For the last decade plus, merger has been a strategic choice for many law firms. The 2020 pandemic had a negative impact on the quantity of mergers but, many including our firm expect there to be a major uptick in 2021.

Given the probability that firms will at least be considering merger as part of their go forward plan, it seems prudent to think about what a good merger partner should look like.

To that end, here are 10 questions you should answer before having a conversation with another firm:

  1. What principal characteristics of your existing culture are most important to you. A lack of cultural compatibility is difficult, if not impossible to overcome, and one of the reasons so many combinations fail.
  2. In what rate tier do your clients exist. A lack of similarity in realized rates drives conflicts in staffing client files, compensation and a host of other critical law firm areas.
  3. What additional expertise (whether new to your firm or additional depth in existing areas) will allow your firm to make desired progress in targeted areas of growth.
  4. What are your key financial metrics. A good merger partner will have economic metrics that are similar to yours (of course unless your firm is failing). Metrics significantly different from yours — whether better or worse — will lead to painful pressure for one party or the other on rates, hours and retention.
  5. What aspects of your current compensation system do you most value. Merging with a firm with a significantly different approach to compensation will almost certainly result in a different relative treatment among your existing partners, possibly with unexpected negative consequences.
  6. What size of merger target best serves your firm’s goals? Questions like are you comfortable being a small outpost of a mega firm, or even small relative to your merger partner are good questions to think about. The greater the size disparity in a combination the less “say” the smaller firm will have in future decisions.
  7. Is your firm facing succession issues? If so in what specific way would you like to see a merger partner solve those issues?
  8. In addition to your existing footprint, what additional geographic presence would bring value to your firm, and why?
  9. What type of governance are you and your partners most comfortable with. Firms are governed in a range of ways, from very democratic to tremendous authority being vested in a few. It is important to know in advance what you are comfortable with and what is off-the-table in terms of governing options.
  10. What level risk do you think is reasonable? Risk in a law firm includes bank debt, partner turnover, unfunded pension plans, pending or threatened litigation and loss of key clients. Understanding your risk-tolerance is key to a successful merger.

The answers to these questions, and the impact the answers will have on your approach to a merger possibility will vary depending on whether you are acquiring or being acquired; but the greater the variance between how you feel with respect to these 10 issues, and the reality of the world you’re considering will be a predictor of the success of the combination.

If a strategic merger is in your future, smart leaders will engage in identifying   the things that are most important to their partners; far too many mergers occur without defining in advance what a firm is seeking, and why.

If you are interested in additional materials we have published related to law firm mergers click here.

For firms that operate on a calendar fiscal year, 2020 is done. Over. Finished. The uniqueness of 2020 presented challenges not anticipated as last year started, but remarkably most firms adjusted and endured. As they now take a deep breath and prepare for the merry-go-round of 2021, firm leaders can apply some lessons from the past year as they move forward.

Among the lessons learned, leaders discovered how to manage with new work-from-home flexibility, activating or acquiring systems to establish efficient remote platforms, communicating with banks, landlords and vendors to get through the crisis, and in some cases aiding liquidity through PPP loans. In many instances law firms achieved results never thought possible given the challenges faced. As planning for the next year takes place, knowing which experiences to draw on is an important key to a successful 2021.

With that in mind, here are four thoughts about assessing 2020 as you plan for 2021.

Don’t Be Fooled by the Non-repeatable. Being hoodwinked about the future because year-end numbers were good is not a good thing. Take a careful look at the “why” instead of just the “what.” Some things that contributed to the 2020 performance may not happen again. Obvious candidates would include one-time concessions from vendors or landlords, unanticipated work for clients as they attempted to navigate the unknown pandemic world, and PPP loans that may or may not be available in the future.

Successful Changes with Long-term Promise Should be Kept. It was a whole new way of doing business this past year, and in some cases the changes implemented proved to be eye-openers. Many of the changes demanded by the situation were intended to be short-term ones to be discarded as normalcy returned. A good exercise for 2021 and beyond is to review each change that expediency required and test it to see if it has long-term promise. If so, it could represent a new way of doing business that should be kept.

Listen to Your People and Clients. Adjustments made in 2020 may have been vital to survival or perhaps revelatory as you look back. Their implementation may have been acceptable to your people and clients then because “we are all in this together.” But as firms begin to return to the routine, attitudes towards the necessary of 2020 may become less accepting. As you see the opportunity for some daylight, engage your people and clients to learn how they feel about last year’s changes and their support for their continuance.

