Workplace transparency, Part II: A roadmap for law firms (095)

As an industry, law firms ignore Glassdoor.  So why is it such a good predictor of law firm profits?

In Part I (094) of this two-part series, we noted that within the broader economy, Glassdoor ratings are associated with strong organizational performance, such as higher sales, greater profits, and superior market returns. We also discussed how hedge funds and private equity firms are using Glassdoor to make investment decisions; and how Salesforce relied upon Glassdoor to prioritize targets as part of its acquisition strategy. Finally, we showed the conceptual similarity between Glassdoor and Gallup, with the latter driving enormous competitive advantage for its clients.

All of Part I was designed to answer the question, “Should lawyers take Glassdoor seriously?”  Part II ups the ante by showing that the opinions of lawyers really don’t matter.

As shown in Figure 1 above, Glassdoor ratings are remarkably good predictors of law firm profitability. For the 15 law firms in Glassdoor’s “Very Satisfied” category (> 4.0 on 5-star scale), the median Average Partner Compensation is $1.38 million, more than $500,000 higher than the median score in the “Satisfied” category (>3.5 to 4.0) (n = 75). For each of the next two Glassdoor categories, median profits go down, with the horizontal bars tying together the 25th and 75th percentiles. Further, and even more notable, is that this strong statistical relationship exists despite the fact that most law firms ignore their Glassdoor profiles.  See Part I (094) (Figure 6).

So what does all this mean?

Here’s our conclusion: The legal market circa 2019 is in the early days of lawyers discovering, learning, and mastering principles of professional management, including sophisticated notions of leadership and employee/team development. This is going to happen because we are far along the pathway of several hundred high-quality regional law firms converging into a single national and global market. See Post 082 (discussing progression over a period of decades).  If Firm A resists the principles of professional management, it will be vanquished by Firm B.

In the end, talented workers vote with their feet, with the transparency of the modern workplace telling them where to apply.

Roadmap

Part II of this series is a roadmap to orient lawyers to a world that requires treating employees like assets integral to the firm’s long-term success.

• Section (a) is a deeper dive into law firm profitability to get a better grasp of Glassdoor as a predictor and what it’s likely measuring. This section also lists the law firms with the highest Glassdoor ratings.
• Section (b) breaks out Glassdoor scores by employer type so we can see the similarities and differences between law firms and their professional service peers in accounting and consulting.
• Section (c) presents law firm-only regression models to reveal the strongest drivers for Glassdoor Overall and Recommend Employer to a Friend scores.
• Section (d) pulls back to look at the broader economy, showing that levels of employee engagement vary less across industries than within them. In other words, leadership and management really matter. Thus, firms that want to control their destiny should invest in this crucial (nonlegal) skill set.

(a) Law firm profits and Glassdoor

Let’s start with a point of clarification — Glassdoor is measuring dimensions of employee satisfaction.  This is a significantly broader category than attorney or associate satisfaction.  And frankly, it’s likely to confuse law firm managers who fixate on the care and feeding of fee-earners (aka elevator assets) who generate revenue and profits for the firm.

The theory being advanced here is that it’s competitively advantageous if all employees in the organizations — attorneys plus secretaries, paralegals, practice group managers, and all the allied professionals in IT, marketing, finance, recruiting, and professional development, etc. — come to work fully engaged in the mission of the firm. Stated another way, if staff is treated like overhead, you’ve likely got a culture problem. And that culture problem is showing up on Glassdoor.

If decency isn’t a sufficient motivator to cause law firms to change, here’s evidence that a bad culture negatively affects firm profits. Figure 2 is a regression model that shows the relationship between average partner compensation and several firm attributes that are relevant to financial performance.

Similar to the regression models in Part I (094), Figure 2 has a simple method of interpretation:

• Dots to the right of the baseline are positively associated with profits
• If the horizontal black line does not touch the orange baseline, the relationship between the variable and profits is statistically significant level (i.e., unlikely the result of random chance)
• Black dots further to the right of the baseline are more powerful predictors.

The key takeaway from Figure 2 is that Glassdoor ratings are a meaningful predictor of profits — not as powerful as firm leverage but more significant than firm size and nearly on par with diversity.  See also Post 074 (discussing relationship between diversity and higher profits); Parker, “Racial & Ethnic Diversity — A Multiplier for Law Firm Profitability,” TR Forum Magazine, May 17, 2019 (explaining diversity in context of more detailed profitability model).

One way to understand how and why Glassdoor ratings affect firm profits is to study the law firms with high Overall ratings.  Below is a list of the 25 AmLaw 200 law firms that posted a 4.0 or higher rating on Glassdoor during the spring of 2019.

Remarkably, more than 60% of the firms listed above have Unclaimed Glassdoor pages. See Part I (094) (explaining three types of employer engagements). Yet, law firm culture and values exist with or without Glassdoor. In the year 2019, Glassdoor is merely a mechanism running in the background that records the sentiments of current and former employees. If your firm is looking for a competitive advantage related to employee engagement, as a group, these peer firms are worth studying.

Below is a screenshot of the Glassdoor ratings of Kirkland & Ellis, which has ascended like a rocket ship over the last several years to become the highest grossing law firm in the world.  See Ben Seal, “The 2019 AmLaw 100: By the Numbers,” American Lawyer, Apr. 23, 2019.

