Why too much cost cutting could damage the future of your firm

Significantly reduced fee income made cost cutting essential in many firms, as partners responded to deep recession by making hard decisions. However, while efficiency is good, cutting costs too much can cause you to lose your best people and demotivate staff. Even in tough times the question should be not ‘how much can we cut costs?’ but rather ‘how can we make more profit?’. The latter approach can help your firm not just survive in a difficult market, but actually flourish.

Law firms often cut headcount without careful analysis of the ‘potential’ as well as ‘performance’ of individuals, and by stopping any ‘non-essential’ HR activity. This non-essential activity probably includes improving the performance of your leaders and development of your potential leaders. This will adversely affect the quality of client service.

Recent research from Deloitte on the corporate sector is clear: 61% of chief executives globally said that their key issue was ‘cutting and managing costs’. Some 56% also rated as important ‘acquiring, serving and retaining customers’; 27% cited ‘managing human capital’; 26% mentioned ‘developing new products and services’; and 25% pointed to ‘improving top- and bottom-line performance’ (in summary, doing more with less and doing it better). Many law firms face exactly the same issues.

But chief executives also said that development of talent was vital for the future: 37% of organisations said they would increase focus on this area and 36% said they would increase management and leadership development. Having effective leaders now is even more vital than when times are good and it is best done by developing them in-house, not trying to buy them in from outside.

Deloitte found that 43% of top management had concerns about competitors poaching their best staff, while 40% said they would try to attract more people with hard-to-find skills. So you must have a compelling offering to both internal and external talent to make them either stay or join your firm.

Partners, supported by HR, can quickly develop plans that deal with these key challenges and thus demonstrate to all staff that they are still valued. Here are some key areas of focus for the firm that may help achieve this, all of them delivering quick and easy wins at minimal cost.

1. Identify potential leaders to target investment and retain the best
Confusing past performance with future potential will waste money and talent – and perhaps drive talent to competitors. Identifying future leaders is very simple and quick to do, but a disaster if not done properly. In one study, 51% of those selected as future leaders by past performance did not actually have the potential to progress further. Measuring potential is vital for your firm’s future viability.

2. Make people perform better
According to the Corporate Leadership Council’s 2005 High Potential Employee Management Survey, which questioned 11,000 employees in 59 global organisations, the key factors affecting better performance are:

• Personal characteristics: 43%.
• Having an achievable development plan: 38%.
• Being managed well: 37%.
• Manager helps me do my job better: 35%.
• Executives open to new ideas: 31%.
• Executives prioritise employee development: 29%.

So those who manage others must be able to motivate and develop them on the job. This maximises billable hours and encourages a real understanding of clients. Leaders at all levels must be trained, willing and able to:

• Develop the performance and potential of staff on the job through coaching and provision of challenging work;
• Accurately identify potential as well as performance quickly, simply and effectively to target resources where they will deliver best return;
• Run good-quality appraisal and development discussions and build achieveable but challenging development plans that deliver quality work and client service. Poor development plans are a key reason for career stalling or early departure;
• Act as mentors to those not on their team to drive high performance, encourage innovation and share experience across the organisation.

If leaders do this you could get up to 30% extra performance from around half of your staff. How much difference could that make?

3. Make everyone work as part of a firm-wide team
Create face-to-face networking and communication opportunities within the organisation to:

• Discuss issues and look for: cost reductions, more effective working, better client service, new business – and innovate in new areas;
• Enable people to build their networks;
• Enable partners to demonstrate commitment and set an example.

4. Get senior partners involved face to face
Senior partners must be prepared to live by example – by developing their own teams, by constantly cascading messages about the importance of high performance and development and by getting involved themselves, for example by becoming facilitators on development programmes or mentors. Studies suggest this could increase performance potential in the firm by up to 30%.

5. Ask people where costs can be reduced – but without loss of value
You might be able to reduce costs on development programmes by cutting non-critical training. This could be up to 25% of your current provision. But you must keep business-driven programmes and make them more cost effective, such as those enhancing leverage of clients across the partnership, and those focused on better client service and excellent leadership. This can be done by increasing the use of experienced internal staff with minimal external support. Identifying ways to save money should be everyone’s role,
not just the finance director’s.

6. Look at how HR and other support areas can act as a catalyst for better client service and help deliver more fee income
HR and other support areas should take time to really understand the external clients of the parts of the firm they support and look at areas where they can provide better support.

HR can also build a communication system across the organisation to make sure key messages from managing partners reach all staff as effectively as possible at all touch points. This aligns effort with key deliverables more effectively.

7. Position for the upturn
Don’t forget where future leaders come from and who delivers most of the work to clients – your staff. So, as you develop future leaders you must also engage all staff so they are ready to leverage the upturn when the first signs appear. If your leaders and future leaders are performing well and inspiring others, then everyone in the firm will perform at their best and you will be ahead of the competition.

Focusing on the areas outlined above will enable you to:

• Find opportunities to reduce costs and increase efficiency;
• Avoid losing talent in any headcount reductions;
• Increase the retention rate of existing talent and attractiveness to new talent;
• Exploit a reservoir of leaders and potential leaders ready to move in to new roles as you expand again;
• Change the culture of your firm to engage the majority of your staff so they innovate and support each other, potentially delivering up to 30% extra performance;
• Improve your client service;
• Position your firm ahead of competitors for the upturn.

Now is not the time to cut too deep and put the future of your firm at risk. It is time to create a high-performance culture where client service comes first, and innovation and efficiency enable your people to be more effective and ensure you lead the field.

Chris Roebuck is visiting professor of leadership at Cass Business School. He has worked with a number of legal firms and has held senior HR roles at UBS, HSBC, KPMG and London Underground