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Trending for Law Firms in 2012: What to Expect This Year


Trending for Law Firms in 2012: What to Expect This Year.

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Trending for Law Firms in 2012: What to Expect This Year


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                                                                                      Jerome Kowalski

                                                                                      Kowalski & Associates

                                                                                      January, 2012

 

Thirty items affecting the legal profession that are guaranteed to dominate the headlines in 2012

It is that time of year when you are entitled to know what to expect for this new year.  Accordingly, here is what the hot trends for 2012 will be:

  •  Continuing decline in legal spend on outside counsel.
  • As law firms continue to more efficiently and timely bill for matters and, the trend of law firms whittling away at their inventories (WIP), while not being able to replace that inventory because of the lethal combination of  reduced headcounts and  reduction in the legal spend, lenders to law firms will require more stringent reporting and will in some instances, reduce available credit lines.
  • Deleveraging of work with partners and other senior lawyers billing increased hours and the trend towards the inverted pyramid model continuing.
  • Law firms establishing subsidiaries to engage in services complementary to their services, including e-discovery, document review, legal staffing services, investment advisory services for high net worth clients and the like.
  • Congress, the courts and the judicial conference will make serious progress about modifying e-discovery rules, bringing down their current gravity defying costs as well as dampening down the torrent of spoliation claims and the attendant Herculean tasks companies need to take to avoid these claims.
  • Given weakening retail sales and decreased demand for most commercial real estate, buyers will emerge to take advantage of attractive pricing on some properties, perceiving real value opportunities.  Private equity funds will move in to this arena in a big way.
  • Increased  focus on collaboration, within the law firm, vertically with clients and horizontally with vendors of support services and co-counsel. Extranets will be enhanced and new technologies will emerge to provide greater transparency and real time feedback and collaboration.
  • More paperless offices.  With the bulk of communications now being electronic and the expected decline in timely services from the United States Postal Service likely to increase the trend of communicating electronically, law firms will be incentivized to go completely paperless. Incoming snail mail will be scanned and digitized. The huge cost of storing paper documents will evaporate.
  • Increased use of outside facilities management companies for mail, fax, reproduction, IT, bookkeeping and legal records departments.
  • Law firms will make more investments in technology than in people. The IT hotspots are knowledge management, software to farm information for the purpose of responding to RFP’s, making an AFA proposal, based on prior similar work handled by the firm and for project management purposes.
  • Every lawyer will tuck an IPad under his or her arm and no lawyer will attend a meeting without opening one. Continued development of apps for lawyers will simply make this tool not only essential, but a lawyer not having an IPad at the ready, risks a serious loss of credibility.
  • Tough times often brings out the worst in some folks.  Last year’s small spike in BigLaw partners and even other law firm personnel who engaged in defalcations of client funds will sadly probably continue.  Look for more headlines of such tales.  Law firms will be well served to now tighten controls and checks and balances regarding client finds.
  • There will be periodic announcements by a partner at a BigLaw firm stating “after 25 rewarding and wonderful years with my former firm, I have decided to open a solo practice so that I can work more closely with my clients.”  Sometimes these announcements will be sincere and genuine.  Sometimes these announcements really mean “I’ve been on the job market for almost a year since I was asked to leave my former firm.  I haven’t been able to find a new slot and my firm wants me out right now, so I may as well give this a try.”
  • Virtual law firms, such as Clearspire and Rimon will continue to grow and gain real traction and increased market credibility.

I am quite sure that we have been fairly thorough and inclusive. If you think we left anything off the list, please let us know by commenting below. Similarly, if you think we are wrong about any of the above, post a comment.

It’s going to be a challenging year.  Please fasten your seatbelts, hold on to the handrail and make sure that your arms and legs do not extend outside your car. We are in for an interesting year.

© Jerome Kowalski, January, 2012.  All Rights Reserved.

 Jerry Kowalski, who provides consulting services to law firms, is also a dynamic (and often humorous) speaker on topics of interest to the profession and can be reached at jkowalski@kowalskiassociates.com .