Consider Where You Fell Short. Even if you closed the year with a sense of a job well done, you might have been able to do better. Just because you survived an existential crisis you should not become complacent. A post-mortem will allow you to consider your mistakes as well as the best practices of industry leaders and take those lessons forward into 2021.

Planning for 2021 presents unique challenges. Will 2021 be like or different from 2020, or a little mixed? Listening to the lessons learned without being drowned out by the noise is as important as ever. As the new year dawns, will you look back as you look forward?

 

 

 

 

Most firms are in the final stretch of 2020, wrestling with collections, budgets, PPP loan forgiveness, promotions and compensation decisions. All of these are important activities. But, while focused on wrapping up 2020 let me suggest one more subject that deserves attention — something that stands a chance of making a real long-term difference.

I suggest that you spend some time really wrestling with this question: “What one thing, if accomplished in 2021, will leave us a healthier, happier firm — better positioned to compete in the new year and beyond?”

A few months ago I came across the book The ONE Thing: The Surprisingly Simple Truth Behind Extraordinary Results, by Keller and Papasan. The premise of the book is that we all face a tremendous number of distractions and demands on our time, most of which make no significant difference in our lives or the endeavors most important to us.

But if we take the time necessary to determine the most important thing to accomplish today, this week or this year, we can make a difference that really matters.

This isn’t a particularly complex concept, but it is one that far too few law firms (or individuals for that matter) seriously consider…much less, actually execute.

If you are in a law firm that doesn’t have a strong culture of planning, start by gathering the senior members of your firm for a discussion about the “one thing.” The dynamics will surprise you. Agree that you won’t be distracted…that you won’t attempt to solve every issue…but you’ll focus on identifying your “one thing.”

Agreeing on the “one thing” is more than half of the battle; but you will still have to execute. Things are more likely to really happen with some accountability built into action items. I recommend a regularly scheduled meeting with your partners during which progress towards the “one thing” is discussed. To accomplish the “one thing” requires a relentless, unwavering commitment to make it happen.

With these simple tools, you and your partners can take a giant step toward being in a better position when you take stock of 2021, and plan for the next year.

What do you think?

It is not an exaggeration to say that 2020 was different. As unanticipated as it was, it is notable that for many law firms this past year has been financially okay, if not good. But with the challenges still playing out and uncertainty looming as the year comes to a close, what kind of planning makes sense for 2021?

One lesson from the past year is that fundamentals do not change even when the unpredictable occurs.  So rather than trying to predict the ways that 2021 will be similar or different from 2020, focusing on the fundamentals of success is a better approach to controlling your law firm’s future. Attention to these essential building blocks help drive lasting benefits and the ability to overcome unforeseen challenges.  So as the New Year dawns, five areas should receive a firm’s focus:

Client-Relationships. Without an adequate client base, a law firm’s prospects are dim.  For that reason, it is important to annually (if not more often) take stock of the firm’s client portfolio as well as the firm’s strategy.  And just because the last year may have caused change, a focus on client relationships, whether new or old, is essential.  A top to bottom review may indicate many things, including whether a different client profile for the future should be pursued to better align with a newly emerging firm strategy. If there was ever a time to review the firm’s client relationships, it is now.

Financial Performance. Understanding your firm’s financial success and prospects for the future is more than asking whether everyone made enough money last year.  A surprisingly good 2020 may mask red flags sure to wave soon. Was your firm’s financial success in 2020 “earned” or was it was “gifted.”  Even with recent success, focused firms perform an objective assessment to determine financial strengths, weaknesses, trends, and strategies for improvement.  In the middle of a pandemic the scope of the review should include a look at productivity trends, market reliance, margins, expenses, investment levels and financial risk. In the wake of a tumultuous 2020, don’t be fooled by false positives/negatives.

Talent.  Just as a law firm is nothing without clients, it is nothing without talent.  Successful law firms usually are blessed with talent, but positive talent levels in the future are not guaranteed.  Doing a talent review in light of the pandemic means reviewing each person, each practice segment, and the back of the house.  Once performed, leadership should consider possible improvements and whether a boost in talent can be realized in-house (through training, focus, or otherwise) or by acquisition. If the review identifies gaps in the firm’s talent profile, the firm should act to fill the holes. In the shadow of industry disruption, 2021 could be a year of talent improvement.

Culture.  The quality of and commitment to a law firm’s culture is often cited as critical to success.  Yet the pursuit of high financial performance or growth can undermine a firm’s culture.  An annual review of the firm’s culture can identify whether short-term initiatives or successes have come at the expense of the firm’s valued culture.  Moreover, has the firm strayed in its efforts to survive the turmoil of 2020 and is now misaligned culture-wise?  A thorough review of the firm’s culture allows the firm to correct unwitting detours, embrace good changes, and plan for a future in which the firm’s culture is aligned with its strategy.

