In The Lawyer of 18 November 2019 the headline of one of the articles read: “Skadden and Weil will need more than a couple of magic circle hires to fix their succession problems” While the article focused on the upcoming lateral hire spree, the real issue is why neither firm has been able to groom internal successors. This question resonates strongly with what we at TGO Consulting see in our day-to-day practice: The last of the baby boomers who are now towards the end of their career find it really hard to transfer, power, practice, clients and profit to the next generation. Succession will become an issue because there will be no natural successors. Time has been incredibly generous to baby boomers When we work with our clients, we often do a TGO Power Curve© analysis. In order to do that we have developed a clever algorithm that calculates a value for each of the partners based on the size and quality of their practice and their reputation in the market. The result is plotted on a base line, representing the age distribution of the partner group. The graph below represents two different situations. Figure-1 reflects a partnership where revenue and market reputation are concentrated with partners who are now in their late fifties and early sixties (the last of the baby boomers). Figure-2 represents a law firm where the strongest and most successful partners are in their early fifties. As you can see, in Figure B, partners are transferring their practice towards the end of their professional career. Time has been incredibly generous to the baby boomers. The last baby boomers, who are now in their 60-ties have during their professional career been part of a seismic shift in the legal profession. At the time when they became partner, they could not imagine what the legal world would look like 25 years down the line. They also could not imagine, even in their wildest dreams, how much money they would end up making. The legal profession has been professionalized during this quarter century. Law firms became professional businesses, hourly rates exploded, clients became more professional and the world became more legalized. One could say that the baby boomers became rich and successful without too much effort. They just had to tag along with the developments. Santa's little helpers Even though they were riding the wave of the economy, the baby boomers are in a way self-made men and women. They developed their practice along with their clients. Strong partners create weak offspring. Their associates were not trained as potential new partners, but as lawyers who had to be the diligent executors. All the associates were in a way “Santa’s Little Helpers’’, Santa needs them and can not do without, but they will never be the next Santa. Even Santa likes to stay in the limelight of power. The baby boomers are no different, they cling on to power. In a law firm power comes with having a great practice. From the power perspective law firms are a fragile ecosystem. If you want status in the firm, want to be a thought leader and opinion maker, it is more important that you bring in a large amount of revenue, than having a vision. Those who have the most revenue must be the best partners and we should listen to what they say and obey them. So, if revenue is more important than content, it comes as no surprise that I will want to keep as much revenue in my name as I can. If I create new partners who are better than me, I will lose power and become obsolete. The same will happen if I transfer some of my clients and contacts. Some baby boomers cling to power and wealth It is a natural tendency wanting to be loved, admired and relevant. Powerful partners are addicted to standing in the center of attention. They cling on to power. It goes against human nature to step aside and let someone new be the new star. It happens to politicians, to business leaders and captains of industry. It is so hard to let go. That is why the economy and society have been ran by old people for so long. Not because they are better suited for the job, but because they refuse to transfer the power. Why would lawyers be an exception? Once people have power, status and influence, they cling on with all their might. When we work with our clients doing the TGO Power Curve© analysis, we typically also do a risk assessment. In situations that are represented by Figure A, one of the more prominent risks for the firm is the fact that a number of powerful rainmakers will be retiring over the next 3 to 5 years, without there being adequate replacement. Law firms who are in a Figure A situation have neglected to work on developing real home-grown talent. The associates they trained to be “Santa’s Little Helpers” may have become partner, but they generally lack the entrepreneurship and personality to be rainmakers and opinion leaders. Strong partners created weak offspring because it served them well. The retirement of rainmakers is a major risk to the firm, but the risk will only materialize after the baby boomers have left. Why bother? The next generation needs to be stronger, not weaker Obviously, this is a situation that the best and most ambitious law firms would never allow to happen. The most successful of our clients are in a situation that is reflected by Figure B. In these firms the strong partners systematically strive to create offspring that will be the better version of themselves. They know this is needed because the demands of the markets will always go up. Their pride and satisfaction are not in retaining power, but in seeing their protegees become tremendously successful. Such partner will always trust his protegee and will find pride in transferring their practice to the next generation. This type of law firms will be better with each new generation. They will still be the winners in tomorrow’s market. The transition from a Figure A situation to a Figure B situation, is not an easy one. It can be done only when the baby boomers recognize their ‘mistake’ and care more for the firm than for their own position. It is our experience that some exceptional great lawyers and law firms can navigate through such fundamental cultural transformation. Be it potentially at the cost of the weak “middle generation” …

On the 24th of April 1916, the now legendary Antarctic explorer Ernest Shackleton set off from Elephant Island in the James Caird, the lifeboat in best repair, patched up and partially decked over by what meager resources were available, on a rescue mission to South Georgia. On board where six men, while 22 others would stay behind to await being rescued. The sea journey was extremely perilous as the temperatures were freezing cold and the seas around Cape Horn are known for extreme weathers. It would take the exhausted frozen men two weeks of rowing to reach land. When carefully selecting who would be his crew on this dangerous but vital rescue mission and who would wait behind on Elephant Island, Shackleton selected among two others, Thomas Crean and Henry McNish. These two men were troublemakers and Shackleton did not like them, but they were men with the best skills and the most endurance. When it became a matter of life or death, Shackleton decided to rely on two men who were certainly not his friends. A good decision, as we all know eventually every single member of the expedition made it back to England alive. I was reminded of this story when I was having a conversation with a managing partner not so long ago. As most of you will know, for me ‘trust’ is extremely important in a partner group. I regularly ask partner groups if they would trust any of their fellow partners to go to their client without them being present. Typically, I can literally see a shiver go through the partners when I pose that question. Some are convinced that some other partners are of mediocre legal quality and/or are socially awkward. Some others might fear that actually their client might like some of their fellow partners better and they would risk losing that client to that other partner. Whatever the motivation, the answer is almost invariably: “no, I would not trust all of my fellow partners to go to my client, without me being present”. Only a handful of exceptionally great and successful law firms have high levels of unconditional trust between partners. Lack of trust between partners is a problem A fundamental lack of professional trust between partners is typically the consequence of a long history of opportunistic partner promotions. It is still surprisingly rare to objectively evaluate potential new equity partners. Some partner promotions are driven by fear that an associate that is crucial to a certain practice, will leave. Sometimes there is a trade-off: If you support our candidate, we will support yours. Sometimes firms need new partners to help bear the costs of a new and expensive office. Sometimes we appoint a new partner to fill a gap after another partner has left. Whatever the reason, a careful evaluation against objective criteria is not one of them. The inevitable consequence of opportunism is that over time the level of trust among partners will diminish. It will be obvious that lack of -professional- trust is not an optimal situation. As we can clearly witness at this time of year, lack of trust will make partners fight over profit distribution. Lack of trust will hinder joint client development. Lack of trust might even create disputes on what legal templates to use. We have even seen situations where lack of trust made it impossible to put two partners in one practice group (even though their practices were basically comparable). Lack of trust between partners will lead to all sorts of irrational bad behavior and will inevitably lead to loss of business opportunities to the firm. This was the topic of my meeting with the managing partner. We discussed how we could improve trust among the partners of his firm. At some point he asked me if partners should be friends? My answer was unambiguous and clear: “there is no need for partners to be friends in order to create trust”. On the contrary, I would be inclined to advise against partners developing friendships that go beyond being good colleagues. I know this might come as a surprise, so let me explain. Friendships stand in the way of trust Friendship will most certainly blur your judgement. When we are friends, it will become hard to tell the truth as we will fear that uncomfortable conversations will harm our friendship. Friends are supposed to help and support each other, not to criticize or penalize. In my practice I have come across situations were two friends, one the former managing partner and the other his immediate successor became embroiled because the former MP took it as personal criticism when his friend the new MP decided to do things in a different way. This personal argument weighed heavily on both men. Situations between two persons who are friends can become even more complicated when also the spouses get involved. I know of a situation of two lawyers who had become such good friends that they even had dinner parties and went to social events with their spouses. Also, the spouses got along really well. When at some point one of the two became the practice head and came in a situation where the firm decided to throw the other one out, you can image the pressure this lawyer got at home from his spouse for allowing this to happen. Compromising on quality erodes quality and trust Friendships can lead to other partners feeling locked out. Friendships between partners will also make other partners suspicious of favoritism. In general friendship between certain partners will likely erode trust within the partner group. Back to Shackleton. His example shows that friendship is not a requirement for trust. You don’t even have to like a person in order to trust this person. Shackleton choose among his rescue crew two men whom he did not like and who caused him trouble. He trusted them nevertheless with his life and those of the other men because he respected their skills and their character. The same holds true for lawyers: when things really matter, you only trust the best. So, in a partnership don’t breed friendship, breed quality. Stop making compromises as it comes to the quality of the partner group.

