Managing Law Firms in Transition

Managing Law Firms in Transition

Big Bonuses and Robots-Today and the Future

Posted in Law Firm Leadership, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Transition

As 2014 draws to a close, there have been more than a few reports of generous associate bonuses at some well-known firms. In an industry that has had its share of challenging economic news since the Great Recession, news of these bonuses is a welcome change. While the increased bonuses are positive, especially for the receiving associates and the law firms able to spread such largesse, it would be wrong to conclude that they signal a return to the go-go years of yore.

Indeed, just as we read about the bonuses, we were treated to a prediction that robots and artificial intelligence ultimately will replace the iconic hard working associate. Not surprisingly, the report sparked a great deal of interest (here, here and here).  For the futurists, the demand for efficiency will stimulate a remaking of the legal profession, particularly for law firms, in the next fifteen years. Jomati Consultants predicts that the 2030 law firm will have fewer associates. In this view of the future, senior lawyers will deliver legal services by interpreting data and analyses largely generated by non-humans. If true, large associate bonuses likely are not a topic of year-end reporting in 2030.

Is there any need to reconcile accounts of today’s large associate bonuses with the forecast that associates will be replaced by evolving tools like artificial intelligence? No, but there are a few take-aways.

Predictions Aside, Greater Efficiency Will Be Required in the Future. The march towards delivering legal services more quickly and less expensively continues. Client expectations assure that. While nobody knows whether an army of R2D2’s someday will replace eager associates, clients and competitors will demand greater efficiency than available today.

Large Associate Bonuses Do Not Impress Clients. As much as it is interesting to hear about this year’s large associate bonuses, only the receiving associates and their firms enjoy having that news to tell. Most clients could care less, unless they think that they are indirectly paying for the bonuses through the high rates charged. Then they care, but in a negative way.

Firms Should Strive to Understand How Artificial Intelligence Can Help. Artificial Intelligence’s use in the legal profession will continue to evolve. Robots by 2030? Maybe not. But the successful firms of the future will master AI instead of having it master them. Understanding AI and its latest trends will help a firm take advantage of this groundbreaking tool. “Being one” with AI can give a firm the edge it needs to compete more effectively.

Clients Will Want You to Embrace New Tools of Efficiency, Including Artificial Intelligence. Clients today ask their law firms about diversity, data protection and succession planning. Clients likewise will ask about the latest tools of efficiency, including AI. As AI gains industry acceptance, a large bill laden with associate hours may be tough for a client to stomach.

Get Ahead of the Game. AI and other tools of efficiency are inevitable in one-way or another. Getting ahead of the game will be a key to your success in the future. Don’t wait. Start now.

Hopefully, your firm was one that enjoyed such a successful 2014 that it awarded generous bonuses to deserving associates and staff. Congratulations if your success was the result of great team effort and hard work. But even if it was, do you think it is time to start thinking about your firm’s efficiencies for the coming years?

 

An Open Question About The Way We Choose Law Firm Leadership

Posted in Law Firm Leadership, Law Firm Transition, Uncategorized

iStock_000003363370Small

Law firms around the globe are busy wrapping up 2014, and planning for what they hope to be a stronger 2015. (There is an issue with the way we tend to approach year end, but that is is a conversation for another day.) Amid the flurry of collection activities, compensation and budget debates and meetings, a too often overlooked factor is the way in which we make decisions about law firm leadership.

It is no secret that one of the significant contributors, if not the number one factor in the success (or failure) of any enterprise is the quality of leadership. Yet, when it comes to an alarming number of law firms, the value of the specific experience required to build a highly functioning organization are vastly under-appreciated.

Today, around the world, law firms are addressing leadership issues — whether changes or initial appointments — by turning to the partner/shareholder that has successfully built a legal practice.  There are two issues with this approach.

  • Far too often, this is the first leadership experience for the individual; and,
  • You are either significantly limiting or robbing your partnership of a rainmaker’s efforts in an area where they have proven to excel.

Is There A Better Model?

One firm that I know of has taken a different approach. In 2012 Pepper Hamilton took the somewhat groundbreaking action of hiring a non-lawyer CEO to run the Philadelphia based law firm. Prior to holding the position at Pepper Hamilton, Scott Green, a Harvard MBA, had developed his management and leadership skills in positions with Deloitte & Touche, Goldman Sachs and Weil Gotshal before joining Wilmer Hale as their Executive Director.

