Category Archives: Strategy

Flying start

 

 This article was first published in Managing for Success, the magazine of the Law Management Section of the Law Society. The Section’s website can be found here.

 

The appointment of non-executive directors is not common in law firms, but those that do take this step significantly outperform their competition. Nigel Haddon and Rob Lees explain how and why you should appoint a non-executive director for your firm

 

Nigel Haddon is a former chief executive of SAS Daniels, and now a management consultant who advises law firms on strategy and leadership issues. He is a member and past chair of the Law Management Section committee. He is an author of two Law Society publications and various articles. Rob Lees is an author of professional service firm strategy books and articles, including co-authoring the best-selling ‘WhenProfessionals Have to Lead’. He is a former global consultant advising professional services firms on improving individual, team, and firm capability

 

With so many law firm clients required to have independent, non-executive directors (NEDs) as part of their governance structure, it is surprising that so many law firms, with no regulatory barrier to the incorporation of NEDs into their own corporate governance, have opted not to do so.

Of course, this may be more down to lack of knowledge than anything else. Becase NEDs are relatively rare, firms may not know some of the basics: what a NED would do; what value they could bring; how to find the right NED for their firm; or how to incorporate the NED into their culture once they’d found one.

In this article, we address these questions, outline the business case for NEDs in law firms, and provide a beginner’s guide for recruiting a NED in your firm.

 Do law firms have to have a NED?

No. Listed companies must comply with the UK Corporate Governance Code, which requires at least half the board, excluding the chairman, to be NEDs. Smaller companies, perhaps more directly comparable with sub-top 50 law firms, are required to have at least two independent NEDs. AIM-listed and unquoted companies, which includes most professional service firms (PSFs), are not subject to the code.

However, there is much encouragement both in the code itself and from peers, funders and accountants for them to follow suit. This may be for a range of reasons, but one often cited is that NEDs can, when appointed appropriately and operating effectively, improve the management and operation of businesses of all types.

But appointing NEDs is no panacea. To be effective, a NED must be truly independent, and needs to be given time to really understand the business and to know when to challenge executive management. For a NED to succeed, the right person must be appointed, and an appropriate environment must be in place (or be created) for that NED to effectively operate.

 How can law firms benefit from a NED?

In a piece published in The Lawyer in August 2014 (tinyurl.com/Drummond-research), executive search firm Edward Drummond revealed that only one in four of the UK top-100 law firms had appointed one or more NEDs, but that those which had appointed them had grown about a third faster over the previous four years than those which hadn’t. They also identified a trend for law firms to ape corporate governance structures with a view to gaining competitive advantage.

And those which had appointed NEDs had generally done so not to gain sector knowledge, nor connections, but to add a ‘helicopter’ or external view of the business.

The benefits of appropriate NEDs being appointed to firms identified in the Drummond research and elsewhere include:

  • a fresh, external perspective
  • contribution to strategy development and performance improvement
  • strengthening leadership and management
  • helping instil a more stringent process for making strategic decisions
  • bulking up commercial expertise.

Would every type of firm benefit from a NED? With our 60 years in and with law firms, we would say that just about every firm in firm in the top-500 would benefit from at least one NED. There are exceptions – there are some firms where the cultural barriers may be insuperable, such as in a highly collegiate, regional ‘High St’ firm, and there are others at the lower turnover end of the top-500 which may not choose to prioritise investing in a NED, given a range of competing priorities. But in general, and given all the benefits, we would encourage every firm in the top-500 to at least investigate the options.

What will their remit be?

Recruiting people into any firm in any position starts from knowing precisely what you want the individual to do, and NEDs are no different. So you need to define the NED’s remit clearly before you begin recruitment. Of course, that remit may change over time, but their initial responsibilities must be clear to all parties.

Should a NED be someone who can open doors and introduce the partners to potential new business, or someone who can help the firm become even more effective across all aspects of its activities? The Edward Drummond research was quite specific on this point, and all of our experience supports their research: that lasting improvements to a firm’s operations and profitability only come from appointing NEDs with the ability to contribute across the piece.

Some firms hope to combine the two roles but, in reality, finding someone with both the right business networks and the expertise to help the firm substantially improve its performance is exceptionally rare. One requires knowledge of markets, the players within them, and how the firm’s services can be most effectively introduced. The other requires knowledge of how professional service firms ‘work’ and what the best firms do, and an acute understanding of how to translate that knowledge into actions that lead to the firm making substantive increases in all aspects of its performance.