Commentators outside the legal industry often criticize the way in which law firms operate and organize their business. Although certain aspects of law firms might come across as archaic or strange from a ‘normal’ business consulting perspective, the business of law is still one of the most profitable business models in existence. In what other industry can you make so much money, while investing so little. Partners at the elite law firms make more money than most captains of industry and more than any elected head of state. From a business perspective it is hard to beat the business of law. Oddly enough also as it comes to the level of obsession over the profitability, the legal industry is a bit of an outlier. One will be hard pressed to point out any other type of privately-owned business, where there is so much ‘transparency’ and comparison on profitability. There is a thriving publishing industry that lives of reporting on law firms’ profit numbers. Not only the famous AML-100/200 in the US, but also for example The Lawyer in the UK and JUVE in Germany publish overviews and rankings based on profit levels. I am not aware of any other industry where non-listed companies voluntarily disclose and compare their figures. One could argue that the legal industry is in a way obsessed with profit. The legal industry seems overly obsessed with profit numbers To a certain extent for any company it is healthy to be focused on profitability. For us at TGO Consulting it is the core of what we do: we focus on helping law firms to be more profitable and have better clients and mandates. At the same time in our practice we are often witness to the destructive power of unhealthy focus on profitability. In many partnerships there are tensions on how the profits are distributed among the partners. So here we have a kind of a contradiction: on the one hand law firms as a firm need to be as profitable as possible, while on the other hand individual partners focus on how the profit is distributed may have averse effects on the profitability of the firm as a whole. One of the advantages of a global practice and working with many different law firms across the world, is that we in detail come across more different profit distribution systems than any law firm leader will ever see or be aware of. The two main categories are ‘collective’ and ‘individual’. The lockstep and equal sharing profit distribution systems are well known examples of the collective system. The individual system is also known as ‘eat-what-you-kill’. On both categories there are numerous variations and also hybrid systems do exist. However, in the ‘collective’ system each partner gets rewarded based on the performance of the firm as a whole, as where in the ‘individual’ system a partner’s remuneration boils down to personal performance. At first sight, one might be inclined to think that the individual system is the most fair system and will be a system that does not create tensions between partners. That might be one of the reasons why this system has been so widely adopted across all parts of the world. Partners who work hard and are successful are rewarded and some others that do not perform do not drag them down. Whereas in theory the individual system might seem ideal, in practice this system creates all sorts of issues. Based on our experience partners in firms which follow an individual based profit distribution system have more discussions on profit distribution than those who employ a collective system. Partners often complain that their compensation is not fair The reason behind this is that in an individual profit distribution system there typically are all sorts of internal compensation systems such as origination credits, or rewards for management positions. In the individual system, there is a clear disadvantage for a partner who cooperates with another partner on a large matter. The cooperating partner will have to ‘pay’ origination credits and while helping out on the other partner’s big mandate will have no opportunity to get out and work on their own book of business. We have come across situations where this type of ‘slave partners’ are only employed to make the strong and originating partner even more rich. The question ‘who owns the client’ is of particular interest to any partner working in an individual profit distribution firm. On top of that comes that in some firms each partner must ‘pay’ a certain percentage of his/her profit to the founder(s) of the firm. Another issue with the individual system is that partners don’t want newly appointed partners to cannibalize on their practice, so each new partner has to find a new niche and a new clientele to build a practice. An individual profit-based system also runs a risk of poor utilization of associates. So, if an individual profit distribution system can create all sorts of fights and tensions, is a collective system any better? The short answer for that is: no. Under any collective profit-sharing system, partners can become hypersensitive to under-performers. The mere thought that while they are working their ass off and have built a great practice, some others are leading a laid-back life, go home at five and still make the same amount of money is unbearable. We experience that in collective systems the firm leadership is under permanent pressure to identify and deal with under-performers. Sharing a collective profit requires an enormous amount of trust. Maybe more than most lawyers are able/prepared to give. In order to prevent partners from under-performing, collective distribution-based firms invariably monitor individual partners. Every partner has to produce a minimum amount of revenue under their own name and has to meet a threshold in billable hours. The surprising thing is that this effectively will create similar tensions as in an individual based system. If I have to produce revenue, I will want the file and the client put in my name. If I have to produce billable hours, I will make sure I meet my threshold, before handing out work to my associates. Like in an individual system, in a collective system it is not a good career move to be a ‘slave partner’ (or a lawyer’s lawyer), as the rainmaker will always feel more important and entitled to more money. A collective system with a black-box might be the best solution Many consultants today are preaching the end of the ‘lock-step’ system, which is one of the collective sharing systems. We are not one of them. Our data clearly shows that firms where partners cooperate and trust each other, have a higher PEP that those who only focus on individual gains. So if cooperation is the most profitable business model, and we do not believe that the lock-step model has become a relic of the past, what would be the best profit sharing system. After having seen and analyzed literally dozens of different profit distribution systems, I have pivoted towards a black-box profit distribution system, based on collective sharing. It might be the only way to stop discussions on who gets what, and the only way to put a halt to individualistic behavior that favors the individual, while it harms the firm. I am aware that I need to elaborate on this point of view, and I will do so in a separate article in the coming weeks.

