Measuring and Managing Performance for Law Firms

EditEd by Edward bowEs

Measuring and M

anaging Performance for Law

Firms edited by Edw

ard Bowes

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By John Sterling, founding partner of Sterling Strategies, LLC

The balanced scorecard is a proven approach to strategy implementation and performance management. It has been in active use for well over a decade in manufacturing and service companies in developed econo-mies around the world.

Yet, a review of Kaplan and Norton’s key points would lead a thinking law firm manager to conclude that substantial barriers exist relative to applying the balanced scorecard in a law firm environment. Keep the following points in mind as this chapter examines the opportunities and challenges inherent in adopting the balanced scorecard in a law firm and/or a law firm practice group or department.

Application of the balanced scorecard assumes that the firm (or prac-tice group) has a well-articulated and understood vision and strategy. The balanced scorecard is an implementation-management tool, not a strategy-development tool. Commitment to using a balanced scorecard might alter the strategy development process in subtle ways, but it is not a substitute for having a logical and compelling strategy.

As developed and defined by Kaplan and Norton, the balanced score-card is intended for application at the strategic business unit (SBU) level – or in the context of a singularly focused middle market company. It assumes there is a common set of products, customers, and business processes – all focused towards the achievement of a common vision and strategy. That is an important point for law firm managers to remember, particularly in the context of attempting to use this tool at the firm level.

The balanced scorecard, as defined by Kaplan and Norton, is an inte-grated system for aligning objectives, action plans, and near-term metrics with an organization’s long term vision and strategy. It is designed to be a top down system that begins with the vision defined by senior manage-ment – cascading into the organization to align day-to-day priorities and measures with that vision.

Chapter 2: Applying the balanced scorecard

in a law firm environment – opportunities and challenges

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Chapter 2: Applying the balanced scorecard in a law firm environment – opportunities and challenges

The starting point for developing objectives, action plans, and meas-ures in this integrated system is the financial needs and expectations of shareholders. Thus, while the balanced scorecard reaches well beyond shareholder value and financial measures, it starts with those objectives. Further, it assumes that shareholders are primarily financial investors in the enterprise (a critical distinction when considering the ownership structure of law firms).

Finally, the balanced scorecard assumes important cultural charac-teristics exist in the organization adopting the system. That includes an assumption that people will actively engage in action planning that aligns their work with the overall strategic direction of the organization. Further, it is based on the assumption that people across the organiza-tion will embrace metrics (and the accountability that goes with those metrics) connecting their near-term performance to higher-level organ-izational objectives.

By their very nature, these points highlight some of the obvious chal-lenges law firm management will encounter in adopting the balanced scorecard. Those challenges will be examined in more depth in a subse-quent section of this chapter. Before turning to the challenges, however, the nature of the opportunity associated with effective balanced score-card adoption should be explored.

Nature of the opportunityBusiness research has demonstrated two very important conclusions regarding the balanced scorecard. First, organizations that adopt and utilize the balanced scorecard as an integrated system improve their own performance and out-perform organizations that do not use an inte-grated scorecard. Second, organizations that have adopted the balanced scorecard experience much higher levels of buy-in and understanding vis-à-vis the organization’s vision and strategy – they understand what it means to them on a day-to-day basis.

Law firms are late to the table with regard to adoption of the balanced scorecard – firms have tended to focus on elements of the scorecard and have not yet taken an integrated approach to the process.1 Yet, in considering the potential benefits of adopting an integrated approach, the nature of the opportunity becomes apparent. Those potential bene-fits include:

●● Development of clear linkages between the work of the firm and its practices, with high-level goals directed toward improved profit per partner;

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Measuring and Managing Performance for Law Firms

●● Dramatically improved implementation of firm-level and practice-level strategic plans;

●● Pointed improvement in performance associated with each dimension of the balanced scorecard, especially on behalf of clients and in the development of the capabilities of a firm’s people, but also in the development of other important capabilities (for example, the use and application of technology) and in business processes; and

●● Substantial improvement in practice group performance – where the integrated nature of the balanced scorecard can best be leveraged in the context of the common clientele, service offerings, skill base, and work processes that exist at the practice group level.

The nature of each of these potential benefits for law firms will be discussed in more depth in the sub-sections below.

Linkages to profit per partnerProfit per equity partner (PEP) has become the statistic that matters to lawyers – at least in the large and mid-size firms in the US and UK. The American Lawyer Am Law 200 statistics and Legal Week’s annual rank-ings of the top 50 UK firms focus intently on profit per partner. Profits had grown impressively prior to the global financial crisis.

This focus on PEP has become a central driver informing consolida-tion in the legal industry, as firms seek merger partners with comparable profitability. Likewise, this statistic strongly influences the movement of lateral partners (as well as the loyalty of some partners to their current law firms).

A real estate website (zillow.com) will provide estimated valuations for virtually any residential property in the US. When one types in an address, the result not only feeds back the valuation for that property, but also an aerial photo of the street in question – with valuations of all the other homes on the block as well. The PEP listings in Legal Week and The American Lawyer have a similar feel (i.e., one looks up the ranking of his or her own firm, but then sees everyone else’s at the same moment). The tendency to believe that the grass is greener somewhere else is quite tempting.

This heightened focus on a single financial statistic is tempered – at least in some quarters – by a reasonable macro level understanding of the other financial metrics that closely correlate to PEP. Most obviously, revenue per lawyer (RPL) or turnover per lawyer (TPL) closely track PEP. In addition, good law firm managers understand that other financial

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Chapter 2: Applying the balanced scorecard in a law firm environment – opportunities and challenges

levers drive PEP – including leverage (associate to partner ratios), realized billing rates, hours, or productivity of timekeepers, and other revenue drivers.

Yet, despite this understanding that other factors drive PEP, there is rarely an integrated view of how these financial drivers are linked to client perceptions of value; to business processes and approaches to the delivery of legal services; or to the development of human and technical capabilities. The balanced scorecard is expressly designed to create those linkages between highly visible financial metrics and the client, process, and human factors that drive financial performance.

So, if the shareholders/partners in a law firm want continued growth in PEP, balanced scorecards provide a reasonable path to achieving that growth. Given the reality that much of the growth in PEP was driven by rising billing rates and further, given the reality that in-house counsel are strongly asserting their objections to future rate increases, it would seem that new paths to profit growth will be needed in the future.

Effective implementationA long-standing management truism holds that even the most elegant strategies are doomed to failure if the ensuing implementation of that strategy is poor. The corollary to this truism is that mediocre plans often win in the marketplace as a result of strong implementation.

Over the past 25 years, law firm and practice group managers have placed increasing emphasis on strategic planning and strategic thinking. Law firms have come a long way since strategic planning first came into vogue as a buzzword and as a management practice in the 1980s. The breadth of managerial focus has grown, strategic thinking has improved, and the relative sophistication of strategic planning and the plans them-selves has increased.

However, even as the emphasis on strategy has grown and the sophistication of strategic thinking has improved, implementation has remained spotty.

Certainly, some firms and some practice groups are disciplined and well-focused – and they implement their strategic plans effectively. The majority, however, struggle to overcome organizational inertia, to build understanding beyond the management committee (or ad hoc strategic planning committee) and to maintain focus on high priority initiatives.

Law firm managers now widely acknowledge that strategy matters and having a clear strategic direction is vital. In that context, effective imple-mentation is the critical next step to successful strategic management.