Growing Your Law Practice Productively: A Twelve Step Program for Curing Social Media Addiction


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Jerome Kowalski

Kowalski & Associates

November, 2011

                                                                            

Confession:  I am a fan and a believer of the commercial vitality of social media. But  then again, I suppose I also enjoy a fine wine from time, an occasional trip to a gambling casino, a social liaison and an occasional cigar.  But the vice is that any of these pastimes can easily turn into addictions. I say this bearing in mind part of the American Psychiatric Association’s definition (DSM- IV) of addiction:  “Repeated use resulting in failure to fulfill obligations at work, school, or home.” The trick of course is that all of life’s pleasures are enjoyed best when used in moderation.

The issue came up a month or so ago when I was visiting with a client’s executive committee which was taking its first cut at budgeting and calculating partner compensation for the coming year.  As we went through the partnership rolls, we came to a mid-level partner, whom I shall, for purposes of this piece call Bob, because that’s his name.  Ken, the firm’s managing partner, quietly
rolled his chair back from the conference table and said simply “Bob is a real problem.”  “How so?” I asked. “Well,” Ken said, Bob is a fine lawyer who came up through the ranks. He is talented, smart,
a team player and is a tireless worker.  He is an important service partner in our banking group.  But in the last couple of years, his billable hours have gone way down and the department head tells me that he has plenty of work for Bob to do that he just doesn’t get to.  But, by the same token, Bob is starting to bring in some revenues.  He’s brought in almost $750,000 in quality work from some fine clients, which is nice, given the fact that two years ago, he brought in zero.  But that year, he billed close to 2,000 hours and this past year he billed less than 800 hours.  Yet, he is always in the office  and seems to be constantly busy.  But he also billed 1,500 hours to ‘client development.’  He’s also managed to get his name in the papers commenting as an expert on recent developments in banking law and he’s been having greater success in getting his name out there than the head of the department and we have a paid PR flack whose mission is to get the chairman’s name out there.  While I’ve complemented him on his growing business and fame, he just doesn’t want to listen when I tell him that client development is critical, but he is losing sight of the fact that the actual legal work needs to be done.”  I suggested that I spend a little time with Bob and see of I could get a handle on what his game plan is.

So I moseyed down the hall later that day and popped in on Bob.  A handsome straight laced 38 year old Ivy League law school graduate, Bob was pecking anxiously away at his keyboard, using two computer screens, staring intensely at both. He took no notice of my arrival. I finally harrumphed and said “Bob! I was in the neighborhood and thought I would stop by.”  No response, as Bob continued to feverishly peck away. I repeated myself a bit louder and got the same reaction.  I then came around his desk, tugged at his elbow and again repeated myself.

Bob greeted me pleasantly, but surely very distracted. He then said:

What a day!  I got to work at the crack of dawn.  I checked my Twitter feed and then re-tweeted a bunch of stuff.  I checked LinkedIn for updates and then for discussions in which I am articipating. I  responded to some comments in discussions in which I am participating and some new discussions. I checked all of the on line trade and business papers for items of interest and Tweeted those. I  checked my RSS feed and then my Google Reader. I Tweeted items of interest. I checked my Facebook pages – personal and business and responded where appropriate.  I then checked Google+ and commented where appropriate. I then checked QuoraReddit and StumbledUpon.  I again commented and Tweeted where appropriate.  I wrote a great blog post about the Volker Rule.   I  published the blog post to various LinkedIn groups, I Tweeted the post, uploaded it to JD Supra, posted it to Google+, Reddit, Digg and  Stumbledupon.  I  responded to various new comments in LinkedIn as they appeared during the course of the day.  I published my post to Lexology.  I then logged on to Legalonramp and posted there. I checked Facebook and Google+ again. I responded to comments posted on my blog.  I have three calls that I need to return from The Wall Street Journal, Reuters and Bloomberg.  And, as you can see, it’s now 5:00 PM and time to start doing some work.  But I’m too tired.   On the plus side, I have 2,615 followers on Twitter, 457 connections on LinkedIn, I belong to 30 LinkedIn groups, I have 650 friends on Facebook, 350 people in my Google+ circles, and when I add all of these up, together with  the aggregators I posted to, I have gotten my name in front of well over 10,000,000 professionals and business people around the world. And I think I did a pretty good job at my blog post so there are 10,000,000 or so people who I would hope that I have some demonstrated expertise in this growing field of law.”

