Law Firm Leaders and Law Firm CMOs: Stop Whining and Get On With It

The legal marketing community has been abuzz in the last few days after Zach Lowe in the AmLaw Daily posed the question, "How Essential is a CMO?" following the announcement that long-tenured BigLaw CMO Ed Schechter left Duane Morris.  Experts have weighed in, from Heather Milligan's dead-on comparison between an essential CMO and a non-essential CMO, and Mark Beese's list of five critical contributions of a top CMO. Indeed, in this space I have often challenged law firm leaders to take stock of their current organizational structure, adjusting not just compensation and staffing ratios, but finding new and innovative ways to deliver legal services in more cost-effective ways.  Since a seasoned BigLaw Chief Marketing Officer is all-in a half million dollar investment, it certainly makes sense to question whether in today's economic climate this is a wise use of a law firm's capital.  Like most good debates, there are multiple valid perspectives.

A seasoned marketing executive can help a law firm differentiate itself from the pack.  In a world where every law firm claims to be big but offers a personal touch, represents big corporations to small businesses, values diversity, is client-focused and offers leading expertise in dozens of practices, one can readily see the value in standing apart from the crowd.  Don't believe me?  Visit Ross Fishman's Automatic Brochure Generator and tell me if it's indistinguishable from your firm's own copy.

A seasoned marketer can help define the optimal client footprint, i.e., which work do we enjoy, that is profitable, in growth industries, with clients who have needs that span our practice and office mix.  Instead, most of the many firmwide and practice group marketing plans I've reviewed tend to fall into the "We'll chase all new revenue" category.

A seasoned marketer will be able to distinguish between building awareness and generating business, and therefore offer tactical support to move prospects from a wish list to an active client list.  Nearly every marketing plan I've observed includes at least one "unicorn" statement (referring to my daughter's wish for a unicorn on her 3rd birthday):  "We hope to increase revenue from key clients and prospects in our target markets."  This is essentially useless.  What it really means is "We hope the phone will continue to ring as a result of worldwide demand for legal services, despite our inept approach to business generation."  Good marketers don't traffic in unicorns; they take actions and build processes that are designed to generate revenue.

A seasoned marketer will build an operation that performs the above tasks, and many more, in such a way as to optimize the competing constraints of speed, quality, subject matter expertise, available resources, time zones and, shall we say, partner importance.  It's a poor operation that merely reacts to whoever is shouting the loudest at any given moment.

So why don't law firms rush to hire experienced professional marketers?  And why are many eliminating, or considering eliminating, those they have in place, or delaying replacement hires?  It's as simple as BigLaw leaders not understanding the revenue-generating impact of a good CMO.  But the legal marketing community isn't blameless either.

Many of our most senior marketers are hesitant to embrace the financial aspect of the role.  Measuring return on marketing investment is difficult even in the corporate sector, and BigLaw poses additional challenges because annual budgets are a relatively new phenomenon, partners often have great latitude in spending "marketing" funds and expenditures are typically viewed as one-time debits to cash flow and profits rather than investments with multi-year horizons.  As a result, many senior marketers are thankful they aren't given budget responsibility and don't contribute to revenue forecasting when in fact this is a glaring omission.

BigLaw partners operate under the amusing notion that a flat governance model in which every partner is an equal owner with equal authority is somehow a rational business choice, when in fact it's an inefficient, extraordinarily dilutive and disruptive structure that persists due to inertia.  To be clear, the partners can organize their sandbox however they want, but this scenario rewards senior marketers who have learned to please partners above advancing the financial interests of the firm.  Indeed, there are countless examples of experienced marketers from other disciplines stymied by the bizarre world of BigLaw.

As one CMO put it to me without irony, "Success in a large law firm is all about credibility, which means accepting that we don't often do things the right way, we do them our partners' way, but after about a year of serving their needs you should have built up enough credibility to gently make suggestions, most of which they'll discard, but to survive you can't try to do too much too quickly."

And let's not overlook the recruiters in the field who specialize in moving around the same players, or at least the same skillset, because it's the safe approach to placement. I've been approached more than two dozen times for law firm CMO roles and each recruiter plays some variation of the same tune: "This firm is not like all the rest. They have good practices, with loyal clients, and very few toxic partners. They don't need a change agent, what they need is someone to keep the trains running on time. They hired someone in the past who spent a lot of the partners' money (on restructuring, branding, CRM, advertising, or whatever) so now they really just want someone to maintain what's in place."  Or as one BigLaw leader euphemistically declared, "We're picky and we're looking for the perfect candidate."

