Above and Beyond KM

We’d like to think that our advanced education protects us from the dangers of irrationality, but for too many of us that is a delusion. The reality is that unless you are keenly aware of how you make decisions, you may well find that your seemingly logical decisions are riddled with unconscious errors. As modern psychology is demonstrating, most individuals know surprisingly little about what happens in the space between our ears. Now, before you start protesting that you’re smarter than the average bear (and, therefore, fully capable of avoiding irrationality), consider how often you’ve observed irrational decision making on the part of others. It happens all the time.

It truly is easier to see the speck in another person’s eye than the log in your own eye.

If individual decision making is rife with irrationality, what happens when a group of people make decisions on behalf of an organization? Unless they are very careful, they are liable to achieve collectively an even greater degree of irrationality than an individual acting alone.

So what’s the cure? I’m so glad you asked.

Come to the ILTA conference on Thursday, August 30, at 3:30pm (in Maryland B) to hear an entertaining and thought-provoking discussion about common cognitive traps into which people tend to fall and learn how we can move our decision making process out of the realm of the unconscious and sometimes irrational to the more rigorous, deliberate and rational. Along the way, we’ll discuss how data (whether it be Big Data or little data) can help light the path to more rational decision making.

The name of this session is “Overcoming Irrationality: Improve Decision-Making and Client Service with Strategic Uses of Data” [Hashtag: #INFO6]. The panelists for this session are the name partners of that “preeminent” law firm: Abraham Friedmann Mills & Rovner LLP. Those of you who have attended recent ILTA conferences will know that this will be the third year in which this firm has held a partners meeting in conjunction with the ILTA conference. In prior years, these partners have discussed the implications of two radically different law firm business models (i.e., law factory vs. bet-the-farm practices) and how to future-proof your law firm. This year they will get to heart of why so many law firm organizational decisions are fundamentally irrational. They also plan to give examples of how other industries have used data to make more rational decisions.

As in prior years, we expect a lively discussion with the audience. So come prepared to jettison your preconceptions and jump into the conversation.

If Lisa J. Damon has a bridge to sell, I’m buying it.  And, it’s not because I’m all that gullible.  However, over the course of one hour she changed me from an admitted Lean Six Sigma skeptic into a person willing to consider the possibilities of that approach for every law firm. I had previously heard several presentations on the law firm miracle that is Seyfarth Lean Six Sigma, but it was only when Ms. Damon and Seyfarth’s Chief Information Officer, David Hambourger, explained how they and their colleagues are beginning to change the way the lawyers of their firm actually practice law that I began to appreciate the scope of their accomplishment.

First a little background, Six Sigma is a business technique developed by Motorola to quickly identify and fix defects in its manufacturing processes.  Lean is a business technique derived from the Toyota Production System to redesign a manufacturing process to make it more balanced and consistent, thereby removing waste from the system.  (Another way of looking at this is to eliminate anything that does not create value for the end customer.)

At first blush, neither approach to manufacturing would have much obvious application to the work of any lawyer who considers herself or himself to be an artiste. Even in a so-called “law factory,” I’m not sure many would consider lawyers to be in the manufacturing business.   However, Seyfarth’s leadership came to the conclusion that elements of their practice needed to be handled with the same discipline Motorola and Toyota brought to manufacturing.

What drove them to this conclusion? Economics.  As their clients started requesting more alternative fee arrangements, Seyfarth’s leadership correctly concluded that the firm would take a loss unless it could find a way to reduce its own costs of production. So six years ago they began with the following goals:

• improve predictability of fees
• lower client costs
• increase transparency
• allow clients to collaborate
• provide clients with real-time access to fees and the management of a matter

After looking at pure Six Sigma and Lean, and talking to clients who had used these approaches, Seyfarth settled on a modified Lean Six Sigma approach tailored for legal services.  To begin with, they eliminated the jargon, some of the statistical tools and the heavy-duty math. (Ms. Damon acknowledges that the focus on numbers demanded by Six Sigma would have been a major turn-off for every lawyer in the firm who went to law school just to avoid another math class.)  They also built in some strategy, project management and change management.  Along with this, they hired client-facing professional project managers and created a project management office. The other key element is a commitment to continuous, sustained improvement (kaizen) in the quality of the services they deliver.