On the articles that I publish, I typically get response from readers. Out of all articles, no article so far has led to such overwhelming response as last week’s article on being the managing partner. This has sparked some interesting and insightful discussions over the weekend. I also got numerous requests to elaborate some more on the topic of the managing partner as it seems to strike a nerve in many law firms. Before I do, I wish to apologize for the picture above showing a man. I want to acknowledge that many firms, among which some of our clients, are led by great female managing partners, so please do not take offence. The way in which the governance of a law firm is structured, is in many aspects a predictor of a firm’s future success. Between law firms there are vast differences in the way the firm is managed. Some firms have one managing partner, others have two or even three. Some firms have a board that is hands-on involved in the management, while other firms have no board and the MP reports directly to the partner group. While there is a lot to say on the governance of law firms, for the purpose of this article, I will concentrate on the position of the managing partner. Although no two firms or managing partners are the same, one can distinguish between four main categories of managing partners. As is shown in the diagram below, the differences can be plotted along two axles. On the horizontal axle we plot the level of vision and appetite for change, going from conservative on the left to entrepreneurial in the right. On the vertical axle we plot how solitary the managing partner operates. This ranges from dominant on the bottom to collaborative on the top. Every managing partner can be scored on these two variables and plotted in the diagram. Perhaps it would be interesting to think where your managing partner would be. Based on the diagram, we can distinguish the four main categories. Needless to state, each category represents an archetype and no real people will exactly match that archetype, although some might get remarkably close. The Founder This is the managing partner (or managing partners) who founded the firm more than a decade ago. What started out as a fresh and aspirational law firm has over time gradually turned into a ‘dictatorship’. The founder scores high on dominance, low on collaboration and has over time become more and more conservative. Critique on the strategy of the firm is taken personal. As the founder is the person who has appointed or hired all other partners, the other partners typically are weaker and/or feel dependent on the founder. The founder rules the firm with an iron grip and opposition or deviating opinions are generally not appreciated. While founders can have been extremely successful in building an excellent law firm, they at the end of their career can get destructive as it comes to the future. For a founder it can be hard to let go, step back and hand the helm of the firm to the next generation. The Burner In some respects one could say that the burner is the opposite of the founder. Burner managing partners are weak partners that are appointed managing partner because they have little or no practice. In this category of law firms there typically is a small group of strong partners who have a great practice that they do not want to be ruined by a stint at managing the firm. That is why they appoint a weak partner to do the dirty work for them. The burner almost always must leave the firm, after their term has ended. This type of managing partner obviously scores very low on dominance and relatively high on collaboration as they are not supposed to take important decisions without prior consultation with the strong partners. This consultation could both be formal if the strong partners are on the board, or informal. From an economic perspective, having a burner managing partner might be an attractive option. As the burner did not have a strong practice in the first place, not much revenue or reputation is lost. As it comes to guiding the firm to the next stage of excellence, the burner has to be a poor choice. Not supposed to have a vision, a burner MP can only be a caretaker. Acting on behalf of a small group of strong partners, they typically are not as conservative as founders. The Eternal The eternal managing partner intends to be the managing partner for the rest of his/her career. The eternal managing partner will never return to (full) practice. The eternal is different from the burner as these are not weak partners. Typically, the eternal is a moderately strong partner that will manage the firm until retirement. Looking at the diagram you can see that the eternal scores on both axles somewhat in the middle. The reason for this is that this type of managing partner carefully has to maintain a balance to avoid criticism from one fraction of partners or the other. Going to fast might alienate some strong partners, while being too conservative will frustrate some others. Being too dominant will draw criticism whereas being too collaborative will prevent from being perceived as an effective manager. The balance however flips towards mild dominance, as otherwise it will be impossible to last until retirement. Eternal managing partners are typically effective in executing a chosen strategy. Not having an active interest in the future of the firm, they might not be premier choice to transform the firm. The Visionary The visionary managing partner scores very high on vision and entrepreneurship. This is the type of partner that will transform the firm. As transformation is not a one-man job and can only be achieved by the whole firm, the visionary must create buy-in and can not be too dominant. Like the eternal, the visionary scores on this axle somewhat in the middle but slightly higher on collaborative as there is no long-term position to defend. The visionary will have a limited life-cycle as a managing partner. Once a new strategy has been defined, he/she must go back to their full practice as too much vision and for a long time, will become equally harmful as no vision at all. Visionary managing partners typically are not great in long term execution or in day-to-day management of the firm. These four types are archetypes and as such somewhat bigger than life. In our practice we work with law firm leadership all the time and we rarely encounter people who literally 100% match the archetype. However, every real-life managing partners can be plotted somewhere in the diagram and will pivot towards one of the four archetypes. As outlined in this article each type has its specific strengths and weaknesses. What is best for your firm will depend on where you are and where you want to go. Depending on your needs, this article might help in more structured selecting the next managing partner.

This week it will be Halloween. This signals mid-autumn in the Northern hemisphere and law firms are preparing for the big Q4 partner meeting. On the agenda will be the budget, new partner promotions and for many firms the election of the new managing partner. If you are the candidate, you might want to read this article before you formally get elected as the next MP. We will give you one good reason why you might want to think twice. Different law firms have different policies when it comes to the ideal profile of the managing partner. There are firms that favor partners who are at the end of their career, and those who favor young partners who still have a personal stake in the future of the firm. Some law firms tend to appoint a strong partner, while others favor a weak partner, that does not have a great practice. Whilst there is something to say in favor of any of these systems, this article is primarily aimed at the young partner who has a strong practice and is aspiring to be the next MP. Our data show that 32% of managing partners leaves the firm within 3 years after their term has ended. This should definitively be something to keep in mind before you accept to take the role. After leaving the firm it is very unlikely that you will be able to make the same amount of money at a company or in any government or judiciary position. So, if you are 45 today, you will be 49 after your first term and 53 after a potential second term. If then, for whatever reason, you leave the firm at the age of 55, you will have at least 10 years left in which you have to earn a living. Let’s assume, you made 750.000 as a partner (obviously this could be much more in reality) and you are able to find a decent job in which you will make 250.000 (which is more than any judge, academic or government official will earn), you will lose no less than 500.000 annually. This will mount to 5 million over ten years. So, in order to become managing partner, you are in fact potentially investing 5.000.000 of your own money. Are you sure you are willing to do this? And what about your partner at home, does he/she buy into this? Becoming managing partner could easily cost you 5 million! Over the years I have had conversations with many managing partners. Obviously, none of them entered the role with the intention to leave the firm soon after the term had ended. So, why is it that unintentionally one thirds of managing partners leaves the firm after their term has ended? As a managing partner you will lose your practice, or -best case scenario- you will not be able to maintain or grow your reputation in the market. In some firms the managing partner role is a full-time role, in which case the MP will certainly lose his/her practice. Running a successful legal practice is something that requires 100% dedication. In some firms, for that reason, partners are not allowed to work part-time. Whatever way you look at it, at the end of the term there will hardly be any practice left and the then former MP will have to start from scratch all over again. Few are willing to do this at the age of 50-plus and even fewer succeed. Managing Partners have to learn not to get bogged down in details. For most newly elected MP’s this will be a steep learning curve. As a lawyer you are primed to focus on details, as this is where crucial flaws or opportunities will be hidden. Once a lawyer has ‘unlearned’ to be obsessively focused on details, it is almost impossible to get back in this mode again. I have spoken with ex-managing partners who literally got anxiety attacks when working on a large, detailed and complex piece of legal work. Once you have acquired the ‘helicopter view’ there is probably no turning back. You will have made enemies within the partner group. Being a managing partner means making tough decisions and breaking some eggs. Some of the partners might not like this. There is very little they can do as long as you are the MP, but after your term has ended it will be ‘pay back time’. I know former managing partners who at some point dreaded going to the office as they felt abandoned and isolated. One of them, got an office at the end of the corridor where no one ever came to say hello. It can be hard to be stripped of the status and the power. For someone who has been in the center of power and attention for a longer period of time, it can be a raw experience to get back to the rank and file. As an MP you are treated as the most important person in the firm. Many of your co-workers will try to flatter you in order to make you like them and at some point do them favors. You might get the impression that you are smart and a great leader. You get to represent the firm to the outside world. You will meet important people, attend prestigious events and get to travel and see the world on the firm’s expense. Losing all these perks could be hard to handle. Some former managing partners cannot deal with anonymity. Make your investment worthwhile: don't become a 'caretaker' MP Now you know that accepting the managing partner role might cost you 5 million of your own money, why should you even consider it you might ask. Well despite all the negative arguments, there might actually be one good argument do it: make your firm a better firm. The younger partners should be the ones in charge of the future of the firm, as they will be the ones that are part of that future. Do not be a ‘caretaker’ managing partner. Be ambitious, set clear goals and make sure you reach them before your term ends. Only if you can leave the firm in substantially better shape than you found it, your investment will have been worthwhile. So, increase the profit, raise the reputation, get better clients, and improve the overall quality of the partnership. If you are willing to do this, go for it!