There is no perfect formula for a law firm CMO, though some have offered useful advice here and  here and here.  Others have offered criticism, here and here.  I am a long-time passionate supporter of the legal marketing profession and its professional association, and I'm a paid adviser to law firm and practice group leaders on how to grow and manage their business.  This experience has led me to these simple conclusions:

• All businesses need a continual focus on identifying targets and pursuing opportunities.  While a law firm shouldn't mimic a traditional corporation in all respects, recent events aptly demonstrate that BigLaw leaders who confused high demand with business acumen should now seek expert assistance to help them create demand.
• BigLaw leaders need to discard the outdated notion of the role of a CMO, hire experts who know their craft, and give them air cover to inform the debate and drive positive change.
• Legal marketing has come a long way but still has opportunities for growth.  The old formulas valuing longevity and loyalty and keeping the peace should make more room for financial acumen, forecasting and planning, business development  and executive presence.  To be sure, people skills are always important, but let's find a way to solve for financial success rather than merely keeping partners happy.

We don't all have to get along. But we do have to recognize that long-needed change is afoot, and with change comes discomfort -- and this applies equally to BigLaw leaders and legal marketers.  Indeed, in my prior corporate life some of our greatest successes came only after forceful debates and significant disruption. The economic downturn has already provided the disruption, so let's not let it go to waste.

Calculating the Cost of Doing Nothing

In any business school finance class you learn capital allocation techniques, whereby you reduce competing projects to a single measure in order to more easily select the capital project with the highest potential to add value to the business. Examples of these measures include NPV (or Net Present Value) which reduces multi-year cash inflows and outflows to a single value in today's dollars; and RI (Residual Income) or EVA (or Economic Value Added) which both reflect the value created from a project after achieving a required rate of return; or the more simple ROI (or Return on Investment) which is the ratio of money gained relative to money invested for a given project.  Inherent in these calculations is the notion that there are alternatives for the investment of the firm's capital.  There is no such thing as a good or bad rate of return in isolation.  Only by comparison to alternative uses of the capital can a business deduce what investment returns the maximum long-term value. In each of these calculations assumptions must be made, particularly with regard to future cash flows.  When a law firm calculates that an hourly rate increase of 10% will lead to a 10% improvement in top line revenue, the partners have assumed that other factors will remain constant, such as demand for their legal services.  And in a price-insensitive (or inelastic) market, this is true.  In other words, when a client is faced with the proverbial "bet the company" litigation, price is far less important than quality in the selection of outside counsel.  Given constant demand, an upward adjustment in hourly fees will increase top line revenue.

Similarly, a prominent legal vendor with which I have some familiarity tends to treat annual price increases as a mechanism for printing money. In one product line it issued annual price increases at about three times the CPI for a very long time, with a continuing assumption that these increases would directly correlate to increased revenues.  As the business innovated to reduce internal costs, the marginal profit on the new revenues was significant, leading to a perpetual assumption that increasing prices will lead to significant increases in profits.

However, each has experienced steep revenue decline and customer attrition, to the consternation of the baffled leaders.  Can you spot the critical mistake made by both the law firm and the legal vendor? It's not rocket science. Obviously each overestimated the price sensitivity of the market. By assuming that buyers will continue to buy at the same pace even as the price increases, each made a fatal miscalculation. Each assumed that its product was of such high quality, was so unique and special, that buyers didn't want and wouldn't seek alternatives. Of course we now know this isn't true. BigLaw partners everywhere are getting a crash course in microeconomics. After a generation of near unlimited demand for legal services -- as close as one gets to the very definition of a mathematical constant -- clients are refusing to pay the high rates, realizing that a good portion of their legal needs are closer to commodity than "bet the company," and they're running, not walking, to find lower-cost alternatives.

The legal vendor is similarly challenged.  Whether it's a backlash to high prices, or the rise of alternatives and substitutes in the marketplace, buyers are pushing back, even canceling their purchases.  The vendor is caught in a vicious spiral.  By baking its perpetually flawed assumptions into its annual profit expectations, every cancellation or significant downward renegotiation creates a gap which it tries to make up by -- surprise! -- increasing prices to other customers or in other product lines.

