Managing Law Firms in Transition

Managing Law Firms in Transition

Investing More Capital at the Law Firm-Five Thoughts for Leadership

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

Invested capital at law firms varies widely and reflects the differing philosophies between firms. The amount invested says something about a law firm’s values, speaks to its fiscal approach and provides commentary about a law firm’s culture. Traditionally, the more capital in a given firm indicated a strong institution with the shared value of fiscal conservatism. Yet not all successful firms view it as vital that its owners make significant cash investments in the firm. For those firms, the adequacy of cash flow and the deferral of most distributions until year-end is viewed as more than adequate capitalization.

Law 360’s recent BigLaw Putting More Cash in Piggy Bank After Firm Failures reports a recent trend among some large law firms to increase permanent capital through a variety of measures, including requiring greater partner buy-in. As Law 360 reported,

“[I]n a recent firm survey, Wells Fargo found that the top 100 U.S. firms by size had 5 percent more permanent capital in the first half of 2014 compared with the same period of 2013.”

Yet the same article acknowledged that the push towards higher capital reserves is not universal and it can be difficult to convince law firm owners to invest more capital despite pressure from lenders and clients.

As a basic matter, a firm that increases its permanent capital has leadership that over-comes the common reticence among lawyers to part with their money. Experience shows that convincing partners to invest more permanent capital can be tough. Success or failure in cajoling ownership to invest more measures ownership’s confidence in their firm and confidence in firm leadership. It can be a telling if the effort is not successful. For that reason, the following facts should be understood prior to making a “capital call.”

The Timing is Never Perfect. Whether a law firm is riding high or struggling, any proposal to raise permanent capital will be met with arguments in opposition. If times are good, management will be met with “we’re fine, we don’t need to raise our capital.” If times are not so good, many owners will balk at investing more money in a firm that soon may be taking on water. There is never a perfect time to raise capital. But if additional capital is appropriate and all other things are equal, leadership should not refrain.

A Capital Raise Must Also Address the Return of Capital. A successful capital raise is not really successful if the capital raised can be quickly and easily redeemed. Most firms increasing capital also couple it with conservative redemption policies. Any firm adding to its permanent capital must not leave the barn door wide open or its “permanent capital” is not very permanent.

Make it Count. While a request to increase capital is never easy, the struggle that goes with the initiative militates in favor of raising an amount that is more than nominal. Inviting blowback for a small increase in permanent capital just is not worth the effort.

Departures May Result. Anytime a firm seeks to increase its permanent capital, fence sitters may decide that have had enough. So before you seek to raise capital, undertake an honest assessment about who might depart and prepare for that possibility. Many times departures are just part of the process.

Gradual is Easier. Many firms increase capital over a number of years instead of demanding that it all be contributed at once. The more a firm can phase in the increase by raising it from yearly distributions over a number of years, the more likely the initiative will be accepted and succeed.

Any program to increase a law firm’s permanent capital will invite controversy. Yet for firms seeking financial strength, as well as improving their standing with their banks and clients, an effort to raise permanent capital can be sound. Have you attempted to raise permanent capital recently? How have you fared?

 

Want To Project The Stability of Your Law Firm? Test Shared Aspirations

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

 

I am interested in the interaction of a group of people who have a common goal, or a common obsession, each contributing something unique to make something greater than the sum of its parts. I don’t know why, but from day one, that has interested me. – Steven Van Zandt, Bruce Springsteen’s E Street Band

 

I believe that today you can project the stability of your law firm.7382239368_ba418d5b73

The number one factor isn’t the economy. It isn’t even about how efficient your management team is in transitioning to the new normal.

The single greatest predictor of a law firm’s stability — through good as well as tough times — is the degree to which the partners share aspirations.

In fact, it is really pretty simple. The more disparate the aspirations in a partnership, the more difficult it is to maintain harmony.

