Firm values

What is the key to commercial success for a law firm? The million-dollar question perhaps, but the attitudes and aspirations of employees certainly need to be high on any list of possible factors. A clear, correct and well-communicated set of core values can make all the difference.

By Rupert Merson, partner, BDO Stoy Hayward

The easy things to manage are the obvious things – for example the things you can measure easily. But the real challenges are the qualities and characteristics that are difficult to pin down that can yield sustainable competitive advantage.

But as any ambitious law firm will already have realised, the most difficult of all things to manage is people – and people are the only thing that ultimately matters to a law firm. People resist attempts to categorise them, or to make them behave in predetermined ways. All well-organised firms have lines of responsibility, job descriptions and organisation charts. These are the easy things that take your firm above the hygiene level of management practice. But well-managed firms recognise the importance and influence of the unofficial roles that exist in all organisations – the secretary that secretly runs the whole firm, the keeper of negatives from last year’s Christmas party. Similarly, there are the official communication channels and mechanisms that well-organised firms invest in. But well-managed firms recognise the importance of informal communication too – and find ways of using gossip, for example, to their advantage.

It would be a mistake to think that the more capable your workforce, the easier they are to manage. Far from it. Capable people often react against rather than respond to direction. Highly-paid, successful individuals will often see through links between performance and remuneration, and can often afford to interpret them in ways their managers don’t expect. The people that law firms recruit are nothing if not capable, and despite official grumbles to the contrary, are usually highly paid.

BDO Stoy Hayward is a firm of accountants, so unsurprisingly our preferred route into managing anything, including people, is by way of measurement. ‘If you can’t measure it you can’t manage it’ is a comforting mantra for many of us trying to wrestle with management in the modern world. Turn this around and you have a recipe for perfect management: make sure you have the right measurement tools and you can manage anything.

Even in the act of hunting for finer measures of performance, however, there is a suspicion that the mantra is perhaps a little too comforting. As we continue to wrestle with our businesses, we suspect that people are far too complicated to be reduced to the easily measurable. Or rather, if you want to develop really powerful people-management levers, you have to look for something really special.

The importance of values to people and performance

The most important route to people management is through an organisation’s values. These show themselves in all sorts of ways – including the complicated tangle of custom, anecdote and unwritten codes of conduct that influence how and why things really get done. Everybody has values. So do the organisations they work in – particularly people businesses like law firms. Most organisations pay the values that drive them little heed, not least because historically they have been difficult to measure. Nevertheless, they are there – values around which staff and partners can align, and on which foundations you can build a firm that is different and robust, and whose success is sustainable.

For the last 18 months BDO has taken its interest in values much further – through a research product into the relationship between an organisation’s values and its commercial performance. Taking advantage of the expertise of ISR, the world’s most experienced surveyor of staff data, the project is beginning to generate detailed insight into which values to foster and how to make fundamental and sustainable improvements to commercial performance. Eight professional-service firms and 2,000 staff have already participated in the survey. The findings, although necessarily preliminary, are already startling, and suggest that there are strong links between values and performance.

Values that drive profitability

Are there particular values, or patterns in values, that characterise the firms achieving particularly high scores on performance indicators? The answer seems to be yes.

Take what many might consider to be one of the most significant performance indicators – profit as a proportion of fee income. Our research shows how identified values differ between profitable firms and less profitable firms. Members of the more profitable firms are 19 per cent more likely to describe their firms as ‘innovative’, for example. More profitable firms also seem to be the more generally entrepreneurial firms – at least according to the values they align themselves with. As well as innovative, these include ‘risk-taking’ and ‘entrepreneurial’, as well as being more ‘quality-focused’ and (perhaps unsurprisingly) more ‘efficient’. The research also suggests that profitable firms are more likely to be firms where staff prize enjoyment as an organisational value, while they are less likely to see their firms as secretive, blame-oriented and exploitative.

Research also suggests that profitable firms are more brand-oriented – particularly interesting as brand orientation is not that often associated with professional-service organisations. Interestingly, however, three of the values that distinguish the most profitable firms were also singled out
by those that spend proportionally least on marketing. These are ‘fun’, ‘innovative’ and (most interestingly) ‘brand-oriented’. It is also worth
noting the significant difference in
scores between those firms that spend least on marketing and those that display negative value ‘bureaucratic’. There’s a suggestion in these scores that brands, like values, have to be lived – that they are more than just constructs of the marketing department.

