Under the Star System

Managing partners often focus so much on finding a competitive advantage - figuring out how to beat their competitors for a client's business and do it profitably - that they lose sight of a simple truth: At any professional service firm, the people you pay are even more important than the people who pay you. This maxim may seem counterintuitive at law firms, where client service and rainmaking reign supreme. But we believe that even in a slow economy, it is "star making," not rainmaking, that fuels long-term success.

Stars are those lawyers who have the highest future value to a firm as an organization - young lawyers who are potential rainmakers, for instance, or lawyers whose work is so outstanding that potential clients seek them out. Star making is the ability to align star lawyers' needs with the firm's strategic goals, to allow the firm to get as much value as possible from stars. To obtain a lasting competitive advantage, there is no greater priority than recruiting, developing, and retaining star talent.

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In fact, a recent Bain & Co. study suggests that the single biggest root cause of law firm failures is that they underpay their stars (who eventually depart), while overpaying their lowest-performing tier of partners. This leads to a dilution of the entire partnership's capacity and, eventually, a meltdown.

For our book Aligning the Stars, we studied 18 leading professional service firms representing a variety of disciplines. Four of them were law firms - Fulbright & Jaworski; Latham & Watkins; Skadden, Arps, Slate, Meagher & Flom; and Wachtell, Lipton, Rosen & Katz.

One of the things we found was that great, enduring professional service firms have high levels of alignment between stars' needs and strategic goals. This alignment transcends business cycles and leadership successions. It exists when partners behave in a manner that is consistent with the firm's strategic needs - when everyone is pulling together toward the same long-term goals.

Because the alignment of a complex organization is hard to achieve and even harder to maintain, its presence creates a powerful competitive advantage. In the best-practice firms that we studied, we found a balance between the partners' attention to developing business and serving clients, on the one hand, and developing younger stars, on the other. Not all partners did both equally well, but a balance existed nonetheless.

FIRM ALIGNMENT

Four dynamics enhance firm alignment: people systems, governance, culture, and leadership. The first two are relatively straightforward. People systems include compensation, which, while overrated in influencing day-to-day behavior, should be designed to drive lawyers toward the activities the firm wants to reward. In addition, there are performance review systems and other types of feedback loops, which are usually underrated but are, in fact, quite powerful.

The second dynamic - governance - is most effective when it incorporates such basic principles of partnership as strong peer networks and participatory decision making.

The remaining two areas - culture and leadership - deserve special attention because they are more ethereal. They are the "soft stuff." Contrary to popular opinion, culture can and must be explicitly managed to generate desired behaviors. Rewards - even things as simple as Lucite block trophies - are an obvious way to do this, but so are private words of encouragement and other sorts of recognition.

Culture is a system of beliefs that members of an organization share. These beliefs concern goals and values, as well as conduct - appropriate behavior for attaining the goals and living by the values. While every organization is distinctive, outstanding firms are remarkably similar in the beliefs that make up their cultural core. Among other things, their partners agree that their goal is to build a strong, enduring organization they can pass on to the next generation of partners.

Consider the case of Skadden. During the economic downturn of the late '80s, its performance-based compensation system put younger partners at a considerable disadvantage - so much so that several senior partners worried about possible defections. In response, the older partners agreed to take a pay cut for the sake of the younger ones. In the Skadden culture, the lawyers were concerned not only about each other but also about the health and perpetuity of the firm. Nurturing the next generation needn't depend on such extreme measures, but it does require partners to invest time and effort in coaching and mentoring their junior colleagues.

A commitment to nurturing can fit within the up-or-out pyramid structure of law firms. The outstanding law firms that we studied are very thoughtful and careful about providing accurate feedback to their young people. Associates often realize on their own that they aren't going to make partner, so they leave. The firms we studied help them find other opportunities, often with clients, which, through referrals, can be a source of future business for the firm. This translates into good feelings at law schools and makes future recruiting easier.

MYRIAD CHOICES

This talk about nurturing the next generation may sound like motherhood and apple pie. But it explains the myriad daily choices that contribute to an organization's culture. Partners who believe deeply in these principles should be placed in key roles as office and practice-area leaders. Personnel practices must be designed to create an environment that advances these beliefs. In meetings and personal conversations, firm leaders need to encourage behaviors that reinforce these beliefs. In this way, culture becomes a potent force in aligning the behavior of individuals with the needs of the firm.

The final dynamic that enhances firm alignment - leadership - is the attribute that most influences the degree of alignment that a firm is able to achieve. In law firms and other professional service firms, power is diffuse. The absence of strong leadership can undermine star making by paralyzing the decision-making process and undermining alignment. But exercising leadership in professional service firms is enormously complex. Law firm partners are practicing lawyers, firm leaders, and equity owners - all at the same time. Those three roles can easily come into conflict, especially when a partner takes on formal management responsibilities. Every professional firm we know of has leaders who wrestle with them daily.

Organizationally, law firm managing partners typically lack the power and control inherent in corporate hierarchies; nonetheless, they still must guide their firms toward their goals. Facilitating decisions and shaping behavior through persuasion and consensus are critical skills. That may sound obvious, but the process of persuasion requires partners to listen to others' perspectives and hone the capacity to develop and deliver proposed arguments. These skills do not come naturally to all managing partners. When they do not, they must be learned.

The marketplace for legal services is evolving rapidly. New competitors, mergers, cross-border partnerships, and even firm failures are increasingly common. A firm - and its partners - must be genuinely willing and able to make sacrifices today to build a stronger business tomorrow. This is challenging work. Too often, procrastination, debate, self-delusion, and mixed motives conspire to push a firm toward mediocrity and perpetuate inertia. To remain competitive, partners must move beyond their personal circumstances to meet the overall needs of the firm - and its subsequent generations.

Jay W. Lorsch is a professor of human relations at Harvard Business School. Thomas J. Tierney is the former chief executive of Bain & Co. and current chairman of the Bridgespan Group. This article first appeared in The American Lawyer.