Law Firm Culture and The Law of Extraordinary Margin…What???


In talking to law firm partners across the country, one noticeable impact of work from home (WFH), and by extension, downsizing office space and hoteling, has been a precipitous decline in the sense of culture, camaraderie and the sense of a shared vision. I’ve heard from several attorneys that the scarcity of people in the office often makes their place feel more like a co-working space rather than a first-class law firm. And I suspect this is not unique to law firms and has been showing its head in other service verticals as well.

I began to think about this in more detail after I read somewhere about law firms showing more favorable economics following office space downsizing. Something didn’t sit well with respect to the relationship between WFH, culture and the bottom line.

It dawned on me that a roadmap to understanding the nature of this problem lies in a principle I was introduced to in an “earlier life” when I was a consultant to the CEO of a high-end cosmetics company. He referred to the concept as the Law of Extraordinary Margin. My interpretation of this law postulates that in an industry where the cost of production and the price of a product varies dramatically (e.g., the high-end cosmetics industry), the “gap” does not translate into substantially higher profit margins. In fact, almost the contrary holds true because while the cost of goods for the actual product may be low, the costs required for packaging, marketing and advertising are often extraordinarily high.

It's the expenditures of those extra sums that help foster and develop a higher perceived value. And this applies to all sorts of businesses, not just high-end cosmetics companies but also service industries like law firms, where some can charge much higher prices than their competitors and still have loyal customers/clients, for the goal is to convey the notion that these businesses offer something that is not easily replicated or substituted, such as a unique brand identity, a superior customer experience, unparalleled quality or distinctive expertise. And there are added costs that are appurtenant to those higher rates and prices; the law firm that charges $2,000 an hour is not 50% more profitable than a firm that charges $1,000 for identical work because of those other costs that the more expensive firm must undertake to maintain their perceived value.

WFH and office hoteling and its impact on culture

As we’ve seen in Major, Lindsey & Africa’s 2023 Law Firm Culture Survey, culture is a key factor that can differentiate one law firm from another, and it can have a significant impact on the performance, retention and satisfaction of the employees. A strong culture can create a sense of belonging, alignment and purpose among the employees who share the same values, goals and norms. A weak culture, on the other hand, can lead to confusion, conflict and disengagement among the employees who may then feel isolated, unmotivated or unsupported. And the glue of culture is the interaction among people.

Working remote, as we have all seen, while offering many enormous benefits, can have the unintended consequence of chipping away at culture—it eliminates the “glue” that so often holds culture together. This is where the Law of Extraordinary Margin comes into play.

While decreasing office overhead reduces expenses, the cultural vacuum still needs to be filled, which means that firms will need to reach into those savings and increase their expenditures to shore up culture. They’ll need to focus on creating and maintaining a sense of community and identity among the employees by promoting collaboration, cooperation, and teamwork and celebrating achievements, milestones, and events. Moreover, law firms will need to provide and support their employees with the necessary resources, tools and training to cope with the challenges that stem from a perceived loss of culture.

In hindsight, it seems that by and large, this is something law firms really didn’t need to contend with as much prior to the era of WFH because culture grew almost organically out of the daily and constant in-office interactions between the people itself.

Culture is not a fixed or static asset, but rather an intangible, dynamic and evolving one—and one that requires constant attention and investment, more so now than ever before. So, while WFH, downsizing and hoteling may improve the bottom line in the short term, ask yourself what the long-term impact will be on your culture and whether the Law of Extraordinary Margin dictates that more resources will need to be allocated to bolster those things appurtenant to culture.

What is your firm doing to enhance culture?


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