    I quickly did the math and concluded that Bob was probably right on the mark in terms of the number of people whom he was exposed to that day.  I asked him what the results have been in
terms of his own professional advancement. He said, “well two years ago, I was just a service partner, which was nice, but really didn’t give me a lot of job security.  Last year, I brought in about three quarters of a million of new quality work, all of which I can trace to my social media activities.  Based on the stuff I have in the pipeline, I expect to double that next year.  That is my job security.”

Bob was of course right. But, I pulled out my trusty DSM-IV manual and quickly diagnosed Bob as a social media addict.  The more social media in which he partook, the he needed to produce his required level of dopamines.

         Clearly, Bob needed a Twelve Step program. And so, this is what I recommended to Bob and Ken:

 

  1.       Bob had to admit that he was powerless over social media. His life had become unmanageable.

        2.      Bob also needed to admit that only a power greater than him (I suggested Ken) could restore him to sanity.

        3.      Bob also had to make a decision to turn the management of his professional life over to the management of his department head, and his firm’ marketing department who would give him needed control over his addiction and his practice.

         4.      He also needed to make a searching inventory of the various social media he was using and eliminate those that yielded poor or no results.  Did he really get some business from Facebook or Google+?  Was his Twitter account bringing traffic to his blog?

         5.      Admitting to himself and others where he had just gone too far in his social media addiction.

         6.      He had to be ready to remove all of his shortcomings.  Among other things, Ken was right, somebody had to actually to do the legal work and Bob’s talents in this area were not being put to their highest and best use.

         7.      Bob also had to ask Ken, his department head, his marketing director and his partners help him rid himself of his shortcomings.

          8.      Make a list of all of those who had to pick up the work that Bob should have been handling.

          9.      Make amends to all of those who had to pick up Bob’s slack, by not only pitching in more but in continuing to grow a quality practice for the benefit of the ultimate higher authority:  The Law Firm.

          10.  Continue to take a personal inventory of the most effective social media outlets that served Bob, his practice and the firm best.

          11.  Through careful thoughtfulness improve his conscious and productive contact with his colleagues.

          12.  Having had a spiritual awakening through these steps, it was Bob’s mission to carry this message to other social media addicts and to practice these principles in all of his affairs.

Bob really did have an awakening. He continued to build his practice. His social media activities are still a part f his life, but don’t control his life.  And his practice continues to grow productively. And, I expect he will be treated well by his firm’s compensation committee.

As for you, how many hours a week do you spend blogging and otherwise engaging in social media?

 

© Jerome Kowalski, November, 2011.  All Rights Reserved.

 Jerry Kowalski, who provides consulting services to law firms, is also a dynamic (and often humorous) speaker on topics of interest to the profession and can be reached at jkowalski@kowalskiassociates.com .

How to Respond to Clients’ Needs to Reduce Budgets for Outside Counsel


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Addressing Client Demands for Further Reductions of Legal Fees

 

                                                                                      Jerome Kowalski

                                                                                      Kowalski & Associates

                                                                                      December, 2010

 

 Dear Santa:  What I really want for Christmas this year are lower legal bills.

As I visited with the managing partner of a client last week, I noticed the interesting array of letters that he had propped up on his coffee table, which was otherwise festooned with Christmas ornaments.  My first passing sideway glance led me to conclude that this was just a typical seasonal display of Christmas cards.  After some brief chitchat, this MP invited me to sit with him at the sofa and he said that he wanted me to see the hordes of economically induced greetings he was receiving this year.  He also told me that he had intentionally put them on prominent display so that as his partners visited, they would see them and get the message loud and clear.

