Control or Consensus? The Stifling Points in Law Firm Decision-Making
This article first appeared in Managing Partner 28th Feburary 2011
I have recently been involved with two quite different mid-sized law firms, each of which is managed very differently. I cannot, of course, mention any names. Firm A has around 60 partners of whom less than 20 are equity partners, and has just less than 200 lawyers in all. Firm B has around 40 partners, but only five (all founder partners) are equity and the firm has around 150 lawyers in all. In Firm A, the Managing Partner has many responsibilities but seemingly little authority; all decisions of any size are dealt with at monthly partners’ meetings. Firm B has maintained a very tight equity and one of the equity partners has combined his fee-earning with a role as managing partner. He is trusted by his Equity Partners and has a great deal of decision-making authority. Interestingly, decision-making is equally slow in both firms. In firm A, decisions often get deferred from one meeting to another through lack of agenda time with the result that even quite minor decisions can be made to wait for two to three months before being resolved. At Firm B, the Managing Partner has presided over a period of strong growth in which decisions used to be made nimbly and entrepreneurially but the size of the firm now means that the Managing Partner is completely snowed under. Issues needing a decision pile up on his desk to await his attention whenever he can get to them
What is clear in both cases is that the governance and management system which worked well five years ago does not so work well now. In both firms, some degree of decentralization of power is needed. In Firm A, the Equity Partners need to recognise that they cannot be involved in all decisions and need to entrust some of the decision-making to a Managing Partner and Management Committee. In Firm B, the benevolent embrace of the founder partners has become an iron grip and they need to consider what is needed to manage a firm which has grown considerably in size.
All law firms – all organisations, for that matter – go through a maturity cycle as they develop over time. The growth curve shown in the table illustrates how a firm can emerge, develop and then start to fade through its eventual lifetime. Firms such as Firm A can find that their development becomes stunted before they reach their prime and in some cases premature aging starts to happen and the firm begins to go downhill. Firms such as Firm B find that their progress comes to a sudden halt as decision-making becomes paralysed. Such firms may find that they enter the “Founder Trap” in which their rapid emergence and growth turns into decline and sudden death.
Not all firms are like Firm A and Firm B but it is important to understand that there are four phases of development for any firm to try to work through – the creative phase, the directive phase, the decentralized phase and the institution phase, the last phase being difficult to attain.
During the creative phase a firm emerges, is born or, in some cases, becomes rejuvenated. Firms may start up or start a period of renewal and revival. Such firms are almost always very entrepreneurially oriented at this stage of the growth cycle, and the firm is generally driven by an individual or a small coalition of individuals. A hard work ethic drives the firm’s momentum, and management activities tend to be ad hoc, flexible and uncodified. There is often a random patchwork of decisions and processes which emerge as needed and in response to the opportunities and demands which the firm faces. Policies tend however to focus on what not to do, rather than the enforcement of consistency and quality. This also tends to be a phase of heavy investment with the partners or members sacrificing immediate income in order to see the firm develop. During this phase the baby firm heads into infancy, usually accompanied by a growth spurt. A tipping point then occurs when the firm realizes that it needs a measure of discipline, coordination and systems in order to control the growing organisation.
The firm then enters a directive phase, in which the firm’s leaders (usually the founding coalition) impose some structure and order. At this stage the founder partners are unwilling to relinquish control and – like Firm B – concentrate power into the central control of a Managing Partner or the equity group itself. These leaders now, however, have a dilemma. The firm has developed thus far largely through their entrepreneurial and client-facing efforts. They are the partners with the client relationships and they are the partners with the specialist reputations. In the larger firm, however, the leading partners steadily become obliged to spend more and more time on management rather than fee-earning and they find this shift hard to assimilate. For a while, hard work and long hours allows the founder partners to continue both their client facing and management activities. Niche or boutique firms often decide at this stage in the cycle to remain the same size in which case the founder partners can continue successfully to direct operations for long periods of time – their crisis point may come when the founder partners grow old or tired and wish to retire. Some growing firms acquire professional management staff to assist with the increasing burden of management, but the founders generally only allow those managers to make the decisions which they themselves would have made, and this leads to frustration, duplication of effort and very little saving of time for the founders. This gives rise to further issues as the strategies first employed by the firm to get it to its current state may not be sufficient to enable it to grow further. Not only does the firm need a grown-up governance system, it may also need a more advanced and mature strategy. It is at this stage that the firm also risks losing its good people as profits start to plateau or slip. In essence, this directive phase can tip from a period of adolescence( in which the firm’s body seems constantly to be outgrowing its clothes) to a period of stagnation and decline.