Green is leaving Pepper Hamilton at the end of this year, coinciding with the expiration of his contract with the firm. I don’t have any idea how Green performed at Pepper, though reports indicate the firm successfully expanded geographically and became fiscally stronger during his stay.

The point of this discussion is not success or failure of one individual; rather, the creative approach taken by the lawyers at Pepper Hamilton to filling a position that they clearly value. Their action demonstrates an appreciation for the importance of business experience when it comes to the leadership of their firm.

One of the challenges our industry faces is the speed (or lack thereof) with which we adapt and change. It hasn’t been very many years since major firms hired and/or promoted their first minority partner…or their first female partner.

Green’s hiring is one of the first in what I believe will be a growing trend — spurred on by the market’s pressures for law firms to employ more efficient business practices.

There are countless analogies to our typical insistence on proven competencies. One of the most pointed is whether any of us would hire anyone but a well regarded and seasoned expert to perform heart surgery.

A law firm is a complex confederation of assets possessing the mobility to move on a moments notice. The industry is under enormous pressure from new and effective competitors. Clients are becoming more sophisticated consumers, and have access to the best metrics. Hence, their demands.

The law firms that survive, differentiate themselves from the pack, and thrive will be the few who buck the industry norm, and address the leadership question in a different way.

One model worth consideration revolves around a strong Board of Directors who bless future plans, sets limitations and ensures that the firm’s leadership adheres to values. Reporting to this Board of Directors is a CEO who may or may not have gone to law school, but does possess significant management training and leadership experience.

What are you thoughts?

 

Strategy of Merger: Four Steps for Success for Law Firm Leaders

Posted in Law Firm Growth, Law Firm Leadership, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Transition
This blog post was originally posted, in late October, by Kevin McKeown at Above the Law and his blog Leadership Close Up.  Kevin has been a tremendous resource for us and has guided us greatly as we work at delivering meaningful content about the legal industry and the significant changes it faces. Legal Leaders Blog by SEAN LARKAN (iIllustration adapted from FT image, graphic artist unknown)These are challenging times for the nation’s 200k+ law firms. Just look at the pace of mergers. Combination announcements appear almost weekly. In fact, 2013 was a record year for law firm mergers. And, based on the first nine months of this year, 2014 will end with a similar number of transactions. Although the mega-mergers grab the headlines, a big number of transactions are between smaller firms or smaller firms being scooped up by larger concerns seeking to gain a foothold in new markets. Last month, The American Lawyer reported on this record merger pace citing deals closed in the hot southwest legal market. Two notables:
  • LeClairRyan’s merger with Houston’s Hays, McConn
  • Fox Rothschild’s combination with David Goodman in Dallas

In both mergers, Roger Hayse and Andy Jillson of Hayse LLC advised Hays McConn and David and Goodman in their respective transactions and helped shepherd those two firms through to successful deals. Why are Roger and Andy front and center in this robust merger market? For one, they have walked in your shoes. Here are two guys who led and helped build a strong regional firm that included the strategy of merger. So, how should small-to-medium size firms approach a merger strategy? What are the “rules of the road” for achieving a successful merger? What are the best ways to manage the inherent risks? 

Let’s hear from Roger and Andy:

…………………………………………………………………………………

Managing Law Firm Transitions blog by Hayse, LLC

Roger Hayse and Andy Jillson

Beginning in 2013, we observed an unprecedented string of law firm mergers – a remarkable fact in light of reports (here and here) of the risk and failure rates associated with law firm combinations. In his article A Myth that Motivates Mergers, noted legal industry thinker Steven Harper debunks the wisdom of the merger, splashing cold water on the notion that bigger is better.

For some firms finding themselves in distress, “any port in the storm” greatly influences leadership’s perspectives on merger. Ed Wesemann’s terrific White Knight is a must-read for any firm leader seeking counsel in an hour of trial.

The broiling merger market is added evidence of what we already know — the pressure on the leaders of small to mid-sized law firms is relentless. Even as the market recovers from recession, pressures from competition and from clients wanting more for less leaves leaders of mid-sized firms at the proverbial fork in the road. The future depends on the right choice, but many are unclear about the direction they and their firms should take.

FoxRothschild-150x32The last two years underscore the fact that for many of these firms the path chosen is to merge with a larger firm. To say this is a significant step is to understate the case. Post-closing, the smaller firm ceases to exist. In two of our recent merger engagements (LeClairRyan/Hays LeClair RyanMcConn; Fox Rothschild/David and Goodman), two smaller firms accepted this outcome, believing among other things that the future for their younger lawyers was served better by combining with a larger firm (kudos to leadership for this approach).