Succession. Every year that passes brings a firm closer to the need for an effective client relationship and leadership succession plan.  Whether succession is more client-relationship driven or leadership based, annual attention to the topic is vital.  Even firms that have planned previously must pause in the shadow of the pandemic to see if the path makes sense.  Has the pandemic upset the firm’s succession plans? A firm cannot be comforted simply because it has addressed succession in the past.  Existing plans should be reviewed to determine whether a refresh is required and whether implementation elements need updating.

Successful years at law firms seldom occur due to happenstance.  Rather, they require leadership focus.  After surviving an unscripted 2020, how will your firm plan for 2021?

“What gets measured gets managed” – Peter Drucker

I had the pleasure of serving as a guest panelist last week at a Managing Partner Forum webinar on “Which KPIs Are Best For Your Law Firm?” The program was a lot of fun and, I hope, beneficial to the participants.

The program was chocked full of insights on the topic. Here are just a few for your consideration.

What makes a good KPI?

My co-presenter, Steve Mabey, suggested that all useful KPIs meet the following criteria:

  1. Be reflective of firm strategy and goals;
  2. Be seen as key to firm success; and
  3. Be quantifiable.

If you’re part of management and seeking to identify your firm’s KPIs, these three points provide an excellent framework for your discussion.

Which KPIs are best?

Well, as is often the case, it depends. The best KPIs for any organization are those associated with the performance criteria most important to that organization. In working with firms, we recommend the development of a KPI to monitor performance associated with each of the firm’s strategic initiatives.

For example — have a growth initiative? The measurement of progress (or lack thereof) should be monitored along the way through carefully constructed KPIs. This allows for course correction before you travel too far down an unproductive path.

Further, the firm should develop metrics associated with any areas of potential risk for the firm.

During the early months of the pandemic, a number of our clients were anxious to monitor their liquidity. During that period, there was a great deal of uncertainty as to what the level of decline in revenues might be. With the potential for falling revenue, firms didn’t want to be caught unaware of their combination of cash on hand and borrowing ability.

KPIs have become a popular topic in recent years. It might be tempting to write the conversations off as a management-flavor-of-the-month. However, smart firm leadership understands the value in establishing ways to measure performance in critical areas in rea- time,  allowing for necessary adjustments or even pivots…whether in the midst of a succession debate, a growth initiative, or even economic stress brought on by a pandemic. Well run firms spot issues early, and adjust quickly.

 

Law firms seeking to thrive today must stand out from their competition.  Of course, that is easier said than done, and identifying specific steps to achieve this goal takes careful thought, planning and execution.  Thomson Reuters’ recently released 2020 Dynamic Law Firm Report presents a provocative and instructive glimpse of certain elements found in law firms that have managed to stand out.

The Thomson Reuters Report is commended for your review.  The data is interesting and the analysis worth digesting, especially for firms seeking an edge in the current market.  And while the data and conclusions may not be relevant for all firms, the Report and its lessons should resonate with firms that focus on their clients and the industries they serve. That focus should make firms think about two things in particular:

Investing in Your Client

As the Report suggests, the most successful firms (in its parlance-Dynamic Firms) have strong individual lawyers who understand their client’s (industry) business, with that understanding provide commercial and strategic advice, and lead strong client teams (which likewise understand the client’s business and industry).  But being that kind of law firm can’t be left to luck or happenstance. Realistically, a firm seeking that exalted role must be willing to invest time and money in educating its service professionals, from top to bottom, about the client’s business, its industry, its competition, and the keys to its success. When a marketing dollar spent to promote a non-credible law firm team achieves far less than one spent on promoting a team populated with thought leaders, the rationale for such investment is clear. Adopting an investment plan and strategy could be transformative for your firm.

The Return on Investment

While the investment may seem too distantly related to day-to-day results, the indirect returns can be substantial. Intimately knowing your client’s business and its needs will draw your client closer. It will feel that the hourly rate charged buys it legal expertise delivered by a savvy advisor that understands the big picture.  It will get more from your firm than other firms. A client that thinks of your firm in that way will have less reticence to reach out for your perspective, will begin to think of you as a strategic partner, and ultimately will seek validation of its decisions on a recurring basis.  So positioned, your firm will be busier, more important to the client, and considered for every major engagement for which you have expertise.