For a large part of my life, I have been a Land Rover enthusiast. I have owned a Series 2A, a Series 3 and a very rare original early Range Rover. All these cars I have taken frequently off road. All mechanical maintenance I did myself. Driving a Land Rover gives you a sense of freedom. Driving a classic Land Rover is being part of a community. As a token of freedom, many of my fellow Land Rover enthusiasts had sticker on their car: ‘One life, Live it’ A reminder not to waste time on things that don’t really matter. The last quarter of the year is always a busy time for TGO Consulting. Many running projects reach a stage in which an important milestone is reached; many new projects start after the big November partner meetings. Having so many conversations with clients around partner meetings, I often think about the text on that Land Rover sticker, as I am wondering if partners are spending their time wisely on these meetings. “Out of all the time you spend on partner meetings, what percentage of the time do you discuss clients and market opportunities?”, I regularly ask partners. The typical response will be “close to zero”. When the partners of a law firm get together, they typically discuss internal issues. Market opportunities and clients are rarely part of the conversation. Can you imagine the board of any commercial company not discussing markets and clients? So why are lawyers so obsessed with internal issues? Partner meetings are hardly ever about clients and opportunities As a partner in a law firm your available time and energy is finite. Lawyers are under constant pressure from their clients and from their firm to produce outstanding results. For any partner in a top law firm client work will consume most of the time and energy. If time and energy are precious resources, why waste it on things that do not contribute to better business or wellbeing? Available time is limited, use it wisely. In general, partners don’t like partner meetings. Many bring their laptop, check their emails, do some client work or read the news/watch sports. Why spend time on a meeting that does not bring you anything other than drinks or dinner at the end? The same applies to most other internal meetings. Many partners don’t like attending. They are invariably late, did not prepare and are distracted with other things for as long as the meeting will last. They only attend because they are expected or required to do so. If not, they would rather spend time on their files. The purpose of this article is on the one hand to liberate partners from the chains of useless meetings, and on the other hand to highlight that when they meet partners should talk about the business much more than about internal stuff. Business and clients bring you money. So, if you invest time and energy, there will be a positive return on the investment. Ideally a law firms should abolish all meetings that do not bring a clear return on the investment. No more meetings for the sake of having a meeting. No more useless rituals. Applying this simple rule will free-up a significant amount of time, will have a positive impact on your wellbeing and will keep you focused on the outside world. Many law firms have an internal culture of whining and complaining Mutatis mutandis, this rule also applies to the managing partner, the executive committee and the practice group heads. Typically, in law firms there are many internal issues, big and small, that absorb disproportionate amounts of time and energy. All of you involved in law firm leadership know the amount of time that is spent on disputes between partners or the type of flowers on the reception desk. The problem is that spending time on solving all these little issues, does not make the firm any better and does not bring in better clients or more revenue. It just drains your energy. Law firm leadership would be well advised to simply ignore all these internal issues. If two partners have a ‘fight’, let them sort it out themselves, they are adults. If the flowers on the reception desk are not fresh today, let it be, there will be fresh ones tomorrow. It does not directly affect the business. Also, for law firm leaders, time and energy are limited. Your task is to make the firm better, not to be a schoolmaster. Rather than wasting time on the weak ones, invest time in the strong performers. Rather than trying to persuade the unwilling, work with the willing. Focus on opportunities rather than on obstacles. Once you start doing this you will not only be far more effective, you will probably also fundamentally change the culture of the firm. Too many law firms have among the partners an internal culture of whining and complaining. Shake off this toxic blanket and start focusing on business opportunities.

When I attended law school, laws and legal case law were still only available on paper. I remember receiving an envelope with a bundle of single pages that needed to be inserted and exchanged in my bundle of legislation on a monthly basis. This was an ever-repeating tedious task all law students back then had to commit to. Only in my final year MS-DOS computer training became part of the curriculum. All this is set some three decades ago, and much has changed since. Back then, knowledge of the law was virtually inaccessible for anyone except for those who had gone through law school. Lawyers had a monopoly for even the most basic legal questions. Today this obviously is no longer the case. Due to a process of digitalization of legislation and case law, access to legal knowledge is no longer limited to those who hold a university degree and have access to the books. Unprecedented progress in search technology and information available online has opened the legal knowledge to the masses. Today anyone, even my mother, can find basic answers to the most common legal questions. While the world has changed, the way in which we educate and train young lawyers has not. This is an issue we need to discuss. As I have outlined in previous articles and in my most recent book ‘Data & Dialogue, a relationship redefined’ the process of what a lawyer does consists of two distinct elements. We call this the Creation-Production-Divide-Concept©. Creation contains all elements that are uniquely connected with the individual skills of the lawyer. These are the things that have most value to the client and are also the elements that distinguish effectively one lawyer from the other. Elements like, the knowledge of best market practice, strategic skills, the ability to find creative and innovative solutions, negotiating skills and communication skills are all part of Creation. Production contains all the actions and processes needed to produce the actual legal output. Production is document review, drafting the agreements, doing mark-ups, discovery, due diligence, and so on. These necessary processes have very little added value to the clients and are not very distinguishable between one law firm and the other. This is the prime area where technology will increasingly be used to augment lawyers. Production needs to be done as efficient as possible as it is considered a ‘necessary evil’ that does not add any substantial value. Once you learn to understand the Creation-Production-Divide-Concept©, you will start to realize that Creation is the key to delivering value to clients and to setting yourself apart from other lawyers in the market. We at TGO Consulting operate in the top segment of the legal market and the future for our clients definitively will be in delivering Creation, not Production. This might be slightly different for mid-market law firms now, but also this segment will need to shift its focus. So why is this such a big issue? Well, the fact is that today almost every law firm heavily relies on the revenue generated by Production. The majority of law firms, even in our segment of the market, employ a small army of associates that almost exclusively focus on production. Associates review documents, draft agreements, perform due diligence, and so on. I would be fair to state that the revenue derived from Production is what keeps firms afloat today, but will it also in the future? Probably not. High end law firms will be the first that need to shift their business model towards Creation. The issue is, that this will require an overhaul of the business model. Firms need to change the leveraged model, need to introduce value pricing and need to invest in technology to help deliver the final output. This transformation will take several years to successfully be implemented. In future business models, associates will no longer spend most of their time performing tasks that, from the clients’ perspective have low value. Technology will help them do the tedious boring work much faster. While almost every law firm is spending time and effort on innovation and legal technology, almost none invest in human beings. Their lawyers might be working with AI, learn to code or dive into blockchain, they are not challenged to develop their personal skills. I would advise all law firms in the top segment of their market to start developing their young lawyers’ human skills in order to prepare them for a future in which the Creation abilities of a lawyer are far more important than the ability to perform repetitive low value tasks. This is a departure from where we are today, where many law firms occupy their young lawyers with basic (stupid) low value work. As some of you may know, we have at one of our clients (an elite law firm with an international footprint) done a very interesting experiment: 50% of their new recruits was put to work in the traditional way, doing basic legal work. The other 50% also did this basic work, but only half the time. The other half of the time they accompanied partners to high level meetings with clients. Obviously, this time was not charged for. They just had to sit, listen, observe and learn. Afterwards they discussed with partners their observations. Data showed that in year one, the traditional group of new associates brought more revenue to the firm, which is logical as they made twice the number of billable hours. After one and a half year both groups were equal and after three years the ‘experimental’ group outperformed their traditionally trained peers by more than 25%. Exposure to client dynamics has led to a greater ability to deliver value, to have less write offs and to charge more. The whole point of this real-life example is to show that it pays off for lawyers to invest in human skills. Training young lawyers how to create value to clients through Creation can be done in many ways. The one way that surely is not going to work is to keep them busy with basic Production stuff. Even if you would lose some revenue on the short term, you will create a multitude in revenue on the longer term. Creation is for lawyers; Production will be to a great extent for machines.