But in light of the uncertainty of success and the permanence of outcome, does it make sense for a small to medium sized firm to dance the merger dance, and waltz its way out of existence?

Despite the odds and the warnings of Mr. Harper, a merger can make sense — IF these four steps are carefully followed.

ONE–Clarify Who You Are and What You Want?

Start with the basics.

Establish Your Strategic Objectives. As in any high-consequence transaction, the process begins by establishing your strategic objectives. There are three solid strategic reasons a law firm might consider a merger:

  1. Valuable expertise and technical capabilities can be added to serve existing or targeted clientele better;
  2. Addresses succession planning, both in terms of firm leadership, and key clients; and,
  3. Yields financial stability.

You might add to this list; but one thing is almost certain — if the objectives are not clear from the beginning, pursuit of a merger will be haphazard and potentially ineffective, or worse yet, harmful.

Assess the risk. Pursuing merger can be unsettling to a firm’s personnel, including its key contributors. Uncertainty abounds and producers, non-producers, associates, and staff wonder whether a combined firm, from a personal standpoint, will be good or bad. Indeed, uncertainty can result in unanticipated departures that can tarnish a firm’s appearance and attractiveness.

Objectively Assess Your Attractiveness. Nothing can waste more time than being unrealistic about your firm’s attractiveness. Conversely, nothing will be more disappointing than to realize that your merger strategy undersold your value. To avoid missing the mark, hire an advisor experienced in law firm mergers that will provide an unbiased assessment of your place in the market.

TWO–How Do You Prepare for the Market?

If you have decided to move forward, it is time for spit and polish and a plan for marketing.

Make Your Firm Look Good. Many times, a home sells more quickly and at a higher price if it is “staged” to look more attractive. The same can be true if proposing to enter the merger market. Deferred maintenance needs to be remedied, lingering problems need to be addressed and contingent liabilities need to be resolved or at least contained.

Develop a “Sale” Strategy. Law firms are best marketed discretely and without being on the market for too long. It is essential that your advisor develop a strategy that presents your firm to qualified candidates without shoving a “for sale by owner” sign in the front yard. An indiscriminate approach to marketing your law firm can be counter-productive and leave you “market worn.”

THREE–Preliminary Due Diligence: Are the Firms Generally Compatible?

Once you have completed your preparations and suitors come calling, the “fit” of a prospective merger partner can be assessed preliminarily by considering five areas of compatibility.

Culture. Culture is more than being comfortable with your new partners. Culture involves many things that you may take for granted but define a law firm’s DNA, including employment arrangements and practices with legal and non-legal personnel. Promotion practices, performance evaluations and decision-making processes say a lot.

Finances. Firms with a wide gulf in metrics like profit margin, revenue per lawyer, productivity per lawyer, capital, pension obligations, debt, space utilization and realization are not likely to mesh. Metrics that are more closely aligned nonetheless need to be scrutinized to avoid false positives based on apples being compared to oranges.

Clients. Clients make a firm. Besides the all-important question of legal conflicts, a firm needs to know the philosophical and strategic approach of its betrothed to business conflicts, client profiles and the proposed billing rates. These philosophies and strategies need to be studied.

Conflicts. The easiest indicator of a bad fit is if diligence reveals that each firm represents a party to litigation or other matter than creates an ethical conflict that cannot be waived. And even if a waiver is ethically possible, the manner in which one is pursued can demonstrate a lack of fit between firms.

Compensation. The setting and paying of compensation is tough in any circumstance. But trying to blend two systems in which one firm’s lawyer behavior is different than the other firm’s due to compensation system induced motivations is even tougher. Moreover, if one firm’s lawyers are used to being paid a larger draw every month than the other firm’s lawyers, something will have to give.

FOUR–Deeper Due Diligence: Is There a Deal to be Made?

Once past the compatibility test, it is time to move to the second and deeper level of diligence.

Assess Past Merger and Acquisition Success. Your prospective partner may have a track record of mergers and acquisitions. If so, dig deep into its record of integration, post-merger success and failure. Bingham McCutcheonmerged with Riordan & McKenzie in 2004 and by 2007 only 50 percent of the new additions from that firm remained. Get an explanation.

Delve Into the Firm Policies. No one would contemplate a merger without digging into the other firm’s constituent documents. But a lot of what gets done in a firm is contained in the firm’s policies that can make day-to-day life starkly different from the happy talk heard during the courting stage. Read them and understand them.

