of Law Practice Management, an American Lawyer Fellow, and a member of the Hall of Fame and past president of the Legal Marketing Association. A former CEO, Tim guides law firm and law department leaders through the profitable disruption of outdated business models. A sought-after speaker and writer, he also authors Corcoran’s Business of Law blog. Tim can be reached at Tim@BringInTim.com and +1.609.557.7311.

Collect Your Fees or Collect Your Belongings

The ongoing Dewey & LeBoeuf trial provides endless fodder for observing dysfunctional organizational behavior. Today's commentary was prompted by the quotes attributed to a former Dewey partner in response to nagging from a collections clerk. The partner had apparently missed his monthly collections target of $1.6 million and didn't appreciate being hounded.

"I am the reason you have a job. You obviously have no clue about what is appropriate. I am going to talk to [the Chief Operating Officer] and insist that you be fired if you ever send me an email or call me again. If he does not, I will seek other opportunities at a firm that gets it."

What exactly is a firm that "gets it?" One that allows partners unfettered access to firm resources without demanding anything in return, such as revenue? One that allows a partner to speak and act like a schoolyard bully to a staff person doing her job? One that allows a shareholder to meddle in day-to-day operational affairs, such as the acceptable age for receivables, how our collections clerks should handle their responsibilities, and who gets fired? And exactly what is he threatening? "Don't make me collect my fees, or I'll quit... and forever absolve myself of all responsibilities to collect these fees." We get it. You don't like to collect your fees. Who does? Well, in fact, many do.

Photo: ©iStockphoto/Taphouse_Studios

I've shared this thought with numerous law firm partners: If you are routinely discounting fees or failing to collect your billed fees, one of two things is happening. Either your clients do not believe you're worth the fees you charge, or YOU do not believe you're worth the fees you charge. Actually, it's probably a bit of both.

Every so often, I think it's helpful to offer a bit of tough love to partners who think their accomplishments give them free pass to act however they want, even when their actions are harmful to the business. Allow me to dust off my former CEO hat and offer my contribution.

• If you act like an asshole, you should be fired. Point me to one firm, anywhere, ever, where a perpetual asshole was shown the door and the law firm collapsed. It doesn't happen. We're all replaceable. Being a schoolyard bully to a lowly staff person is easy. Collecting your fees is evidently hard. So if you want to prove you're all that, then collect your fees.

• The top dog rainmaker isn't the reason everyone else has a job. In fact, it works both ways. The top dog rainmaker looks good because there are many people marketing the firm, managing key client relationships, managing firm operations and infrastructure, and doing the legal work necessary to satisfy the client that you brought in. Also, the firm exists because of the efforts of many others who built the brand and paved the way for you to get a job here. Your success wasn't inevitable; it was a result of an extraordinary team effort. If you don't like, or can't understand, the team approach, collect your belongings and leave. If you think you did it all on your own, then go form your own one-man firm and prove you can compete.

• Many partners are not 100% utilized. Many partners do not bill 100% of the time they capture. Many partners offer discounts that erode profitability. Many partners rewarded for billing time do not fully exploit leverage to improve firm profitability because doing so will reduce their hours. Many partners cost too much for what they generate. So after all these deductions to the firm's profitability, when you have the nerve to refuse to collect whatever discounted fees the client has agreed to pay, you are willfully engaged in a conspiracy to screw your colleagues out of rightfully earned compensation. You benefited from a plush office, the firm's powerful brand strength, and all of these lawyers and staff being paid to work on your matters before you collected a penny. Collecting your fees isn't a favor you're doing for the rest of the firm, it's your rightful obligation. If you can't stomach asking clients to pay for your work, then you have abdicated your fiduciary duty to the firm and you have no right to be an equity shareholder.

• Law firms often adopt the partnership model as a business form for its tax, liability, and profit-sharing benefits. But let's be clear: operating as a partnership doesn't convey day-to-day management responsibilities to every shareholder. If you want to engage in firm management, step up and volunteer or run for office. Otherwise, leave firm management to others. If you don't like the firm's collections policies, or business development team, or IT services, or secretary ratio, or compensation plan, or the color of the logo, then communicate these concerns to those in charge and then go practice law. Or start your own firm where you can make all the decisions, drawing on your substantial expertise running a business... though if your insight into collections is any guide, your career as a titan of business will be short.

