Driver or administrator? HR’s impact on law firm success and how to measure it.
HR leaders are being called upon to step into the “golden triangle” of strategic management, to be on an even footing with the CEO and CFO.[1] However many CEOs complain that HR leaders focus extensively on “administrivia”, lack vision and strategic insight.[2] Is this also true for law firms? The Bucerius Center on the Legal Profession (“Bucerius CLP”) recently investigated HR standards across top law firms in Germany (the “Bucerius CLP HR Benchmark Study”) and discovered that although HR leaders from 80% of firms regularly participate in executive meetings, HR’s role continues to be weighted towards traditional activities such as operations and recruitment. Critically, the study also revealed that little is being done to evaluate the performance of the HR department and its impact on the business strategy of the law firm. The use of HR metrics positively correlates to organisational success.[3] But which metrics? And how can law firm HR leaders get closer to the business and avoid the administrivia trap?
Quantifying HR: Data, data, data?
With the advent of increasingly sophisticated law firm management tools, more and more information is becoming available and can be analysed. Time-recording and billing systems provide better and more accurate information on lawyer performance, and work allocation systems can provide information on lawyers’ experience and capacity for new work.[4] Some businesses already make use of Microsoft Workplace Analytics or Fitbits to provide insight into their human capital.[5] Provided that the data can actually be harmonised (as it may often be held in different databases and systems) and local regulations permit the data to be accessed and mined, the potential for people analytics is immense. According to some, people data (not HR leaders) will win a seat at the CEO’s right hand and will be able to answer critical questions such as “will there be enough talent for the firm’s new service delivery model?”[6]
Some major organisations such as Philips and KPMG are already using predictive analytics to identify potential early leavers (see for example, the PRETA – predictive analytics employee turnover tool - from iNostix by Deloitte). Whilst other organisations, such as JPMorgan, use predictive analytics to identify potential rogue employees – “Minority Report” may be closer than we think.[7] In addition, some consultants have even devised financial performance metrics for HR, such as ROIC (return on investment capital) and balance of trade scorecards (number of associates in: associates out/ per partner) in an attempt to encourage HR to substantiate its work with hard data and manage people as you would manage your finances.[8]
Is data the answer? Strategic planning necessitates the establishment of key performance metrics. According to the well-known-maxim attributed to management guru, Peter Drucker, “if you can’t measure it, you can’t manage it”. In our view this oversimplifies matters, and apparently he never actually said it.[9] Although data can provide insights, data alone cannot replace the “people” element of HR. Law firms are not Google and very few law firm HR leaders have the resources to run predictive analytic reports at the touch of a button. So what can HR leaders measure?
Three key questions for HR
The purpose of key performance metrics is to measure the success of a business. How do law firms define success? Generally speaking, success is the accomplishment of predefined goals, so without knowing each individual law firm’s goal, it is difficult to establish a universal definition of success for law firms.[10] Especially so, when these goals are cloaked in nebulous mission statements.[11]
Strategy is not to be confused with goal setting, but encompasses the steps required to achieve that goal.[12] Strategic planning thus relies on establishing the right performance metrics. Revenue growth, profitability, utilization, realization, costs, pricing, margins, leverage are all typical metrics used by law firms to measure “success”.
The crux of the matter for HR leaders is therefore to devise key performance indicators for HR that demonstrate its impact on the firm’s success. In our view, HR leaders need to start by asking themselves the three key questions identified by Lawler and Boudreau in their report on global trends in HR management[13]:
Efficiency asks, “What resources are used to produce our HR policies and practices?”. Am I using resources without wasting money? Would it be more efficient to advertise training contracts online rather than sending lawyers and HR staff to day-long career fairs?
Effectiveness asks, “How do our HR policies and practices affect talent pools and organizational structures to which they are directed?”. Am I producing the desired result? Did the investment in online recruiting result in a larger, better pool of candidates?
Impact poses the hardest question of the three: “How do differences in the quality or availability of talent pools affect strategic success?”. Does HR affect the strategic success of the firm? Did the larger, better talent pool result in the firm increasing revenue earned from client A plc?
According to Lawler and Boudreau’s study, as well as the Bucerius CLP HR Benchmark Study, most HR functions only measure efficiency and effectiveness, if they measure anything at all. Focussing on efficiency and effectiveness can result in HR leaders being seen as “administrators” rather than strategic advisers. So how can HR leaders measure HR’s impact on strategic success?
How to measure impact
Common metrics traditionally used by HR functions are employee satisfaction, productivity and turnover.[14] According to the Bucerius CLP HR Benchmark Study, most (but not all) top law firms are employing these three traditional metrics. Around 59% of HR leaders in top law firms carry out engagement surveys at least every five years and 70% measure employee absences and turnover. How can HR leaders move from efficiency and effectiveness to impact on strategy, and do so without an array of people analytic tools?