If you find yourself in a less than harmonious firm, you’re not alone. The hiring priorities of most law firms exacerbate the issue. When it comes to hiring entry-level associates, little matters but grades. And when hiring partners laterally, the expected portable business trumps everything else (even though reality rarely measures up to those projections).

You might try conducting a blind survey in your firm to see the extent to which your partners or lawyers perspectives on 5 simple issues vary.

Pose these aspiration-based questions:

  • All partners should work at a minimum billable level of ________
  • All lawyers should commit a minimum of______ hours to pro-bono work.
  • Should the firm accommodate lawyer part-time schedules
  • What is a reasonable target for senior partner compensation.
  • How do you rank the following on a scale of 1-5, with 5 being most important:
    • Quality of client work;
    • Partner income;
    • Firm size;
    • Employee welfare;
    • Community reputation.

 

To the extent you find wide variation, you might consider reevaluate your hiring practices.

 

In a Time of Law Firm Transition, Executing on the Fundamentals is Key

Posted in Law Firm Leadership, Law Firm Transition

Interesting news about the legal industry in transition was reported over the last couple of weeks. Jacob Gershman of The Wall Street Journal wrote one of a number of articles that reported a drop in legal jobs. Jennifer Smith recently wrote that clients are gaining traction in tamping down the cost of legal services.  Robert Half reports that in Canada (will the US follow?) law firm salaries will fall behind some other professions in 2015. The ABA Journal provided a summary of law firms with the highest percentage of attorney losses. Forbes’ Basha Rubin theorized that mid-size law firms are at risk because of corporate trends towards insourcing. Another report about mid-size law firms had more positive news and concluded that the prospects for mid-size law firms had stabilized.  For large law firms, the news was not all bad as revenues were reported to be up.

The market turmoil currently being experienced will keep up for a while. For that reason, law firms today must have the resolve to tackle the problems that stem from market turmoil.  As formidable as these issues appear, many of these transitional issues can be addressed by sticking to sound law firm management fundamentals. To manage through transitional times, firm management should:

Review Performance Data Constantly. Smart law firm leaders stay on top of a law firm’s health by reviewing performance metrics frequently. A drop in a particular practice’s statistics is to be expected from time to time, but to keep it from getting out of control any substandard performance should be analyzed promptly. If the review suggests that a bigger problem is developing, an action plan to remedy the situation must be developed and executed without delay.

Increase Communication Efforts. At any law firm, keeping the lines of communication open is a must. In times of transition, a law firm leader should reach out to partners, associates and staff to keep them informed and gain feedback on their activities and concerns. Communication is a two-way street, so good intelligence on how your firm’s most valuable assets are feeling is best obtained by keeping your people informed. In times of transition, burrowing deep into your bunker is the worst thing a leader can do.

Keep Attuned to the Marketplace. Law firms do not operate in a vacuum-they compete in a robust legal marketplace that can be very informative. Law firm leaders should make it their business to know what is happening to their competitors. If a leader is well informed with the latest market intelligence, he or she will be more nimble to react to developments within his or her own firm.

Review and Re-Assess the Firm Strategic Plan. All firms should have a well thought out strategic plan. A law firm leader should frequently review the firm’s strategic plan and make small and large decisions that are consistent with a furtherance of that plan. If, due to the passage of time, the plan is dated or losing some of its relevance, re-think the plan and assess the firm’s next steps. Whether it simply needs tweaking (a common solution) or a radical change (generally not the case) will only be known if the plan undergoes a rigorous review by management.

Avoid Being Reactionary. Change experienced by a law firm can be gradual or immediate. Depending on the nature of the change, a response may be required. While circumstances may compel a prompt response, it should be measured and take into account its impact on the firm’s future. A reactionary response, in which management takes action because it “feels right” or the rank and file is clamoring for “action” is seldom wise. A misstep can be difficult to reverse.  Whatever the speed of a response, it must be thoughtful and aware of its potential consequences.

A market in transition manifests itself in change and often creates concern. Managing through that change does not require a change in management principles. Indeed, sticking to management fundamentals most often works best. Are there other approaches that you think work better?