Law firm senior leadership and practice group chairs, if you're not having this conversation with your partners who fail to collect their fees in a timely manner, then you should question whether you're cut out for your role. A law firm is a business. If every partner is allowed to choose which policies they will follow, you're not running a business, you're operating a holding company of independent contractors sharing a logo. Your failure to establish sound policies and to hold everyone accountable means shareholders are losing money and compromising the quality of the legal services delivered to the clients. Is it any wonder why clients are dissatisfied and seek alternative approaches to addressing their legal needs?

Timothy B. Corcoran is principal of Corcoran Consulting Group, with offices in New York, Charlottesville, and Sydney, and a global client base. He’s a Trustee and Fellow of the College of Law Practice Management, an American Lawyer Research Fellow, a Teaching Fellow at the Australia College of Law, and past president and a member of the Hall of Fame of the Legal Marketing Association. A former CEO, Tim guides law firm and law department leaders through the profitable disruption of outdated business models. Tim can be reached at Tim@BringInTim.com and +1.609.557.7311.

Bar Associations: Protecting Consumers or the Status Quo?

Status Quo

Some Bar Associations are behind the times. And some are challenged by the dual and potentially conflicting roles they play: one, to self-regulate the practice of law in order to protect consumers; and two, to protect the guild of lawyers from competition. A recent Texas State Bar ethics ruling demands a reaction because not only does it fail to protect consumers, it creates additional barriers for advancing the profession.

The ruling states that a Texas law firm may not use "officer" or "principal" in job titles for non-lawyer employees in the firm, as doing so may suggest that these employees exert control or influence over the work of the lawyers, which is a violation of the rules of professional conduct. Additionally, the ruling states that bonus compensation for such non-lawyers can't be formulaically based on the firm's financial performance, as this would constitute unauthorized fee-sharing with non-lawyers. The ruling purports to protect the consumers of legal services, presumably under the premise that non-lawyers are simply not qualified to influence the delivery of legal services and any such interference constitutes a prima facie case of wrongdoing. (See what I did there, pretending to speak like a lawyer?!)

In my role as President of the Legal Marketing Association, and on behalf of our 4,000+ members, I collaborated with the leaders of other legal associations to draft a response urging the Texas Bar to reconsider its stance. These association leaders are well-credentialed professionals who are dedicated to improving the operations of law firms, big and small, and yes, improving the delivery of legal services. And one could argue that by specifically excluding such voices, the legal profession is holding itself back. You should read our letter. It's reasonable and articulate and provides good food for thought.

But speaking individually as a former CEO, I'll be a bit bolder. The Texas ethics commission ruling is ridiculous and unsound. It reflects the worst of the closed-minded lawyer mindset: a belief that lawyers alone can define "quality" in the delivery of legal services. I can assure you, most CEOs spend very little time ruminating about the state of their suppliers' industries or professions, unless some impending disruption in these fields will impair our business performance. And lawyers are doing just that. So, wearing my CEO hat, here's my reaction:

Business clients are unhappy. Lawyers in the mid-size and big firms that serve us often do a terrible job of communicating. They fail to properly manage expectations by limiting the client's surprise. They tend to treat each matter as if it's unique and infinitely variable, yet at the same time expect us to believe their experience in a given field is meaningful. They believe in charging higher fees based on the length of time they've practiced, even when they are unable or unwilling to demonstrate this experience by using matter budgets or project plans. And their fees are typically established irrespective of the value I place on the services rendered, and what alternatives exist for me obtain these same services elsewhere, assuming that the seniority of the lawyer and the time necessary to deliver the work are the primary drivers of value.  They claim that non-lawyers in a law firm, or worse, non-lawyers providing legal services outside the structure of a law firm, e.g., an LPO, must be incapable of providing quality legal services, even when these alternative providers can unassailably demonstrate higher quality at a lower cost.

