Is building your firm’s institutional capital on your to do list?

This article was first published in Managing Partner in June 2013 and is reproduced by kind permission (www.managingpartner.com)

A new financial year has recently started for many UK-based law firms, and managing partners are turning their attention to the uncertain and probably bumpy road ahead.  Budgets – a major part of a firm’s shorter term operational plan – should have been set and action plans are hopefully in hand to achieve results this financial year.  However – although it is never easy to think very far ahead when endurance and survival are the leading priorities – planning in law firms should never be entirely short term focussed.

It often works well to create and develop one straightforward long term strategic project that can galvanise and inspire partners and staff.  One such possible project is to focus on those parts of a firm’s intellectual capital or intangible assets that sometimes get overlooked or starved for attention.  Most firms, when they think about their intellectual capital, turn readily to their human capital and their relational capital (brand, clients, referrers, and networks) for their action planning at the same time as careful management of the firm’s economic capital and shorter term business recipes.  What many firms ignore (and even at times fail to understand) is their firm’s structural capital (sometimes and perhaps better known as institutional capital) made up of those features that make the firm unique and competitive – such as systems, processes and know-how.  An additional and important part of any firm’s institutional capital, is its ethos, internal ecology, expected sets of behaviours and ways of doing things – in other words, its unique organisational culture.  A set of institutional capital projects could therefore include one or more of three separate parts, but it has to be recognised that none of these is easy to introduce and implement.

The first and most topical of these is the improvement of the firm’s processes and systems.  Approaches regarding Legal Process Improvement (LPI) are steadily gaining traction in the legal profession in order to gain the benefits of streamlined legal services, the minimisation of waste and increased efficiency.  In parallel, many firms are also seeking to improve their business support functions by optimising their organisational business processes.  Whichever approach is taken, it is vital for the firm’s leadership to support, sponsor and coordinate the project.  As my colleague Chris Bull points out in his Ark/Managing Partner Legal Process Improvement Toolkit, “Tackling a single process or practice area using Process Improvement tools is a common starting place” and he suggests the creation of a balanced project team to oversee legal process re-engineering programmes and business process management initiatives.

A second possible Institutional Capital Project should concentrate on the development of know-how.  Knowledge Management (KM) has been around in the legal profession for at least two decades and most firms have had a crack at developing a coherent and useful system.  Most initiatives have been unsuccessful either because lawyers have failed consistently to contribute their know-how to a central system or because a mass of material is left sitting idle and under-utilised on the firm’s databases.  It is, of course, hard for a managing partner to gain enthusiasm amongst his or her partners and members for yet another KM project in circumstances where previous initiatives have failed.  A good starting point may consist of two steps.  First, it may be necessary to invest in a bit of internal education as many partners do not really seem to appreciate that the profession is at yet another tipping point brought about by client pressures and the advent of new providers who both take the provision of KM very seriously.  Sophisticated clients perceive that under-emphasis on KM drives inefficiency.  New legal service providers embrace best-in-class KM systems as vital ingredients in their strategy and success.  The other step is for the firm’s leadership to work out and demonstrate compellingly to their partners exactly how investment in a KM system will improve performance and result in financial success and performance pay-off.

The third and final possible Institutional Capital project is a cultural change initiative.  If you look at the top firms in any locality, their unique individual cultures tend to distinguish between them.  Some may gain strength from being collaborative and collegiate, whilst the success of others may be driven by being very achievement oriented.  Further firms may manage performance in a disciplined manner with a very hierarchical and controlling structure and style, whilst others may be more creative and innovative.  There are no rights and wrongs here, but what is clear is that a strong and homogeneous organisational culture does seem to have a powerful effect on the performance and long-term effectiveness of any firm.  Furthermore, a 1994 study on enhancing organisational performance by reengineering processes and procedures concluded that success required integrating such a project with a culture change programme. Hence, culture change may indeed be the most important initiative of the three proposed Institutional Capital projects.   Culture is however so intangible and amorphous that it is sometimes hard to know where to start.  In my view, the best way is to try to establish both what your firm’s culture now is and what you and your partners would like it to be, in the context of the firm’s strategy and conditioned by the values, mindsets and aspirations of the partners. A number of qualitative and quantitative methodologies and instruments are available to achieve this step.  The next step is some action planning to move the firm from its present state towards its desired state.

What is clear is that the building and development of Structural or Institutional Capital – specific to the firm rather than individuals – is difficult and painstaking.  These projects are therefore easy to avoid in deference to shorter term plans for growth and increased profitability.  However, it should be in the job description of every managing partner to take a balanced and long term view to the development of the firms’ intellectual capital and intangible assets