Good Strategies Gone Bad

I used to think that there was no such thing as a bad strategy – just bad execution.  I thought that any strategy was better than no strategy and that a law firm with a plan of action couldn’t possibly be bad.  I’m pretty sure I was wrong.

Here’s the problem.  A strategy is a means of achieving an objective, which, of course, requires that a firm first have an objective.  The objective doesn’t have to be all that complicated; it can be as simple as increasing profitability or developing a specific reputation.  Unfortunately, many law firms (bordering on “most” law firms) never really come to a consensus about the objective.  Some partners want to make a lot of money, some want to have more time with their families.  There are all sorts of objectives and, often, large segments of the partnership aren’t quite sure what they want.  So, as a result, firms’ strategies are cobbled together by copying what other firms are doing or simply by writing down what the firms themselves were already doing.

So, the resulting strategies end up either inappropriate for the firms’ situations or impossible to execute.  Not surprisingly, we seem to see the same bad strategies over and over again in firm after firm.  So, here are the five most common faulty strategies that we see law firms adopting and what typically makes them bad:

1.  Lateral Hiring. Among the most common strategies by U.S. firms is to bring in work to fill the empty plates of lawyers through lateral hiring of partners with business.  Now, it is pretty widely recognized that lateral hiring is at best a crapshoot.  For a lateral to bring along all of his or her clients, generate enough work to fill empty plates, be a cultural fit with the firm while being a good partnership citizen is close to a miracle.  And the risks are huge when one considers the firm’s investment in negative cash flow while the lateral fills his or her pipeline, concerns about reputational impact, the investment of management and marketing resources and the wasted political capital with the firm’s partners if the lateral doesn’t work out.  Load in compensation premiums paid to attract the lateral, headhunter fees, tag along associates and secretaries, the increased compensation demands by those people the partner’s work is going to hopefully support and assume all the risks succeed.  Then factor in the risk of losing partners to other firms because they are disgruntled over the compensation paid to the lateral.  To the extent there is revenue growth it is unlikely to yield profitability to justify the overall risk.

Firms like lateral hiring because it is easier for the partners than attempting to organically develop business.  Now, lateral recruiting does make a lot of sense to fill specific needs or as crimes of opportunity as they become available.  And it especially makes sense when used to bring in groups or small firms.  But one at a time laterals as a significant revenue growth strategy is only a notch above buying lottery tickets.

2.  Emerging Practices. Among the most common questions asked by strategic planning committees is, “What is the next big practice”?  Firms look at emerging practices such as Homeland Security law, “Green” law and Photonic Transfer law, wishing they had gotten in on the ground floor.  There is certainly a first mover advantage if a firm is capable of selecting the practice accurately, but, like any speculative investment, only a small portion of new practices ever mature into a revenue stream (remember Y2K law).  And, even if a firm guesses correctly, while emerging practices enjoy high billing rates, there is typically a very small initial demand.  For most firms, stumbling into a cutting edge practice is the result of having the right experience and the correct client at the right time, not a matter of strategy.

3.  Plaintiff Contingent Fee Practices. Enamored by huge fees going to class action lawyers, law firm strategies are increasingly embracing the dedication of a portion of their practice to contingent fee work – often as much as ten percent of total billable hours.  Successful plaintiffs’ lawyers depend as much on the law of large numbers as they do on good lawyering and careful case selection.  It is a function of getting to settlement with the minimum investment of time and having a sufficient number of cases so that the value of verdicts and settlements covers the cost of losses.  Using contingent fee cases to fill the empty plates of litigators is an extremely high risk strategy, especially since the tactics and skills involved in being a successful plaintiffs’ lawyer are almost the antithesis of those of a good defense lawyer.

4.  Branch Offices. Targeted locations for future branch offices are another frequent aspect of law firm strategic plans.  But when revenue potential is balanced against the margin hit they cause, new offices make sense only in certain unique circumstances.  There are certainly legitimate strategies that justify branch offices, especially when they involve regulatory and government relations practices requiring a Washington or state capital presence, or securities practices wanting to have an office in a capital market to support their clients’ needs.  But branches in locations where the local billing rates are lower than the firm’s other offices, or where specific work can’t be identified to cover the office’s cost, are an absolute no-no.

5.  Compensation System Adjustments. Many law firm strategic plans focus on perceived problems with their partner compensation system.  Reward systems are important to keep people from leaving the law firm.  But it is almost impossible to incentivize lawyers to do what they don’t naturally want to do with compensation – your firm simply doesn’t have enough money.  Focus on giving lawyers the support they need to develop revenues to expand the size of the pie.   The result will yield more money in everyone’s pockets than horsing around with the size of each partner’s slice.  You don’t win wars or get soldiers to charge the enemy by focusing on Lieutenants’ pay.

The bottom line is that bad strategies result from a lack of clear objectives.  Successful strategies are built on law firms having clear consensus on what they are attempting to achieve.  Whether it is all about profitability, having a fulfilling practice or sustaining a culture of personal freedom and family time, it makes no sense to debate what highway to take if you have not agreed on the destination.