Does the Texas ruling really protect the consumer? There are different consumers of legal services. As a seasoned corporate executive, mindful of my corporation's risk tolerance and business objectives, and well-trained as a steward of my corporation's hard-earned capital, I don't need as much hand holding. I have long experience managing complex M&A transactions, launching new products requiring IP protection, managing layoffs and plant closures, negotiating labor contracts, and being deposed in contracts disputes. I want the Bar to protect me by ensuring my lawyers are competent in business issues. I can find a thousand lawyers who can conduct legal research, identify precedents, and draft a memo telling why taking some action carries risk. I find far fewer lawyers who think like me and understand the business impact of my legal issues.

And if these so-called protections are not, in fact, in the interests of consumers, might they instead serve to protect the interests of lawyers? It's a curious industry that establishes its own operating rules, self-regulates its members' conduct, decides for itself what competition it will allow, and purposely addresses these issues without the input (or interference?) of anyone outside the profession.  I'm not suggesting that there's a vast conspiracy with nefarious purposes, but I am suggesting that human nature operating within such a closed system is bound to create confusion between "what's right" and "what's right for us." From my perspective, the Texas Bar ruling has a lot to do with protecting lawyers from adopting modern, sound business practices, as if somehow doing so is inconsistent with practicing law.

If a senior business person in a law firm can help the lawyer-leaders understand how to budget, how to profit from efficiency, how to embrace continuous improvement, how to lower fees while improving quality, how to better communicate with unhappy clients, and more, then not only should that businessperson be given a title befitting that knowledge, he or she should be given a compensation package commensurate with that experience, experience that is highly prized in the business arena. And if growing the firm's profits is a consequence of improving client satisfaction, then reward that businessperson in some way commensurate with his or her impact on business performance. If you're unable to distinguish between a non-lawyer who improves firm operations and client-focus, and one who is engaged in the unauthorized practice of law, I question your competence as a lawyer.

If I can't trust you to understand simple business mechanics -- the issues I deal with all day, every day -- and if I can't trust you to recognize your own deficiencies and fill these gaps with competent professionals -- and instead you harangue those who speak truth to power and sit smugly in an alternate reality where partners cannot be wrong -- and if I can't trust your pals in the Bar to protect me from your deficiencies -- and instead they issue rulings designed to forbid competent professionals from meeting my needs -- then I can't possibly trust you to give me sound legal advice. THIS is why law firms are suffering, not because demand for legal services is down, or because bean counters value price over quality.

By the way, let's banish the "non-lawyer" label as unnecessarily non-descriptive and non-productive, prone to nonsense. Defining something by what it's not isn't all that helpful, is it? Or keep it, if it makes lawyers feel better. No one really cares. But understand that corporate executives don't spend much time drawing such distinctions of pedigree and titles within their vendor organizations, so partners should feel free to proudly carry the label of "vendor" or "supplier." We care mostly about rising legal costs and declining value, not labels. The adjacent graphic represents an excerpt from an actual corporate budget representing exactly how even the most prestigious senior partner with sterling credentials is categorized. And yet you rarely hear corporate executives insist on calling partners “non-strategic suppliers.”

If the Bar wants to focus on truth-in-labeling, can we look into :

• Law firm leaders who haven't received a single day of formal management training yet carry the label of practice group leader, or managing partner?

• Non-equity or income “partners” who are merely highly-compensated employees, not equity shareholders in a partnership?

• Can we look into Marketing Partners who have never taken a marketing course, Technology Partners who have no technology training, Finance Partners with no finance or accounting degree?

• Can we look into pitches and proposals that compile disparate experience in creative ways, purporting to reflect deep subject matter experience but instead reflect the common but misguided notion that "We're smart lawyers. If we win the work we can figure out how to do it later?"

• Can we look into lawyers' over-reliance on hourly billing rate cards to purportedly convey the price of legal services, when in fact rates are but one element of the formula for the overall cost and the lack of other data is purposely misleading?

• Can we look into published billing rates that reflect an inflated “sticker” price as compared to actual receivables that perpetually reflect a much lower realized price?

• Can we look at inconsistent discounting and write-down policies in use in firms that bear no relation to "key client" programs?