Understand the Firm’s Strategic Plan and Vision. If the firm has a strategic plan, read it to make sure the firm’s strategy and tactics are clear, but also read between the lines. Gaining a holistic understanding of a firm’s strategy and vision for the future can help determine if your firm fits within the larger firm’s plan. If your prospective merger partner doesn’t have a strategic plan or it is old, its commitment to management has to be questioned.

Get a Handle on Recent Financial Performance and Productivity. While your suitor pours over your financial data, you should return the favor to determine whether financially a merger will be a net benefit or burden. You should also assess the value of your equity pre-merger and post-merger and seek compensation if appropriate. Are productivity levels close? Plans to lift up a slower firm are tough to pull off.

Capital. The capital invested by one firm’s partners may be very different than the capital committed by partners of another law firm. How capital is calculated and returned on departure is as important as knowing how much capital is invested. Two firms with widely different capital profiles and policies could find their combination ill fitting.

Debt Levels and Collection Practices. Debt can be the hobgoblin of law firms. Bringing two firms together with different debt levels and/or approaches to debt can be difficult. In some instances, however, a small debt laden firm can be acquired by a bigger firm with low to no debt if the debt in the combined firm ends up being small compared to the strategic gain delivered. Debt levels can be positively or negatively impacted by collection practices. Are both firms similarly disciplined about collecting bills?

Concluding Thoughts

Hayse Blog

This blog is co-authored by Roger and Andy.

Law firm merger, as an answer to crisis, competition, or succession, is a viable alternative for some, but not all, small to medium sized law firms.

Danger lurks for the law firm whose leadership pursues merger without methodically understanding whether merger fulfills a strategic imperative. Even if a compelling case for merger can be made, only careful execution can optimize the prospects for a successful merger. Following these four steps can be the difference between a merger that works and one that doesn’t.

For a small to medium sized law firm contemplating merger, can there be anything more important?

Distressed Law Firm Acquisitions-The Times May Be Perfect (Part Two)

Posted in Law Firm Crisis, Law Firm Liquidation, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Transition

As reviewed in Part One last week, the example of the Morgan Lewis/Bingham McCutchen mass lateral transaction may serve to stimulate the pursuit of distressed firms by healthy firms. Although distressed law firm transactions are nothing new, the model of that deal plus two new legal developments may foster greater distressed law firm activity.

The first development was long awaited-the New York Court of Appeals’ decision on whether the “Unfinished Business Doctrine” is recognized under New York law. Answering with a resounding “no,” in Geron v. Seyfarth Shaw LLP the Court of Appeals directly paved the way for law firms to poach away a struggling law firm’s best lawyers and business generators. Whereas prior to Geron a raiding law firm risked having to share the unfinished business profit, now all the value in the transferred business belongs solely to the acquiring firm. While the decision is strictly limited to the application of New York law, it and a similar outcome under California law in Heller Ehrmann LLP v. Davis, Wright, Tremaine, LLP could influence other jurisdictions into largely gutting the Unfinished Business Doctrine and its associated risk to acquisitive firms.

The second development, coming from the United States Bankruptcy Court of the Southern District of New York in In re Dewey & LeBoeuf, LLP, et al., greatly increases the risk for the owners of failed New York law firms. In Dewey, the Bankruptcy Court determined that in constructive fraudulent conveyance litigation and certain New York partnership law litigation brought against former owners, no reasonably equivalent value or fair consideration defenses are available. In essence, the ruling may leave former owners strictly liable for all pre-bankruptcy funds received while the firm was insolvent or undercapitalized. Like in Geron, the Dewey decision is limited to New York law, but its influence in non-New York jurisdictions could be far reaching.

In a distressed acquisition world in which there is less risk to healthy law firms and greater risk to the owners of unhealthy ones, five reasons make it a perfect time for distressed law firm transactions.

The Healthy Law Firm’s Litigation Risk is Greatly Reduced. Without a fear of the Unfinished Business Doctrine, an acquisitive firm can scour the ranks of a struggling law firm and know that even if the target firm fails, having to share any profits with the failed firm’s bankruptcy trustee is substantially reduced. Its downside risk can be slight.

A Piecemeal Acquisition Can Be Attractively Structured for the Healthy Firm. With the reduced litigation risk to the healthy firm, a healthy firm can select the filet of the distressed firm, plus add some logical complimentary parts without having to take on under-performers. It can even over-pay a little for what it really wants in order to make the deal happen.