Here are three simple metrics which would enable HR to provide greater strategic insight into the success of a law firm:
I. Absenteeism: Although engagement surveys can provide a useful snap-shot of lawyers’ satisfaction with various aspects of their employment they tend to be seen as a pure “HR” exercise rather than something which provides insight into business performance. Consequently the results often end up back on HR’s desk, rather than prompting a change to the business. Analysing simple data, such as firm-wide absence rates, for the existence of trends or patterns can provide more insight into lawyer morale than a standard 20 minute questionnaire.
Changes over time. Is the average yearly absence rate per employee increasing or decreasing?
Employee group. Do certain practice areas, client teams or partner teams have higher absence rates than others? Is this higher amongst associates or partners?
Utilization. If you compare utilization with absence rates (including over time or per employee group), are there are any trends? Do employees with high-utilization rates also have high absence rates?
Productivity. Are the most productive lawyers (how much each lawyer brings in in fees) the ones with the lowest absence rates?
II. Turnover: Measuring turnover rates (voluntary and mandatory turnover as well as length of tenure) seems an obvious way to evaluate firm performance, but this alone is not enough.[15] HR teams need to know what percentage of star-performers and under-performers are leaving, and why the star-performers are leaving. Is pay a motivating factor? Is the quality of work relevant? By tracking and comparing the voluntary turnover rates of both groups and analysing data for the existence of trends or patterns, HR can obtain valuable insights:
Changes over time. Is there a sudden peak in turnover rates?
Employee group. Do certain practice groups, partner teams or client teams have a higher turnover rate than others? When do the majority of associates leave?
Performance. Do high-performing teams (partner, client or practice group) have higher or lower retention rates than the average? Conversely, do low-performing teams have higher retention rates?
Training. Have voluntary leavers received more or less training than the average employee?
III. Learning and Development: Training is designed to enhance lawyers’ performance and productivity, and most firms seek feedback from course participants after training (some 80% of firms in the Bucerius CLP HR Benchmark Study).
However, only a small percentage of firms evaluate whether knowledge has actually been transferred (HR effectiveness) and whether this had any effect on business (HR impact). This is surprising as training and development is a key area in which HR can establish a connection with firm strategy.
Alignment of training goals. In order to determine whether the training was effective, HR leaders need to have set specific training goals. Take for example “networking skills”. If the goal of the training was to improve the networking skills of lawyers in a particular practice area in order to win new clients, then the test of effectiveness is whether the training actually met this goal i.e. did the lawyer (a) actually win work from these potential clients, or (b) at least establish a relationship with regular contact to the client. The effectiveness of the training cannot be assessed by asking the lawyers to merely complete a questionnaire answering “on a scale of 1-5, how relevant was this training to your day job?”
Impact on business. Did the training increase productivity or revenue in the long-term? If, for example, the firm wants to invest in some smart software for the real estate team in order to speed up basic transactions, it needs to train the lawyers on how to use the software. HR should be able to report on whether this training has resulted in increased productivity for the team: Has the team been able to take on more matters? Have billables increased? Has absenteeism dropped? Is the increase in productivity proportionate to the cost of training?
HR as “Coach”?
“Measuring the impact on the business” means measuring the effects of HR performance on business outcomes such as financial performance or increased client acquisition. In order to ensure that the HR metrics and strategic processes are aligned, HR needs to get closer to the business. We are not talking vaguely about “HR as a Business Partner”, but rather practically speaking HR needs to get closer to each individual practice area. In this way, typical “HR metrics” can be integrated into the relevant practice group’s specific performance metrics and HR becomes an enabler in the strategic planning process.
If the corporate group sets a strategic goal of increasing work in a specific sector by “winning more work from platinum Client A plc”, then HR needs to be able to measure its own “success” against that yardstick. HR needs to ensure that it has recruited and improved the quality of the right talent pool for the right work vis-à-vis this goal. The metrics which HR could draw up to support this goal might look like this:
Average performance rating of lawyers working on Client A matters compared to the average performance rating across the firm.
Average productivity level (utilization, time billed) of Client A lawyers compared to firm wide averages for productivity.
Average level of absenteeism for Client A lawyers compared to the firm wide average.
Number of dormant lawyers working on Client A matters (i.e. lawyers who haven’t worked for Client A in over 1 year).
Average number of training hours Client A lawyers receive compared to the firm wide average.
Percentage of Client A lawyers receiving training/coaching compared to measurable improvements in client A lawyer performance (client satisfaction, improved performance appraisals, higher billables, greater utilization, reduced absenteeism).
Amount of time Client A partners spend on Client A’s work compared to revenue obtained from Client A.
The case for HR metrics
HR should be in its prime, no longer a purely operational function, solely for hiring, firing and payroll, but a strategic partner setting direction for the business. Data is important, but not in isolation. The crux of the matter is to devise HR Metrics that are aligned with each individual practice area’s goals.