But law firms and legal vendors aren't unique.  Every industry, even government, has its own flavor of flawed assumptions.  Pharmaceutical manufacturers lobby Congress for trade protection to prevent consumers from buying lower-cost prescription drugs from Canada.  The music industry laments the millions of dollars in lost CD revenue due to unauthorized music file sharing.  Government officials rail about lost tax revenues from individuals and corporations aggressively seeking tax havens.  In each example, buyers are doing nothing more than logically and legally seeking lower-cost alternatives.

Okay, I guess music file sharing is illegal, but the sentiment's the same.  None of us who used to pay $12.99 for a music cassette and who now pays $19.99 (or more!) for a music CD really believes that the cost to produce a CD is higher than than the cost to produce a cassette.  Some would say the music industry created its own demise by positioning CDs as a premium purchase and therefore limiting its potential buying audience, rather than lowering the price and dramatically increasing the addressable market, which is exactly what Apple did with iTunes.  (Personally, I believe music file sharing is a backlash against the typical music CD's inexplicably confounding security wrapper!)

In my years leading a business, my team and I developed the most precise forecasting methodologies and as a result year after year we achieved our revenue goals while others floundered.  Our approach was simple:  we always included a line to reflect expected losses due to rejection of our price increases, and we developed a sophisticated predictive index to identify which buyers were at risk.  Most organizations have a contingency for bad debt but this is reflected on the balance sheet and not at the product level.  We were required to increase our prices by corporate mandate, even though we demonstrated time and again that it impaired our brand equity, resulted in emotional total losses (buyers who would refuse to do business with us again in any product line) and unfairly assessed penalties on good customers who didn't complain (because when the bad customers left, who do you think had to pay an even higher price to make up the difference?).  The leaders were tone deaf, and today that product line has experienced monstrous losses which, in the usual manner of corporations, the present management blames on past mis-management.

Among the many questions law firm leaders and business leaders should be asking is whether or not they have properly considered their customers' alternatives.  Many BigLaw partners are astonished to learn that the pedigree of the firm truly doesn't justify fees that are substantially higher than smaller competitors in most cases.  This isn't a character flaw and their myopia is shared by many others.  However, those that do nothing now to address the change in circumstances should be held accountable.

You don't have to be an experienced economist or financial analyst to lead a large enterprise (though it helps to have some chops).  What you do need is a healthy understanding of the mathematical drivers of your success.  In your revenue calculations, use different assumptions for those products and services which you can charge at any rate and those for which buyers have numerous lower-cost alternatives.  Assume the services you believe to cater to a price-insensitive buyer to be shorter-lived than they used to be.  Look to grow your top line as much by offering an innovative new product or service  as by increasing your prices for your present offerings.  When marginal profit contributions from price increases are elusive, look to achieve your profit objectives by reducing internal costs through outsourcing or business process improvement programs.  But do something.

Seth Godin recently described the calculus of change:

"Do nothing is the choice of people who are afraid. Do nothing is what you do if too many people have to agree. Do nothing is what happens if one person with no upside has to accept downside responsibility for a change. What's in it for them to do anything? So they do nothing."

In the legal marketplace we have relied on assumptions that are no longer true.  We can roll up our sleeves and re-work the underlying math in our assumptions.  Or we can conduct a few layoffs, cancel the annual meeting, put a freeze on hiring and travel, and wait for the old assumptions to revive.  Or we can do nothing.  Your call.

First Rule of Business: No Surprises!

In a recent post on his fantastic blog directed to corporate counsel, Rees Morrison describes the opening statement in a communication from a corporate General Counsel to his outside law firms:

On the first page of the JDS Uniphase guidelines for outside counsel gleams the distinctly un-lawyerly sentence "We hate surprises." That dramatic and clear statement leads off two paragraphs about the utter importance of prompt and full communication between law firms and the law department.

This lesson cannot possibly be repeated enough.

I've had the good fortune to lead businesses. It's hard to forecast revenues and expenses well in advance, it's hard to make progress when talented employees come and go, it's hard to make profits when those confounded competitors keep catching up or overtaking us! Each of these presents uncertainty. Uncertainty is a fact of business. Some have even found a way to quantify uncertainty so it can be incorporated into the business planning process (see here, but have Advil and a very good calculus textbook on hand).