A Piecemeal Acquisition Can Be Attractively Structured for the Distressed Firm. Even though the distressed firm may be disappointed with a piecemeal offer, working with the healthy firm to consummate a transaction may help it avoid bankruptcy. Many of its owners, especially those that are part of the traveling squad that goes over to the healthy firm, will draw comfort from knowing that the risk of bankruptcy has been reduced.

For the Distressed Firm’s Owners, Even Onerous Terms or Being Excluded From the Deal Can Still Be Better Than Bankruptcy. It is one thing to be looking for a new firm when your old one ceases to exist, but it is another thing to be searching for a new home while staring down the barrel of Dewey like liability. A deal that simply avoids bankruptcy may be palatable, even if barely so.

The Haves and the Have Not’s May See Eye-to-Eye on a Piecemeal Deal. Traditionally, when a large number of owners are not offered the chance to go to the healthy firm, it can be very difficult to gain the necessary votes to gain approval of the distressed transaction. Yet a struggling firm does not have unlimited time and failure can be looming. In the aftermath of Dewey, the interests of all the firm’s owners, whether included in the deal or not, may be to get a deal done that protects against bankruptcy. Despite having very different opportunities, unanimity about the lesser evil may provide the electoral support needed to get a piecemeal deal done.

We can only speculate about the respective motivations that resulted in the Morgan Lewis/Bingham McCutchen deal.  But with the recent outcomes in Geron and Dewey, there are a number of reasons to take a fresh look at distressed transactions.  Will these reasons be enough to impact your strategic thinking?

 

 

Office Space and Law Firm Stability

Posted in Law Firm Crisis, Law Firm Growth, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Transition

Dubai_marina2

Reports vary on the degree to which the business of law is recovering or improving; but few question the fact that competitive pressures are growing, thanks to:

  • Decreased demand due to more matters being kept in-house,
  • Increased pricing pressure,
  • Outsourcing of routine tasks to low-cost providers half-way around the world; and,
  • Increased competition from non-law firm enterprises like the Big 4 and technology based service providers.

General industry conditions notwithstanding, as we near the end of 2014, conditions for some law firms are better; for others, not so much. For all but the strongest and best positioned, the focus as we plan for 2015 continues to be on how we manage the business side of our firms, and decrease the risk of critical stress. Or failure.

A Closer Look At The Question Of Office Space

The cost associated with housing a law firm is one of the two or three largest and fixed expenses for most firms. If your firm is considering the issue — renewing a lease, renovating, or relocating and upgrading your space in the coming months, this post is for you.

There are, of course, two key drivers in this discussion — the amount of space, and the cost per square foot.

On the first count, in recent years firms have found ways to decrease the amount of space they occupy. Some of the efficiencies offered by technology combined with less spacious partner offices are among the big factors here. Reports suggest that over the last decade or so benchmarks for space have dropped from 900 square feet per lawyer to closer to 600. Significant progress indeed.

But what about the cost per square foot? Thanks to landlords, this one is out of our control — right? Or is it?

There continues to be what I suggest is a false perception that firms need to be located in the very areas where rates tend to be highest. The inclination remains to lease space in the heart of the central business district, or the hottest new area of town in the newest building.

While many law firm leaders tend to view the cost of premium space as a cost of doing business, the increasing reality is that this space is of no relevance to virtually any clients.

As is the case for almost all of us at a personal level — where we balance the desire for large new homes and luxury cars with long-term financial security — law firms face the same trade-off.

A striking similarity between almost every firm that has run head-long into unsurmountable stress — and many who find themselves on the cusp of crisis today — is a top-of-the-market lease, an unnecessary luxury.

On the other hand, a few firms have found clients actually appreciate the kind of management that is demonstrated in prudent office space decisions.

The profession is going to undoubtedly get even more competitive. For those firms wrestling with economics and performing below average, the future is (or should be) scary. If your firm is not in the top quartile of performance you should be considering the trade-offs that will better secure your future.

How is your firm managing space cost.

 

Distressed Law Firm Acquisitions-The Times May Be Perfect (Part One)

Posted in Law Firm Crisis, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Transition

This is the first of two installments that examine the changing landscape of distressed law firm acquisitions and how recent developments may encourage healthy firms to pursue struggling firms like never before.

Last week, the long-anticipated Morgan Lewis acquisition of a core component of Bingham McCutchen’s practice was announced. Described as a mass lateral acquisition as opposed to a merger, reports indicate that somewhere around 70 Bingham partners were not invited to join in the move. It is also reported that Morgan Lewis drove a hard bargain with some requirements not commonly seen. But with the Bingham ship taking on water, its ownership had no choice but to go along.