The tone and tenor of the letters varied, but the messages were all the same. They were all sent by either general counsels, CEO’s or CFO’s.  A typical letter read more or less as follows:

Dear Ed:

My colleagues join me in wishing you, your family and all of your colleagues the very best of season’s greetings and good wishes for the coming year.

The last year has been very challenging for all of us.  We here at ABC Company appreciate the counsel you have given us in the most recent year as the firm has done in the past   during the very long relationship we have enjoyed with your firm.

Management at ABC see significant challenges still lay ahead in 2011, as I am sure you do as well. Just as you at the law firm have taken steps to reduce costs and overhead to maintain profitability, our management is determined and obligated to do the same.

Because we value our relationship with your law firm, we would like to meet with you in the coming weeks to hear from you your thoughts and proposals concerning how your firm will work with us in connection with our determination to reduce our expenses for outside counsel by 10% for the coming year.

Again, all of the best.

Cordially,

These letters on the coffee tables were not shockers.  Reports of planned reductions of expenses for outside counsel for 2011 were abundant during the last quarter.  Dozens of clients of ours have reported receiving identical letters.  Fleetingly, the thought had actually occurred to me the previous week that there may even be a sufficient demand for these epistles for Hallmark to mass market them festooned with appropriate artwork.

What to do and how to respond?  Respond promptly, schedule the meeting and come prepared with some concrete ideas.  As I recently noted and as we all know too well, there is a dwindling demand for legal services and firms must focus on grabbing a larger slice of the shrinking pie.  This market requires us to run forward at full speed simply to stay in place.

  • Don’t hesitate poaching on the competition. If there is a substantive area of practice that ABC doles out to a competing law firm and if you have capacity in that area, buy that business by offering to do so at a meaningful discount, while making it clear that this discounted arrangement will last through 2011 and will be revisited at year end by both parties.
  • Insource commoditized work within the law firm to lower billing timekeepers.  These lower rate timekeepers may be resident in branch offices or assigned to non-partner track associates, who are compensated at lower rates.
  • Analyze work that you are doing for the client that is truly commoditized and which yields small or no profit margins for the firm.  Bite the bullet and suggest that work of this nature should b referred to smaller firms that can handle the work well at lower rates. Develop a network of such firms and build alliances with them.  They will inevitably be asked to handle work for which they lack the horsepower and look forward to their up streaming work to you.
  • Recognize the fact that the corporate “legalspend” is now being guided by a non-lawyer procurement executive or consultant.  Establish a monthly meeting between the client relations manager responsible for ABC and the procurement adviser, to review bills and budgets.  Establish a regular course of conduct in which budgets will be set at the outset of each engagement and reviewed monthly.
  • Demonstrate the steps you are taking to improve processing and project management as well as the steps you have taken to take advantage of IT innovations for enhanced and more efficient delivery of legal services.
  • Explain that your associates are now rewarded for the efficiency in which they can deliver a quality work product and not for the raw number of hours billed.
  • Consider establishing a secure web site, accessible only to clients which will contain a searchable reservoir of research memoranda and FAQ’s to which a client can turn to in the first instance without tripping the meter.  These secure web sites naturally function best on industry specific or practice specific areas. The secure searchable web site should also be linked in to the firm’s practice blogs.
  • As we all know now, corporate clients have become increasingly reluctant to litigate matters both because of risks always associated with litigation and because of the dramatically escalating costs of litigation arising from, among other things, the black hole of e-discovery.  Since your firm has a well trained risk assessment team in place to assess any matter you are considering undertaking on an Alternative Fee Arrangement, offer ABC assistance of your risk assessment team and process in making “go, no go” litigation decisions.
  • In the process of considering the potential risks and rewards of commencing a litigation, add to the calculus and offer for your client’s consideration utilizing a reputable hedge fund that provides litigation funding. These hedge funds assume all of the cost risk of litigation, without recourse to either the client or law firm, and participate in a small portion of a positive recovery.