A NED’s remit must be tailored to the challenges the firm is facing. For some firms, that may be how to be develop a more effective compensation plan for the partners; in others, it may be about succession planning; and in others, it may be about turning strategy into action (which is where a lot of law firms falter). In determining what you want the NED to do, it is imperative that their remit is tailored to a real understanding of the challenges facing the firm.

 What expertise does an effective NED need?

1. First-class diagnostic skills

A NED needs to be able to offer high-quality, objective advice, and this requires truly high-level diagnostic skills – with those skills having been applied successfully in PSFs and law firms. In our experience, law firms and PSFs are different from their corporate counterparts, and it is rare for people to be able to switch diagnostic expertise in, say, a production environment, to professional services.

 2. Strategy formulation and implementation experience

We have met a lot of managing partners whose instinctive understanding of their markets is first class. They know exactly what the firm should do to penetrate them successfully, but, sadly, they do not know how to align the firm’s people and processes to deliver the actions necessary for success. Consequently, any NED must be able to both craft strategy and assist the firm’s partners in turning strategy into successful actions. To us, this is a core skill, and it is one of the reasons why we believe truly effective NEDs must have worked in professional services at a senior level.

3. An objective, external voice

This is critical, of course – but not as critical as the voice being heard and acted upon. Again, we have seen too many instances when effective external advice floundered through managing partner inaction. So, while we firmly believe firms should appoint NEDs who can help them deliver lasting, substantive uplifts in performance, we also firmly believe doing so is an absolute waste of time in firms where the managing partner’s actions (on their own or with their team) have refused to countenance any challenge to the status quo.

4. A fresh perspective

This is the key element in the challenge to the status quo. All of the very best PSFs we know actively look for new markets and new ways of doing business. They refuse to accept the status quo and also refuse to be second best. Sometimes that presents a real challenge to a practice or a team, but that willingness to look at things differently is what singles the top firms out. As a result, looking for a NED who comes from exactly the same world as you do is usually a mistake: we recommend looking for NEDs whose experience in different firms and markets will challenge what your firm does.

5. Previous experience as a NED or at a high level in the legal sector

Law firms, in fact all PSFs, contain some of the most ego-driven people we know, and they can be intolerant of people they do not consider as their equals. Partners’ initial willingness to listen to what a NED has to say is typically positively influenced by the partners’ perception of the NED’s track record – so ideally, they should have experience as a NED or at a high level in the very best law firms, and evidence of that. Also, having faced or advised on similar situations speeds up the NED’s ability to consider potential responses and to come up with objective advice that will make a difference.

6. The ability to be a critical friend

Of course, this links closely to many of the other points above – having a different perspective, challenging the status quo and a voice that is listened to. Being a critical friend means having the expertise and skill to bring new ideas and perspectives to the table, and to act as a vital sounding board and external voice to challenge the firm’s current thinking and practices. It is an exceedingly tough role for anyone to play, just as it is exceedingly difficult for some firms to be the recipients of that advice.

7. A proven track record of delivery

One of the things often forgotten when recruiting is the need for the individual to fit into the firm’s culture. That fit takes you into the NED’s characteristics – such as sense of humour, interpersonal skills, friendliness, considerateness – and you need to choose which are the most appropriate for your firm’s culture. However, without exception, any and all characteristics are usually blown apart in most firms unless the individual delivers. Professional services is an execution game and sustained success is only achievable if the firm continually delivers the right products, delivered by the right people, into the right markets, at the right time. It sounds very easy, but in today’s highly competitive markets, it most certainly is not, and the more astute firms look for additional support from skilled NEDs to help them succeed.

How do we recruit for a NED?

It’s through people you know – definitely not through advertising. Most partners have good networks both within and beyond their community, and through these contacts, names often come to the surface. So too do names of good headhunters with a strong NED practice. Using the headhunter route obviously has costs associated with it, and our advice is to only use headhunters with a PSF arm, with experience in recruiting partners, as well as their more traditional senior corporate practice.

We’ve appointed someone. How do we make sure they add value?

You need to integrate the NED into your business. This is where having been clear from the start about the role’s remit will pay dividends – integration is so much easier when both parties are clear about the NED’s remit. In our experience, successful integration is always about time and timing.

Time is about allowing the NED to experience the firm’s culture in action. The best NEDs will always ask for time in the firm to understand how it works, how power is distributed, who carries sway, which practices are closest to their markets etc. If a NED isn’t able to answer these and all of the other questions related to getting things done, they will not be able to give informed strategic advice.

