New Book: Law Firm Profits Driven by ‘Smart’ Collaboration

Lawyers will make more money if they work together — but only if they do it the right way.

That’s the premise of Heidi Gardner’s forthcoming book, “Smart Collaboration,” which is set to be released Jan. 3.

Gardner, a former McKinsey consultant, has spent more than a year analyzing data from time sheets and personnel records of several law firms to dig into that hypothesis.  She came to the conclusion: “Collaboration doesn’t just increase revenues, but profits, too.”

It doesn’t work, though, if done incorrectly, she emphasized. For instance, “collaboration” doesn’t mean “cross selling” services to clients — something she found in interviews with top lawyers of the Fortune 500 to be a nagging complaint.

“It’s the legal equivalent of saying, ‘Do you want fries with that?'” said Gardner. “… Not all teamwork is smart.”

Gardner, who studies the legal profession and lectures at Harvard Law School, caught up with Big Law Business for an interview. She spoke about what “smart collaboration” means for big law firms, the research that went into her new book and what she learned from some of the country’s top lawyers along the way. Below is an edited transcript of our discussion.

heidi-gardner-smart-collab

 

Big Law Business: So I received a copy of your book, “Smart Collaboration.” How long has it been out?

Gardner: I think it started rolling off the press about 10 days ago, so we have had some copies. It’s available for pre-order on Amazon now and it should be hitting their warehouses any day now. January 3 is the official launch date.

 

Big Law Business: This was something you worked on for a long time. 

Gardner: The research underpinning the book has been more than a decade and the book has been at least a year. I have been studying teamwork at professional services firms for some time and that stemmed from my time at McKinsey.

 

Big Law Business: What brought you to test this idea with lawyers?

Gardner: Collaboration has the risk of being seen as a soft subject. The approach I took was founded in two principles. One, what ends does (collaboration) result in? And the second principle was that this should be analytically rigorous. I wanted to collect objective data that I could analyze statistically and quantitatively. I analyzed millions of data records across multiple professional services firms including several law firms. This included ten years of time sheet records from multiple law firms.

 

Big Law Business: What was in this data?

Gardner: It tracked the number of hours that every time keeper in the firm has billed on every project on a month by month basis. I didn’t identify the data so I don’t have names of people or clients, but I have records that allow me to understand which person I’m tracking year-on-year. There’s a four digit alphanumeric code associated with (individual lawyers and employees) but I don’t know which real person it is. So what the time sheets do is, it allows me to quantify different kinds of collaboration. I can see how many partners a given individual has worked with and how many partners across jurisdiction and practice groups or the number of projects the person has worked on that involves five or more.

 

Big Law Business: How were you able to convince law firms to hand over that financial information?

Gardner: The first one was really hard. But I established a relationship of trust with a firm based on some advice I had given them. And I had built a relationship with them and explained what I would be able to understand differently about their partner collaboration and outcomes if we had the data. I teamed up with people in their finance department to scope out their data. And my team at Harvard were able to figure out how to analyze these massive quantities of data. We didn’t just have time sheets, but it was important to marry those with personal files – looking at gender, how many were home-grown lawyers, and how old they were.

 

Big Law Business: But you weren’t able to see their true names? 

Gardner: Every firm has a way to track employees with an employee code in People Soft or whatever system them use. They gave me the records that go with personnel identifiers, which were codes and not people’s names.

 

Big Law Business: You can’t disclose the law firms that participated?

Gardner: No, I have NDAs with all of them.

 

Big Law Business: What did you find most surprising when you went through this data?

Gardner: It’s astonishing that firms are sitting on these massive treasure troves of data and haven’t analyzed it the way I have.

One thing I found was that cross practice collaboration doesn’t just increase revenues but profits, too. The reason that’s surprising is that a lot of lawyers are concerned that if they give clients too much buying power then they demand discounts such that they are big, but not profitable. I was able to show the pattern holds, but not to the extent that it makes them have lower profits.