With the market presenting uncertainty all day every day, the last thing business owners want is another surprise, particularly those that are self-generated, particularly from vendors and suppliers.

Most law firms add up revenues and expenses at the end of the year, and then decide whether to raise rates in the coming year. Problem is, the coming year has long since arrived when the rate increase notice is distributed in January or February. When's the best time to issue notices of rate increases? Late December? By Thanksgiving? In the corporate world, most managers have to submit all revenue and expenses for the coming year by the end of August, and several revisions will take place until we lock it down by early October. Anything past that date constitutes a surprise.

The same goes for budgets for ongoing matters. Predictability is often more important than absolute cost.  But sometimes costs exceed expectations. As a service provider, you shouldn't necessarily bear the brunt of overruns if your actions are in keeping with the assignment. But don't ever ever rely on the invoice to communicate the delta between actual and expected costs. Make a phone call. Make it long before the invoice is generated. Give the client as much runway to adjust accordingly. It may even impact their business decisions concerning how to proceed.

But it's not just about fees. We all know litigation is by nature unpredictable. That said, there is a finite set of potential outcomes. Each outcome has a financial and public relations cost. The savvy law firm helps its client identify and quantify the potential outcomes, within reasonable ranges. It's not just good client service, it also helps the client make better business decisions. As I've written elsewhere, most business owners don't consider legal issues in the same way that a law professor might, as an opportunity to explore fascinating areas of the law. It's merely risk management. What path gets me to my goal most expediently? Given my appetite for risk, what legal tactics further my business objectives? I may not even care about being "wrong" as long as the cost and PR impact are manageable. I don't want to be surprised if the legal tactics you advocate present unforeseen challenges.

By the way, if you're a lawyer and you don't explicitly know your client's appetite for risk, and how this shades his business decisions, and instead you provide advice based on what you feel is the "right" response to a legal issue, then you might very well be the next to receive a surprise.

Galileo Was Wrong: The Earth Revolves Around Lawyers!

In Biglaw, there's an established hierarchy: Partners are at the top of the heap, followed by junior partners, non-equity partners, senior associates, associates, paralegals and then staff (although some C-level administrators have risen to a more exalted status). Where do clients fit in? It depends. Sometimes they are listed in strategy documents as more important than the partners, but generally we know this not to be true. In actual fact, few law firms rely on client needs as their driving force. Law firms are law firm-centric. In fairness, the legal market is at the tail end of a cycle of near limitless demand for legal services. In a demand-rich market, existing clients and new clients will come calling no matter what you do, so it's hard to expect a change in behavior when it's so profitable to stay the course. But where clients are concerned, there is general agreement that the client's law department, represented by the General Counsel or Chief Legal Officer, is the appropriate focus of attention. By and large this works. Many business leaders aren't sophisticated enough to grasp the nuances of legal issues, so it's best to have a buffer between the businesspeople and the lawyers/counselors. I don't buy it.

I've had the good fortune to lead divisions of publicly-traded businesses, and I can't recall a single instance where I or my colleagues felt insufficiently equipped to address business or marketplace issues and as a result needed to turn to our in-house law department or outside counsel for insights. In fact the opposite was often true. In over a decade of boardroom participation, only a few enlightened colleagues of mine regularly invited the General Counsel or law department liaison to our strategy meetings. These were the same leaders who invited the head of HR to attend as well. The feeling was, it's important for everyone to understand what we're trying to accomplish as a business, and what challenges we face, so everyone can execute their function in accordance with the agreed-upon goals. Very rarely did the HR leader or the lawyers have a speaking role in the substantive discussions, though they were expected to provide updates on their functional areas. This is not a slight to the in-house lawyers or HR professionals. It's merely a fact. In any enterprise there are those who formulate strategy and those who execute. The legal department and the HR departments executed.