Morgan Lewis’ proposed acquisition comes after the New York Court of Appeals rejected the unfinished business doctrine-a legal development that can provide comfort to acquisitive firms like Morgan Lewis.

A recent decision in In re Dewey & LeBoeuf LLP shows, however, that partners at failing law firms have more to worry about than any fallout from the unfinished business doctrine. As a result of the Dewey decision, owners from failed law firms may be subjected to strict liability for all monies paid to them while their failed law firms were insolvent or inadequately capitalized. Given the agonizing and lengthy path of some law firm failures, the dollar amount of the risk could be substantial. One might assume that when facing these risks, the owners of a distressed law firm might fight doubly hard to keep their law firm alive. But as we can observe from the Morgan/Bingham experience, embracing a deal, even an onerous one, may be a better alternative.

Indeed, the reduced vitality of the unfinished business doctrine (at least when New York law is involved) juxtaposed against the scary potential for owner strict liability, work together to create the ideal environment to stimulate distressed law firm acquisitions. Almost in the nature of a case study, the Morgan/Bingham transaction manifests the reasons why acquisitive and distressed law firms may be perfectly suited to join in a transaction that benefits most if not all parties. These reasons meld the interests of the healthy but acquisitive firm, the interests of the struggling distressed firm, and the desire of all parties, particularly the distressed firm’s owners, to avoid bankruptcy.

The next installment in this two-part blog will review the reasons, or dynamic circumstances, that can bring together such divergent interests to create a successful distressed law firm transaction.

 

A Strategy For Law Firm Survival (Even When The Market Pushes Back)

Posted in Law Firm Leadership, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Transition, Uncategorized

 

Recent reports on the legal profession reinforce what most realists already knew; market forces continue to apply significant Focuspressure on law firms.

Two forces at work in the marketplace show no signs of easing any time soon: the demand for legal services on one hand, and on the other, the (over) supply of lawyers to do the work. And while firms have attempted to adjust to these forces in a number of ways, the use of technology and a fresh look at strategic issues  are two specific responses worth a quick look.

Demand

The results of Altman Weils’ recent Survey of Chief Legal Officers is loaded with relevant information. Here are a few highlights:

  • 48% of respondents decreased their budgets for outside counsel with only 26% reporting an increase;
  • 26% intend to further reduce the use of outside counsel in 2015 while only 14% are projecting an increase; and finally,
  • 43% plan to increase their in-house staff in the next year.

These statistics in conjunction with a continuing shift of (for now) certain types of work to alternative service providers, and outsourcing of services constitute relentless pressure on the demand side of the equation.

Supply

Beginning in 2007/2008 through 2012 we saw an aggressive correction in the quantity of lawyers employed by US law firms (layoffs). But we should note that this trend has begun to shift.

According to a recent Thompson Reuters report

“In 2012, firms did a commendable job of pulling back headcount growth, bringing supply into better balance with demand. But since Q3 2013, headcount growth has been steadily rising, reaching its highest level since Q4 2012. Firms continue to add headcount ahead of demand. In fact, in recent quarters, headcount growth has more than cancelled out growth in demand, dampening productivity and profitability.”

The bottom line is that supply is growing again in a marketplace that never did return to a healthy supply/demand balance.

In other words, short of an unforeseen growth in demand, firms are going to be facing all of the tough questions that come with too much capacity — more lawyers than there is work.

Technology

In response to the continuing economic pressures some firms have turned to technology as a means of becoming more competitive.

A recent report (The Emergence of Tigers and Bears and Other Law Firm Trends) by Aderant provides some intriguing insights into this response. The report is based on responses from 227 firms with a good mix of small and large firms.

Two points stood out to me, and both draw a clear distinction between larger vs small to mid-sized firms.

Point 1. When asked what the number one business objective was, the majority (51%) of the small to mid-size firms said acquiring new clients. By contrast, only 21% of the larger firms cited this as their primary objective.

 Point 2. When asked where they were investing their IT dollars, the large firms indicated that 55% of their IT budget goes to automate processes and making service providers more efficient. Whereas only 12% of the small to mid-sized firm budget is invested in this area. Instead smaller firms are investing in better analysis of their operations and technology in order to capture more billable time.

