Effects and Examples of Status Quo Thinking in Law Firms

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Effects and Examples of Status Quo Thinking in Law Firms

by Emmanuel Kyrinis, Vice President of Product Management, Aderant

Humans are wired to prefer the familiar. We are programmed with a cognitive bias to resist changing the way we do things until the impetus for change is sufficiently attractive.

The problem is “sufficiently attractive” is an exceedingly high standard to overcome. Social science research suggests we have a “natural urge to stay on the path” even when the “current path is no longer beneficial.”

So, we stick to the status quo.

The Effects of Status Quo Thinking in Business

In its heyday, Blockbuster was the dominant movie rental store and had a strong preference for the familiar.  In the year 2000, it earned 16% of its revenue – $800 million – from late fees.

That same year, Blockbuster reportedly had an opportunity to buy Netflix for a mere $50 million. Technological innovation, such as streaming media, certainly had potential, but it wasn’t sufficiently attractive to put 16% of earnings at risk.

Slowly but surely, the market evolved over the next 10 years. Today, the movie rental store business is extinct. Netflix has just announced its 2017 earnings, surpassing market expectations, with revenue exceeding $11 billion.

This is an important point because this didn’t happen suddenly, rather it was slow and steady change over the better part of a decade. By the time things appeared sufficiently attractive to make a change, it was too late.

3 Examples of Status Quo Thinking in Law Firms

The parallels to the legal market today are stunning and it’s a central theme of a newly published Legal Business Report titled Challenging the Status Quo in Law Firms.

The legal community is ripe with technological innovation. Corporate clients are demanding greater transparency, efficiency in work, and predictability in costs. Law firms face pricing pressure and competition from new sources while demand for legal services remains flat.

If the 2008 recession is widely considered the catalyst for transformation in the legal community, we are now entering the ten-year mark. The current legal climate is squeezing law firms between pricing pressures and growing costs.

Arguably, there’s never been a stronger stimulus to challenge status quo thinking in law firms. In our discussions with hundreds of law firms from around the world, we see examples of status quo thinking in various forms stemming from finance, culture, and legal technology.

Below are just three out of the 13 examples listed in the full report:

1) The annual collections push accelerates revenue.

Aderant research indicates on average, about one-third of the law firm revenue comes in the final month of the year. This is because law firms tend to make a massive push at the end of the year to draw in collections.

There this creates several problems. First, it introduces cash flow challenges for the first few months of the year, as cash gained in December often goes to annual expenses and payouts. Law firms can see this in their own metrics like work-in-progress (WIP) and the average age of accounts receivable (A/R).

Second, such pushes often come with a hit to profitability. As firms strive to collect on overdue accounts, they are more inclined to make discounts. Sometimes these year-end discounts are over and above work that has already been discounted.

Finally, when an entire law firm is focused on the year-end push, it’s not doing other important strategic activities such as planning, business development, cross-selling or even software and system updates (which is important to contemporary cybersecurity measures).

Challenging the status quo means striving to bring the average time-to-collection down and flatten out revenue earned month-to-month. In turn, this provides better predictability into law firm finances, improves cash flow and profitability.

2) Revenue growth automatically increases profits.

Most firms measure and track finances on a cash accounting basis – money in with revenue –and money out in expenses. There’s an inherent assumption that if revenue goes up, profit does as well.

However, this doesn’t account for the cost of delivering the legal service to the client such as the cost of the individuals working on the account. We can see this at a macro-level in falling realization rates reported across the industry.

This happens when costs grow without supervision and eat into margins. For example, a high revenue account may have a slimmer margin because the firm uses more partner time to complete the work.

We see this in lateral hiring too, which is a top law firm growth strategy. Sometimes firms acquire less profitable work because of payments to lateral partners draw against that revenue. If it costs more to complete the work, then that book of business is less profitable.

The fix centers on modifying compensation incentives. While we are seeing firms embracing this consideration, there are still many firms that incentivize attorneys by hours or revenue rather than margin contribution or profitability.

3) Replacing a billing system is only about back office efficiency.

The replacement or upgrade of a law firm billing system only happens once every 10 or 20 years. The project is significant enough that it has become something bigger than itself: it’s not merely about replacing a billing system, but a once in a lifetime opportunity to transform a law firm.

This is a chance to drive significant improvement across essential law firm processes. When law firm processes – client intake, case workflow, WIP-to-cash – are augmented by technology it removes inefficiencies that drive up costs.

Upgrading a billing system is not merely about back-office efficiency – it’s about improving the efficiency for the entire firm.

Challenge Assumptions to Change the Status Quo

Rees Morrison, a principal with Altman Weil, recently published an exceptional piece relevant to this topic titled, How to Counter Bias – Whether Conscious or Not. He illustrates the origins of cognitive bias with an analogy of three legal managers that have opposing views on hiring new paralegals.

For example, one manager argues the firm should hire one paralegal for every two attorneys. Mr. Morrison says this assumption creates “a seemingly pivotal number to negotiate around” that “might be baseless.”

The first step in challenging the status quo is acknowledging assumptions and then examining their origin. In the analogy, the question to ask is where does the benchmark of one paralegal for every two attorneys come from?

“If underlying assumptions such as these are not surfaced, and if there is no data to undermine or support their correctness, managers are apt to make weaker decisions than they should,” wrote Mr. Morrison. “Apposite data can be used to bore in and counterbalance statements and assumptions that might otherwise be accepted unquestioningly.”

We believe he’s on to a big idea and yet, it also conjures up an important question at the strategic level: where should the case for change originate in a law firm?

From our vantage point, the task of challenging the status quo is a function of leadership.  It requires vision, change management planning, and the courage to see things through. Challenging the status quo in law firms must start at the top.

The full report Challenging the Status Quo in Law Firms is freely available in PDF format without registration.

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