Today many clients want more from their law firms than just legal expertise.  Meeting expanded expectations requires an internal investment so that client appreciation is realized. Is your firm ready to invest?

 

Managing the delicate balance of law firm economics has always been a challenge. In serving any particular market (practice type and geography), firms struggle to find that sweet spot — the perfect formula of rates/pricing, productivity, cost, and resulting profits. Should any one of the particulars get far out of equilibrium, the consequences can be stressful

For the majority of law firms, one of the most significant areas of cost is office space. As a result of COVID, firms closing offices and adjusting to working from home, many firms are considering whether there is an opportunity for a triple win — to decrease costs and make positive strides on issues related to satisfaction in the workplace while maintaining or even improving productivity.

 There are a growing number of examples of firms seizing this opportunity. This article’s title sums up the state of thinking pretty well — COVID-19 Shutdowns Have Law Firms Wondering How Much Real Estate They Really Need.

 Another good example of the evolving thinking is reflected in this quote from senior partner Louis Miller of Miller Barondess “Even after our office opens up,” Miller said, “I’m going to make it optional. (The firm’s attorneys) don’t have to come in if they don’t want to. As long as they do the work, I don’t care where they are.” (Read this  interesting article here). The same is true in cities throughout the country.

 The impact of firms rethinking their space needs is reflected in the sharp decline in law firm office leasing. According to this article, New York City law firm office space leasing is down 45% from last year as firms defer leasing decisions while they contemplate how to respond to COVID-19 challenges.

 Some firms have taken decisive action, downsizing their space commitment. In the process, we know of several firms who have been proactive in renegotiating their lease as they decrease their commitment to space (see Burnham Brown restructuring to 20% less pace and Greenspoon Marker Shrinks Footprint…) while others are still considering their space options.

The issue of how much office space is actually required for service providers is not new, or unique to law firms. The public accounting profession has operated with a different and more efficient space model for many years. As firms realize that their space needs aren’t what they once thought they were, options like hoteling, shared offices and working at home permanently are being and should be considered.

 What are your firm’s plans for space?

As talk about more states allowing non-lawyer ownership of law firms is heard, concern over more deeply capitalized competition may be on the mind of some law firm leaders.  No doubt, opening up law firm capital structures to investors is significant, but it won’t change the fundamentals for surviving in today’s legal services market.  Since time immemorial law firms have had to compete for business.  Regardless of a new kind of competitor on the horizon, firms will continue to enjoy success if they focus on service, value, and client needs.

Because service, value, and client needs are table stakes, new entrants to the legal services market will confront the same kind of client expectations law firms do today.  For that reason, overreacting to new ownership may be a distraction.  Rather, law firm leaders should stay clear-headed about what matters and refocus on providing better client service, more value and meeting client needs.

In its In-House Counsel Q&A from September 15, 2020, Thomson Reuters Legal Executive Institute detailed the preferences of one sophisticated legal services consumer.  The deputy general counsel in question said that outside lawyers should (ii) provide practical and business-oriented advice, (ii) be a reliable trusted advisor that can make life easier, and (iii) communicate well.  While there are many ways to meet these requirements, three recommendations come to mind.

Understand the Client’s Business.  Whether keen to provide practical and business-oriented advice or seeking to make a client’s life easier, a thorough understanding of the client’s business is essential.  Digging deep into the client’s business is a fundamental precursor to meeting the first two requirements identified in the Thomson Reuters’ piece.  And because having the ability to communicate articulately and succinctly is also highly valued, knowledge about the client’s business will greatly enhance communication skills.  Think fluency in the client’s business.

Broaden the Partnership (No Weak Links on the Team).  An appreciation of the client’s business must be present in all team members that work for the client, not just the client relationship manager.  When the firm’s appreciation for the client’s business is deep and wide, the client will sense it at every interaction. Moreover, if all team members are thinking about the client’s business, you’ve created an incubator of beneficial ideas.  Big dividends will follow.

Avoid Being Insular (Consider Best Practices).  No one has a lock on knowing how to meet client needs.  Some of your competitors or other industry players may be more effective because they do things your firm does not do. Conversely, the latest client service fad may not be a “best practice” and may advance the ball little.  So, while you look around, consider success stories and reject failed experiments. After alternative practices are vetted, adapt the winning ones to your service model.

New law firm ownership rules (if they come) can be exciting, scary, and different.  But managing your firm through a possible new age does not change the need to earn your clients’ trust and help them achieve their goals.  Will you keep your eye on the ball?

