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Law Firm, Know Thyself

HBR Consulting’s roots in analyzing and advising law firms stretch back to the disco era, so when you get a chance to sit under the learning tree with HBR CEO Nicholas Quil, you take it. Over the course of the interview he graciously granted me, Quil shared his thoughts on overcoming the structural problems of law firms, how the industry can transition through the COVID-19 crisis, thriving in the coming decade, and more.

Ways Law Firms Are Structured To Fail

I’ve often argued in this space that the legal industry suffers from a lack of entrepreneurial thinking. When I asked Quil about that concept, he was quick to defend us. “Lawyers do have, I think, pretty entrepreneurial minds, pretty creative minds. It’s just how you lead an organization and create a culture that is aligned to addressing those that I think is challenging.”

In Quil’s view, what law firms really suffer from in comparison with other market sectors is a lack of incentive to reinvest the firm’s profits back into growing the business. He chalks this up to some basic structural impediments inherent in most firms.

First, lawyers and legal staff command a lot of salary. Quil sees firms as engaged in a “war for talent” that generally ensures those salaries keep creeping higher every year. Individual attorneys have little incentive to cut their own salaries for the benefit of the larger entity. Firms that try to make those cuts may see their best talents and biggest clients walk out the door to another firm that will keep that comp high. All that money spent on payroll leaves little for structural improvements.

All of this is exacerbated by the dominant law firm financial model, where the partnership cashes out at year’s end. Since there’s no inherent mechanism for retaining earnings and building up a war chest, many firms struggle to even think about investing long-term in the firm’s growth, much less systematically build out their infrastructure over a series of years.

This all means that law firm leaders hoping to push for reinvestment in the firm itself don’t have many sticks, and so they need to get creative on using carrots. “I think the challenge for a law firm leader is how do you shape a culture, how do you create a vision and a consistency in communication and alignment, that brings people together on the journey of what you’re trying to do in growing your law firm.” It takes conscious effort and buy-in from the partnership to grow an entity, but the firms that can pull it off will be far better off to grow and expand than those that simply ride their current momentum and drain the coffers every year.

Quil On COVID-19

Most of the issues being raised by the COVID-19 crisis are, in Quil’s view, nothing new. “The pandemic has just accelerated some known issues or opportunities that have persisted for a long time.”

That said, the opportunity for change is real. The shared burdens and tragedies of this crisis are creating bonds and culture that otherwise wouldn’t likely exist among law firm members. For example, whereas most law firm leaders would traditionally communicate with their firms from a podium wearing full business formal, the shift to more casual, informal Zoom meetings (with kids and pets occasionally breaking into frame) allows those same leaders to come to their teams from “a much more authentic place.”

Quil also senses that many leaders in the industry are seeing COVID-19 as not just a crisis, but an opportunity. “We’re starting to see a shift toward asking ‘How do we make some strategic transformational bets in this period of time?’ And I think people who acknowledge that you can make tough decisions but implement them compassionately given what’s going on in the world around us, that can be an exponential differentiator versus a mindset of, ‘Let us get through this period, and then we’ll tackle all these things on the other side.’”

As for how to handle those risks, Quil sees financial discipline as key. “Not having a real enough assessment of where we are in this journey” is the biggest mistake Quil sees firms making right now. “Firms right now are in an interesting spot [compared to] the projections that they modeled in spring; they fared better than those. Not as good as the original plan, but I think generally speaking firms are in a better spot than they anticipated.” Quil continued, “A lot can happen in the last three to four months of the year. You can’t overestimate the importance of continuing to have strong financial discipline.” Rather than simply distributing unexpected cash to the partners, Quil suggested that investing in infrastructure or bringing aboard new talent are likely stronger long-term plays to keep firms primed to compete and grow.

Lean Into Who You Are

Quil added that he sees many firms as suffering from a lack of internal identity. “There’s probably not enough true reflection across the industry of what business or what segment of the market we are in as a law firm, and doubling down on what makes [a firm] unique. I think there are firms who are doing that, and I think they are excelling. They’re probably less impacted by competition and price sensitivity to their clients because their clients value them for who they are; they’re not trying to be all things to all people.”

Quil advises firm leaders to spend this time figuring out who they are as a firm and using that knowledge to double down on their key clients. “What can you do to go engage proactively with a certain segment of your client base to say ‘Here’s some observations around what’s happening in the portfolio of work that we’ve done with you historically, here’s some observations on what’s happening from a regulatory standpoint in the industry, and here’s how we think we should be thinking more proactively with you?’”

Most firms struggle to engage in that kind of self-reflection, whether due to a lack of training in such analysis or the more general pressures of the billable hour model to always be moving on to the next chargeable project. “It’s tough to do that in a law firm environment just given the way information flows as well as the metrics that are measured,” Quil said. Spending that non-billable time on self-examination can be worth it, however, for firms that find ways to unlock new value for their clients. In an ever-more-competitive market, clients appreciate the firms that appreciate their budgets and outcomes and are visibly working on improving both.

Tomorrow’s Firms Today

Lastly, I asked Quil to peer into his crystal ball and tell me what the legal industry looks like in 10 years. Quil said that he sees the current flexibility of the COVID-19 quarantine remaining largely in place, even after a vaccine is found. Firms that continue to offer that flexibility and that tailor their cultures around it, will be best situated to continue waging Quil’s war for talent.

Quil also spoke of the market continuing to segment away from all-in-one firms and more toward specific firms for specific needs. “It’s not a great analogy, but think about the automobile industry. They’re all cars, right? But what’s the purpose of the vehicle you need? Is it a heavy-duty pickup truck? Is it a sedan? An SUV? A sports car?” Quil anticipates the legal service market moving in the same direction, with law firms filling niches depending on the sophistication and cost needs of their clients, with ALSPs and the Big Four nipping at our heels all the way.

The moral of the story for today’s law firm leadership is to focus on understanding what niche their firm fills and expanding into that identity. “The opportunity for law firms is in understanding who you are as a law firm, understanding what makes you unique. It’s not what you believe makes you’re unique but what your clients believe makes you unique and really leaning into that. Don’t get distracted with a homogeneous narrative on what the legal industry is doing. Run your own playbook.”