© Jerome Kowalski, December, 2010.  All Rights Reserved.

Alternative Fee Arrangements, Value Billing and Metrics in a Dwindling Marketplace for Legal Services: Are We All Marching to the Beat of the Same Drummer?


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Value Billing and Alternative Fee Arrangements:  What are we Really Talking About?

 

A Client and a Lawyer Walk in to a Bar. 

The client says “we want you to provide us with value billing.”  The lawyer says “we’re big believers in alternative fee arrangements and have very sophisticated AFA programs.”  The client says, “Okay, how much are you going to reduce your rates?”

 

                                                                                      Jerome Kowalski

                                                                                      Kowalski & Associates

                                                                                      December, 2010

When it comes to value billing, are clients and lawyers speaking the same language?

  

In 1985, while still actively practicing law, I defended a claim brought by a diversified Fortune 500 Company against my client, a relatively small manufacturer of fluidized bed heat treating furnaces. These furnaces are, among other things, designed to harden certain ferrous metals for greater endurance. For example, many of the metals in automobiles require enhanced hardening beyond their natural state. This enhanced hardening is achieved by heating the metals above 1,200 degrees Fahrenheit for fixed periods of time. The breach of warranty claim was straightforward:  The plaintiff purchased such a machine for $103,000 and it claimed it did not function as warranted. It wanted its money back. An AmLaw 100 firm prosecuted the case.  The lawyer handling the case has since become a federal judge, while I sit from my perch here and jot my musings.

Early discovery in the case and my client’s own engineers’ inspection of the device at the plaintiff’s facility led us to quickly conclude that the problem was that the plaintiff’s personnel were simply not properly operating the equipment. Our conclusion was not surprising: In 50 years of business, no customer had ever successfully prosecuted a breach of warranty case against my client.  To be sure, this 1,000% batting average was not the result of outstanding lawyering; rather, my client had an excellent product and high quality control standards.

In a very early settlement conference, my client offered to provide the plaintiff’s personnel with additional training at no added charge and further offered to refund the full purchase price plus some portion of the legal fees if an independent academic expert mutually acceptable to the parties reported that the device was in fact not operating as warranted. The plaintiff’s division head summarily rejected the offer and in an expression of refreshing candor conceded that his division was not meeting net revenue expectations and he needed to get rid of both the machine and the personnel needed to operate the unit if he were to get close to meeting his division’s net revenue projections.

Against this backdrop, my client’s CEO called me and told me that he could resolve the case quickly. His company had received an order from a different customer that required the purchase of $10,000,000 worth of refractory brick (that is brick that can sustain consistent high heat, such as you will find in your own fireplace) and that our plaintiff, through a different division,  was one of the nation’s three largest manufacturers of such refractory. My client was prepared to issue a PO for this refractory to the plaintiff, while still providing the promised additional training.

Sounds easy, doesn’t it? The plaintiff would get the full benefit of its bargain and profit from the new order.  Yet the plaintiff’s division manger refused, since his division would not be credited with the sale and he still needed to trim costs to meet revenue projections. Try as we might, opposing counsel and I, who agreed privately that the proposed resolution was sound and an outstanding commercial resolution, just could not get the plaintiff, even at its highest corporate offices, to buy in on the deal.

We nonetheless settled the case quickly thereafter. My client simply repurchased the machine and resold it within days to the United States Department of Energy for $135,000. The PO for the refractory was issued to a competitor of the plaintiff.

The litigation costs were far less than anticipated for both sides, and in today’s parlance we provided “value billing:”   We provided efficient professional services and concluded a potentially complex litigation, at a fraction of the budgeted cost.  But, did we really provide “value billing?”

This quarter century old case came to mind as I sat through the National Law Journal’s Managing Partners Conference in Washington on December 2.