Law Firm Risk, Debt and Shared Aspirations

Posted in Uncategorized

I’ve seen more people fail because of liquor and leverage – leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing. – Warren Buffett

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It is typical of all businesses, including law firms, to utilize some form(s) of debt as part of an operations strategy. Many firms finance the purchase of furniture, equipment and leasehold improvements. Some utilize debt to finance payments to the owners when collections are slow or business is down.

It is not breaking news that the greater the debt relative to their revenue, the greater the risk. With higher debt levels a firm is under increased scrutiny,  and — in practical terms — the control of their bank.  By default, handing greater control to a lender limits options for the owners of the firm.

Within the legal profession there is a healthy and increasing trend to decrease relative debt levels. This Law 360 article (subscription required, but also posted here on LeClairRyan’s website) discusses some of the rationale behind the trend. Simply put, many law firms are taking a longer term view of the organization, choosing to set money aside to finance growth and short term needs in exchange for a more secure future.

Key to successfully implementing a move towards a decreased reliance on external financing is getting the firm’s partners on the same page. The more disparate the aspirations of a partnership, the more difficult it is to obtain the requisite buy-in to a debt reduction plan.  Some partners are conservative and willing to trade a degree of short term cash flow for longer term stability; others are predominately interested in maximizing immediate personal cash flow.

One approach that can help firms navigate a resistance to debt reduction is a phased-in reduction. This approach, through which a firm achieves a targeted level of debt reduction over time, is made even more painless if the funding of the debt reduction can be taken from year-end distributions.

One firm we worked with maintained a required partner contributed capital balance equal to approximately 8% of the partner’s income. In order to decrease outside debt, partners agreed to increase their contributed capital to 22% of their budgeted income. The increase was funded in increments of 2% per year for 7 consecutive years, and came out of the year-end distribution.

Is your firm decreasing risk by decreasing the use of debt?

 

Strong Leadership and Sound Strategy: Law Firm Success in Transitional Times

Posted in Law Firm Crisis, Law Firm Leadership, Law Firm Transition

Some recent news and commentary drives home the idea that the legal industry and its law firm participants are facing transition. Jennifer Smith of The Wall Street Journal reported that more law firm clients are insourcing-taking in work heretofore performed by outside counsel. That development, by some accounts impacting large law firms in particular, occurs at the same time that Bingham McCuthen and Morgan Lewis and Bockius have announced the intention to merge. Given Bingham’s travails over recent years, speculation abounds about what will happen to it if the merger does not close. If one thinks that it is only big law that faces challenge, Basha Rubin of Forbes offers the view that insourcing will impact mid-size firms more than the larger firms. Ms. Rubin’s The Business of Law: Is the Mid-Tier Law Firm Dying[?], posits that insourcing could spell doom for the mid-sized law firm.

Whatever a law firm’s size, or its past commitment to aggressive growth like Bingham, the ability to withstand the strains of a transitional market comes down to strong leadership and sound strategy. The presence of both can avoid crisis exacerbated by a legal market in turmoil. When challenges exist due to a gurgling market, strong leadership and sound strategy can prove critical to future success and, in some cases, survival.

The characteristics of strong leadership and a good strategy can be and are often debated. But five fundamentals, if followed, are little things that can greatly aid a law firm during these times of transition. They are:

Develop a Long-Term Plan and Stick to It. Hopefully your firm has developed a long-term strategic plan after careful and thoughtful consideration. If such a plan does not exist, get one. But any long-term plan’s value is undermined if it is cast aside in favor of the latest trend. So develop a long-term strategic plan (sound strategy) and have the discipline to see to its execution (strong leadership). If it begins to appear flawed, recognize the flaws, rethink the plan to make necessary fixes and create a new long-term plan. It likely will represent a tweak of the earlier plan, not an entirely new direction. Above all, don’t manage “on the fly.” It will only disappoint.

