(Ed. Note – While this is essentially addressed to law firms, its thoughtful approach is too good not to share with all professionals. BWM)

From Los Angeles and New York, to London and points in-between, every law office management conference scheduled of late has someone on the agenda addressing the topic of how to compete with the accounting mega-firms. Participants contemplate strategies ranging from initiating partnering and strategic alliances to expanding the scope of services that their firms might offer; and it all takes place against the backdrop of a legal marketplace that has never been hotter as firms enjoy record-breaking revenue increases.

For those forward-looking managing partners with a view to what might lie beyond today's good fortune, it has become clear that the status quo is simply not viable. There is a growing concern for the advances that accountants have made in other parts of the world. It is becoming blatantly obvious that the legal profession has some tough choices ahead of it. Despite any rules forbidding multidisciplinary partnerships, the top accounting firms have managed to put together international legal networks and become the biggest legal players in all the major European centers. For those watching this scene, they have recognized that it is a good bet that within the next five years, Arthur Andersen will reach it's articulated objectives of being one of the leading international players delivering legal services.

It may be illuminating to take a look at this new breed of competition that many law firms now face and will be continuing to confront. Perhaps the notion that accounting firms believe that they can deliver legal services better than most law firms can be better understood by examining some of the approaches accounting firms have long utilized that makes their culture different in delivering value to clients. This difference in culture between the two professions, seen as a whole, translates into an interdependent blend of management philosophy and client focus.

It all starts with a focus on client satisfaction.

Imagine what substantive answers you might evoke from among the partners in your firm if you were to pose the question: "what do you now do to make your kinds of transactions or matters more valuable to clients, and to improve your level of client satisfaction?" From our experience in asking just such a question, you will likely find a few partners who are doing some significant things (except no one else in their practice group either knows about it or gets the benefit of learning how they are doing it) to those partners who frankly "haven't really given it much thought." After all, the client does seem to keep coming back!

Contrast that with a recent authoritative survey of client satisfaction conducted among 500 of America's corporate executives, wherein Ernst & Young took top honors for offering practical advice, responding quickly to requests, giving real value for fees, and acting proactively and with initiative. According to this survey conducted by Novak Marketing of New York, the client satisfaction results were very close between all the Big Six (soon to be big five) firms. Arthur Andersen came in a tight second.

These executives, were asked to rate their current firm and their perceptions of the other five firms by nine quality service attributes. Novak then weighted the results based on how important the clients regarded each of these characteristics. For example, among the largest companies, executives most admired Arthur Andersen's reputation for possessing a wide range of skills, understanding the client's business, displaying industry expertise, offering practical advice, deploying a capable staff and taking initiative.

Similarly, since 1993, all partners at Coopers & Lybrand have been measured (and rewarded) on a qualitative as well as quantitative basis. Through the use of "regular" client surveys, management gauges partner's effectiveness in serving clients. Also, by interviewing and surveying staff the firm grades partners on their ability to mentor, train and manage personnel on client matters.

But then there are those brave law firms who have attempted to actually measure their client's satisfaction - - once, about two years ago - "and we seemed to be doing okay."

They work hard to really understand the client's business.

You might have noted from the responses to this Novak survey that clients seem to value a professional firm that understands their business and displays industry expertise.

Let's provoke with a little exercise. Have each partner (in your practice group) take a blank sheet of paper and list their largest and most important clients. Include as well those clients who represent fast-growing emerging companies that currently have or we expect that they may soon have, some form of international business transactions. This list (if it is capable of being generated) represents the most likely targets of future accounting firm interest. How vulnerable are these clients to being courted away by one of the accounting mega- firms?

But we're not finished. Now, let's have each partner note next to each company on their lists, "the top three issues that are keeping executives in that company awake at nights" as best they can identify and articulate them. Care to guess with me how well the accounting competitors would score with this exercise! Now, how vulnerable do we feel?

The lesson here: to thrive, specialize. To really know a client's business, you have to understand the client's industry.

The fastest-growing accounting firms report the strongest niche practices. The 1998 edition of Accounting Today's Top 100 Tax and Accounting Firms cited the most popular (30) industries, from manufacturing to auto dealerships; and (25) niche services, from non-profit organizations to practice management for doctors, that these firms currently focus on -- most of which haven't occurred to the average law firm. Even local accounting firms have become national powerhouses. With strong -industry-focused specialties, many local firms do business coast-to-coast.