The conference included much talismanic recitations of “value billing.”  Actually, the repeated catch phrase that captured my ear was the too oft cited “legal spend.”  The repeated juxtapositions of the two phrases by each presenter, extremely capable law firm leaders, to be sure, was rather straightforward:  Corporate clients were slashing expenses for outside counsel and law firms were scrambling to maintain significant slices of the shrinking pie by discounting prices.

It’s now been two years since the Association of Corporate Counsel issued its “Value Challenge” and perhaps it’s now time to reconsider the concept and perhaps re-define re-think what legal “value billing” really should mean. I readily admit to be a value billing junkie.

A principal problem in the ACC Corporate Challenge is its rather wholesale reliance on defined metrics. Professor Steve Harper, a former Kirkland partner, recently reported that reliance on metrics is frequently misplaced.  I long ago joined a chorus of others in raising the issue of the “mother” of all metrics; the much touted annual AmLaw 200 report on law firm profitability is slightly less than gospel.

The National Association for Legal Placement, which has a key part of its mandate issuing reports on the metrics of recent law school graduates issues reports on that are nothing more or less than picture perfect portraits of opacity. NALP and its constituents are unwilling or unable to answer a simple question:  “If I decide to go to law school, work my butt off for three years and incur $200,000 in debt, what is the likelihood that I will get a well paying job?  If the law schools let me know how their recent graduates managed, I could make an informed decision.”  An Indiana Jones inspired group, The Law School Transparency Project, embarked on a good faith search for this holy grail of metrics and short of an extremely unlikely national labor strike there is very little likelihood that actual metrics will ever be found.

The point here is that metrics are ephemeral, misleading, quixotic, enigmatic and too often of little assistance in getting the full measure of quality.

All of which brings me back to my original questions:  exactly what is value billing, how is it measured (or even recognized) and how should it be rewarded?

Indeed, even with the ever rising crescendo demand by corporations for Alternative Fee Arrangements over the past 30 months, corporate general counsel are still expressing confusion and uncertainty regarding the concept while law firms, eager to satisfy a dwindling client base believe they have risen to and met the Alternative Fee Arrangement challenge, remain perplexed about why they are having so much difficulty marketing AFA’s.

Metrics are simply just but one, and only one, variable in a far more complex algorithm by which value is measured.

I think we all need to get back to basics and view the issue in the context of law school:  Classroom participation counts.

Let’s posit the query in a Socratic hypothetical:  Assume a sophisticated client believes it has perfected the alchemy to turn dross in to gold.  All that it needs is the capital to finance the R&D and the assistance of regulatory specialists to gain required governmental approvals. At a networking event at law firm or through some blog postings by a law firm, the client makes the connection to obtain financing and is introduced to scientists who can serve as Scherpas through the regulatory gauntlet. Clearly, the client has already obtained value (of the most prized, sort, since it came at no cost) but now it needs to engage counsel to handle the lawyering. Corporate counsel, guided by his or her own Sherpa, the purchasing agent, issues an RFP and circulates it among the usual suspects, including the networking event host and blog poster. Five acceptable proposals are submitted, with network hoster and blogger proposing a fee schedule placing it as the second most expensive bidder in a tight race.  As John Belushi asked, “who are you going to call?”

General Counsel:  How do you answer Belushi’s question?   Hit the comment section below and share your thoughts.

The Law Firm and the Lawyer as a Marketplace for Value

            Lawyers who have achieved marketing successes have done so because they intuitively comprehend that they add value because they have developed a network of contacts and that this network is a constant work in progress. Whenever such a lawyer is in contact with a member of his or her network, his or her first instinct is to calculate in nanoseconds which of his or her other network contacts can add value to that contact. The primary skills for achieving this result is listening to the speaker and then instantaneously calculate how value can be added to the speaker by hooking him or her up with another network member and for each to develop synergies, business alliances, business solutions and more spokes attached to the hub of the marketplace for value.  No direct metric can be attached to this activity nor will immediate revenue derive from having a lawyer or a law firm function as a marketplace for value.  But the simple fact is that clients will flock to lawyers who regularly add value, even if no invoice can be rendered for the value received by the client in having commercially enjoyed the benefit of this marketplace for value.