The impact of COVID-19 on law firms has barely begun. When it comes to the flow of work, some firms are experiencing a measurable or even significant bump thanks to having the right practice focus at the right time: but for the most part, law firms have experienced some degree of decline in both work and collections.

How firms have responded to the negative impact has been mixed. Some have found ways to hold the line on employment and compensation. Others have implemented furloughs, lay-offs, and compensation reductions.

But all signs point to the fact that we’ve barely weathered the initial shock.

As the reality of longer-term damage to demand becomes clearer, there are increasing signs that in response to the market, firms are downsizing. The following is a sub-set of the numerous announcements during the last week:

  • Skadden is latest firm to announce layoffs; experts say more…
  • Layoffs Hit Two AmLaw 100 Firms
  • Nixon Peabody Lays Off Some Furloughed Workers…
  • Baker McKenzie to Cut North American Workforce as COVID…
  • Layoffs Come to Cleary Gottlieb

An Appropriate Response

The prospect of downsizing any organization is daunting. The impact on individuals and families is impossible to calculate or plan for and is often tragic.

Yet, as law firm leaders around the world are examining options, the question is when are layoffs the appropriate response to economic realities.

At one end of the spectrum, firm leadership has a duty to clients and partners to do what is necessary to ensure continuing viability. Failure to act soon enough could result in even more pain for many more people.

The discussion isn’t legitimate, however, without looking at the other end of the spectrum. Leaders have a responsibility to each and every person that is part of their law firm. Any decision to downsize, which is driven by the pressure, or a need, to deliver as much income as possible to firm owners is to completely ignore the degree to which every individual in the firm has contributed to any success.

Equity ownership in any endeavor carries with it implicit risk as well as a potential reward.

For owners who have accepted this reality, the challenge comes in identifying the point at which some level of economic impact becomes a threat to institutional existence. Possessing this level of insight requires access to real-time measures and a commitment to manage this reality.

The answer as to what to do is going to vary from firm to firm. It warrants planning that, if not already in motion, should begin today. It not only depends on the data noted above but must include substantial input from firm owners.

I have been inspired by accounts from within our industry where leaders have brought creative thinking to bare on this discussion and have crafted innovative responses to the moment, and in the process, have rallied everyone in pursuit of the other side of this challenge. It requires a vision that sees beyond the end of this year.

An Effective Path to a Decision

The questions of when and how to deal with the possibility of layoffs speak to who and what a firm is. A quiet but broad-based discussion with owners to determine common objectives and values, what varying approaches to the moment might cost, and precisely what that existential moment looks like is an effective way to come to a position that reflects a firm’s real culture.

How is your firm preparing to answer this critical question?

For some time, law firms have felt heightened competition from not just other law firms, but also from clients moving needs in-house and alternative service providers picking off peripheral services.  As reported by Bloomberg Law in Arizona First State to Allow Nonlawyer Co-Ownership of Law Firms, looming rule or legislative changes in a number of states may boost significantly ASPs ability to compete with traditional law firms, and not just on the margins.

It is too early to predict how much pressure law firms will feel from these changes.  Nor can it be predicted whether expanded rights for ASPs will make legal services for Americans more accessible.  Yet given the relative prominence ASPs have in the legal landscape already, it is reasonable to predict that future ASP competition will be more formidable than ever.  Indeed, ASPs creative use of impending changes could be breathtaking.

Guiding traditional firms in this potentially altered industry requires leaders to redouble their attention on management principles, strategic planning and talent retention and procurement.

What should be done?  At a high level, three things come to mind:

Look Inward.              With all that has happened in 2020, no doubt most firms have taken stock of where they stand.  Don’t stop, do it some more, but with ASP intrusion in mind. Focus on internal changes that can add greater efficiency (and quality) to the delivery of legal services.  You know that is what the ASPs will be doing and touting to your clients.

Look Outward.           What does your legal service market look like? Is more ASP competition likely (is your state sprinting towards ASP expansion or dragging its feet), is your firm already finding it hard to compete, or does it have a leg up on existing competition.  Even if this review is positive, realize that the impact of ASPs will be felt eventually.

Look Ahead.               If ASPs are likely to descend into your market like never before, what is your challenge and how do you meet it?  Or are you on the cusp of a “if I can’t beat them join them” moment? There is a fork in the road-will you turn right, left, or follow Yogi Berra’s advice and “take it?”

With the advent of this change, what are your strengths internally and externally?  Assessing them in the context of a looming marketplace disruption can highlight a responsive path forward. But business as usual, without thoughtful reflection on these impactful developments, just won’t do.