Emphasize Your Strengths. Face it, not every practice area at your firm is a world-beater. Play to your strengths and consider phasing out anything that is weak or not critically complimentary to your strengths. As Basha Rubin writes, as do others, specialization allows you to distinguish yourself in today’s ultra-competitive world. In contrast, little that a generalist does is unique.

Recognize that Growth is Neither a Solution Nor a Strategy-It is a Tactic. Refrain from thinking that growth itself is a great plan. Too often growth plans are viewed as a strategy that solves problems or stimulates opportunity. Unfortunately, growth is mostly a tactic, not a strategy. If growth implements a firm’s strategy, great. If not, it is action packed but aimless.

Understand that Not All “Best Practices” Suit Your Firm. Another law firm’s success with an initiative does not mean it is something to be emulated. Studying industry best practices is good, and thinking about them introspectively is better, but implementation should only happen if the fit is right.

Be True to Your Firm’s Culture. Trying to be something you are not is destined for disaster. A firm that has a distinct culture should manage, hire and practice consistently with that culture. If lateral hiring occurs, leadership should give as much attention to integrating the new hires as catching them. Integration means inculcating the additions into the firm’s culture. They will benefit, your legacy people will benefit and the firm will benefit.

Strong leadership and sound strategy are like motherhood and apple pie. They are things everyone likes. But in these times of transition, will your firm do the little things to assure the needed leadership and strategy?

 

 

The Future of Mid -Sized Law Firms

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

 Strength and growth come only through continuous effort and struggle. – Napoleon Hill

Even as the economy improves, we see many law firms of all sizes continuing to struggle. Mid sized firms seem to be having the greatest difficulty adapting in the evolving marketplace.

In a recent Forbes article, Basha Rubin suggested that we might be seeing the end of the mid-tier firm. Rubin’s reasoning is that the growth of in-house counsel staff and their uses of temporary legal resources to manage fluctuating workload results in dim prospects for the mid-tier firm.

Step Away From The Ledge, And Remember What It Takes To Flourish and Grow

There is no denying that a number of forces are creating pressure on many firms; however, the fundamentals of what it takes to grow a successful practice remain the same – for firms of any size. Here’s a quick primer.

  • Manage obligations to a low and manageable level. This means:
  • Not committing to expensive (and extravagant) office space. Resist the siren song of that newest office tower – and the long term lease that comes with it.
  • Limit hiring of permanent lawyer and support staff until there has been an extended and reliable need established.  In the interim, learn to rely on part time, and temporary resources.
  • Focus your practice on an area of law for which you have a passion, and for which there is a significant demand.
  • Strengthen and expand your relationships. This means the network of those that you have a direct relationship with, and those that can be developed through social media.
  • Without exception, do work of a quality that will bring clients back and turn them into referral sources.

Success is not about size. It is about purpose, passion, wise management and a relentless focus on your network.

How do you see the future for mid-tier firms?

Strategic Attorney Departure-Deciding to Not Join in Your Law Firm’s Merger

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

Law firm mergers have continued this year and are approaching last year’s record. For law firms, any number of motivations can lead to merger, but the common denominator is the perception that merger serves the greater good. Despite the onslaught of mergers, a vast number of mergers are less than perfect. And while a merger may be for the “greater good,” its imperfections prevent it from being for the “universal good.”

Lawyers are the ultimate free agents. At any point in time, a lawyer can decide that his current firm is not suitable and decide to leave. In times of transition, especially in the face of an imperfect and impending merger, the declaration of free agency can be at its loudest. The experience of Patton Boggs (before and after the closing) and Bingham McCutchen, among others, prove this to be true.  Conflicts, compensation issues, cultural differences and underwhelming opportunity can compel a merging firm’s lawyers to consider an alternative course. For those lawyers, strategic reasons typically drive the decision to go a different direction. If a lawyer reaches that point, there are at least five things to keep in mind:

A Clean and Amicable Break is Best. Like any divorce, separation is best for all parties if it is clean and amicable. A clean and amicable break will assist in transitioning client files, understanding which relationships are off limits to raiding and how the separation is to be announced. For that reason, negotiations over departure should employ objective and rational reasoning instead of emotions. Because emotions sometimes can’t help but surface, rationality and traction towards an amicable split are helped by using a third party to negotiate the break.