To make these wholesale changes in the way they practiced law, the lawyers of Seyfarth also had to make wholesale changes in the way they carried out the business of law:

• They replaced their professional development and promotion model with a more dynamic model based on advancement by competency and achievement rather than tenure.
• They replaced their compensation model so that it rewarded results achieved rather than time spent.
  • Seyfarth has a scorecard system based on the ACC value index. They survey clients and then reflect that response in partner compensation.
• They moved from merely automating manual processes to the creative, strategic use of knowledge, expertise and operational information.
• They changed their service model from bill/pay as you go to one with a more strategic focus, with defined outcomes based on client business goals.

Lisa Damon is honest about the work involved in making such extensive changes within her firm.  While they don’t yet have 100% adoption, she says they make a new convert every day. Along the way, they take every opportunity to improve their practice and their business. As the inimitable Ms. Damon put it, “Seyfarth loves to process map. We create process maps for anything that moves within the firm.”  In addition, they approach this in a way that flattens the hierarchy within the firm; everyone with expertise is brought into the effort — whether they are professional project managers, paralegals, secretaries or lawyers.  In the beginning, they create their process maps with paper and pen. Later, they record their process maps using a lawyer-friendly tool called Task Map (an overlay to Visio). Once the process maps are created, they are linked to key knowledge management tools such as case analysis, checklists and samples. Better still, each process map can be tailored to the needs of individual clients or matters.

On the IT and knowledge management side, Dave Hambourger reports that they started by implementing enterprise search.  They also have built extranets that create new business for the firm.  (They are not just inert document repositories).  Another important element is the way they have deployed SharePoint to deliver “memorable value” to clients.  This includes matter management tools and financial dashboards.  The matter management tools show both the percentage of the project completed as well as the percentage of the budget spent. Since the dashboards are visible to the clients, the lawyers of the firm have had to learn the discipline of entering their time daily.

Lisa Damon will be the first to tell you that none of this has been easy or cheap.  However, the sheer joy with which she tells the Seyfarth Success Story suggests that the undertaking has been well worth the effort. At the end of the day, sustaining a success story like this requires top-level business support, careful project selection, project discipline, and a focus on continuous improvement.  Seyfarth shows that it can be done.  Is your firm willing to try?

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If you’d like to learn more about SeyfarthLean, I’d encourage you to read (or listen to) the following:

• Law and Order (iSix Sigma Magazine) — see also the Seyfarth press release on this article
• Lean Six Sigma Tools, courtesy of Seyfarth Shaw’s Lisa Damon (Rees Morrison)
• Making it Lean (ABA Journal)
• Raising the Bar: How Seyfarth Shaw Provides Efficient Delivery of Legal Services Through Lean Six Sigma — and see also the Seyfarth press release on this podcast
• SeyfarthLean: A Commitment to Deliver Quality and Measurable Results (Seyfarth)
• SeyfarthLean Background (Seyfarth)
• Value Practice: Use of Tailored Six Sigma Methodologies at Seyfarth Shaw (ACC)

If you’re in law firm management, you’ve probably been feeling a bit like Ebeneezer Scrooge staring at an unhappy future as several bloggers** recently painted a relentlessly challenging picture of the law firm of the future.  (In Charles Dickens’ A Chrismas Carol, Scrooge’s deceased partner, Jacob Marley, warns him in a dream that he is headed for a dismal fate if he does not pay attention to the message of the Ghost of Christmas Past, the Ghost of Christmas Present and the Ghost of Christmas Yet to Come.) Over the course of the last week, Toby Brown, Ron Friedmann, Jordan Furlong, Steven Levy, Bruce MacEwen, John Wallbillich and I have written about the growing pressures on law firms to refine their business models and business practices so that they can flourish in the new law firm economy.  Toby Brown describes that new law firm economy as one in which there are three tiers of firms:

• Tier 1 — high stakes matters; 15-20% of the market and declining
• Tier 2 — mid-level stakes; 50-60% of the market and growing
• Tier 3 — nuisance matters; 20-25% of the market and relatively stable

