Some large companies are facing a severe decline in their ability to create real value for shareholders. Indeed, according to a recent BCG article, “The Transformations That Work — and Why” (Nov. 7, 2017, by Hans-Paul Bürkner, Lars Fæste, Jim Hemerling, Yulia Lyusina, and Martin Reeves), this is a problem for about one-third of the companies in the United States. Only a small number of those companies in decline will recover within five years. This is absolutely no different for law firms.
A leader’s struggle to create real organizational value is inextricably intertwined with creating something that attracts enough customers — or in the case of law firms, clients — at a profitable price point. That’s why, today, businesses of all sizes and types are vulnerable to demise due to disruption if they do not transform their organizations now, regardless of whether they have an immediate concern with organizational value.
Technology and mergers are commonly used by law firms of all sizes, but now skewing toward the mid-size firms, to improve profitability through cost-cutting and improving efficiency. If a larger organization needs fewer people, it will experience a significant increase in its profitability; however, if it isn’t also investing in ways to increase revenue through new sales of its products or services, it will never increase its value.
There are two ways for any law firm to increase revenue. It can acquire another firm with significant assets. In that case, the organization is essentially buying new sales (clients) at the right price to increase its revenue and profitability. Sometimes, the combination is called a merger when the two organizations are of comparable size or the optics require the appearance of equal strength in both organizations. The organization may also be proceeding from a more defensive strategy to reduce costs by reducing workplace redundant processes and roles, while maintaining the same level of work production.
The second way is for the organization to grow organically and increase sales, which drives up its revenue and profitability. The right acquisition or merger offers both and it’s up to the organization to transform whichever elements of its business model and operations are necessary to make that happen. When two organizations combine, they can immediately cut costs. It may take a few more resources (people, time, money, space and technology), but leaders can direct transformative work to nudge people to work more collaboratively to solve operations challenges and improve their performance. In professional services, the transformation that takes a greater aggregate of resources is getting professionals to cross-sell the work of other professionals in the organization to their clients. This is the only way that the combined firm is now getting more of the combined clients’ work than they ever could if they continued in a pre-combination configuration. This is similar for a manufacturing or distribution organization, even if not as obvious. These changes are transformational, if done well.
Why the solution is to develop leadership at all levels
Transformation, for most every organization, is now mandatory to survive and thrive. The leaders in place must be able to balance short-term needs for profitability with long-term needs for true revenue growth. Transformations are designed to change strategies, business models, operations processes, structures that organize people and the organization’s culture. They are designed to begin with a complex, multifaceted series of changes in at least one area. Success depends on leaders, who know how to do this and the development of leaders at all levels, who will be able to support the overall organizational goals for transformation.
Transformative change depends on committed employees, increasing profitability and retaining desired employees — especially after an acquisition or merger where a group of redundant employees are let go. There are a number of leadership skills involved. Development of some is easier than development of others. Good leaders are not good enough and poor leaders have an adverse impact on those they attempt to lead and the organization’s overall effectiveness and profitability. Let’s look at some published research data (from “The Extraordinary Leader,” by John H. Zenger and Joseph R. Folkman) to see why.
Research shows that average leaders, those that fall within the range of 30th percentile to the 70th percentile, have little effect on employee commitment. It’s only those leaders that are in the highest third of effectiveness that create more positive results. A related study found that 13 percent of employees of the worst leaders are highly committed, while 57 percent of employees of leaders in the 90th percentile of effectiveness were committed.
The goal of a transformation for a for-profit organization is in its name. Research on a mortgage bank demonstrated that poor leaders drove customers away and lost money. Good leaders made a reasonable profit; however extraordinary leaders nearly doubled the profit generated by the good leaders. Research from a communications company showed that leaders in the top 20 percent of effectiveness received substantially better ratings on customer satisfaction, even those the leader does not have direct contact with employees. In a related study of customer satisfaction within the retail industry, despite equal training for store employees, those stores with customer-oriented managers outperformance those with operationally-oriented managers.
Losing valuable employees is demoralizing and can be extremely expensive. This can easily derail a transformation effort. One calculation of turnover cost for the loss of a software engineer put the number at $200,000 – $250,000 per departing employee. Research from an insurance company showed reducing employee turnover has a direct effect on customer satisfaction and profitability and that poor leaders created a 19-percent turnover rate. A precursor to turnover is the intention to leave. Employees of the best leaders are significantly more committed to stay according to another research study of leaders in a variety of industries.
How to design the solution
Successful transformative change is more likely for organizations that are developing leaders at all levels. Since we are conditioned to think linearly, one might jump to the conclusion that the first step must be to develop the leaders before trying to implement the strategy. This isn’t true. Not only can leadership development be done as part of a comprehensive transformation strategy, it is more effective if part of the skill-development process includes working through and addressing active, ongoing adaptive challenges of the person and organization. Adaptive challenges are the type that are found in transformations.
I was personally involved in three transformation initiatives: (1) a law firm that had a long history of being unable to implement a strategic plan for increasing revenue, (2) a non-profit organization that was trying to design and implement a strategy to grow its membership, and (3) a post-merger integration project at a large law firm aimed to reduce resistance at the chiefs, directors and managers leadership level. In each case, the people required to lead and/or implement aspects of the organization’s transformational change, lacked the interest in leading or the necessary leadership skills. This created points of resistance, which in the case of the law firm was so strong that all implementation efforts had been stopped.
In each situation, there was no choice but to develop leadership skills in conjunction with the transformative changes required or the desired growth. Each organization was successful despite common misconceptions that an organization must first develop its leadership bench strength before diving into transformative change. Successful leadership development and moving the transformation forward was possible in each situation because the leadership development efforts resulted in reducing resistance through collaborative efforts to address a real problem the participants were facing.
These situations were not coincidental. Rather, it is common for an organization to recognize its need to grow or change and that part of the problem holding it back is a dearth of skilled leadership. These problems feed on each other.
When leadership development is delivered to peer-level groups within your organization, there are several key benefits. The first is that participants are able to support and learn from one another as they progress through similar individual change experiences. The second benefit of this cohort design is that peer coaching becomes an available tool to learn and develop for use inside and outside the learning group. When the training is internal, the organization receives an additional benefit because the group is able to explore the organization’s pernicious problems through the different perspectives that arise from different points of view on the organization and the different viewpoints that come with being unique individuals.
Several months after the conclusion of one of these projects, which culminated in a retreat program, the chief human resources officer reflected on the work and said, “[T]eams are working more effectively than a couple of months ago. Whenever you can have folks communicate effectively and candidly about integration and discuss the concerns that people have, it reduces the anxiety that many may feel when firms initially merge.” They can’t do that without the right leadership skills. Introducing leadership development into your organization’s strategic growth plan is one of the smartest and most helpful decisions current empowered leaders can make
Susan Letterman White, JD, MS, is a law practice advisor with the Massachusetts Law Office Management Assistance Program (LOMAP) and an adjunct professor teaching organizational leadership and leadership ethics at Northeastern University in Boston. Before joining LOMAP, she led Letterman White Consulting as its founder and managing partner for 10 years and before that she practiced employment law for more than 20 years and was the managing partner of a law firm. She can be reached at susan@masslomap.org.