The more practices that serve a client, it tends to be with a lower percent margin. But you multiply that percentage with a massive uptick in revenues and you see you are making considerably more profits. And when you factor in the much lower cost of sales to grow existing business, rather than attracting new accounts, then you see they are considerably more profitable.

 

Heidi Gardner, distinguished fellow in the center for the legal profession, Harvard Law School

Heidi Gardner, distinguished fellow in the center for the legal profession, Harvard Law School

 

Big Law Business: Did you find this purely in the data, or did you hear of anecdotal experiences as well?

Gardner: At first, it was data driven and then I went out and started sharing the data as early as I could when I had robust findings. In design thinking, they talk about having a ‘minimal viable product’ and going to market. So that was what I was doing. I was getting statistical robust findings and replicated that at one other firm. And then you say, ‘now we have found something.’ Then I would go into the market with those findings and write about it somewhere or present it at a partners’ conference, with an appropriate caveat. I would say that this is early findings but help me make sense of this. That opened up the opportunity for people to co-create knowledge. People get excited about that. They were able to provide anecdotes and explanations and often times they would raise questions and I would realize I could analyze my data to answer the question. All of the stories came out that way, but I also collected survey data. Every time I would speak at a partner conference, I would use it as a data collection opportunity and run a survey asking them about the benefits of collaboration.

 

Big Law Business: What are some insights you found in the data about collaboration in Big Law?

Gardner: For example, if there is a firm that grew up through mergers rather than organically, chances are there is going to be a lot more skepticism about other partners’ competence. If we just scooped up another whole firm, I’m sure a number of the people are really good, but we also got the rest of them, too. It makes me hesitate to open my client relationships, not knowing how good they are. As opposed to a firm that grew up through lateral hiring, where interpersonal trust is an issue. One might say, ‘I’ll be damned if I open up my relationship with him because he may take my clients to the next firm.’

 

Big Law Business: What are the types of law firms that you found to be most collaborative and therefore most financially sound? Any commonalities in their pay systems or overall business structure? 

Gardner: I’d say there is a small correlation between their compensation systems, and the degree to which they are collaborative. But not really to the extent that we would expect. I have studied a range of firms, from pure lockstep to eat-what-you kill compensation, with really sharp elbows. And lots in between. But across that whole spectrum what we find is, in every firm, there is a significant range of behaviors. Some people collaborate on everything they bring into the firm. And firms are equally likely to have lawyers who bring on matters and never share. Seeing that enormous range of behaviors to every firm suggests that there is not as much influence from the compensation systems as you might expect. They would more or less behave the same way [regardless of] the compensation system. It’s not clear cut.

 

[Below, Gardner moderates a panel on collaboration at the Big Law Business Summit in 2015.]

 

Big Law Business: The range of behaviors you mentioned, from the lawyer who collaborates liberally, to the lawyer who jealously guards their work… what kind of career path is each type of person most likely to have? Did the data show this?

Gardner: That is the second line of analytics we took. Even if (collaboration) is good for the firm, we can’t convince lawyers to behave that way if it’s against his self-interest. You can expect people to behave altruistically, but we had to let people know if it was in their self-interest or against it. We could look at individual collaboration patterns and correlate it to individual outcome, like how much their book grew over time. What we found is that the more people who share work that they originate and refer to other partners, the more their books of business grow in subsequent years. There are powerful effects on existing clients and it expands those relationships across practices and geography. It also improved their ability to attract new clients, and we see books of business growing from existing and new clients in future years, contingent on how many partners they bring into relationships they open up today.

 

Big Law Business: I’ve heard that a big part of becoming a rainmaker is delegation. Instead of managing cases, you dish your work to other partners and manage them instead. Yet the origination credit stays with you. But that’s not necessarily ‘collaboration,’ is it? 