There's a lot wrong with the modern law firm business. It takes smart people with relevant experience to solve these problems. Forbidding competent professionals to lend their experience isn't productive. Insisting that a law degree is the only distinction necessary to decide what is and what is not "good" for clients is myopic. I call on the Texas Bar to review and revise its ruling to reflect the cold truth that protecting the status quo is not what clients want. Progress waits for no one, and the Bar Associations and incumbent leaders of the profession can wring their hands and lament the intrusion of economic forces, or they can collectively step up to reshape the profession. Relevance is recoverable. Roles as trusted strategic advisors are there for the taking. Your move, lawyers.

View my interview here with Lee Pacchia on the Business of Law webcast at Mimesis Law TV. 

Timothy B. Corcoran is principal of Corcoran Consulting Group, with offices in New York, Charlottesville, and Sydney, and a global client base. He’s a Trustee and Fellow of the College of Law Practice Management, an American Lawyer Research Fellow, a Teaching Fellow at the Australia College of Law, and a past president and a member of the Hall of Fame of the Legal Marketing Association. A former CEO, Tim guides law firm and law department leaders through the profitable disruption of outdated business models. Tim can be reached at Tim@BringInTim.com and +1.609.557.7311.

On Bullying

It's a relatively simple mathematical calculation to quantify the negative impact of bullies in the workplace, yet managers in organizations everywhere allow toxic behavior to persist. This week's object lesson comes from the NFL Miami Dolphins, where a professional athlete left the team due to persistent harassment and bullying.

While the full story is not yet known, there are certain unassailable facts: at least one protagonist with a long record of impulsive behavior has acknowledged coercing a teammate into contributing funds to a Vegas vacation, directing ethnic and homophobic slurs at this teammate, and engaging in physical and mental abuse, all in the spirit of hazing -- a long and misguided tradition of veteran players "riding" younger players. The protagonist is not merely a veteran teammate, he's also on the team's leadership council.

There has been a large public outcry leading to the suspension of the protagonist, the victim hiring a lawyer, and the team owner demanding a full investigation. Sadly, but perhaps predictably, the segment of sports punditry comprised of retired athletes has defended the protagonist thusly:  One can't possibly understand what goes on in a locker room unless you're part of the team; the victim walked out on his team during a competitive season, thereby revealing his true character; and the protagonist's actions were merely "boys being boys."

One retired coach called the victim a "baby" and waxed philosophic about "Back in my day when men were men..."  Others accused the victim of gamesmanship, suggesting his failure to report these allegations earlier and his supposed camaraderie with the protagonist demonstrates disingenuousness. In response, the victim acknowledged a fear of retaliation and the loss of his livelihood as reasons for not stepping forward earlier. We'll learn more as this story unfolds, but we know enough to recognize a hostile work environment. Why? Because nearly all of us have witnessed such bullying in our own workplaces.

In the corporate sector, the toxic personality often takes the form of a top-producing salesperson who breaks the rules, fails to properly document activity, over-commits the organization to meeting a client demand, and then bullies colleagues into delivering the impossible because, as the old saying goes, "nothing else matters until we make a sale."

It can also take the form of a long-entrenched manager who has watched leaders come and go, who has watched strategies come and go, who has watched competitors come and go, and all the while she's tending to the company's day to day needs. She truly believes her steady hand on the rudder is the primary driver of organizational success in an ever-changing marketplace, and so when presented with new and uncomfortable ideas her knee-jerk reaction is "We've tried that before and it didn't work. Next!"

In law firm land, the corollary is the toxic partner, that rainmaker bringing in millions in billable hours, or the long-established patron of the corner office whose reputation is unassailable and who can do no wrong. Whether the partner cycles through secretaries like others change their socks, or metes out punitive assignments to associates who fall out of favor, throwing tantrums in the office when the staff fails to read his mind or demanding that others adhere to stringent work requirements out of some vague allegiance to client service, these actions constitute a hostile work environment.

Worse, if the toxic partner is acting under the delusion that such actions will improve team performance, she or he is assuredly provoking the exact opposite outcome. We've all seen the feel-good movies where a tough-as-nails but kind-hearted leader drives his team to victory by forcing everyone to reach deep inside, to unlock that extra courage, to go that extra mile. And there's some truth to that, of course. Any coach knows that even high performers often need external motivation to break through barriers. But how much is too much?