The Trend graphic in the lower left corner can be displayed for Overall and each of the five satisfaction dimensions. Kirkland is an “Engaged” employer with 285 employee reviews. All of its Glassdoor metrics are trending upward. Is this gaming or good management with a long-term view?

It’s striking that the firm with the strongest financial performance based on growth is also a top-ranked firm on Glassdoor. Kirkland may not be for everyone, yet 90% of employees are willing to recommend the firm to their friends. It also has the highest ratings for Compensation & Benefits (4.7). In contrast, if you’re focused on Culture & Values, consider Vinson & Elkins (4.6). If you want Career Opportunities or Work/Life Balance, Lowenstein Sandler is top-ranked on both (4.2 and 4.3).

(b) Law firms compared to other professional service firms

If we are correct that law firms are in the early days discovering, learning and implementing professional management principles, including improvements in employee engagement, it would be useful to start with some benchmarks.

Figure 3 below breaks out average Glassdoor scores into four groups: AmLaw 200, Top 100 Accounting Firms, Top 50 Consulting Firms, and the Fortune 1000.

The key takeaway from Figure 3 is that law firms look much more like their Fortune 1000 clients than their professional service peers.  For example, the Career Opportunities averages for accounting (3.75) and consulting (3.70) far outdistance law firms (3.11). Similar patterns are present for Culture and Values (3.76-3.80 vs. 3.37), Work/Life Balance (3.40-3.60 vs. 3.29) and Senior Management (3.37-3.57 vs. 3.09).

Although the AmLaw 200 lead the pack on Compensation & Benefits (3.57), it’s insufficient to drive strong employee engagement. On Glassdoor’s Overall rating, law firms are significantly lower than their professional service peers (3.75-3.78 vs. 3.48). Being a best-in-class employer requires law firm leaders to broaden their skill set beyond just giving out slightly higher paychecks.

(c) What drives higher Glassdoor scores for law firms?

In Part I (094), we discussed how an employer might want to improve its Overall or Recommend Employer to a Friend scores on Glassdoor, as both measures are likely to affect the cost, quality and efficiency of recruitment efforts. We then offered some guidance based on regression models, albeit the underlying data includes the Fortune 1000 plus the largest accounting and consulting firms. Perhaps some readers believe that lawyers are different or special and thus would only pay attention to results based solely on law firms.

Figure 4a below is regression model based only on the AmLaw 200.  The model uses the five Glassdoor satisfaction dimensions to predict a firm’s Overall rating.

Similar to Part I (094), the Culture & Values dimension is the most influential driver of the Overall rating–even for law firms.  Although Compensation & Benefits is the second most important driver, its closely followed by Senior Management and Career Opportunities, which are also statistically significant predictors of the Overall rating.

Figure 4b presents the regression model results for Recommend Employer to a Friend.

In the typical AmLaw 200 firm, 60.9% of employees are willing to recommend the firm to a friend. Nine firms are 90% or higher; at the other end of the spectrum, five firms are less than 30%, with one at 8%.

Per Figure 4b, if law firms want evangelist employees and all the associated benefits, they need to focus on their Senior Management and Culture & Values–two factors that require a significant investment in leadership and engagement with employees.  Again, we are in the early days of a new and more sophisticated era of law firm management.

(d) Quality of management more important than industry sector

Within the broader economy, it is reasonable to believe that employee engagement is going to vary by industry, as some sectors vary widely based on type of work conditions, location, and type and variation of workers, etc.

However, when it comes to employee engagement, industry sector is not a company’s or firm’s destiny. Figure 5 below breaks down the Fortune 1000 into industry sectors and adds in data for the AmLaw 200, Top 100 Accounting, and Top 50 Consulting.  The light blue dots are the sector’s median Glassdoor Overall rating; the grey lines show the 25th to 75th percentile range.

The long grey bars in Figure 5 and large amount of bar overlap suggest that employee engagement varies much more within an industry than across sectors.  For example, any company with Glassdoor Overall scores at the 75th percentile in its industry would be outperforming the 25th percentile companies in the top-ranked Accounting and Consulting sectors. Stated another way, management and leadership really matter — a toxic culture creates similar problems pretty much everywhere.

Finally, far from being special, law firms are right in the middle. Over the coming years, that’s destined to change.

Coda

The two of us are veteran researchers of law firm engagement.  Indeed, neither of us will ever forget seeing the results of our first law firm engagement survey back in 2013.  The survey instrument was substantially based on Gallup questions in the public domain.  In a large sample that contained both staff and associates, we were surprised to see that the most powerful predictors of overall satisfaction were factors like “Proud to work at the firm,” “My opinion matters here,” and “I can make a difference working at the firm.”

Had we stumbled into a utopian workplace? Not at all.  Over the years, we accumulated very similar results from other large firms. Further, one of our greatest professional satisfactions was using social science methods to develop data-driven strategies to improve performance and coming back one or two years later to see across-the-board gains.  Yet, even happier were the mid-level managers who drew tremendous energy from seeing concrete evidence that their efforts were bearing fruit.

We don’t need to tell lawyers that analytical thinking is a very powerful tool. But what’s more powerful is analytical thinking combined with detailed, reliable data.

We hope you’ve enjoyed this two-part holiday series.  Personally, we are thrilled by the growth of a more transparent workplace. Workers of every stripe want to be competent, respected, and given the opportunity to make the world a marginally better place. By giving them a voice, we have the possibility of good companies chasing out the bad.  That’s the type of capitalism we can all support. Thanks for reading. BH, EP.