Last Sunday, 6 October, while browsing the news over breakfast, an article on Bloomberg caught my eye. The title read “A Banker Reveals the Bonus Culture Behind a $220 Billion Scandal”. Bloomberg had interviewed Mikhail Murnikov a former banker at the non-resident unit of Danske Bank A/S in Estonia. He explains how the bonus system has led to wide spread money laundering: “The whole non-resident business was built on one principle: Everyone was making money on cross-border transactions because non-residents had to pay $90 per transaction, while the costs associated with each transaction amounted to $1.” By 2013, when profits peaked, Murnikov says Danske’s Estonian bankers were told to process close to half a million transactions for 4,000 non-resident clients, mostly from the former Soviet Union. That year, returns at the non-resident unit hit 402%, compared with about 7% for the whole Danske Bank group. “I had a clear plan,” Murnikov said. With the 300 clients he had, the former banker says he needed to “make 40,000 transactions a year so I could get a bonus.” He says the only metric Danske used to determine an employee’s bonus was the number of transactions he or she handled. (source: Bloomberg) We at TGO Consulting regularly have discussions with our clients on their lawyer bonus system. Most law firms award their associates a bonus if they manage to exceed a certain threshold in billable hours. Despite this being widespread practice, in my opinion this bonus system is flawed. Let me explain some issues your bonus system has: Working on billable matters is not a virtue Working on billable matters is not a virtue, it is simply a lawyer’s job. In the most countries in the western world employees are expected to work around 1900 hours annually. The actual number varies a bit between countries depending on the number of public holidays and labor laws, but 1900 is a good ballpark figure to work with. This means that a normal nine-to-five office worker or industry worker will have to work 1900 hours for their salary. I don’t think that I need to explain that during these 1900 or so work hours, the employee is expected to be as productive as possible. Some companies go to great lengths monitoring their employees’ performance. Examples like Amazon and Ryanair spring to mind. So why do law firms consider it to be something special if a lawyer produces over 1500 billable hours. This would leave 400 hours unutilized (amounting to one full day every week). Amazon would never accept that I assume. Or if Amazon is too far-fetched, just imagine a corporate counsel who would spend only 4 out of 5 days in a week being productive for the company. So why would we award lawyers working in law firms a bonus for being productive only four out of five days a week? It does not make sense. Billable hours are not the associates’ responsibility Billable hours are not the associates’ responsibility. The main reason why associates don't produce 1900 billable hours is the partners not providing them with the work. As explained in previous articles, it is the responsibility of partners to make sure that the associates have sufficient files to work on. If partners would provide associates with a steady workflow, associates would easily be able to make 1700 billable hours without any stress. Still leaving 200 hours per lawyer for education, training, publishing, recruitment and so on. So, if it is not within the reach and responsibility of an associate to influence the workflow, why make their bonus depend on it. At least the bankers in Tallinn could influence number of transactions. The fact that the number of billable hours an associate can produce heavily relies on the workflow from the responsible partner, also makes the bonus system inherently unfair. A medium quality associate working in a small team of a partner that has a huge practice will get a bonus, as where the talented associate who happens to be part of a larger team where the partners has a smaller practice, will never get a bonus. I see this happen a lot. It is often not the best associates who get the bonus. Bonus system is often a lottery, where the associate just must be lucky enough to be connected to a successful partner. The bonus system does not reward quality. The bonus system does not promote teamwork The bonus system does not promote teamwork and rewards selfish behavior among associates. As with any performance metric, the bonus incentive will drive behavior. In any law firm that expects an annual hourly target of less than 1600 there is a structural shortage of client work. This means that the bonus system will encourage associates to not share work. An experienced associate might be tempted to self-handle non-complex matters that would be better handled by a more junior lawyer. This will hamper the training and education of the junior lawyers. For the firm as a whole, it would be best if all matters were handled at the right level. The bonus system is likely to undermine this principle. Conclusion So, if the commonly used bonus structures are no good, what are the alternatives. Firstly, in my opinion no one needs to be extra rewarded for simply doing their job. Bonus should be reserved for accomplishments that are really outstanding. At the same time, I would encourage law firms to set up a flexible lawyer remuneration system that would lead to lower fixed costs if business is slow. There are numerous ways to achieve this without using the billable-hour-based bonus system. If you are interested in this, please talk to us. As far as bonuses are concerned, why not let everyone share in the performance results of the firm or the team. Lawyers that operate as a team will always outperform a group of ‘selfish’ individuals.

Recently I was asked by the managing partner of a well-known tier-1 law firm, what in my opinion was the number one reason why change processes are so hard to successfully accomplish in a law firm. This is not an easy question to answer as there are multiple reasons. Lack of ownership and the deep-rooted wish for magical solutions among the most noticeable. After I had given the question some thought my answer was: “fear”. Fear is a very powerful driver of behavior. Lawyers are trained to virtualize every potential downside or risk. In general, it is hard for a lawyer to focus on opportunity instead of potential risks. Even though there might be several reasons NOT to do something, there might be ONE good reason to do it. This is the way in which entrepreneurs look at the world. This is not how lawyers see it. This is equally true for company lawyers as it is for outside counsel. Virtualizing potential hazards, lawyers prepare for the worst possible scenario. This also applies to any process of change. Almost all resistance to change, both active and passive, boils down to fear. Not fear for the future of the firm, but a very personal fear of how any change might negatively impact the partner’s personal position. Find the core of the fear and you have found the key to change. Find the core of the fear and you have found the key to change Personal fear comes in many shapes and forms. Among them is the fear of being ousted. Notwithstanding the fact that partners are shareholders and as such owners of the firm, mentally they often remain employees. Just like employees can be fired, partners can be made to leave. Market data shows that partners that are made to leave, unlike the partners that choose to leave, most of the time end up earning less. Partners are aware of this and that is why they will do whatever it takes to hang in there and avoid being kicked out of the partnership . We have discussed KPI’s for partners before. Reality is that today most law firms measure and monitor the amount of revenue that a partner brings in. This is equally true in eat-what-you-kill as it is in equal sharing full lockstep. Revenue is king, closely followed by hours. Partners are under constant pressure to bring in money. Not being natural born rainmakers, many struggle to do so. Often it takes years for a new partner to build a practice that produces a more or less steady stream of revenue. For many partners meeting the revenue requirement remains a permanent major headache. Most partners recognize the fear of an empty desk Unlike many other types of businesses, lawyers generally handle one-off assignments. People will need to buy groceries every day, just as they will have to keep buying fuel for their cars and new clothes to wear. Supermarkets, oil companies and fashion brands will have a steady stream of recurring customers as no one can do without. This is different for legal matters. For most companies M&A is a once in a lifetime event, as is litigation. Unless they have some big companies that are repeat players as a client, lawyers are depending on finding new clients as soon as a matter is completed. A partner and his team that have just completed a major M&A on which they have worked for months, will be worried whether and when the next big mandate will come in. In general, many lawyers fear the prospect of not having enough work. Lawyers live in fear of an empty desk. This fear is amplified by the pressure to produce revenue and hours. Even a short period of time without sufficient work might jeopardize meeting the targets. Fear of an empty desk leads to all kinds of bad behavior When we at TGO Consulting are working with law firms, we are in many cases consulting on improving the practice and raising profitability. Working towards a better, more profitable practice might entail raising the average file size, higher average rates, or a higher share of blue-chip clients. On a rational level, partners understand that it would be better if their average file size would be a lot higher. Bigger files are, in the eyes of the client and the market, considered more important than small files. But convincing a partner to actually stop accepting files below a certain size, is a totally different ball game. The partner will fear that once he rejects the small files, there might not be big files to fill the gap. The fear of an empty desk will prevent the partner from raising the quality of his/her practice. As more partners will feel the same way, this will frustrate implementation of a strategy that is aimed to increase profitability. The same mechanism will apply when the partner is asked or pressed to raise the average rate. Again, the partner will fear that existing clients might walk away, without sufficient new clients to fill the gap. The fear of an empty desk is a consequence of the fear of not meeting the targets, which in turn is fueled by the fear of being ousted. The fear of an empty desk is a driver for partners to take on clients and mandates that do not fit the strategy of the firm. Personal fears of partners can be so strong that they stand in the way of growth and greatness. No safety-nets Based on the above, one might be inclined to think that one solution to this problem could be to give the partners a guarantee that they will not be ousted if they fail to meet their targets due to the process of adapting their practice to the new strategy. I personally do not believe in this approach. The only way to succeed is to not have a plan-B. Having a plan-B or any other safety net will kill the burning platform that is needed to change any existing routine. Successful change can only be achieved with an all-or-nothing mentality. Do-or-die, otherwise mediocrity will rule.