The underlying math in any organization is simple, requiring us to balance the revenue generated with the costs incurred. But too often we fail to complete the equation, focusing solely on the revenue side. So the rainmaker generating millions of billables earns a free pass, or perhaps only an occasional private "talking to" when his conduct falls too out of line. But when we factor in the victims' lost productivity due to distraction or emotional detachment, the cost to continually recruit and train replacements, the sub-optimal work product that results from star performers avoiding collaboration with the toxic partner, the client defections, and more, this "total cost of ownership" will invariably tip the scales in the other direction.

There is NO financial reason to perpetuate a hostile work environment. There is ALWAYS a long-term loss in revenue and profit when such a situation is allowed to persist.  If you've done the math and somehow produce a result that says otherwise, I challenge your approach.

There are protections in place for whistleblowers for a good reason: people often won't speak up for fear of retaliation, because they fear the loss of their income and job security, because they feel they'll be shunned by colleagues for impairing the team's performance. Rather than discourage open talk, we should encourage it. If there's a toxic personality creating a hostile work environment in our workplaces, as managers and leaders we need to step up and address the situation directly and immediately. If you can't summon the courage to do so because it's the right thing to do, then take action because such an environment is unquestionably impairing the team's performance.

Why in the world would you take money out of your own pocket to reward some immature buffoon's temper tantrums or locker room behavior, when the alternative is to excise the annoyance and improve both morale and financial performance? Not every workplace has a toxic personality. But if you have one, or more, take action today.

Epilogue: The Miami Dolphins had a .500 record when the above incidents came to light, meaning their next game would literally put them on the path to a winning record or a losing record. The team lost its next game to a previously winless opponent.

Timothy B. Corcoran is principal of Corcoran Consulting Group, with offices in New York, Charlottesville, and Sydney, and a global client base. He’s a Trustee and Fellow of the College of Law Practice Management, an American Lawyer Research Fellow, a Teaching Fellow at the Australia College of Law, and past president and a member of the Hall of Fame of the Legal Marketing Association. A former CEO, Tim guides law firm and law department leaders through the profitable disruption of outdated business models. Tim can be reached at Tim@BringInTim.com and +1.609.557.7311.

Solving for Profitability

At a recent collaborative workshop between two camps -- in-house counsel and corporate procurement professionals on one side and law firm partners, finance and marketing professionals on the other -- we had a lively discussion about law firm profits. Most agreed generally with the view that a law firm has a right to profits, but the challenge arises when a law firm is extraordinarily profitable at the same time the client is extraordinarily unhappy with the value delivered. This scenario, one which resonates with many in-house counsel in recent years, leads to increased price pressure from buyers and over time this will depress law firm profits.

Predictably, in an effort to boost sagging profits some short-sighted law firm partners will make up for price pressure from one set of clients by raising prices for others, eroding the price-value connection for even more buyers, and accelerating this decline of profits. One in-house participant declared that he requires all outside counsel to submit profitability data and he'll decide what profit margin is acceptable! We can all empathize with buyers who are dissatisfied with the value received at the prices they pay for goods and services. But it's a stretch for the buyer to explicitly decide what profit the supplier should earn, in any marketplace.

So how can a law firm both enjoy a healthy profit and satisfy clients? If we adjust our lens a bit, it's not all that difficult - as with many commercial ecosystems, the pursuit of profit can best be maximized by delighting customers, and not as many assume by having one party win while the other loses.

Long Term vs. Short Term Profitability

Most law firm financial systems are structured to measure short-term profits, that is if there is any measurement structure at all. A surprising number of law firms do not explicitly calculate profitability, and many who do refuse to share these calculations with the partnership out of a misguided concern that it's divisive and corrosive to a collaborative culture. What's more divisive is a culture of not knowing -- which naturally leads to most parties making flawed assumptions about their performance relative to their peers. But the root problem is that without a clear understanding of what generates profits and what dilutes profits, no enterprise can sustain itself indefinitely because there will be too many factions working at cross-purposes. When everything supposedly makes money, then nothing makes money. And vice versa.