While every lawyer likes to think of their firm as a top-tier firm, chances are that very few firms will actually be able to survive and thrive in Tier 1.  John Wallbillich suggests that about 40 global firms will inhabit that top tier.  The Lawyer.com points to their transatlantic elite “Sweet Sixteen.” Even if we don’t know the exact number of firms in Tier 1, we know that it will be a number that is substantially smaller than the AmLaw 200.  And, we know that getting into and staying in that group will take considerable effort.  These firms will need to attract and keep legal stars.  These firms will need to support those star lawyers with law firm machinery that can deliver excellent services at a defensible price.  In this regard, any firm that aspires to remain in Tier 1 needs honesty and discipline.  Where does the honesty come into play? Each top tier firm has to be brutally honest with itself — understanding its strengths and weaknesses, acknowledging that while it may charge top dollar for its work, not all of its work is necessarily complicated, innovative or high risk.  Some of it is routine, repeatable and could benefit from a more systematic approach.

One way to think about the array of work within a firm is to plot it against John Wallbillich’s Legal Fee Pyramid (PDF).  In a high-stakes matter, the judgment and experience of the senior legal expert on the team may be worth more than $599 per hour (in some firms more than $1000 per hour). But what about the work of less experienced personnel on the due diligence effort? Or the eDiscovery work? Or drafting relatively routine documents? Or planning a closing? For each task or phase of a matter that falls low on the pyramid, a firm must carefully examine the workflow to ensure that it is as streamlined and economical as possible. Done well, this means imposing law factory discipline on those parts of the practice that are most susceptible to client fee pressures. There is no substitute for a clear-eyed honest effort in this undertaking.

Why? Isn’t the whole point of being a Tier 1 firm that you’re free of fee pressure? Not exactly.  Even Tier 1 clients want to prevent runaway legal spending.  And, as I heard at a recent conference, there is growing pressure on Tier 1 firms to curtail spending on litigation matters.  Surely non-litigation matters are not far behind.  In fairness, while the conference participants might grouse about the highest billing rates, they did not dispute the value provided by the most experienced lawyers in Tier 1 firms. Rather, they were focused on ensuring that the work done by the less experienced or less expensive people in the Tier 1 firm was necessary, focused and efficient.

At the end of the day, even Tier 1 firms are not immune from client concerns about legal spending.  Those client concerns may get expressed in a variety of ways such as a request for a discount, an unwillingness to pay for certain “overhead” expenses or a decision to move eDiscovery in-house or off-shore.  Smart Tier 1 firms intent on not only surviving but thriving will undertake a close self-examination to ensure they understand how they work before those client concerns about spending are expressed.  Otherwise, those firms will be looking at involuntary discounts, lower realization rates, and growing competition for the spots on a client’s shrinking legal panel — all of which add up to diminished partner profits.

All of this calls for more disciplined firm management.  Gone are the days when a firm’s one sentence billing statement (i.e., “For services rendered….”) cloaked a variety of work and expenses.  Just as clients are demanding more transparency on the bills, firms should be insisting on more internal transparency.  Until a firm truly knows itself, it will never be able to explain and fully defend its value proposition to its clients.

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** Here are links to various posts on the Law Factory vs Bet the Farm (or Bet the Company) Firm Debate to date:

• Apple Meets the Law Factory
• “Bet the Farm” versus “Law Factory”: Which One Works?
• Fourth in Our Series on Strategy: Tier 1, Tier 2, Tier 3
• Law Factory, Education Factory
• Law Firm Investment Portfolios
• Legal Billing Rates: The Next Wave 2
• Legal  Project Management and the Law Factory
• Tier 1: Know Thyself
• The Law Factory Debate: Another Perspective
• The Stratified Legal Market and its Implications

[Photo Credit: Jake Bouma]

Every good conversation invites participation, and I’ve found it impossible to resist jumping into the very interesting conversation Toby Brown and Ron Friedmann have begun online regarding possible business models for large law firms.  The genesis of the conversation was a session at the 2010 International Legal Technology Association Conference in which Ron Friedmann, Gerard Neiditsch, Jeffrey Rovner and I proposed two extreme law firm business models:  “bet the farm” practices and “law factory” practices.  (You can find our slides, as well as links to some discussion summaries, in  Ron’s blog post regarding the ILTA session.)  While we limited our discussion to the purest form, where a firm focuses on one business model or the other, real life isn’t quite so tidy.  In fact, law firms may reluctantly discover that they need to support examples of both business models simultaneously.  But what’s the best way to handle this? Toby draws inspiration from large banks, while Ron analyzes the example of large hotel chains.  In both cases, they show how it is possible for an organization to offer a variety of services at different price points without damaging that organization’s brand.  In so doing, Ron and Toby challenge a large law firm concern that moving away from marquee (bet the farm, high-touch) legal practices will cause such confusion in the public’s mind that the firm’s brand will suffer.

