OVERCOMING PARADIGM BLINDNESS

While the doctrine of judicial precedent is a foundation of the U.S. common law system, it’s my been my observation over 30+ years that U.S. law firms all too often have extended adherence to precedent beyond the substance involved in the practice of law into the business of practicing law.  I previously mentioned this behavior in an earlier posting when I closed with the following quote from Rear Admiral Grace Murray Hopper:

I am now going to make you a gift that will stay with you the rest of your life. For the rest of your life, every time you say “We've always done it that way,” my ghost will appear and haunt you for twenty-four hours.

I didn’t realize it when I did the earlier posting, but this attitude of “we’ve always done it that way” is symptomatic of something that has been labeled “paradigm blindness,” which typically has been described as being the mode of thinking that:

The way we do it is the best because this is the way we've always done it.

Paradigm blindness also has been used to describe conduct in a number of settings, including the attitude of seeing the way you work as being “right” and building defenses to protect it instead of recognizing experimental evidence that should guide the way you work or the attitude of refusing to acknowledge experiences, facts and feelings that cannot be explained by old sets of assumptions.

Benchmarking has been called a powerful management tool that can facilitate the fight to overcome paradigm blindness.  Lots of definitions of “benchmarking” can be found; and the one at www.businessdictionary.com is that “benchmarking” is the:

Measurement of the quality of a firm's policies, products, programs, strategies, etc., and their comparison with standard measurements, or similar measurements of the best-in-class firms. The objectives of this exercise are (1) to determine what and where improvements are called for, (2) how other firms achieve their high performance levels, and (3) use this information to improve the firm's performance. 

Benchmarking can be an effective competitive tool that improves a firm’s operating effectiveness by:

• Exposing the firm to new ideas and new ways of doing things.

• Helping to overcome resistance to change by demonstrating that new ideas and ways of doing things work since they’re being used by others.

At morepartnerincome, Tom Collins recently touched on benchmarking when he referred to the article The Four Principles of Enduring Success by Christian Stadler in the July-August 2007 edition of the Harvard Business Review.  In his article, Stadler said:

When your company is doing well, revenue is pouring in, and your stock is rising, how do you know if you could be doing better? How can you tell which of your management practices are making the difference and which are merely doing no visible harm? Benchmarking is the obvious answer, but not by comparing poor companies with good ones. The way to get at this problem is to compare good companies with even better ones.

It is that very philosophy that led to my month-long LawBall tour through Legalritaville that just concluded and is why I included both at each “division stop” a ranking of the top firms in the division and at the end of the tour my own ranking of the AmLaw 200.  There are law firms out there that from a financial operations perspective clearly perform better than others, and the other firms can learn from and improve their own performance by benchmarking against these top-performing firms.

For those that did not catch the conclusion of the Legalritaville tour in Beauty is in the Eye of the Beholder, here again in order are my LawBall top 10 financial operating performance firms for 2006 from the 2007 AmLaw 200:  Wachtell, Lipton, Rosen & Katz; Wiley Rein; Sullivan & Cromwell; Cahill Gordon & Reindel; Irell & Manella; Cravath, Swaine & Moore; Simpson Thacher & Bartlett; Munger, Tolles & Olson; Gibson, Dunn & Crutcher; and, Quinn Emanuel Urquhrt Oliver & Hedges.  As I noted in that posting, when compared to the aggregate performance of the AmLaw 200, the aggregate relative financial operating performance of the LawBall Top 10 picks significantly exceeded that of the aggregate AmLaw 200 in every individual key metric category (margin, asset turnover, ROA, leverage, and ROE) except for leverage.  In other words, these 10 firms achieved superior performance with slightly less risk (more conservative leverage) than that of the aggregate AmLaw 200.   In addition, on average the LawBall Top 10 pick firms were moderately sized.  The average gross revenues and profit achieved by the LawBall Top 10 firms was $489,200,000 and $272,450,000, respectively.  Also on average, these firms had 379 lawyers, 111 of whom were partners.

What can other firms learn from benchmarking against these LawBall Top 10 firms?  How did the LawBall Top 10 in the aggregate achieve a margin (55.69%) that nearly was 20% higher than that achieved by the aggregate AmLaw 200 (37.65%)?  How did the LawBall Top 10 in the aggregate achieve an asset turnover or revenue per lawyer ($1,290,765) that was 1.79 times as great as the asset turnover achieved by the aggregate AmLaw 200 ($720,808)?  The resulting product achieved by multiplying margin times asset turnover is return on assets (or profit per lawyer) – and the different margin and asset turnover levels of performance achieved by the aggregate LawBall Top 10 versus the aggregate AmLaw 200 resulted in a ROA for the LawBall Top 10 ($718,865) that nearly was 2.65 times that achieved by the AmLaw 200 ($271,403).  And, despite a more conservative use of leverage (3.4237 for the aggregate LawBall Top 10 vs. 3.7302 for the aggregate AmLaw 200), the aggregate LawBall Top 10 return on equity (or profit per partner) of $2,461,156 was 2.43 times as great as the ROE of $1,012,375 achieved by the aggregate AmLaw 200.

I’ve said often that I prefer to analyze a business over a 5-year operating period – not just a 1-year period.  But, having said that, the rather stark differential in 2006 financial operating performance between the LawBall Top 10 firms and many of the others in the AmLaw 200 should make it clear that there is no room in the business of practicing law for paradigm blindness.  “This is the way we’ve always done it” just won’t cut it and must be overcome.  How did the firms in the LawBall Top 10 achieve their high performance?  What do they know, what do they do, and what policies, products, programs, and strategies (to name just a few things) do those firms possess that the other firms don’t know, don’t do, or don’t possess?   Perhaps some of the answers can be found in the 4 principles of enduring success that Stadler discovered in his benchmarking study discussed in his article:

1. Exploit before you explore. In managing growth, the tension between leveraging existing assets and developing new ones is well known. Great companies have a clear priority: exploitation.  (The LawBall Top 10 firms seem to have figured this one out as they generate much more revenue from their assets than do the other AmLaw 200 firms.)
2. Diversify your business portfolio. Great companies are adaptive. They diversify their supply bases, products, customers, and geographic markets.  (Might they also be doing a better job of matching their assets with the demand of their business – a concept envisioned by the professional asset capability matrix?)
3. Remember your mistakes. Great companies do not fall into the same trap twice. Meaningful stories are passed on from one generation to the next from which successive generations draw clear object lessons.  (I know – getting lawyers to admit mistakes is tough!)
4. Be conservative about change. Great companies go through radical change only at very select moments in their history, and they do so cautiously.  (As I’ve noted before, I think one of those select moments is facing the legal industry now.)