As larger and more established “brand names” have wrestled with the demand problem one strategy has been to aggressively pursue the work being done by firms whose brand is not as strong. When combined with their investment in more efficient service delivery, the (typically) larger firms are creating increased pressure on the weaker firms.

Strategy

The strategy implications for small to mid-sized firms seems clear. With growing pressure from shrinking demand and larger firms pursuing their market, higher efficiencies and focus will win.

In other words, developing a brand around a capability or a small group of capabilities is the ticket to survival. With limited budgets, strategic investments to become known for something is simply more realistic than hoping to become known as a premier provider in an array of practice areas.

This is my observation as to how any firm, weaker firms in particular, have to respond.

How much focus does your firm have?

 

 

 

The Key to Law Firm Success in 2015-Focus

Posted in Law Firm Growth, Law Firm Leadership, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Transition

FocusFor years, a premise behind law firm growth was the recognition (or belief) that many clients required a broad range of services. Sensing a need, and wanting to meet it, law firm leaders sought to build not only bigger law firms, but also ones that offered many substantive specialties. As the thinking went, once a firm client was in the door a cross-selling culture would lead to the client’s every legal need being met under one roof.

In the case of most firms, this strategy has not been completely successful. Fundamentally, few clients want to be “under one roof” but would prefer to spread around their dollars if they must be spent at all. As one in-house lawyer noted last week, great firms may have some great lawyers, but many of those same firms’ lawyers are largely interchangeable with lawyers at other firms. In addition, since garden-variety work does not need a cuff-link popping lawyer leading an army of lawyers, a lot of legal work ends up a lower rate shops. And in the case of many clients, the perceived value of insourcing is reducing the business law firms can even hope to control.

Law firms are beginning to recognize that being all things for all people may not work. Above the Law’s recent article cites a report from Citi Private Bank Law Firm Group that notes that many of the law firms enjoying success in 2014 are engaged in transactional practices. While the dearth of dispute resolution matters could simply be cyclical, Wiley Rein has jettisoned its bankruptcy practice, apparently in the belief that narrowing its specialties will serve it better in the long run. And an increasing number of voices argue that reducing one’s specialties not only stimulates focus, but it also allows a firm to differentiate itself in the marketplace.

For 2015, successful law firms should focus on what they do well, try to improve on those areas of expertise and use that strength to grow their client base around that expertise. The same focus may cause them to consider eliminating distractions by narrowing the array of services offered. In examining whether to focus on a narrower practice, law firms should consider the following:

The Opportunity to Cross-Sell Does Not Justify Marginally Performing Practices. Too many practices are not at the top of their field. If they are not, leadership should consider their elimination. Play to win, not to show.

Clients Don’t See Much Value in Being Under One Roof. One-stop shopping is of little benefit to most clients, especially when the cross-sold practice is not any better than the same practice at 50 other firms. Many clients don’t see the need to aggregate matters at one firm, so stop acting like they all do.

All Things Being Equal, Price May Drive Business Away. A law firm’s non-premium practices are interchangeable with many other firms. That being the case, the only thing many law firms have to sell is price. If you have to reduce your margins to gain the cross-sold business, do you really need that practice?

Insourcing is a Message. Clients that insource a lot of legal work still use outside law firms for the premium matters-the stuff that is beyond routine. Even if you haven’t been hit hard by the insourcing trend, consider the fact that routine work is easy enough for clients to do themselves or your competitors to match at each step. Insourcing is telling you to focus on what is hard and what you do well. Ask yourself if you really need the rest.

Clients’ Buyer’s Market Will Continue. Don’t wait until 2016 to see how things turn out. Business may improve marginally but any improvement could prove illusory. All the dynamics exist to stimulate your focus on the future. Don’t wait.

Competition among law firms is growing at the same time law firms’ differentiation seems to be shrinking. For 2015, focus on what makes your law firm special and build from that strength.

 

Time for a Law Firm Tune-Up??

Posted in Law Firm Growth, Law Firm Leadership, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Transition, Uncategorized

company-115883_1280-2

The November edition of The American Lawyer includes an interesting article by Aric Press titled “Big Law’s Reality Check”. The article has implications for law firms of all sizes.

Press provides much fodder for thought; but these points, in particular, struck me as telling:

  • Since 2007, revenue per lawyer has been dropping for the average AMLAW 200 firm when adjusted for inflation;
  • However, not everyone in the AMLAW 200 is experiencing this inflation-adjusted drop. Those possessing a respected brand in distinct areas have seen a material uptick in their relative top line.
  • Legal spending by American business has been, and continues to be down.