Gardner: Well, across the firms I have studied, they had different ways of accounting for origination credit and clearly that has some effect on the magnitude of the outcomes. But it’s not simply a question of leverage and delegation. We could trace in the data why it was that books of business were growing. And one of the most powerful effects we found was that individuals developed a reputation externally for being able to do more complex and sophisticated work. And we can see in the data that — above other factors such as age, and whether practices are cyclical or counter-cyclical —  the number and complexity of projects lawyers work on are the biggest predictor for hourly rate increases compared to their peers.

 

Big Law Business: What does that tell us?

Gardner: When people develop a reputation in the marketplace for sophisticated, multi-faceted, complex work, the market values it.

 

Big Law Business: You must have received some push back on your hypothesis as you spoke with lawyers. What were some of the most common challenges or criticisms you heard? 

Gardner: The first push back was, ‘My clients won’t pay for it. They use e-billing software and red line every bill that has the word Team or Meeting.’ And so if my clients won’t pay for it, that must mean my clients won’t value it.

That prompted me to do a full round of interviews with clients, so I interviewed dozens of clients across a broad spectrum and I covered publicly traded companies, privately held companies, non-government organizations and government organizations of all sizes and headquartered across most regions of the world. The ‘Aha’ moment for me, coming out of that first round of client research, was that not all teamwork looks the same to a client. Not all pitches for teams look the same. And it’s really the difference between collaboration as I’ve talked about, combining different specialist expertise to address complex problems that none could do alone — whether it’s having experts look at cyber threats, or executing complex M&A deals. All those kinds of issues require integration of highly specialized experts, not just to add their discreet piece to the work, but to combine it and come up with an integrated solution. Clients are desperate for that and they won’t just pay for it, but they will overpay for it.

One Fortune 500 CEO said, ‘We are weeding out the cost of firms that service just one narrow discipline, because there are a lot of substitutes available. I can get good substitutes from a lot of different firms. It’s very hard for me to find a firm to provide a joint solution for my complex problems and when I find that, I’m willing to pay for it.’

They do hate to be cross-sold. Clients don’t want to pay for cross selling at the variety of, [X lawyer] is my tax lawyer and all of a sudden he comes in one day and says, ‘now we want you to meet my employment lawyer.’ It’s the legal equivalent of, ‘Do you want fries with that? It’s in your best interest to buy more.’ Clients see right through that. The [law firm partners] were trying to sell what the firm had to offer. They weren’t understanding the business problem in the context of their industry and explaining why different expertise would reach a more sophisticated resolution.

 

Big Law Business: I guess that’s a pretty human problem. Looking at everything in terms of how it affects yourself. 

Gardner: It’s a classic, ‘I have a hammer, you look like a nail.’

 

Big Law Business: What are the lessons you’d like readers to take away from your book?

Gardner: People should understand that collaboration has benefits for individuals, the firms they work for and their clients, but it’s an investment. My book is called, ‘Smart Collaboration,’ and the reason is that not all teamwork is smart. You need to pick the right opportunity where collaboration results in more than the sum of its parts. And you need to execute it efficiently and there is an investment period required to develop the skills and the relationships and the confidence to engage in that kind of smart collaboration. You have to stick with it long enough until those rewards kick in — there is a lag period and too many people give up before the ROI turns positive.

 

Big Law Business: You said something earlier, that clients are looking to swap out niche, specialist law firms with substitutes that can provide integrated services. But what about lawyers who are known for handling all the bet-the-company litigations, like Ted Wells, John Quinn and lawyers of that caliber? 

Gardner: You’re deeply familiar with the industry and you struggle to think of more than a handful of people who fall into that category. Yes, there is always the super elite, but for the people who are merely superhuman, as lawyers should consider themselves, I don’t think they should bank on being seen as irreplaceable.

 

Big Law Business: So what comes next for you now?

Gardner: I am in the process of planning launch events in cities across the United States and around the globe and I’m carrying on my research as well. It’s focused mainly on the theme of collaboration.

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