Departure is Involuntary. In many ways, the departure is an involuntary act since it is preceded by a commitment to merge made by the firm, not the lawyer. That being the case, the decision to not join in the merger is not a sign of disloyalty but should be recognized as a difference in strategies. Because an individual lawyer cannot match the firm’s control over the firm’s destiny and the destination can be harmful to the lawyer, his or her decision to leave is, for the most part, involuntary.

Deferrals and Punitive Provisions Are Inapplicable. Because the proposed merger, not sought by the individual lawyer, is strategically unsound for him or her, the departure can be viewed as a forced one, similar to a constructive termination. For that reason, it can be argued that muniments of partnership status (capital, loan repayments, property) should be returned without delay and any punitive partnership agreement provisions should not apply.

Good Future Relations Benefit Both Sides. While having an amicable split is critically important in the short-term, thinking about how relations will be in the future can be very important for the long-term. Future referrals, sharing of information, joining in the representation of select clients are issues that should be explored as the impending departure is negotiated.

Numbers Matter. Some partnership agreements are onerous towards departing partners but the severity of the negative provisions is only appreciated when applied to real life financial numbers. Getting the “numbers” from the firm is step one. Vetting the numbers is step two. And negotiating from “agreed” numbers is step three-and the most important step. Like other aspects of negotiating a departure, outside help may prove useful in translating the issues into plain English. Anything less than a full understanding of the numbers and how they work leaves the individual lawyer at a distinct disadvantage.

Law firm mergers almost always stimulate fall-out. A lawyer realizing that he or she does not want to join in the merger can make a gracious exit that benefits everyone. If your firm sought a merger, would you be ready to not follow?

 

 

 

What Do a Law Firm and a Taco Joint Have in Common?

Posted in Law Firm Growth, Law Firm Leadership

Start by getting the right people on the bus. Jim Collins

When I ask what a law firm and a taco joint have in common, it is not intended to be another one of those lame lawyer jokes.

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The other night my wife and I stopped by Torchy’s Tacos for a quick bite, and my wife pointed to a large, colorful plaque hanging near the entry (the graphic here). 

The plaque and the Torchy’s story prompted me to think about the common vein that runs through all successful businesses, including law firms.

Torchy’s started in 2006 in South Austin as a food trailer. The owner, Michael Rypka, was a former Executive Chef and had an idea about building a business around a handful of basic principals. Generalized to all businesses his principles are:

  • Deliver a great product/service – Always
  • Honor your client/customer
  • Treat all employees with respect
  • Continuously focus on improving the bottom line honorably
  • Make the workplace a good place to be for all employees

Torchy’s has been a huge hit. People are lined-up, day and night.  The enterprise has successfully grown from a single food trailer to a dozen sit-down restaurants in the Austin area, and has expanded to Houston, Dallas and other cities.  This is a pretty amazing accomplishment when you consider that there is some sort of taco joint on almost every corner in Texas.

When asked about maintaining quality as the business expands, Rypka says that it substantially comes down to hiring and training people who have the same vision you do.  This is a lot like the Jim Collins quote above.

What principles are you building your law firm around?

Law Firm Alert-Get Your House in Order

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

In a recent interview about his advisory work on behalf of Patton Boggs (now  a part of Squire Patton Boggs), Zolfo Cooper’s Joff Mitchell recommended that law firms “get your house[s] in order.” While not all law firms today face the challenge that Patton Boggs faced and which Mr. Mitchell helped resolve, there are indications that firms should take heed.

