Build a culture of investment in your law firm partnership

Law firms fail to modernize because their owners won't invest present earnings to finance future growth. If your law firm can change that, then the sky's the limit.

Speaking at a law firm retreat recently, I described (among other things) the exponential increase in law firm productivity that Generative AI and other technologies are poised to produce. Simply put, it will take much less lawyer time and effort to carry out many legal tasks in future than it did in the past.

To prepare for this, I said, law firms should start developing pricing mechanisms based on outcomes, value, relationships, or some quality other than the traditional input measure of lawyer hours.

While we were all lining up for the lunch break afterwards, a senior partner approached me and asked how, exactly, a firm could develop such a pricing mechanism. In the three minutes it took us to pile salad greens on our plates, I outlined a strategy that could be roughly summarized as:

• Identify the clients and practice areas most amenable to a fixed-price pilot,

• Ascertain standard elements and internal costs in these areas,

• Figure out what tasks you can accelerate and automate with technology,

• Offer a fixed fee lower than the client’s current average bill, and

• Continuously enhance your productivity and continuously increase your profits.

The partner listened attentively as I ran through this buffet-line blueprint. When I finished, he slowly shook his head and said, “That will be a very hard sell to the partners.”

That was a fascinating and insightful response. Fascinating, because he didn’t say, “That’s a terrible plan, your approach is stupid,” or “No client would do that, how dumb are you,” either of which would have been perfectly acceptable. He didn’t engage on the merits at all.

He simply gauged the proposal against how he thought his partners would react, and I’m sure he was right. They’d have to dig through reams of financial data, change how they carry out tasks they’ve been performing for decades, and worst of all, open a conversation with their most valued clients about money. It’d be a non-starter across the board.

And it was insightful, because this sentiment — “That will be a very hard sell to the partners” — strikingly illuminates why law firms rarely try to modernize and even more rarely succeed.

This is as close as I can come to an axiomatic statement about law firms: Any proposal that some equity partners believe represents more than a nominal risk to revenue, disruption to procedure, or short-term decrease in profit will not be approved. And there are no effective proposals to modernize a law firm that will not require one or more of these things. This principle is so ironclad that the proposal need not even be formally made — we already know the outcome.

Why does this happen? And how can we change it? To answer these questions, we need to understand what equity partners think that their role includes, and what they think it does not.

Lawyers seek equity partnership in their law firms for three reasons:

1. It bestows the highest degree of professional status.

2. It confers the greatest amount of autonomy and security.

3. It grants a share in the overall profits of the firm.

As a rule, lawyers do not become equity partners because they really want to run a business. Although they’re buying a very expensive ownership stake in the firm, they don’t actually want to own the firm, in the sense of seizing the opportunity and fulfilling the responsibility to maintain and grow an enterprise. Their interest in the firm’s present management and future development usually extends only as far as these aspects of the firm support, or at least don’t interfere with, their daily routine and their annual draw.

Most partners don’t think of themselves as running a law firm, as in, operating a business. They’re more likely to think of themselves as presiding over the firm, like they’re the board of a foundation that maintains an historic building. From their perspective, the law firm is a well-oiled machine that runs on client problems and lawyer hours, and all it needs to succeed is a steady supply of both. Doing anything differently is cause for concern: “Why are you changing this? Why are we spending money on this new (technology / marketing campaign / process improvement / office location)?”

It’s important to understand: Their problem isn’t with the new idea, necessarily. It’s that you’re spending their money on something that doesn’t obviously benefit them right now and can’t be guaranteed to benefit them later. Because most partners lack entrepreneurial experience, they don’t see that a business requires investment. The concept of spending money today to expand, improve, and compete better tomorrow feels like unnecessary risk rather than growth-focused expenditure.

Law firms fail to modernize because their owners are not prepared to reduce their present earnings in order to finance the firm’s future growth — which is all that “investment” really means. Partners haven’t learned to balance their role as profit-earners with their role as enterprise-builders. That’s why so many new ideas, such as piloting a fixed-pricing experiment in the face of transformative technology, never leave the starting gate.

This places law firms in a vulnerable competitive position — or it would, if other law firms operated any differently. Across the legal sector, law firms conduct almost no research and development, maintain antiquated production models, and rarely attempt to truly differentiate their offerings in the market. Most importantly, they do not reinvest profits back into the business for future growth. They re-invest profits into a partner’s second home or an offshore hedge fund.

How do you overcome this? If I had an easy answer to that question, I’d be writing this newsletter from an island paradise somewhere. It is, in many ways, the problem of law firm partnerships, and it won’t be solved quickly. But with enough leadership time, effort, and patience, you can accomplish that rarest of feats: You can develop an investment culture within your partnership. You might approach it like this:

• Build the case for investment. Before you approach a single partner, assemble an airtight argument for why the firm must constantly pursue smart growth: increasing market share, improving profit margins, creating novel services, enhancing reputation. Like sharks that drown if they stop swimming, legal businesses will sputter and stall out unless they’re striving to surpass and stay ahead of the competition.

• Set a target for investment. A guesstimate of corporate R&D investment rates is about 3.5% of annual revenues, a figure that varies widely among industries. I think you’d be lucky to get partners to plow even 1% of their profits back into the firm, but start wherever you can. Do the math to figure out how much money your rate would generate, what you could do with it, and how to sell the benefits that would eventually accrue.

• Reframe the role of the partner. You must help the partners broaden their vision of their function and responsibility. They think of themselves as profit-sharing professional experts, which is correct but incomplete. Prepare a pitch that the role of the truly responsible law firm owner includes returning a fraction of annual profits to sustain and build the firm for long-term success. It’s their legacy.

• Identify your respected champions. In every partnership, a few great partners have earned enormous respect from their peers. Within that group, there’s an even smaller few who would prove amenable to this vision. They are your foundation. Commission them at a fancy offsite retreat. Give them a name like The Legacy Circle, or something less lame. Send them out to evangelize their fellow owners in the gospel of investment.

• Prioritize the younger partners. The owners most highly motivated to invest in the firm’s long-term future are those who can see themselves here in the long term. If an up-and-coming equity partner is willing to commit profits today to ensure greater profits in future, that sends a powerful signal up and down the partnership track. Try to ensure at least a couple of your champions are Gen-X or even Millennial.

• Envision this as a marketing effort. You will never force partners to reinvest profits in the firm. They will only endorse an investment movement if they want to, and they’ll only want to if they believe it will enhance their status internally and externally. Strive to always add more (and more influential) partners to those supporting the reinvestment agenda. Increase the gravitational pull of this group. Make it harder to stay out than to join.

What I’m describing here would be a major change in the culture of your partnership, one that would eventually change the culture of your whole firm. As I wrote last time out, culture descends from a firm’s core values, as lived out every day by the firm’s leaders. If your firm’s owners are prepared to adopt “investment for future prosperity” as a core value, and to literally put their money on the line to prove they mean it, then an extraordinary opportunity will start to unfold.

Law firms that aren’t forced to undertake the partner “hard sell” to modernize have everything going for them. The economics of innovation work. The forces bringing about change are undeniable. The advantages available to modernizers (including an almost deserted competitive field) are incredibly attractive. The number of experts who’d fall over each other to assist is legion.   

If you can actually develop and sustain a culture of investment within your law firm’s partnership, then I can confidently state that you won’t have to worry about winning the race to the future legal market. You’ll have already won it.