A focus on short-term profits drives and rewards the wrong behavior. Imagine a partner who sees an opportunity to bill a client $100,000 for a litigation defense matter, when that partner's experience could quite easily lead him to counsel the client that he's better off settling rather than defending, and thereby reducing legal costs by $50,000. Or imagine the partner who pads his own time and allows others to pad their time against the client matter, knowing the client will absorb some or all of these costs without complaint because, after all, "They hired us because we're the best and because we're thorough and they should expect to pay a premium for this."  In reality, clients are rapidly becoming more sophisticated and can incorporate benchmarking data from other matters and other firms to help identify the "right" price for legal services, and increasingly they know when they're being overcharged. This isn't unlike purchasing an automobile before ubiquitous internet research, when price shopping was logistically challenging and buyers expected the dealers to take advantage... and they did. When a buyer discovers he's been overcharged, he doesn't return to that merchant.  And therein lies the mathematical basis for focusing on long-term profitability instead of merely short-term profitability.

A law firm that calculates profitability as a function of maximum hours per engagement will, over time, as sure as the sun rises in the East, eventually experience client defections. Client defections (measured by retention rate) caused by over-emphasizing billable hours lead to three serious financial consequences:

1. The cost to acquire a new client is far higher than the cost to maintain or expand an existing relationship

2. The firm will price itself out of competitive bids

3. The firm will eschew efficiency and alternative fee arrangements and forgo potentially higher profits associated with these models. Success can't hinge on finding an endless supply of clueless clients, a task that gets harder every day.

If a law firm embraces a model in which long-term profitability is more balanced with short-term profitability, we will see changes in behavior and reward systems:

• Matters will be priced more competitively, because the objective is not only to win the work, but to also win subsequent work

• Matters will be delivered efficiently to maintain price competitiveness, and profiting from the learning curve is always more sustainable than profiting from high prices

• Satisfied clients not only stay longer (leading to higher retention rates), they buy more services (a.k.a. cross-selling, leading to higher penetration rates at a lower cost of sales)

• Satisfied clients insulate the firm from consequences of lateral partner defections. Even when a key rainmaker or service partner leaves, satisfied clients remain

• Lateral hires and new offerings measured for their contribution to long-term profitability will insulate the firm from making hasty and dilutive decisions, such as recruiting a lateral partner with an alluring book of billable hours but with high service costs, non-competitive pricing, and clients evidently willing to change firms at will

• Contributions from those involved with delivering high-quality legal services and managing valued client relationships will be more readily recognized, and the emphasis will shift from substantially rewarding origination to rewarding all steps along the supply chain. (Yes, it's hard to win new business, and this is why "hunter" salespeople are often highly-paid individuals in a corporate setting too. But those who make, manage and service the product lines are also essential to the sales and retention process. Missing this point is one of several extraordinary gaps in law firm management science.)

Organizational vs. Matter Profitability

To be clear, if we focus on long-term profitability and ignore the many short-term actions we take day in and day out, it's likely that we'll make many wrong and dilutive decisions. So there's nothing wrong with measuring profitability on a shorter time horizon too. Organizational profitability is typically the derived sum of individual matter profitability, often clustered within practices whose profit contributions are measured and compared.

Matter profitability, as we've described above, can be influenced by over-pricing.  Is it acceptable if we achieve a 50% profit margin on a $100,000 matter, but in so doing upset and lose the client?  Or is it better to achieve a 35% profit margin on a $50,000 matter, followed by a 35% profit margin on four subsequent matters, each acquired at no cost to the firm because a happy client simply assigned the work?  Similarly, who should earn the higher reward -- the rainmaker who brings in a $100,000 matter at 50% margin that keeps 5 timekeepers at 60% utilization for 3 months, or the rainmaker and timekeepers who convert a $50,000 matter at a 35% margin that keeps 10 timekeepers at 40% utilization for 2 months into four more $50,000 matters, each at a 35% margin and that also keep 10 timekeepers at 40% utilization for 2 months?

I know, the math is getting hard to follow.  The point is, sometimes the math is hard to follow so reducing everything to a single, simple point statistic like billed hours, and then basing all rewards and pricing on this one factor, is foolish.  Running a business is a bit more complex.  The many variables we've identified already include retention rate, utilization, realization rate, leverage, productivity, penetration rate, cost of sales, cost of goods sold, and more, and this is only a small subset of the variables available to managers who need to make rational decisions about the allocation of resources.

