Effective law firm management is grounded in organizational theory. Firms can be managed based on mere intuition, and profitably so, but a coherent theoretical framework of the law firm focuses the attention of firm managers on all aspects of the firm’s existence that can be manipulated to achieve organizational goals (e.g., profit maximization), and, moreover, gives management discussions a principled basis.
By way of example, this article samples three prominent organizational theories, and applies them to a hypothetical firm, to see what kinds of management choices each theory suggests.
Assume that five partners have agreed to start a new firm, and now wish to organize it. Assume, further, that the partners agree that the primary focus of the firm itself should be to maximize profits, but that profit maximizing should be tempered by two additional goals, i.e., that the firm’s personnel adhere to the ethical standards of the profession, and that the environment of the firm be collegial. Organizational theory identifies structural levers by which these competing goals can be balanced and achieved on an ongoing basis as the conditions of practice change.
Agency Cost Theory of the Firm
Economists Michael Jensen and William Meckling famously posited the firm as a series of contracts, or agency relationships, in which decision-making authority is delegated. Each such agency relationship entails costs, including the costs by the principal to monitor the agent to ensure the agent’s loyalty, and the residual loss that flows from inevitable disloyalty.
Once so conceived, a goal of management should be to develop a law firm structure that minimizes agency costs. That entails, first, identifying all of the agency relationships within the firm—from the relationship of each partner to the firm itself, to the relationships between the firms’ owners and other law firm constituents (including non-equity attorneys and staff).
As to each such relationship, the firm can (1) align the interests of all constituents with the firm as tightly as possible and (2) erect effective monitoring systems. Interest alignment can be achieved using all of the formal and informal levers that motivate firm constituents, from decisions regarding the granting or allocation of equity, to promotions, resource allocation, titles and other recognition (e.g., praise). Monitoring systems can include everything from a law practice management software package that permits detailed analysis of constituents’ professional decisions (from time allocation to resource allocation within the firm) to audits of specific employee practices.
The goal of effective management in an agency cost frame is to methodically employ these devices across all significant agency relationships within the firm, and, equally importantly, as to each of the firm’s key goals. One of the most common management errors to is focus too heavily on the dominant goal (e.g., profit), without providing sufficient incentives or monitoring as to other goals (e.g., ethical practice or collegiality).
Systems Theory of the Firm
A systems theory of the firm may be one that sees the components of the firm (from its HR policies to its decisions regarding deployment of technology) as interdependent; changes in one part of the firm have an effect system- or firm-wide. An “open systems perspective” is one that focuses—not on the relationships within the firm that constitute it as an entity, but instead—on the dynamic relationship between the firm and outside or environmental factors. Both of these perspectives are critical components of good management.
How will the adoption of a new law practice management software package, for example, affect the way the firm monitors or is able to reward the kinds of behaviors tracked by the system? Similarly, how do changes in technology outside the firm impact the firm itself; for example, does a firm devoted to estate planning need to respond to the growing popularity of do-it-yourself estate-planning programs, and, if so, what changes are to be made (in terms of pricing of services, marketing, etc.)?
Cultural Theory of the Firm
Organizational culture is the personality of the firm. Firm culture changes over time, as individuals migrate in and out of the firm, and as the firm’s constituents’ assumptions evolve. In addition, a firm may have sub-cultures (e.g., a culture among persons involved in litigation that varies from the culture of the transactional lawyers, etc.).
While agency cost and systems theories of the firm assume that constituents are rational, and will respond rationally to stimuli such as incentives and disincentives, cultural theory of the firm assumes that constituents are also irrational, making decisions based on shared and often both invisible and unquestioned assumptions about who or what the firm “is” or “does,” that carry over from one situation, where such assumptions may be appropriate, to future situations, where they may not be.
For example, a firm’s commitment to the autonomy of each partner, and to shared and equitably distributed governance responsibilities, may work as a personality trait of the firm to guide decisions when the firm has five partners, but may not be an appropriate set of assumed values to achieve the correct balance of organizational goals once the firm has 10 or more partners. Effective managers who implement new policies responding to new conditions must be aware of the drag-effects of firm culture, and must be aware of ingrained assumptions about the firm as an organization that warrant modification.
Much of what this article reveals is consistent with common sense. An organizational theory framework prompts us, when acting as law firm managers, to think critically and systematically about choices that may currently be grounded merely on intuition, and challenges us to ask if the firm’s structure or internal routines should be adjusted. That is, theory provides a route to more complete awareness and adaptability.
Morris Ratner is an associate professor of law at UC Hastings College of the Law, where he teaches civil procedure, legal ethics and law practice management. Please send comments or questions to Professor Ratner via email at email@example.com.
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