While I write this article, most of our readers are at the annual IBA conference in Seoul. Good chance that you will be reading this whilst waiting at the airport for your flight back home. I would like you to use this opportunity to reflect on the concept of time. Time is not just a continuum or the patchwork of time-zones around the world. Time is also today the very lifeblood of the business of law. For the past five decades the legal industry has charged fees based (directly or indirectly) on the amount of time spent. Those of you familiar with my thinking will know that in my opinion time-based billing is a poor concept as time does not in any way reflect value. The Creation/Production Divide Concept clearly explains that by using time as a measurement, lawyers vastly undercharge for those aspects of their work that bring most value to their clients (creation), while ‘overcharging’ for elements that bring little or no added value to the client, such as reviewing and producing the documents (production). In case you haven’t read it, here is an article that explains in more detail. In the next few years, the legal industry will have to make a transition from time-based-billing to value-based billing. However as long as lawyers and clients have not embraced value-based-billing, the existing agreement is still that the lawyer will charge for all increments of time spent on a client’s matter. And as long as the agreement is to bill for time, it is implied that time is registered accurately and correct. It is my experience that this is far from the case. Most lawyers (certainly outside the US and London) are lousy at tracking time. Contrary to popular belief, most lawyers undercharge. By not accurately keeping track of time, lawyers are leaving money on the table. We all underestimate the amount of time We humans are not especially good in estimating how much time something takes. That is why there is a whole cottage industry in time-management and planning. The common denominator is that we invariably under- rather than over-estimate the amount of time. That is why we are always late, and projects always run over time. Would you be able to say how much time you spent eating and/or drinking yesterday, accurate to 6 minutes? I’m pretty sure you will not be able to do that. I am also pretty sure that whatever number you come up with will be lower than the actual time spent eating and/or drinking yesterday. The same holds true as it comes to client matters. In retrospective we underestimate how much time we have spent. The longer a lawyer waits with entering time into the system, the more 6-minute increments start to evaporate. The percentage of lawyers that has the discipline to keep time during the day is almost nil. The number of lawyers who enters and closes the timesheet at the end of every day is also disappointingly low. Some lawyers do not even complete all timesheets by the end of the week. Partners are no exception. I know several law firms that have turned to drastic measures to ‘force’ their partners to enter the timesheets at least every three days. It doesn’t help. Discipline is for losers it seems. Partners are ‘above the law’, which is stupid as this directly affects profitability. The eroding effects of the lack of discipline and accuracy in keeping track of time are substantially amplified when a lawyer has been working on a number of smaller files. Retrospectively writing time is relatively easy if it has only been one large file that you have been working on. When working on smaller files the inaccuracies are multiplied by the number of files. If a lawyer has been working on 10 files and misses 12 minutes per file, that mounts to 2 hours over the course of a week. Multiply this with the number of lawyers and you have a substantial amount of profit evaporating every week (as there are no additional costs, all extra revenue is profit). Lack of time keeping discipline will easily cost you a million! Besides lack of accuracy there is a second factor that is eroding revenue: 'modesty'. The present arrangement with clients is that the lawyer will charge for all time spent on the matter. The agreed hourly rate takes into account the level of experience and expertise each lawyer has. The more experienced, the higher the rate. This is fair because the more experienced lawyer will need less time to come to the same result. The lower rates for less experienced lawyers take into account that they will need more time to get to the same result. The problem is that it happens quite frequently that junior lawyers feel ashamed about the amount of time it has taken them to prepare a document or part of a matter, so they artificially reduce the number of hours as they enter time into the system. This form of ‘private initiative’ should be strictly forbidden in any law firm. It is of utmost importance that the real time spend is accurately entered into the system. I would advise every firm to actively and regularly communicate this to each individual fee-earner from the day they start. Should there be a legitimate ground to write off some of the hours, this decision can only be taken at the end once the matter is completed. Only at this stage there is a complete overview of all time spend and does it become apparent if someone has spent unreasonable amounts of time on an aspect of the matter. As long as lawyers have an agreement with the client to charge for time spent, they are under a contractual obligation to keep accurate track of time. Lawyers who do not enter all hours worked on a matter correctly into the system are in fact stealing from the firm and should perhaps be fired. Perhaps something to think about during your long flight from Seoul back home. You might want to implement stricter policies as of Monday.

When you search Google for ‘weight loss programs’ you get 500 million results. Among them are famous diets like the Mayo Clinic Diet, Weight Watchers, Eat more Weigh Less, the Mediterranean Diet, the Atkins Diet, and dozens more methods that are supposed to lead to easy permanent weight loss. Weight loss has grown into a multi-billion-dollar industry. Millions of people are looking for a quick and easy fix that will magically melt away the fat and will give them the figure of a fashion model. Obviously, all this is nonsense, there is no quick and easy way to lose weight. The only way is to forever eat less, eat healthy, no alcohol and exercise more. The only way to lose weight is a drastic change of lifestyle. To most people that is not very appealing, so they fall prey to magical solutions that in the end fail to deliver the desired result. This cycle just keeps repeating itself, hence the multi-billion-dollar weight loss industry. Sure, all of you will be familiar with TED Talks. These 18-minute aspirational talks have been around for over a decade and have gathered huge numbers of almost cult-like dedicated followers. As inspirational and captivating as the TED Talks may be, they are dangerous and misleading. TED Talks simplify complex problems and create the illusion that there is a clean quick and easy fix. TED Talks are tailored to make you believe that there is a world full of rainbows, butterflies and unicorns, where there is a technological solution for every complex problem. Quad non. The TED organization is a merciless commercial machine that feeds off peoples’ craving for hope and a better world. Analyzing 10 years of TED Talks clearly shows that most ideas failed to materialize and deliver the supposed solutions. Remember Elizabeth Holmes from THERANOS, just as an example. She gave a TED Talk in 2014. Humans have a deep rooted wish for quick and easy solutions. The combination of a deep-rooted wish for quick and easy solution and the tendency to believe in inspirational stories is a dangerous one. Mankind is not well equipped to deal with reality and lawyers are no exception. We all want a quick and easy way out. In my book ‘Death of a Law Firm’ (2015) I describe this craving for ‘Deus-ex-Machina Solutions’ extensively in chapter 9. Partners in a law firm are under a lot of pressure to deliver on client matters and to create revenue. By nature, lawyers are a bit ‘nerdy’. Typically, the are at their best, sitting behind their desk solving complicated legal puzzles. Most lawyers do not like change and do not like risks. They like to be left alone and concentrate on the matters at hand. Having said this, at the same time when coming together in a partners meeting, there is often a distinct fear of loosing out. Invariably it seems that some of the other law firms are doing better. Partners could have picked up a rumor that the law firm across the street is using clever technology, or that competing law firms are making more profit. Whatever the cause, there will be a reason to fear that the firm is losing out. Something then must be done. Management needs to come up with a plan. The problem is that whatever solution is proposed, ideally it should not involve active involvement from the partners. Change should happen and results should be achieved while the partners keep doing what they did. Effectively partners are looking for a magical fix. Looking for salvation from the outside. They want ‘Deus-ex-Machina Solutions’ This is why so many, if not most initiatives end up getting stuck in the mud. Just think about how often your firm in the past has decided on change and then think about how few of these initiatives turned out to be effective. Partnerships are going through the same cycles over and over again: everyone agrees change is needed, an ambitious plan is drawn up, task-forces and working groups are formed, trainers and consultants are flown in. In the end nothing fundamentally changes and after some time the whole cycle starts all over again. There is no magical fix. Like that ‘miracle diet’; after a while you start gaining weight again and the whole diet cycle starts all over. If you do what you did, you get what you've got. People should start to face reality. No problem will be solved, and no significant results will be achieved unless you are prepared to take ownership, change your routines and put in a lot of hard work and energy. Change does not so much require inspiration or courage; it requires above all personal ownership and responsibility. If you want to be number one, you have to be prepared to put in an almost disproportionate amount of effort. Not as a burst, but for the long haul. Lack of ownership, lack of focus and lack of continuity are the main reasons why change projects fail. Many law firms want to be more innovative. Not because there is a business case but because they think everyone else is doing it. Appointing a Director of Innovation is not going to do the trick, nor does investing in clever software. Innovation is not something you can do part-time or have organized around you. Your Managing Partner cannot fix it. The same goes for entrepreneurship and many other issues. Projects fail over and over again because partners do not take ownership and are not willing to invest time and effort. If your firm aspires to have more blue-chip clients, Business Development can not fix this for you. You have to take responsibility and get out there yourself. The wish to find a ‘Deus-ex-Machina Solution’, a magical fix is almost universal. We at TGO Consulting work with elite law firms across the world. All but the very best prefer discussing how to take action over taking action. Lawyers are highly intelligent; they can theoretically explore all kinds of solutions. After the interesting theoretical discussion, they want nothing more than going back to their practice. Hoping that magical forces will solve the issue while they are at work. It is time to confront the inconvenient truth: ‘If you do what you did, you get what you've got’. If you want change, you need to change your routines. There is no way around ownership. There is no magical fix, never.