Law firms currently face a myriad of challenges (to name just a few…): technological advances, changing market structure, big data, predictive analytics, business model re-design, alternative career structures, changing talent pools, emerging new working patterns and
alternative talent requirements.
It would seem that HR’s influence on strategy has never been more necessary. By using data to obtain insights, HR’s “strategic” role as coach, adviser or enabler, can help practice groups and firms navigate their way through these challenges and whatever other challenges the future brings.
Notes
1 See for example, R. Charan, D. Barton, D. Carey, “People Before Strategy: A New Role for the CHRO”, Harvard Business Review July-August 2015 or “The Call for a More Strategic HR: How its leaders are stepping up to the plate”, Harvard Business Analytics Service Report, 2015.
2 P. Cappelli, “Why we love to hate HR…and what HR can do about it”, Harvard Business Review, July-August 2015
3 E. Lawler, J. Boudreau, “Global Trends in Human Resource Management: A Twenty-Year Analysis” Stanford University Press, 2015
4 See Bucerius Legal Trends Blog http://www.bucerius-education.de/home/news-termine/blog/artikel/diversity-does-it-again/ for the hidden potential of work allocation systems.
5 See for example; Google, Microsoft and Cigna. Microsoft Workplace Analytics are used by major organisations such as Johnson & Johnson and PayPal. IBM provide employees with Fitbits to analyse their state of health.
6 See for example, PWC’s 10 Minutes on people analytics from March 2016 at http://www.pwc.com/us/en/10minutes/people-analytics.html
7 JP Morgan employs technology designed for counter-terrorism to identify potential rule breakers. See for example reports in Bloomberg, Irish Times etc. as well as C. O’Neil’s, “Weapons of math destruction”, Crown Publishing Group 2016 for the implications of predictive analytics.
8 See for example E. Garton from Bain & Co in “What if companies managed people as carefully as they manage money”, Harvard Business Review May 2017
9 See http://www.druckerinstitute.com/2013/07/measurement-myopia/
10 See M. Hartung „Erfolg! Erfolg?“ Deutscher AnwaltSpiegel Jahrbuch 2012/2013
11 See J.B. Aschenbrenner „Ein systematischer Blick auf Visionen von Kanzleien – oder sind es Halluzinationen?“ Deutscher AnwaltSpiegel Sonderausgabe 18, 7. September 2011
12 M. Hartung, „Strategische Ausrichtung von Kanzleien“ in „Kanzleimanagment in der Praxis“, Schieblon 2015
13 Lawler and Boudreau, Global Trends in Human Resource Management 2015
14 L. Alton, “Can you quantify your human resources department?”, Forbes November 2016
15 J. King, “Measuring the immeasurable”, Managing Partner September 2013
About the Authors
Markus Hartung is a lawyer and mediator. He is director of the Bucerius Center on the Legal Profession (CLP) at Bucerius Law School, Hamburg. His expertise in the framework of the CLP lies in market development and trends, management and strategic leadership as well as corporate governance of law firms and business models of law firms with regard to digitalisation of the legal market. He is Chair of the Committee on Professional Regulation of the German Bar Association (DAV). He is a regular lecturer and conference-speaker on leadership, management topics and professional ethics and has written numerous articles and book chapters on these topics. He is i.a. co-editor and author of “Wegerich/Hartung: Der Rechtsmarkt in Deutschland” (“The Legal Market in Germany”) which came to the market in early 2014 and has developed into a standard reference for the German legal market. He is also co-author of “How Legal Technology Will Change the Business of Law”, a joint study of The Boston Consulting Group and the Bucerius Law School (available here: http://www.bucerius-education.de/english/lawport/projekte/studien-analysen-und-veroeffentlichungen/). Recently he has co-authored and edited “Legal Tech: Die Digitalisierung des Rechtsmarkts” (“Legal Tech: The Digitalisation of the Legal Market”), the first comprehensive and practical overview of the impact of Legal Tech on the legal profession in German-speaking countries (http://www.beck-shop.de/Hartung-Bues-Halbleib-Legal-Tech/productview.aspx?product=20343999).
Emma Ziercke is a research assistant for the Bucerius Center on the Legal Profession and a non-practising solicitor. Between 2002 and 2009, Emma worked as a Corporate Solicitor (Managing Associate) for Linklaters in London, mainly in the fields of private interna-tional M&A and public takeovers by scheme of arrangement. In 2014 she completed an Executive MBA with distinction and received an award for best overall performance from Nottingham University Business School. During her MBA studies she focused on Law Firm Management and won an award for her dissertation on gender diversity in law firms. Her work as a research assistant at the Bucerius Center on the Legal Profession focuses on law firm management, gender diversity and organizational behaviour.