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.

 

 

 

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 Weiss’ Has 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?

 

 

There are hundreds of potential strategies for law firm leaders to consider as they evaluate how to compete in an increasingly crowded marketplace. In the process of wrestling with all the complexity and analyzing options, it is easy to lose sight of a few basic principals that go a long way when it comes to keeping almost any firm healthy. So here’s a quick refresher.

People

If you frequent this blog you know I am a big fan of Jim Collins — largely because of his ability to cut through all the noise and remind us of some basic principles. To borrow Collins phrase, getting the right people on the bus is key. Build (or grow) your firm with quality women and men, ensure that everyone is treated with dignity and respect, you’ve taken a giant leap toward stability and productive collegiality.

And, may we talk about laterals for a second? In particular, make sure that those that you bring aboard laterally share your basic values and aspirations. The same should be said with respect to those who have come up through the ranks for partnerhship consideration.

In the long run (and sometimes it is not a very long run at all) no one wins when you look for ways to short-cut the people part of the law firm equation.

Clients

Clients are getting smarter and demanding more. Central to success is ensuring that your firm interacts with its clients in a way that strengthens existing relationships, leads to additional work, and makes it easy for your clients to be a coveted source of recommendations and referrals.

Cost

It is news to no one that costs — and debt in particular — are law firm killers. Keeping costs at a low and manageable level has an amazing effect when it comes to minimizing the things threaten a firm’s existence.

The killers here are real estate costs,which are typically fixed, no matter the departures of lawyers or clients; and disproportionate (or just flat out-of-whak) partner compensation.

Minimize your reliance on external financing as a basic tenet of your management, and you’ll have fewer moments on the cusp of crisis.

Focus on basic blocking and tackling will lead to a healthy law firm

What are your thoughts?

The concept of insourcing by corporate legal departments has generated some press recently. Jennifer Smith’s Companies Curb the Use of Outside Law Firms highlighted the issue for law firms and judging by the reaction, it explained for some law firm leaders what has been happening to them. Other writers and commentators (here, here and here) added to the discourse with their own take on the issue. As Suzanne Edwards reported in her Houston Companies Hiring More In-House Lawyers to Save Money, even law firms in the very hot legal market of Houston appear vulnerable to large clients cutting back on the use of outside counsel in favor of insourcing. Various reasons are offered for the growing popularity of insourcing, but prominently among them are the views that the high cost of outside counsel, inside counsel’s better service orientation, and inside counsel’s deeper understanding of the client’s business make insourcing a no-brainer. As reported, however, not everything will go in house as big ticket items outside a company’s legal talent base will still go to outside counsel.

Unrelated to that reporting but nonetheless relevant, a recent meeting of general counsel generated some raw viewpoints on how some GC’s see their relationship with outside counsel. A long list of problems, concerns and irritants was compiled by Pam Woldow in her Straight From the Horse’s Mouth-GC’s Say What They Want From Outside Firms-law firms would be wise to take note. Without repeating the list verbatim, and without assessing the fairness of all the points expressed by the GC’s, it helps explain the trend toward insourcing. Law firms that don’t react to insourcing or hope to survive on the “bet the company matters,” will be disappointed.

So what’s a law firm leader to do? Fundamentally, the rise of insourcing is telling law firms to:

Keep Costs Down. No small factor in driving companies to insourcing is the high cost of outside legal services. It does not take a rocket scientist to realize that one response to insourcing is for outside law firms to keep costs down. Alternative fee arrangements, success fees in lieu of some hourly fees must be considered as a way to reverse the GC’s aversion to hiring outside counsel. High legal costs truly have to be tackled-lip service to the problem is not only inadequate it is insulting. Major changes are required. Become financially lean and streamlined so the GC begins looking at the in-house team as bloated.

Become a Business Partner. Time and again, reports about insourcing cite the fact that for clients, the in-house lawyers “get it.” Consider seconding some of your lawyers, but even if that is not a great option, make it your business to know everything about your client’s business. And then show them, at no cost to the client (blogging, invites to panel discussions/seminars, and the sending of “business clippings” instead of just case clippings is a start), how much you know. Of course, you may find it necessary to specialize as a firm since it is difficult to be expert at everything. But since specialization may be key factor in law firm success in the future, becoming a business partner may just work.

Don’t Wait for the Big Ticket Items. Sure, all firms will want the big-ticket items (the proverbial “bet the company case”) but relying on a steady or even sufficient diet of such engagements could be a fool’s errand. The competition for the big ticket items will be fierce, it will include firms far outside your market, and given what typically is at stake in such cases, you may not even be considered much less make the “short list.”

Insourcing is a message to today’s law firm leaders. It tells law firms that clients are fed up with the status quo. To address this fundamental change in client perception of outside counsel, leaders should build law firms around a dedication to lowering costs and providing better service. Is that going to be your reaction to insourcing?

 

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?

 

 

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.

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.

 

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?

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

 

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?

 

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?

 

 

 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?