Timing is about knowing when to introduce the NED into the business: when they will get the best reception, and when the partners have time to help the NED understand the firm and how it works. We have heard people say there is never a good time, but an effective managing partner knows how to position events to ensure the NED gets the right introduction and welcome.

And before you bring the NED into the firm, communicate clearly with your people about who the NED is and what their remit is. Otherwise, rumour and exaggerated rumour will abound.

What next?

An effective NED will see part of their role as educating the board and the partners, helping to uplift their skills and expertise. You should therefore see a distinct improvement in the board’s and the firm’s performance – and this uplift in expertise may ultimately make the NED redundant, and see them replaced by a NED with slightly different expertise or a different perspective.

Why do some NED appointments fail?

 Unsurprisingly, the reasons are often obvious, and many stem from the recruitment process. There can be subsequent relationship failures too, some of which simply weren’t predictable and, sadly, some that were. Anyway, here’s our list of things to avoid:

  • a failure to integrate the role into the business (ie no one understood why the individual was appointed and what they were supposed to do)
  • accepting the word of someone you know well in appointing a NED, rather than having a rigorous selection process
  • the NED not being truly independent – they are known to one or two of the power brokers and tend to side with them, especially in any contentious debate
  • the NED not providing a sufficiently different perspective, but looking and acting like the people they are working with, so they’re seen as yet more of the same, harming and not helping board diversity
  • the NED having too many other commitments and demands on their time to commit the time necessary to get to know the firm properly, making their advice too general to be really helpful
  • the NED not really having the strategic knowledge to turn effective diagnosis into effective strategy and action
  • the NED not being sufficiently skilled to challenge the ‘groupthink’ that exists in a lot of firms.

 

We’re still not convinced…

If, despite our hopefully persuasive arguments, you are not sure that you should go down the NED route, ask someone you trust who has done so, or a consultant who has worked with firms who have. In our experience, which is supported by an ever-increasing amount of research and anecdotal evidence, using NEDs to improve board and firm performance is unequivocally the right thing to do.

 

© Rob Lees and Nigel Haddon, December 2017

 

Lost or retained your crime duty provider contract?

Whether you have lost or retained your contract your firm will now have to face up to major decisions – decisions which cannot and should not be delayed.

Strategic direction.

We have long believed in the merits of the Boston Matrix which classifies income streams in accordance with relevant market share and the attractiveness of the market:

boston

 

 

 

Legally aided crime has for a long time been a challenging market and with reduced rates is even more so. It follows that you have either a ‘Dog” if your firm has a low market share or a “Cash Cow” if you have  a high market share.  If you lost your contract and had a small market share you may be relieved (whether it was an active choice or not) that you are now out of the market and now need to consider what services you should be providing.

If you retained your contract and have a significant market share then now is the time to “milk your cows” – meaning maximise your profitability but use that profit to diversify and to invest in alternative income streams.

Profit Protection

For those who have lost their contract and as a result have spare staff capacity they face an immediate drain on profitability.  Staff costs will be the highest overheads and regrettably there will be a need to make immediate cuts in headcount to maintain at least a semblance of ongoing profit.  While there will inevitably be staff to whom you have long term loyalty, some of which you will hopefully be able to retrain, the rule of thumb is to cut deeply at the outset so as to protect the positions of the remaining staff.  By cutting deeply – in fact possibly over cutting – you can avoid the death of a “thousand cuts” and the inevitable damage to morale & loss of staff you wish to retain.

For those who have retained their contract the issues you face are no less fundamental – if a little less pressing. With the cut in rates this must reduce your profitability and potentially threaten the viability of the practice. The focus must be on “process re-engineering” and examining carefully how and in what way you service the contract so as to reduce the cost of so doing.  This is by no means easy but must be undertaken.

M&A

“Mergers” are often a euphemism for sale or purchase.  For those who have lost their contract they may be facing the unpalatable truth that there is no viable alternative to finding a buyer by way of “rescue” and indeed simply “closing the doors” may be the only option if there is little by way of an ongoing income stream without the contract.  Given the obvious implications for run off cover and TUPE for potential acquirers, finding a “white knight” may be difficult but must be the first, and urgent, option to address – often with the help of dispassionate  expert and knowledgeable advisers.

For those who have retained their contract now might be the time to make judicious acquisitions of firms in distress but who have a core – but now unutilised – expertise.  Such acquisitions my well be part of process reengineering with a view to reducing the cost of providing the service down to sustainable levels.