On a number of occasions where we gathered with the board or executive team of an acquisition target in a secret location to discuss a business combination, we always invited the lawyers because there were items on the checklist that only they could handle. But they otherwise didn't speak much. When outside lawyers were invited, they sat next to the in-house lawyers and spoke even less. Again, none of this is meant to demean the important role lawyers play in doing deals, but the point is they were there to identify and quantify risks in executing the deal so the business people could incorporate this into the financials, or choose to build versus buy if the risk was too great. We never asked for a go/no-go decision, and we didn't ask for exhaustive explanations of the legal issues in play. We asked about the obstacles, the techniques to overcome the obstacles, and the cost of doing so -- and not the legal cost, i.e., the legal bills, but the cost to proceed. For example, I wouldn't want to know how much the law firm will charge to counsel us on new regulations; I wanted to know how complying with new regulations would impact the cash flow projections. Again, the point is, on the business side we rarely think of things in legal terms, but in terms of how legal issues impact our ability to proceed.

In point of fact, the earth does not revolve around the lawyers.

I met recently with the managing partner of a well-established mid-size firm. I was advised that he was brilliant, an incomparable mind in a firm of brilliant minds, which led to his status as the firm's leading rainmaker for a generation. Indeed I found him charming, engaging and clearly of high intellect. But his "secret" approach to winning business is simple and he knows it: he discusses business issues with his prospects and clients, always looking at things from a business perspective rather than a legal perspective. As a result, he has become a trusted business advisor to his clients, not merely a lawyer. This partner is held in high esteem by his colleagues, but many find his approach mystical and unconventional. I find it to be perfectly in keeping with the sentiment expressed above. Business executives don't need legal advice; they need to identify and quantify how legal issues will impact business decisions. This managing partner is concerned that not enough of his young lawyers get this point. I think he's right.

You may have heard about the brilliant dialog taking place on Legal OnRamp regarding the hoped-for demise of the billable hour, which picks up the gauntlet thrown down by ACC in its Value Challenge to change the in-house counsel/outside counsel dynamic. Along these same lines, a very smart colleague of mine, Ron Friedman, recently wrote a short discourse positing how a corporate CEO and his CFO likely came to the conclusion that finally, after years of waiting for the law department to reign in legal spending, it was time to change the game. It's a clever piece and you should read it. My only quibble is the premise for the conversation:

CFO: We need to talk about how much we spend on legal. Since our fiscal year ends in November, I usually have time over the holidays to do some real thinking. This year, I read up on the legal market. It’s not pretty. And I’m not sure our general counsel is the solution.

CEO: Ok, you catch me at a good time. Yeah, I agree our GC is not controlling costs. What can we do?

CFO: Legal costs keep going up, both in absolute dollars and as a percent of revenue. Other cost centers – HR, Marketing, Facilities, and even my own Finance department – have driven costs down as a percent of revenue. Sure, we face more regulations and law suits. But give me a break. Lots of articles report on in-house lawyers complaining about costs. The GC response? Precious little beyond begging for discounts.

CEO: You’re preaching to choir. I hear lots of complaining about legal costs. The whole legal thing is like that movie Ground Hog Day with an even worse twist. Every day is the same but nothing ever improves, lawyers don’t learn from re-plays. It’s hard to figure out how a whole economic sector got so stuck.

CFO: Actually, it’s easy to see why we’re stuck. Who buys legal services? Lawyers. Where do our lawyers come from? The law firms we retain. Do our lawyers think the same as our outside firms? Yes. Are lawyers trained to manage? No. What do our inhouse lawyers do? Lawyering, not managing. So we’re stuck with buyers who share the same bad traits as our suppliers and who travel in the same circles. The hard question is how to get the system unstuck.

In my experience, it's very unlikely that a CEO and CFO would frame the issue in terms of the evolution taking place in the legal industry any more than we'd investigate changes in coffee bean production when looking for cost savings from the company's hospitality vendors. More likely the annual (more often quarterly and lately even monthly) exercise to identify and reign in uncontrolled costs will eventually paint the legal department as the only function unable to provide and stick to a budget. I've written before about how division heads are required to submit revenues and costs 18 months in advance, incorporating whatever uncertainty we can and notwithstanding exogenous events we're held to these targets, and for acquisition or new product business cases we're often held to 5 to 8 year cash flow projections. However, we routinely receive reports from the legal department indicating that they can't provide even a broad range for legal costs for the usual transactional items, e.g., immigration, employment, real estate, etc., let alone pinpoint complex litigation or M&A costs. So a more plausible premise for the discourse above might be:

CEO: Have we identified the cost centers that have unallocated funding and swept them of all but the costs linked to our strategic priorities?