While both the banking and hotel examples have much to commend them, I have a smaller, more personal example in mind intended to help law firms understand that they may no longer have much choice regarding these business models.  What if law firm leaders were to consider their firm’s practices in the same way any prudent person considers the investments in their retirement savings account? For example, one golden rule of investing is to diversify your investments to achieve the correct balance of growth and protection.  Consequently, it won’t be appropriate for most investors to invest solely in high-risk high-return targets.  Typically, investors are advised to put some portion of their money in fixed income investments or money market accounts.  While these investments may provide lower rates of return, they also tend to preserve the monies invested.

Now what happens if law firms were to treat each practice area as a type of investment.  For example, a mergers & acquisitions practice might be likened to a higher risk investment that provides great returns at the top of the business cycle, but may not perform so well in an economic downturn.  By contrast, a bankruptcy practice theoretically should provide better returns during a downturn, as should any practice (such as project and infrastructure finance) that depends on governmental stimulus funding.  In each legal market, the mix of high-risk and high-security will differ depending on local conditions.  Of course, things become more interesting (and undoubtedly more complicated) when a firm spans many legal markets.  Achieving the correct balance between risk and security across geographic boundaries requires even more insightful investing.

Another way of thinking about various investment opportunities for law firms is to compare “bet the farm” (or “bet the company”) practices with “law factory” practices.  Ron Friedmann has written extensively about these contrasting business models for law practices.  In brief, a bet the farm matter tends to be relatively rare and high risk, where the client is more willing to pay what it takes to get the right result.  In these practices, there may be less fee pressure and fewer opportunities for routinized (and cost-controlled) work.  By contrast, the law factory practice is high volume, low margin.  These practices operate under tremendous fee pressure and, therefore, put a premium on producing work in a reliable, repeatable fashion at a competitive price.  To achieve this goal, they tend to rely heavily on efficient business process, standard form documents, automated document assembly, expertise systems, and lower cost professionals.

Taking the investment portfolio approach suggests that a law firm should seriously consider “hedging” each of its bet the farm practices by investing in some practices that thrive in economic downturns as well as some law factory practices that produce steady results despite fluctuations in the state of the economy.  Given the pricing pressures on these practices (e.g., court or governmental oversight of legal fees or a well-established market that prices legal services efficiently), these hedging practices need special attention from law firm leadership. This means focusing on making these hedging practices super-efficient and properly packaged and priced for the relevant market.  It may mean making additional investment in practice support lawyers, automated processes and the kinds of rigorous business performance standards that we are told apply to the best manufacturing facilities.

While the wisdom of a well-balanced, diversified investment portfolio is self-evident, this approach is not entirely without its challenges.  For example, since the bet the farm practices operate under some different constraints from that of law factory practices, law firm management will have to be careful to calibrate firm support services and infrastructure investments so that they are appropriate for each type of practice.  Further, how do you handle the potential for income disparity and differing levels of respect for the lawyers in each practice?  To be fair these challenges are not entirely new.  Even a firm that focuses entirely on bet the farm work may accord different levels of  compensation and respect to the rainmakers versus the service partners.

While large law firms may be comfortable with the notion of building practices areas that thrive at different points in the business cycle, they may have a tougher time accepting the idea of off-setting their high risk bet the farm practices with some lower risk law factory practices.  Then, they may have an initial struggle as they realize that their traditional bet the farm approach to work will not yield the intended economic results when applied to law factory work.  The resulting self-examination and re-engineering will not be easy, but is critical for success.  Firms that accomplish this may well find that the efficiencies forced on them by the law factory business model have a salutary effect on the parts of their bet the farm practice that are relatively repeatable.

At the end of the day, the key is to focus on a well-balanced array of practices that are designed for optimal results under the business model that governs them.  Unfortunately, although we’ve all heard the advice to diversify and re-balance our portfolios, there will always be those investors who forego diversification and decide to stake their lives on a “sure thing.” Let’s hope your law firm isn’t that type of investor.

[Photo Credit: th.omas]