There will of course also be firms who have retained their contract but who have insufficient market share or an inability to re-engineer their cost base to maintain sufficient profitability.  These firms are best placed to seek an acquirer and this may present the best opportunity to obtain economies of scale and increase market share – probably after all the MoJ’s objective.  The challenge is for the stronger firms to find targets and for the weaker firms to truly recognise their weakness and their need to find a buyer.

1406 1473crop

Howard Hackney & Nigel Haddon

Raise our prices? Are you crazy?

imagesEFBHZ8I9Many readers will have seen the recently published research by Morar Consulting for Veyo. To remind you, a few of the headlines were:

  • 42% of consumers were unsure that they would use their conveyancer again;
  • 60% found dealing with their solicitors the most stressful aspect of the process;
  • 27% chose their conveyancer because of the price being the lowest, making it the fourth most important factor in choosing a solicitor;
  • 25% said they would pay more for a faster service.

 

Why would a firm seek to raise prices in this dog-eat-dog world? When one in four choose their lawyer on price and price alone, where’s the mileage in exploring raising prices?

The answer lies in the questions. If every law firm competed to be the cheapest, who would win? Not your firm dear reader. That is a race to the bottom that nobody can win. So how, against this competitive, consumer-empowered backdrop, can law firms push back?

In business literature, commoditisation is defined as the process by which goods and services that were distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market or consumers. Critically, it is the movement of a market from differentiated to undifferentiated price competition. It is the received wisdom of the residential conveyancing market that that is the position we now find ourselves in. But is that so?

Differentiation is not confined to large firms or high value matters. Pricing and service level options can be used very effectively, in isolation or combination to create significant visible differentiation around wills and powers of attorney, divorce, pre-nuptial agreements and residential conveyancing.

One of dozens of examples includes the option of a ‘premium-priced’ residential conveyancing package that includes up to two home/hospital/rest home visits by a legal executive/paralegal – one to take instructions and one to get documents signed. This is a proven and very popular option with the elderly, the immobile, the unwell and those without easy transport options. It is this kind of differentiated offering that helps you stand out from the crowd.

Almost anything is capable of differentiation. If this were not true, how is it that Fortnum & Mason can charge £5.95 for a pot of orange marmalade compared to £0.27 for substantially the same thing at Aldi? Answer – maybe there’s a clue in the names – ‘Aldi Everyday Essentials Marmalade’ doesn’t have quite the aura of ‘Highgrove Duke of Rothesay Marmalade’.  Who would know if there is much actually to differentiate the two products (although one would suspect there is)? More obviously, would anyone seriously suggest that the shopping experience is the same at both? And yet Fortnum & Mason is as busy and as profitable as it has ever been.

The firms that differentiate themselves most effectively are those that have identified aspects of their culture that make them superior service providers in their area and then communicate those advantages to the market in a consistent, compelling and memorable way.

There is clear evidence that home buyers are willing to pay more for a fast track service, so the opportunity is there for firms which are able to demonstrate both speed and efficiency.

Firms must resist the temptation to buy into the inane and demonstrably wrong assertion that legal services are all becoming commoditised and therefore you have no option but to slash your prices to preserve market share. There will always be people willing to pay for the ‘Highgrove Duke of Rothesay’ product provided you give them good reason to do so. If you don’t give them reason to do so, you will never command anything other than ‘Everyday Essentials’ prices.

 

Nigel Haddon

Pricing Consultant at Burcher Jennings, Pricing and Costs Consultant

A people business, right?

images833IJ8SAA people business, right?

 

The topic for this blog almost literally fell in my lap. I met a friend for post-work drinks when, as is the way with these things, we soon turned to a kind of ‘how was it for you?’ conversation, about the last few months in general, and our respective businesses in particular. It didn’t take me to long to take my friend through the evolution of my consultancy practice over that period – I suspect both of us were more interested in how my friend’s medium sized law firm was faring.

I heard what I expected to hear given market conditions and my knowledge of my friend’s firm’s place in their chosen markets, that is, it had been a record year in terms of turnover and profitability. Some of what I heard had made the regional press, and why not? It may not be of huge interest to clients, but there’s nothing intrinsically wrong with celebrating success. Heck, I’m in favour of it, I’ve been there and done that! But what I was told next stopped me in my tracks, and left me pondering the meaning of ‘success’.

