Internal competition is limiting law firm growth
Early August, at the time when most of Europe enjoyed the summer holiday, I have been to Shanghai China to work with the managing partners and board members of China’s leading law firms. Law firm leaders had flown in from all parts of the country: Beijing, Shenzhen, Tianjin, Guangzhou and other cities to attend my lectures. I feel truly privileged having had the opportunity to work with all these great lawyers. Having many inspiring conversations, I learn form them as they learn from me.
The legal sector in China is relatively young. The first business law firms were only founded in the 1990-ties, so most firms are less than 25 years old. The pace in which China’s legal industry has developed is incredible. Today the level of professionalism is on par with most of the western countries, perhaps with exception of the main business centers such as New York and London. An amazing achievement over such short period of time.
The operating model of most law firms in China is based on raw and extreme ‘eat what you kill’. Typically, partners have their own P&L and have to pay each other a fee of around 20% in case of a referral from within the firm. Only a handful of law firms operates more or less as an integrated firm. Personally, I am not a huge fan of the ‘eat what you kill’ operating model. I recognize that it can make some individual partners very rich, but average partner incomes tend to trail behind those of the integrated law firms.
One of the problems with ‘eat what you kill’ is that it allows for the quality of individual partners to vary wildly. Not only the legal quality, but also the type of clients and the practice. Since each partner has his/her own P&L there is no urgent reason to be bothered if some of the other partners operate in a lower segment of the market. More often than not ‘eat what you kill’ firms struggle to deliver uniform quality across partners, practice groups and offices. Any client that has worked with such a firm will recognize this. Eat what you kill may benefit the individual partner, it does not benefit the firm or the clients.
Not so long ago, I had a conversation with a well-known tier-1 M&A partner in a premier European ‘eat what you kill’ law firm. As this partner got two large mergers at the same time, he had asked if he could use some associates from other partners in the M&A group. This then was refused by the other partners as they feared that their associates would be tied up when the time would come that they needed them themselves. Personal interest above firm interest and client interest. Needless to say, the partner had to turn the second merger down, which ended up with a competing law firm. How frustrating.
One might be inclined to think that this example is rather extreme. It is, but in our day-to-day practice we come across issues within ‘eat what you kill’ law firms all the time. If every partner is in the end only driven by personal gain and personal interests, the firm will lose out. Our data proves that firms in which partners collaborate and work together as a team are more successful than those in which partners compete. Clients don’t like it if partners don’t collaborate. These types of law firms under-perform integrated law firms as it comes to ‘cross selling’ services to clients.
It must be said that also integrated profit-sharing law firms are not free from competition among partners. This has everything to do with the way in which partner performance is measured. If partners are pushed to generate a certain amount of revenue in their own name, then that is what they will do. They will try to open as many files in their own name as possible, even if a fellow partner does most of the work. We frequently see this happen.
The more you think about it, the more apparent it becomes that its actually strange that in many law firms the partners are competing with each other. How extreme this internal competition is will largely depend on the profit-sharing model. If law firms were set up as ‘normal’ businesses the firms as a whole would always be more important than the individual. Management guru Tom Peters was a partner at McKinsey. Despite his worldwide success he was asked to leave in 1982 as for Mr Peters his personal interests had become more important than the success of McKinsey as a whole. Strong and powerful brands and businesses can only be built if everyone if fully aligned and committed to the success of the company (firm) as a whole. Same in sports: there is no room in the team for people who are not team players. Sometimes law firms are like football (soccer) teams where each player wants to score the goal. We all know that that doesn’t work.
Back to China. At the end of my lectures one of the participants handed me with a handwritten letter on the hotel stationery. The letter was in Chinese and it said -inter alia- that she thanked me for opening her eyes. Throughout her career as a partner she had believed that the method of each partner having his/her own P&L was the best way to ensure optimal performance and remaining attractive to rain makers. After hearing my lectures over the past few days, she had now come to the conclusion that maybe indeed the collective had to be stronger than the individual for a firm to become truly excellent in every way. This coming from a board member of one of China’s most eminent red-circle law firms means a lot to me. I am keeping this letter as a reminder that law firms do not by definition need to remain as they are. Even in the business of law, the business model can and should change.