CFO: All but the legal department. They claim there are too many uncertainties to fix a budget beyond headcount costs, and even these may fluctuate depending on the volume of legal work.

CEO: Hogwash. Give them another chance to establish a budget using a decision tree or Bayesean analysis or whatever methods they feel are appropriate, incorporating the risks and complexity of our strategic priorities. If they can't do it, assign them a fixed reduction percentage and then tie the GC's bonus to achieving the funding envelope.

CFO: Done.

If this conversation hasn't occurred in the board room of most companies in recent months, it will. In a recent interview a colleague conducted with a General Counsel, we learned that the GC was given a mandate by his CEO to reduce legal spending by 70%.  Ouch!  If you're a law firm partner, are you ready to help your client identify and quantify the risks associated with his organization's business strategy? Do you understand that if you are unable to participate in this discussion, there are many other law firms who are gearing up for this exact conversation? What will you be doing instead?

I Stink, You Stink, We All Stink - A Note On Accepting Responsibility

Lots of noise lately about the billable hour, the dissatisfaction of corporate counsel, the awkwardness of every idle lawyer calling long dormant clients "just to say hello." Actually, only the volume has increased; these are the same discussions that have taken place for years. It's true in every business, and no less true in the practice of law: if you don't like the service, don't return.

I once attended an excellent training class (shout out to the American Management Association) about 6 months after my promotion to manager after years as an individual contributor. The instructor gave the class a simple assignment. Take a clean white sheet of paper. Turn it sideways. Along the left margin list the names of your employees. Along the top list the competencies (skills) expected of the employees. At the intersection of each name and competency, rate your employees' performance as great, average or poor.

We gleefully went about the task, amidst snickering like "Boy, it turns out all my people stink" and "I wish I could get new people." As young managers heady with the wisdom bestowed on youth, we were as confident in our competence as we were dismissive of our employees. For most of us, there was no bell curve: most of our employees were poor performers in most categories.

Then the instructor dropped the bomb.

He characterized the grid as less an indictment of our employees than a report card of our own skills as managers. If we know what it takes to succeed in the roles, and we know which employees are not performing to expectation, then as managers we have an obligation to address the situation by providing the tools, training or alternatives so the employees can succeed. It's not just sensible, it's our fiduciary obligation as managers of the firm.

I can assure you, the room was silent as those of us who gave such poor grades to our employees realized we had just been our own harshest critics.

The object lesson is that if you know what the problem is and you don't do anything about it, then you're complicit in the outcome.

If the local pizzeria consistently forgets the mushrooms but you keep going back, whose fault is that? If your doctor continually disrespects the value of your time and makes you wait 45 minutes after your scheduled appointment, why are you surprised? If you encounter the same slow service every time you walk into your local electronics retailer, then why not find a new retailer?

I'm not alone in enjoying the horror stories of terrible service committed by law firms against their in-house counsel clientele. I've moderated countess roundtables of corporate counsel and outside lawyers and I've been the instigator in asking for juicy anecdotes to liven up the "law firm bashing" session. In fact, there's one fantastic corporate lawyer who has spoken on several panels with me. Whether true or apocryphal, she has the most outrageous stories of outside counsel blunders and so I keep inviting her.

But this begs the question. Has she gotten any better at hiring outside counsel over the years? Does she fail so spectacularly in instructing her outside law firms that the outrageous outcomes should come as no surprise? Those that bemoan the billable hour, do they have such low standing in their organization that they can't negotiate an alternative structure and then defend this to the business owners? Is the average corporate counsel so lacking in credibility that when a deal goes sour his job hinges not upon the merits of the deal (or lack thereof!) but upon the brand name of the outside firm he hired -- a name that in all likelihood (with apologies to Biglaw lawyers everywhere) most business owners don't know or care to know?

We're in this together. It's nice to see the usual dialog finding so many new venues. But these aren't new problems. Corporate counsel are as invested in finding a new model as outside counsel. Whether the billable hour is dead, I don't know (Bruce MacEwen has a perspective). But like that new manager grading his employees, are we ready to take responsibility for implementing the change we know is needed?

Let's all take out a clean white sheet of paper and find out.