It seems clear that the business consumer of legal services continues to redefine our marketplace. And there doesn’t appear to be a change in the offing anytime soon. Strategic purchasing combined with increasing the amount of work kept in-house, demanding discounts and alternative fee structures are forcing disruptive change inside firms.

A Few Take-Aways For Your Consideration

As the absolute volume of demand for outside law firms continues to shrink, the strongest firms will continue to adapt, and move “downstream” — infringing on market share once the purview of smaller firms.

Inflation adjusted costs for law firms (as is the case in almost any business) continue to increase at a slow but steady pace.

At the same time, alternative service providers continue to take a growing slice of what was the legal service pie.

The combined result of the above is that the pressure will continue to grow on all but the most valued, established and strategically managed law firms among us.

Without respect to successes of the past, the market is sending clear signals to any law firm not following a strategic path: it is time to stop and reassess how your firm fits into the competitive landscape — and tune-up appropriately.

 

 

 

Lateral Hiring In 2015-Preparing for the Upcoming Movement

Posted in Law Firm Growth, Law Firm Leadership, Law Firm Transition

As the last quarter of 2014 nears its end, the ingredients for the lateral hiring stew are being added. Firm and individual lawyer performance on the year, bonus expectations and realization, internal law firm management and politics-all will be factors in determining individual lawyer contentment. The same factors, viewed from management’s perspective, will drive an examination about the firm’s “keepers” for 2015 and its future. These respective points of view will flavor the free-agent recipe. Content lawyers seldom leave-dissatisfied lawyers are always potential departures. And money talks.

Two recent articles suggest that 2015 could be a year in which law firms see an uptick in lateral movement. Debra Cassens WeissHas the BigLaw Recovery Arrived? notes the widening gulf between the top 21 revenue producing law firms and the remaining AmLaw 200. Her view that the gap gives these top firms an advantage in the lateral market is hard to dispute.

Michael Allen’s The State of the Legal Job Market details expected lateral movement after the New Year and predicts, after years of mostly gradual movement, a much more active first quarter of 2015.  Mr. Allen’s study notes that some firms historically have been more active than others, but even if all the top 21 firms are not seeking lateral talent in the marketplace, he predicts a lot of movement in early 2015.

Regardless of a firm’s ranking in law firm revenue per lawyer metric, aggressive activity by the firms most able to pursue laterals will stimulate lateral hiring activity by the remaining firms in the AmLaw 200 and beyond. Faced with these predictions, and the dynamic that law firms are at their most active or vulnerable during the three months either side of New Year’s Day, law firm management should prepare for the upcoming lateral rush in at least five key ways:

Update or Develop a Growth Plan That Ties to Your Strategic Plan. Growth for growth’s sake is a losing proposition. Not many law firm leaders will admit to such a strategy, but if proposed lateral hiring is not in furtherance of an imperative in a firm’s strategic plan, it should not be pursued. A reactionary pursuit of lateral hires because a competitor might otherwise hire the target is mindless growth to be avoided. If your firm intends to pursue acquisitions, only target lawyers that further your strategic plan objectives.

Assess Your Vulnerabilities. Lateral movement is a two-way street. Just as you are identifying targets to hire, some of your most valuable attorneys may be checking out opportunities at other firms. Don’t be blind to what goes on around you. Analyze which of your lawyers may leave and then work on a retention strategy. Keep your key assets as you seek valuable lateral additions.

Work on Deferred Maintenance. If your firm is in danger of departures, it is probably because unresolved issues at the firm make some of your producers unhappy. Likewise, a sloppy firm will not impress lateral candidates. Get ahead of the game by curing deferred maintenance. It may help save someone nearly headed out the door and improve your ability to impress lateral candidates.

Build Firm Momentum Independent of Lateral Additions. It is critical to end every year on a positive note. Yet we all know that not all years end up with record profits and bonuses. While positive spin sometimes can be tough to generate, leadership must attempt to excite the firm’s lawyers about the future. They will help excite the outsiders looking in.

Be Disciplined. You can have a growth plan, a strategic plan, a retention plan and a profitability plan. But if discipline is lacking in implementation of any of the plans because leadership has the bug to hire a new lateral to create some buzz, the firm suffers. It is imperative that discipline guide leadership in the upcoming free-agent season.

Baseball has its seasonal “hot-stove league” when players get traded and teams seek improvement through building a new roster. The functional equivalent for law firms is getting ready to start. Is your law firm ready?

 

.