My friend told me that over 25% of the Partners and staff who had been at the firm a year ago were no longer there. Now, some level of attrition is normal, and I’ve always thought that churning 10 to 15% of your staff per annum is what you’d expect in most professional service firms (PSFs).  After all, people retire, move out of the area, leave for a lifestyle change and so on. There is data out there (it won’t take you long to find using your favourite search engine) to suggest that around 8-10% is what law firms should be aiming for, it’s ‘healthy’ at that level, and that 12-15% is towards the very top end (or poorest outcome) that a PSF should achieve. But 25% plus? Something about that didn’t sit right with my understanding of ‘success’, even allowing for record financial results.

For me, success in a PSF is about creating a ‘One-firm’ firm which is able to harness its resources in a way that enables it to compete most advantageously in its chosen markets. Those ‘resources’ are its structural, relational and human capital (together its’ ‘intellectual capital’). And to quote David Maister, a One-firm firm is characterised by “institutional loyalty and group effort” and such firms “rarely lose valued people to competitors”. Given the challenges of recruitment in the legal sector nowadays, you’d have thought that firms would be putting discretionary effort in to talent retention, wouldn’t you, in creating a “sense of cohesion and belonging among the firm’s people”[i]?

Now, I don’t know that my friend’s firm didn’t do everything in their power in 2014/15 to do just that, and were just plain unlucky with the outcome. But I do know that the “starting point in addressing any firm’s strategy for human capital is to place people at the centre of [the firm’s] efforts to gain sustained competitive advantage by developing a workforce that feels it is an integral part of the general needs and aspirations of the firm”[ii]. After all, law is a people business, right?

In short, a firm needs to provide all its Partners and staff with a clear line of sight as to what is required from each of them, each day to help the business achieve its strategic goals. It can be difficult to do this at the best of times, but if strategic objectives are centred on vague goals like being ‘bigger’ or ‘more profitable’ it can be too big an ask. But unless meaningful efforts are made to provide that clear line of sight, people may conclude that they don’t belong in an organization that isn’t clear about where it’s going, and what it wants from its people.

 

[i] Nick Jarrett-Kerr ‘Strategy for Law Firms’ (2009)

[ii] ditto

Winners and losers

W&LI’ve been enjoying my new life as a consultant in the legal sector for about 6 months now, and I thought now was a good time to pause and reflect on what I’ve seen out in the market. Fairly obviously, the economy is providing a far more benevolent backdrop to activity in the sector than was the case throughout the recession. There is more transactional work about, and many firms are processing as much residential conveyancing work as capacity will allow.

Firms are talking about improving processes, employing smarter pricing and going for growth. But I don’t see enough law firms thinking radically about what the market needs and how they are best going to satisfy that need. I’m not the first commentator to opine that the small to medium sized full service firm has had its day – though current increases in turnover and profitability for such firms rather obscure that message. It reminds me of David Maister’s observation that it’s quite difficult to walk in to a room full of million-dollar a year attorneys and tell them they’re doing it wrong!

All firms need a razor sharp focus on which clients, in which markets, they are aiming to serve. Once clear on that, the firm should then aim to achieve competitive advantage in that market or markets. That means, for the avoidance of doubt, being able to provide its services at a higher price than its competitors, or being able to produce its services at a lower cost. Few can achieve the position of premium priced market leader over a range of services – though see for example the Magic Circle firms – but it is possible to dominate a smaller market providing a smaller range of services or to produce comparable services at a lower cost than others. An example of the former could be a niche media law firm operating out of Manchester’s Media City, while an example of the latter could be a volume conveyancing firm that has invested heavily in its IT infrastructure and processes to enable it to operate profitably charging prices that would seem unfeasible on the high street.

Winners and losers are emerging. The winners are not always the firms that are now trumpeting their rude financial health, and the losers are not always the firms that aren’t currently enjoying newsworthy growth. The winners are those firms that ‘get it’. The winners are those that know which clients, in which markets, they need to focus on, and do so. Firms that genuinely understand their clients and their markets. Firms that invest in the optimisation of their processes. Firms that understand profitability on a granular level and price accordingly. Firms, in short, that understand they are in business in the 21st century, and understand what it is they need to do to compete as effectively as they possibly can.

I’ve enjoyed working with firms who perhaps didn’t ‘get it’, but hopefully now do. There’s no doubt that some firms, by reason of service lines or geography, had an easier recession than others. Some of those, not perhaps having had the ‘burning platform’ to prompt change which so many experienced, may be starting behind the pack. But if a firm is prepared to look afresh at why it is in business, possibly by means of a facilitated strategy review, and to re-examine its target clients and markets, it could yet become one of the winners.