While we're at it, a few quick notes on the mechanics of matter profitability:

• Matter profitability and even practice group profitability ignores cross-pollination. One of my clients recognized that the Trust & Estates practice generated a significantly lower profit margin per matter than other practices and considered shuttering the practice. However, deeper analysis revealed that T&E clients, many high-net worth individuals like CEOs, were feeders to the firm's other practices, like corporate, securities and litigation. On an isolated basis, the numbers suggest the firm's T&E practice should be closed, or at least starved of resources in order to focus on more lucrative practices. On an aggregate view, however, there may be more investment needed in this feeder practice if this can be done at a lower cost than alternative lead generation activities

• Matter profitability often provides a false read because of improper allocations. One of the liveliest discussions in any business setting is how to allocate various costs to the business and to the various product lines. In a law firm, we can argue endlessly over whether to allocate costs based on headcount, or on a square foot basis, or on a consumption of resources basis, or other models. In many cases, the final tally isn't all that sensitive to modest tweaks in allocations, but the overriding imperative is to select a model and then stick with it for all, so it provides a sound and sustainable comparative measure

• Matter profitability shouldn't be diluted by productivity. Matter profitability should balance the revenue generated against the hard costs to deliver the matter, including the compensation associated with the timekeepers billing against the matter. But the compensation should reflect target hours worked by associates, or associate bands. While associates are not truly fungible, in this case we should view their contribution as an interchangeable raw material, so if we replace Mary with Carlton, the underlying cost structure doesn't change. Why? Because if we price our services efficiently based both on our organizational learning curve ("We can complete this task in 5 hours") and the client's perceived value ("This task is worth $3,500 to me"), then an individual contributor's productivity shouldn't have a material impact on our costs of goods sold. Said another way, clients resist first- and second-year associates working on their matters because of the assumption that associates work inefficiently as they learn their craft. By basing the price on a standard cost, we remove the client's objection. Some will complain here that more productive associates are penalized because they're placed in a box along with less productive associates. But productivity is a management issue, not a pricing issue. We don't pay more or less for light bulbs or automobiles or haircuts or vaccinations based on the training level of the person making the product or delivering the service. And legal services shouldn't be priced that way either.

• Matter profitability shouldn't be diluted by equity and bonus compensation. Partner time can be billed at actual rates rather than a target, if we choose, under the assumption that their variable billing rates already reflect experience and an experienced partner will bill 3 hours at $650 for a task that an inexperienced associate might bill 10 hours at $275. So a pro rata portion of the partner's compensation based on hours billed is a sensible cost to accrue to the matter. But it would be foolish to add in partner equity compensation, or bonuses for either partners or associates, as these costs have nothing at all to do with the matter! In fact, these costs would force the matter profitability to plummet, requiring the firm to significantly increase prices to make it profitable, which as we've described above serves to provoke the opposite effect, namely that no clients will buy any of what the firm is selling. Consider lawyer bonuses and partner equity compensation as SG&A to be addressed elsewhere.

Managing a law firm or a practice group is challenging enough without adding a lot of financial math to the mix. But the reality is that no law firm manager should be operating without a clear sense, or hopefully a directional sense, or at bare minimum a vague idea, of how resource allocation and pricing can influence the financial health of the business. Long-term profitability vs. short-term profitability, matter profitability vs. organizational profitability, allocations and overhead and leverage, oh my. Yes, it's hard. But I'm willing to bet that you have a resource on staff, or a phone call away, who can help you sort through these issues. The key is to establish a consistent approach across the firm based on the ideals of firm management. And these ideals should be established based on a fully-informed view of the alternatives and consequences. Welcome to management. No one said it would be easy.

For more information about the evolving state of law firm pricing, see Toby Brown's excellent "The State of Legal Pricing 2013."

Timothy B. Corcoran is principal of Corcoran Consulting Group, with offices in New York, Charlottesville, and Sydney, and a global client base. He’s a Trustee and Fellow of the College of Law Practice Management, an American Lawyer Research Fellow, a Teaching Fellow at the Australia College of Law, and past president and a member of the Hall of Fame of the Legal Marketing Association. A former CEO, Tim guides law firm and law department leaders through the profitable disruption of outdated business models. Tim can be reached at Tim@BringInTim.com and +1.609.557.7311.