In 2003 American film maker Morgan Spurlock only consumed McDonalds food for 30 consecutive days. As a result, the then-32-year-old, Spurlock gained 11.1 kilograms, a 13% body mass increase, increased his cholesterol to 6.0 mmol/L, and experienced mood swings, sexual dysfunction, and fat accumulation in his liver. He produced a now famous and award winning documentary ‘Super Size Me’ that follows his experiment from day to day. A 58 grams Mars bar contains 260 Kcal, which is just as much as a 150 grams bowl of Bircher Muesli. Despite having the same number of calories, their nutritional value could not be more different. High revenue does not mean high contribution to the firm's success In law firms, partners are measured by the amount of revenue they create. But like calories, revenue does not mean much. It is the quality of the revenue that counts. It is not unusual that partners who accumulate the highest revenue have a special status within the firm. Such partners weigh in heavy on discussions and partnerships try to keep them happy so that they do not leave. All this however might be misguided. So, let me explain why the partner who makes 20% less in revenue, could be 20% more profitable. Have a look at the graph: In order to understand the economics, it is important to start with the notion of ‘fixed costs’. Unlike most other business, in law firms the costs do not vary with the level of production. We distinguish between direct costs i.e. the salaries of the lawyers and indirect cost, which are the costs for housing, IT, marketing and so on. On an annual basis all these costs are more or less fixed and can not be influenced. Law firms do not fire lawyers if business happens to be slow for a few weeks as it will be near impossible to recruit talent if business picks up again. The same goes for support staff compensation, occupancy and IT. Also, these costs are basically inflexible and on the short term not influenced by the production level. When we take all annual costs of a firm and divide this by the total number of budgeted hours, we can calculate the costs per hour. To keep things simple, we do not take into account the differences per level of experience and just calculate the blended hourly costs for the firm. In the example shown in the graph, the fixed cost per billable hour is 161. Regardless what, every billable hour comes with 161 in costs that need to be recovered before there is a profit. The profit then is the margin between the actual realized blended rate and the blended costs. Focus on profit contribution rather than revenue In the example the first partner has billed 1.000.000 against a blended rate of 220. With a base cost of 161, the margin/profit per hour is only 59. Out of a total revenue of 1.000.000 this partner therefor contributes 267.273 in profit. The second partner has only billed 800.000, which is 20% less than the first partner. The blended rate however in this case was not 220 but 270. As there are no additional costs, this immediately increases the profit margin to 109. As a consequence, despite producing 20% less in revenue, the second partner contributes in absolute numbers 20% more in profit. We encourage our clients not to focus on revenue but on profit contribution instead. Obviously in order to do so, you need to know your bottom line. Revenue from smaller files hurts the reputation Besides the fact that revenue does not equal profit, there is another reason why not all revenue is created equal. That is reputation building. Typically the mandates that help a firm and a partner build a strong reputation in the market are not the small matters. For building a reputation there is a huge difference between 5.000.000 in revenue coming from 10 matters with an average file size of 500.000 and the same 5.000.000 in revenue but coming from 200 matters with an average file size of 25.000. The 500.000 euro/dollar/pound matters will significantly help build the reputation of the partner and the firm, as where the 25.000 euro/dollar/pound matters will not be noticed by the market at all. There you have it. Two reasons why not all revenue is created equal and why the fixation of most law firms on partner revenue might be a bit short sighted. We would encourage you to from now on also carefully look at the quality of the practice before some partners are elevated to the level of untouchable and super important to the firm. Maybe number two is actually doing much better than number one.

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.