If a growing firm is to move out of adolescence into adulthood, some decentralization of management soon becomes necessary. In Firm A for example, the tight-knit band of equity partners need to loosen some of their iron grip on the firm and entrust management powers and authority to others. This can sometimes be an emotional period for a firm during which there is a struggle for power and direction between the firm’s old guard and the firm’s ‘young Turks’. What is often seen here is the emergence of an executive group, with a decentralized structure of office heads, practice group leaders, accompanied by the development of a more empowered ‘C-Suite’ of COO, CFO, Heads of HR, Marketing and IT. Some autonomies at local, practice group and individual level remain, but the firm starts to develop a greater consistency of service and specialist capability. Partner responsibilities and accountabilities become more defined and focussed. The founders often begin to take a back-seat but find this hard to do. At the same time, the firm struggles to retain its partnership ethos. Partners remain insistent on the retention of ownership rights over significant matters like mergers and the admission or expulsion of partners, but more and more of the key decisions are now made by the Managing Partner and the Executive Group. As the firm’s profitability and success becomes more and more reliant on the joined-up effort of the firm and its groups and teams, and less on the performance of key individuals, the whole issue of partner rewards becomes extremely sensitive as partners come to terms with the notion that compensation decisions may be decided by peers. It is at this stage that so-called lockstep firms (where partners share equally after a period of progression to equality) come under challenge. Unless great care is taken, burgeoning bureaucracy can also start to stifle enterprise; partners are no longer under the same entrepreneurial liberty to take hiring and financial decisions themselves or on the hoof.
The future of the decentralized firm is highly dependent on the quality and competence of the Executive Group. In previous phases, management and leadership tasks have been driven more by the availability of people rather than by their competence. The group of professional managers hired a few years back may not have the ability to take the firm to the next level. Whatever governance structure has been agreed, the danger is that firms in this phase can easily plateau or even go into a period of decline and premature aging.
Even firms with strong and capable leadership, excellent decision-making and compelling competitive strategies, find it hard to ensure lasting success for the firm as an enduring institution. Hence, some firms remain as mature firms in their prime for many years without ever managing to take on a degree of permanence which will enable the firm to outlive its current generations of partners.
The Institution Phase
The holy grail of organizational success is to become an enduring institution – that is, a firm with a set of traditions and time honoured structures and norms, with a distinctive way of life, a stable and reputable brand and a long-term client base. These are firms which are more like clubs than commercial organisations but where a pronounced passion for excellence has become part of the firm’s DNA. The firm is often governed and managed with a light touch. The management structures have become less formal and partner discipline is self-imposed by the firm’s culture rather than driven by performance management regimes. Leadership is statesmanlike rather than authoritarian. Membership of the firm is more of a psychological contract than a commercial agreement. Roles are flexible and contextual rather than rigid and contractual. Long term success becomes sustained rather than episodic. Very few law firms manage to achieve this status.
During the firm’s creative phase, the danger is that the founder group’s loving embrace becomes a stranglehold which stifles continued growth. The sudden departure of a founder – even temporarily – can cause paralysis. The firm can at this stage become ensnared in the ‘Founder Trap’ and decline. During the firm’s directive phase, delays caused by the constant need for consensus or which result from the need for a decision from a leading coalition can easily stifle the firm. During the decentralized phase, firms can become equally stifled by a burgeoning bureaucracy or by the needs of the firm advancing beyond the level of competence of its managers. Both Firm A and Firm B are becoming stifled and need to work out where they are in their growth cycles. After mature reflections and discussions they need to develop some studied and deliberative decisions about their strategies, governance and decision-making for the future.