In fact, accounting firms have increasingly been looking to develop expertise even beyond conventional industry groupings. By way of example, we need only look to: "Women Owned and Operated Companies". Interestingly, women have started more than half the three million business formed in the US in each of the past 5 years. The industry sectors that most attract women include Health, Education, Child care, Information networks and Beauty. And one in every 10 Biotech companies currently has a woman founder and CEO. What law firm in your jurisdiction is recognized as the preeminent authority on serving women owned companies?

Law firms will need to all but scrap their historical departmental structure and move toward small industry teams. Smaller teams are becoming more successful, primarily because firms are recognizing that it is much easier not only to effectively manage smaller groups, but also to organize groups according to client need and industry area focus. Where to start? The first step is to at least get your current client base organized by S.I.C. codes. Then begin to look at where your firm may have already developed industry expertise that was previously unrecognizable.

They offer clients significant value based on harnessing knowledge.

We are in an age of knowledge, where the clear winners will be those firms that are the smartest. The implications are profound. Intangible assets like expertise, intelligence, speed, agility, imagination, maneuverability, networks, passion, responsiveness and innovation - all facets of "knowledge" - become critically important.

Lip service notwithstanding, most law firms are not confronting the realities of a knowledge economy. They're not focusing attention (or investment) on putting the pieces together to fully capitalize on the potential of their smart partners and smart technologies. Instead, they're all too often woodenly following a rigid "plan" and an even more rigid annual budget, both of which become obsolete in the face of new eruptions of knowledge, like unexpected innovations from unexpected accounting firm competitors.

These accounting firms (and their consulting arms) trade in what they know, and are investing millions in major strategy initiatives to manage knowledge as a competitive advantage.

Imagine for a moment the day (very soon) when you have to compete with an Arthur Andersen law firm (already in New York), where they are now capable of sending each of their partners out to a client armed with a 35,000-page three-ring binder called an intranet. That is what Andersen had in mind last year when they decided to move the entire body of firm knowledge to an intranet called KnowledgeSpace.

During the last year, Andersen has taken substantive content from each of its major practices and ported the material to the new system. And such initiatives aren't trivial. Andersen spent about $1 million and eight months designing and building its system, including three months porting more than 35,000 pages of content to the intranet. The intranet has become integral to the firm's strategy.

Using KnowledgeSpace, this competing lawyer can bring the firm's collective knowledge to bear on any clients' problem. One professional, when recently visiting a Northwestern company that needed help controlling its growth, accessed KnowledgeSpace and quickly found answers posted by Andersen's Global Best Practices group. The client was impressed and could immediately see the value of the firm as opposed to the value of just the individual partner.

Not to be left behind, Ernst & Young has been focusing on knowledge management as a major business process since 1993. "We're trying to leverage our intellectual capital and reuse our practice-based experience to a high degree and in a structured fashion," says Dick Loehr, a director of the Center for Business Knowledge at Ernst & Young. To help partners share and reuse knowledge, E&Y has created what Loehr calls "communities of interest." Right now, there are 70 such firmwide networks of people with common interests and expertise. Each one is supported by its own database of wide-ranging information.

By way of example, in serving the automotive industry, a law partner at Ernst can access knowledge about the industry and issues that concern its top players. They could find out about product development issues or what they're doing about sourcing problems in the Asian market. In the network's database, they'd find out who has deep background on the industry, what's in their resumes, and where they've been speaking. They could also find out whether E&Y has any specific relationships with academic researchers who cover the industry.

Coopers & Lybrand also has its own version of knowledge management, the Knowledge Management group. It oversees strategy, technology, and learning. Recently, Coopers launched the Knowledge-Curve, an intranet that puts all kinds of company and competitor information in one easy-to-reach place. C&L estimates it can save more than $1 million a year if the intranet shaves just one hour a week from the time that professionals spend looking for information. Also, by way of a special link, Cooper's clients can access daily tax legislation updates, ask questions of C&L professionals, and get answers to questions most frequently asked of C&L experts.

They believe in investing in management and long term development.

How do you compete with firms that are prepared to live with lower profit-per-partner, so that some of those profits can be invested now for market dominance in the long-term?

