Perhaps the single most challenging question to answer cogently—from both the economic and intellectual perspectives—is what can law firm managers actually do to increase profitability?   You imagine rightly, dear reader, that I have sacrificed more grey cells to attempting to wrestle this thorny issue to the ground than have many people, but it is a large topic.  This will be the first of what could well be many posts on this Ur-Question.

Let's begin with the basics.

Most people—certainly including executives with significant ownership of a private corporation or equity partners in law firms—would probably view a high level of sustainable financial performance as the metric of all metrics, but my view is that that observation is: (a) tautological; (b) remarkably unoriginal; and most important, (c) quite unenlightening as a guide to action in that no one has yet figured out how to directly improve financial performance in a world of global competition.  I view “strong financial performance” as akin to happiness in one’s personal life: It cannot be pursued in and of itself (with apologies to the Founding Fathers), but rather it’s the distilled end result or expression of everything else one has been doing.

For anyone who aspires to being an astute and effective manager, this poses a problem. The most important unitary measure of one’s success cannot be directly controlled.

Of course I’m not saying law firm managers can’t or shouldn’t do things like:

• prudently control costs,
• try to make smart hires,
• quickly correct bad hires,
• invest in professional development for associates and partners alike,
• launch targeted, credible, distinctive marketing campaigns,
• invest in or retrench from practice areas or even cities as conditions evolve,
• employ robust and appropriate information technology,
• astutely analyze M&A opportunities,
• and so forth.

The point is that these toolkits are available to everyone and we still have a long history of impressively profitable firms alongside the Brobeck's and Finley-Kumble's.

So what are the winners doing right and the losers doing wrong—specifically, what drives sustainable performance for a very high-end professional service firm?

I’ve adapted this diagram from David Maister*.  It’s intended to address the question of what managers can have an impact on that will in turn affect profitability.

*David Maister, Practice What You Preach (The Free Press, New York: 2001), Figure 7.1, p. 79 (correlation and causation coefficients omitted, diagram inverted).

This diagram strikes me as both intellectually and emotionally astute. Intellectually correct because Maister derived it from real-world empirical data and structural equation modeling, and emotionally correct simply because it has the indisputable ring of truth.  Of course a long-term orientation, respect, professional development, and (perceived to be) fair compensation are the foundation on which all else rests, and of course lawyer and employee satisfaction drives quality delivered to clients which determines profitability.

In Built to Last (HarperBusiness, New York: 1997), James Collins and Jerry Porras make a similar, in some ways stronger point (p. 8, emphasis supplied): “Contrary to business school doctrine, ‘maximizing shareholder wealth’ or ‘profit maximization’ has not been the dominant driving force or primary objective through the history of the visionary companies. Visionary companies pursue a cluster of objectives, of which making money is only one—and not necessarily the primary one. Yes, they seek profits, but they’re equally guided by a core ideology—core values and sense of purpose beyond just making money. Yet, paradoxically, the visionary companies make more money than the more purely profit-driven comparison companies.”

So what, precisely, am I saying here?  Merely this:  "Profitability," Holy Grail though it be, is not something even the world's most gifted management team can control.  (If we could directly control it, we could repeal Chapter 11 forthwith.)  In sophisticated, global, high-performance professional service firms, getting a direct grasp on it is even more elusive.  However, we can control the most important conditions and prerequisites conducive to profitability.

How do we control those prerequisites?  My candidate is:

Practice Group Management

Stay tuned.