Last week the Wall Street Journal’s Jennifer Smith reported on the growing competition that law firms face from their clients. As Ms. Smith noted, more and more companies are using their internal legal staffs to perform the routine work formerly sent out to private law firms. The data Ms. Smith recounts can be scary and tells a story that should concern law firms that are trying to survive in this ultra competitive legal environment.

It is not that clients have ended their relationships with law firms. Rather, today many clients reserve for their law firms’ only special projects. The routine legal work, previously a core component of a law firm’s business base, is being taken in-house. In bringing this work in-house, clients perceive at least three benefits. For one, many feel that law firms used the routine legal work to train the firm’s young lawyers-all on the client’s nickel. Saving that expense goes a long way towards funding an in-house legal department. Secondly, clients are finding that their company business units prefer the in-house lawyers for various reasons, including their better understanding of the client’s business. Finally, many clients find it cheaper to keep the legal work.

In the face of this competition, today’s law firms might consider it wise to “get your house in order.” But, how? Among other things, firms can:

Become More Specialized. Clients no longer see the benefit of paying for routine legal work when in-house lawyers are cheaper and more efficient. The commodity work that formerly supplemented a law firm’s more interesting and complicated matters will be harder to come by. Firms should recognize this fact of life and move away from offering a broad range of services. Instead firms should concentrate on the substantive area of their expertise. By building off that reputation and growing in specialization, a firm will be doing the legal work clients cannot do. And unlike the difficulty in touting general services, specialization allows a firm to differentiate itself more easily.

Change the Firm’s Make-up. Clients no longer want to pay for the privilege of training your baby lawyers. In part, that drives them to use their in-house staffs to perform the repetitive legal work your firm previously devoured.  Morgan Lewis & Bockius has recognized this and is placing its young lawyers directly with one client for training and subsequent hiring later. As you move from generalization to specialization, remake your roster of lawyers to more senior lawyers with experience in the firm’s chosen specialties. Because younger lawyers have not developed the critical expertise, many will have to go. Morgan Lewis‘ approach may be a partial solution.

Pursue Clients That Don’t Have Legal Departments. If you can’t give up the commodity work or need time to phase it out, pursue clients that have not yet graduated to establishing a legal department or hiring an internal legal team. Generally, this means pursuing a middle market client base. Unfortunately, diving into the middle market is not a panacea. Because middle market clients are not going to find large firm rates acceptable, they may balk at the kind of rates previously charged the large clients that are now the competition. Thus, if going after the middle market client, it is imperative that the reduced rates get modeled into the firm’s budget.

Competition is coming from many directions. Are you taking steps to deal with the competition from your clients?

 

 

 

Is the Purpose For Many Law Firm Mergers the Reason So Many Combinations Fail?

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

Efforts and courage are not enough without purpose and direction. – John F. Kennedy

It seems not a week passes without an announcement of another law firm merger.  A report last week of a rumored combination of Morgan Lewis and Transition-Planning-SignBingham McCutchen caught my attention.

The posting in Above the Law suggests that the partners of Morgan Lewis may be less than excited about the possible transaction; but, “… the lure of becoming one of the five biggest firms in the world is hard to resist.”

I hope that isn’t the real driver behind the deal.

There are a numer of solid strategic reasons for law firms to consider merging. In my opinion, three of the best include:

  • The addition of specific expertise and technical capabilities necessary to better serve existing or targeted clientele;
  • Succession planning; and,
  • Financial stabilization.

I have been encouraged by the fact that two recent mergers our firm was privileged to consult on were specifically driven by succession concerns. In each case, senior partners made the strategic and selfless decision to seek a culturally compatible merger partner in order to provide a platform of future opportunity for its younger lawyers.

Unfortunately a significant percentage of mergers are driven solely by a desire to get bigger.

Why do I say “unfortunately”? Isn’t growth a good thing?

Simply put — I believe the numbers-driven strategy is the root cause of a majority of failed merger initiatives. Getting bigger often only compounds existing deficiencies.

Is your law firm considering a merger? If so, what is driving it?

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