Popular values for professionals

Are there any values that are particularly popular in professional-service firms, regardless of how they score on performance indicators? Again, the answer is yes. The six most popular, or ‘core’, values identified were:

Customer-oriented;
Professional;
Achievement-oriented;
Quality-focused;
Forward looking;
Focused.

Only one of these, ‘quality-focused’, also appears in the list that attempts to distinguish the more profitable organisations.

It would be wrong to suggest that these values define the difference between successful firms and others. However, they may be the values at the heart of what it means to be a professional-service firm – or indeed to be ‘professional’. Indeed, the first two on this list, ‘customer-oriented’ and ‘professional’, were cited by 91 per cent of all the survey participants.

And what about the most commonly cited negative values or inhibitors? These were:

Long hours;
Cautious;
Secretive;
Bureaucratic;
Controlling;
Blame-oriented.

Given the negative connotations of the items on this list, perhaps it isn’t surprising to find them receiving lower scores than the positive values. But the relatively high score given to long hours is interesting, and again highlights a commonly acknowledged characteristic of professional-service firms.

The significance of core values

The six core values found have additional significances too. Looking at many performance criteria, the firms where the core values are most strongly reported also do significantly better as businesses. In particular:

Operating margin (operating profit/fee income) is 18 per cent higher;
Operating profit as a proportion of total assets is 19 per cent higher;
Fee income growth is projected to be 62 per cent higher;
Earnings before interest and taxes (EBIT) as a proportion of fee income is more than double;
Employee engagement is 13 per cent higher;
Fee income as a proportion of the number of employees is 14 per cent higher;
Gross multiple (output as a proportion of employee cost) is 35 per cent higher;
Total employee remuneration as a percentage of fee income is 16 per cent lower;
Employee turnover is four percentage points lower (22 per cent vs 26 per cent);
Perception of leadership effectiveness is 22 per cent more favourable.
Partner remuneration as a proportion of total remuneration costs is 54 per cent higher.
Employees are 36 per cent more positive that their organisation is better than the competition;
Marketing spend as a proportion of fee income is 24 per cent lower.

On the face of it, these findings may seem to contradict the findings first reported about the values of ‘successful’ firms. Only one of the six core values also distinguished the most profitable firms. Yet now we are noting that firms more strongly aligned with the six core values seem to be 18 per cent more profitable than those that are not so strongly aligned. The data can be used to derive both conclusions.

It is also possible to reconcile these positions, however. One hypothesis is that firms that work hard at aligning themselves around a set of values – even any values – are more likely to do better across many dimensions than firms that leave such matters to chance. On the other hand, looking at the profit performance criterion in isolation, particular values seem to matter more.

Implications for HR

Can we now make the next step and suggest that the firms who invest time and effort in understanding their values will give themselves a chance of performing better than
the competition?

We know from experience it is possible to find a firm’s values and work at aligning individuals with them, but different firms face different challenges when actually identifying them. The larger and more complicated the firm, the more difficult it will likely be to define values, because at heart values are things held dear by individuals. Do organisational values become less important when an organisation has to satisfy the different needs of many different stakeholders? Of course, in a business dominated by one founder owner-manager you might imagine it would be relatively easy to define the values that predominate. But in an organisation that has passed through several stages of evolution, there is an established cadre of professional managers, many of whom have probably never even met the founder. The firm benefits from the support
of a disparate group of financial investors and sells its services to sophisticated groups of professional buyers, but it is still possible to define one core set of values. Many of the most successful larger businesses have managed to bottle the qualities that their founders once exhibited and convert them into organisational values – a key element of an organisational culture that can be measured and managed. But big companies don’t need famous founders and well-documented histories in order to define the values that matter most to their organisations. Organisations can also work with the staff they have, surveying current management practices and assessing underlying values. If managing partners don’t like what they see, they are in a position to influence change.

All this naturally requires an investment in time and energy. Unsurprisingly research also shows that the firms investing the most in core values also have a training and development spend per employee some 81 per cent higher than firms less concerned with core values. The conclusion is there might be a relationship between training investment and values alignment – and therefore with performance success as well. The results of this investment might also be startling – making it very difficult for another firm to copy and reinforcing competitive advantage.

Rupert Merson is a partner at BDO Stoy Hayward and a Fellow of London Business School. He can be contacted at rupert.merson@bdo.co.uk