This morning on the BBC News website, I read the an article outlining how a Norwegian aluminum producer is recovering after hackers took 22,000 computers offline at 170 different sites around the world. Norsk Hydro refused to cave in to the cyber-criminal's demands for money and have spent 50 million Euro trying to restore their business to full strength. The attack comes as evidence grows that hackers are getting paid off in secret by large organizations who want an easy way out. This article is the last before the summer holidays. We will be back as usual on Friday September 6. This last article of the season will be poorly read, I know this even before publishing. I know from experience that cyber security is very low on the list of partners at law firms. It is not a sexy topic. While Legal Tech is surrounded with a positive vibe and law firms almost tumble over each other to do statements on their websites and press releases on Legal Tech, most remain utterly silent as it comes to cyber security. There is an enormous discrepancy between the investment in Legal Tech and the investment in cyber security. This may one day prove to be a costly mistake. We have seen law firms crippled by crypto lockers Not only large companies, the power grid or the government are targeted by hackers. Also law firms are attacked although this rarely gets mentioned in the news. Based just on our TGO Consulting practice, over the past 12 months we have witnessed two clients who getting crippled by a crypto locker. Within less than 30 minutes after the attack no one in the whole firm could access any file. All files were encrypted by the hackers. Both firms sought the help of specialized IT consultants and both ended up paying a substantial amount in Bitcoins to unlock the files (there is no guarantee whatsoever that the files will be unlocked after paying the ransom, after all you are dealing with criminals). Another client of ours, got their email system hacked and compromised. The hackers send out emails on behalf of lawyers and secretaries to all contacts of the firm. These emails contained a document for review. After opening the document the receivers’ computers also got infected. This obviously is a very bad situation. Both for the law firm and for the clients. Please do not think the law firms mentioned are amateurish. All 3 are considered the elite in their respective jurisdictions. If this happens to them, it could also happen to your firm. For lawyers confidentiality is key. Law firms are not only being targeted by crypto lockers and viruses, but hackers are also actively after the data. Just type in ‘law firm hacked’ in Google and you get over 7 million results. Results feature well known cases such as ‘Panama Papers’ and Cravath and Weil being hacked back in 2016. While some cases are well documented, most hacked law firms manage to keep out of publicity. The Insurance industry estimates that 1 in 5 law firms are being hacked. Again, this could very well be your firm. If it can happen to Cravath, why would it not happen to you? Clients demand proof that law firms take data security serious Increasingly clients of law firms are asking their panel firms to state what measures they take to assure the security of confidential data and the protection against hacker attacks. Having a robust cyber security policy will be an important requirement to get business. Given all facts mentioned above there is surprisingly little sense of urgency among partner groups. Even to the extent that sometimes sensible measures implemented by IT experts need to be rolled back because partners find them inconvenient. This is potentially a dangerous attitude. So instead of raving about their Legal Tech, law firms should start prioritizing Cyber Security. Here are some basic measures for every firm to take. Make sure all software is updated. We see too many law firms that still run on outdated versions of Windows, just because of all the legacy systems they have running. Older versions of Windows are less secure. That is why WannaCry could wreak havoc and cripple major companies back in 2017 Restrict access ta data to a need to know basis. Many law firms have a file system that can be accessed by every lawyer and every secretary in the firm. While this might be convenient, it is not safe No data stored locally unless needed on that specific day. All laptops fully encrypted. Only remote connect through VPN. Never send documents to self by email. Give regular (at least twice a year) training to all staff on all aspects of cyber security. Train people on cyber hygiene and learn the how to recognize suspicious emails. We at TGO Consulting for example have a policy never to click on links or open documents that were sent unsolicited, even if it seems to come from a client. Before opening we will always ask the sender to confirm that the document has actually been sent by them. This simple policy has saved us twice from getting infected by malware during the past 6 months. Do never use USB to carry client documents. Never use USB that has been received as a giveaway. USB should be treated in the same way as a syringe: use only when fresh out of the box. Even then only use USB for non-confidential presentations and destroy after use. Do not let anyone except for your own lawyers and staff ever enter the ‘production floors’. Clients and third parties are limited to the meeting rooms. Make sure that you know exactly who is doing the cleaning in the morning. Make sure you have done a background check on each and every cleaner. Keep record of when they enter and when they leave. Do not permit cleaners to carry cellphones while at work. Third parties that need access to production areas should be properly identified and should be accompanied by a staff member at all times. The person checking the sprinkler, could be there to steal information, so stay with them for as long as they are in production areas. Do never work on clients’ documents while traveling on airplanes or trains. I fly a lot for business and you will not believe the number of times I have seen the person next to me or across the isle work on confidential documents. Only last week the person next to me during a flight was preparing for a presentation to the board of a listed company. Without any effort I could see in which areas sales was going down and in which areas this company was going to invest and how much. This could arguably have led to insider trading. Just don’t do it. Watch a movie or read a book instead. Never talk about confidential matters outside the office. Again, you will be surprised how much confidential information can be overheard while traveling. If two colleagues travel they will almost always end up discussing work. Not to mention telephone conversation. People easily forget that they are not alone when they are focusing on the conversation. So don’t talk client matters outside the office. Data Security is as much human behavior as it is technology: educate and train your lawyers and your staff! The list above is by no means complete, but it shows that a big part of cyber security comes down to human behavior. This is both good news and bad news at the same time. The bad news is that all your investments in IT security and defense will not be effective if humans are not behaving in the proper way. The good news is that you probably don’t need to invest a lot before your cyber and data security can improve. Start by training your lawyers and staff on a permanent basis. Setting up such a program might be an excellent way to spend the summer, so training could start as soon as everyone returns after the holidays.

It is our experience that law firms that need help most, are the hardest to help. That is one of the reasons why TGO Consulting focuses on the elite law firms in each country. Mid-tier law firms in general remain mid-tier for a reason. The culprit is predominantly the culture in the partner group. Based on our initial assessment of the partner group culture, we usually are able to tell after one meeting if we can help a firm to be more successful or not. I would go as far as saying that culture might me more important than legal skills. Let me put one thing straight from the beginning: we are not ‘tree-huggers’. We do not do personality tests, we do not do teambuilding activities, we do not do ‘purpose’, mindfulness or 24-hour retreats. We are and remain business consultants that focus on our clients’ bottom line profitability. We see culture as a tool for better business results. Now we have that out of the way, let’s look at some of the aspects of partner group culture that are strong indicators for a firm’s success, or the lack thereof: Lack of Trust Typically partners become uneasy when we ask whether they would trust any of their fellow partners to go to their client without them being present. There might be various reasons why a partner would feel uncomfortable. Maybe they feel that some of the partners are not such great lawyers. Could be that some of the partners lack the social skills or are simply too nerdy and detailed and the client would not like this. It is not only negative reasons why a partner feels uneasy with a fellow partner visiting their client. Some fear that the client might like the other partner better and that future mandates would no longer be exclusively in their name. Whatever the motivation behind it, in many law firms there is a lack of trust between the partners. This lack of trust is standing in the way of cooperating when developing new business. One of the characteristics of highly successful law firms is a high level of trust between the partners. Typically, the most successful firms have a rigorous vetting and selection process as it comes to appointing new equity partners. Partner promotions at these firms are not driven by opportunism and internal politics. Only those that rigorously meet all the criteria and are supported by all of the other partners, are promoted. The result being a high quality close knitted team where partners fully trust each other. Lack of trust is commonly also the basic driver behind the traditional partner performance criteria focusing on personal revenue and personal hours. The emphasis on individual performance is fueled by the fear that maybe a partner could under-perform and become a ‘parasite’ living of the profits generated by other partners. No partnership would want to carry such ‘backpacks’. Lack of trust creates emphasis on monitoring performance as an individual. Focus on detail and on the negative Would you say in general partner meetings at your firm focus more on the negative or on the positive? Being strategy consultants for law firms, we have witnessed many partner meetings at many different law firms. To our experience discussions during partner meetings tend to focus on the negative. Rather than discussing business opportunities, partners discuss things that are not good. Partner meetings are almost invariably inward focused, discussing internal issues rather than clients and market opportunities. Professionally, lawyers are trained to focus on risks and weak spots. Spotting and avoiding mistakes are what a lawyer does on a daily basis. Qualities that make a good lawyer, become a hindrance when it comes to managing the firm. The focus on the negative and the sensibility for potential risks, heavily influence the dynamics during a partner meeting. On top of that often partner meetings are also very detailed, discussing topics that should be dealt with on an operational level, rather than the partner group. Too much detail and focus on the negative are standing in the way of developing opportunities, markets and clients. No discussion when needed One would be inclined to think that lawyers are good debaters and that during partner meetings partners would liberally exchange and debate their opinions. Excellent results are only achieved after a good discussion and a free exchange of ideas and different points of view. Reality is different. Lawyers that do not hesitate to fight for their clients’ interests can remain silent during a partner meeting, not speaking up even when they disagree. The strange thing is that partners do bring their professional risk avoidance and attention for detail to the meeting, but not their professional ability to have strong discussions. Partnerships that lack the culture of having strong and opinionated discussions while still maintaining the good relationship, perform better than partnerships where only a handful of opinion leaders speaks up. If there is no culture of discussion and fiercely disagree in a constructive way, a culture of backroom politics and discussion behind people’s back will develop. Creating a toxic and/or lethargic climate in the partner group. No need to be friends Lack of trust, focus on details and on the negative and the inability to have opinionated discussions are strong indicators that the culture in the partner group is frustrating further growth and development of the firm. In strong partnerships the partners do trust each other. Successful firms have partner meetings that do not focus on details, risks and things that can’t be done, but on markets opportunities and clients instead. Partners in successful firms do not fear each other. They speak up when they disagree. They can have strong arguments but remain solution driven and focused on the content of the matter. To be a successful firm there is no need for partners to be friends. On the contrary, being friends tends to blur the relation. In strong partnerships partners have great self-confidence, trust each other and keep focused on the bigger picture and business opportunities. I urge you to now take a moment and asses where your partner group is today.