In most law firms the operating philosophy seems to be: "why should partners invest any of this year's profit, for the possibility of a pay-off sometime far into the future?" This is especially true for those more senior partners nearing retirement.

Meanwhile the accounting firm's expansion into providing legal services could only have been possible by being able to transcend the limits of conventional partnership thinking and create a business organization capable of making long-term decisions and investments on a global scale.

Some of those investments have even been dedicated to "revitalizing" what was previously considered by clients as a commodity service to make it more valuable. In February of this year, Arthur Andersen announced their new "Business Audit" system, a major advance in auditing financial statements designed to give clients better and more timely insights to improve financial reporting processes and better manage business risks. Three years in development, The Business Audit is said to represent the latest and most significant enhancement ever of Arthur Andersen's assurance methodology. The firm developed it using an international team representing its worldwide organization and claims to have invested more than two million hours in development and training.

Andersen reported that more than 125 teams in 10 countries field-tested The Business Audit, that the firm will apply the methodology to many of its largest audit engagements this year and expects full implementation across all engagements worldwide by 1999.

And how do you compete with firms who are investing a significant portion of their annual revenues each year on training and developing their people?

On January 21^st of this year, The Wall Street Journal ran an article entitled "Accounting Firms Battle to Be Known as Best Workplaces." The world's biggest accounting firms have long understood something that most law firms will have to recognize: investing in training and retention pays dividends.

Consider a recent announcement by Price Waterhouse. The firm, invested over $100 million in training last year - an average of $9,500 per professional. This investment represents approximately 6% of 1998 revenues. They now plan to open a state-of-the-art global training center which will be the most technologically sophisticated training facility in the professional services industry. Called "The Professional Development Center", it is expected to cost $52 million and accommodate 750 professionals from around the world at one time.

Contrast that commitment to the results of a recent survey of 1200 laterally hired partners at 253 law firms nationwide, wherein attorney search consultants Major, Hagen & Africa codified the factors that make laterals satisfied with their new firms. These laterals were asked to rank how effectively their new firms worked to integrate them into the culture. Alarmingly, of the six firms cited as examples of "where new laterals felt best integrated," lawyers with only two of the six rated their firms a "4" on a "5" (very effective) point scale. The remaining four of the six best firms scored only a "3" out of "5". One wonders what the remaining firms are doing (or frankly, not doing) to rate such a dismal performance score.

Meanwhile, at Ernst & Young, who employ 27,000 people in the United States alone and recruits upward of 5000 people a year, one of the firms own internal studies showed that new hires who experience a thorough orientation and integration process are twice as likely to remain with the firm longer than two years. Last year, the firm created a new Office of Retention and hired its first national director of orientation. Along with its counterparts, Ernst is scrambling to show new laterals, many of whom are lawyers, that it can be a very rewarding environment in which to practice.

These initiatives are in stark contrast to what we suspect is all too often the common standard in most law firms -- show them their office, procedures for keeping time sheets, introduce them to that individual providing administrative assistance, shake their hand and tell them that we will see them again at performance review time. What this implies is a very different approach to managing.

What drives all of this and one of the keys to understanding these accounting mega-firms is that they focus very heavily on management. Management is the preserve of a distinct class of professionals whose only job is to manage. At Arthur Andersen, these managing professionals comprise Andersen's business caste, are a crucial ingredient in the firm's success and their importance is often overlooked by outside commentators. This means that management of Andersen's is in the hands of full-time businessmen who are not trying to be practitioners. They are motivated to develop Andersen's business and to think about nothing else.

If business development requires a substantial long-term investment, so be it. They will arrange it. The investment may hit current profits, it may penalize present-day partners, but it will not hit the managers, even though they themselves may be partners. Why not? Because they are paid specifically to make this sort of decision. And only by doing their jobs well will they earn their salaries and profit shares.

The Lessons.

What all of this implies is some interesting approaches that law firms will have to take to remain competitive.

Change is always a difficult prospect, especially in the midst of today's current legal boom. But firms must start looking at all of the options and thinking the unthinkable in terms of investing time and capital in improving client satisfaction, industry focus, capturing knowledge, training, and management commitment. The good news is that most firm can afford to start some serious initiatives now, while robust economic conditions allow.

 Patrick J. McKenna is the co-founding partner of The Edge Group in Canada and author of Herding Cats: A handbook for managing partners and practice group leaders. He may be reached at www.practicecoach.ai