As for law firms, it is your job to demonstrate the entitlement to a higher grade by touting your own classroom participation and the real value (not the metrics) you added to the client:

  • During your own marketing calls to your clients, show how you added real value, not just a lower bill.
  •  In responding to the RFP, don’t be shy as to expressing a willingness to meet the competition (But only meet the competition after you have first assured yourself that you can manage the engagement at a reduced fee which still yields profitability;  as more than ever, risk assessment and project management are the elixirs for survival in the AFA world).
  •  Just as the swallows head south for Capistrano at this time of year, so too does the annual debate concerning the value of client surveys fill the air.  Does your client survey ask the simple question “other than lowering our fee structure, how else can we add value?”  In your client survey submission, cite instances in which your firm added real value to a client’s business (other than simply by reducing fees); solicit suggestions from clients regarding how your firm can add value,  not just reduced metrics.

© Jerome Kowalski, December, 2010. All Rights Reserved.

Active Marketing of Legal Services is More Critical Than Ever; Each Lawyer Needs to Have a Business Development Plan and Relentlously Pursue it.


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Why Do Lawyers Wonder Why Their Telephones Aren’t Ringing?

 

                                                         

Jerome Kowalski

Kowalski & Associates

November, 2010

 

 

How many times in the past week did you check your telephone to see if it’s still got a dial tone?

             By this time, two full years in to The Great Recession (with no immediate end in sight), I sometimes wonder why lawyers tell me that they aren’t busy.  Sure, long standing clients may not be sending as much work over the transom as they did just two short years ago.  The days of lawyers simply being order takers rather than active marketers are gone.

Law firms often require (and those who don’t, should require) that every partner have a business plan. Every lawyer having even a passing interest in earning a living needs to have such a plan.  Once you implement the plan, your telephone will return to its natural place crooked in your ear. Not every conversation will generate business; in fact count on 75% of the folks you call on or reach out to won’t be sending you some business.  But, each time you get yourself knocked down, pick yourself up and get back in the race. And, given market realities, devote at least two hours daily to implementing your plan.

Ideally, at the end of each month, partners should report in some detail to management on the his or her own prior months marketing activities, with a copy to the firm’s marketing director. Each lawyer, for his or her own sake, should review the previous month’s activities, make a list of where follow up is required and do so.  Study the results achieved, and continue to refine your plan accordingly.

The simple elements of the plan:

  1. List the clients who have historically retained you on a regular basis and call upon them, following the steps I previously outlined.
  2. Identify the clients who have retained you on sporadic instances.  Call them, following the steps in the preceding paragraph. Sort of like apply shampoo, rinse, repeat.
  3. Cross market. The most basic tenet of marketing is that your most receptive target for a successful marketing are existing clients. Law firm partners should regularly get together both in formal and informal settings, as well as in groups and in pairs, and explore cross marketing opportunities.
  4. Blog.  Blogging is quickly becoming the most potent force in driving new business in the door.  Since we started advising our clients about the effectiveness of blogging a year or so ago (and certainly since my first post on the subject in June, 2010, which has literally attracted tens of thousands of readers), those clients who jumped in to the blogosphere with both feet consistently reported remarkable and consistent production of new business.
  5. Roam through your Contacts list (we used to call them Rolodexes). Call lawyers around the country who served with you as co-counsel or even as adversaries.  Remind them you’re around and would welcome to work with them on new matters.
  6. Regularly issue clients and bulletins. We’ve explained the do’s and don’ts before.
  7. Become a master networker.  In my previous post on basic marketing, the importance and effectiveness of networking is outlined in some detail.

Take these steps, as we have been counseling our clients to do and you’ll stop checking to see if the phone is still working.

© Jerome Kowalski, 2010.  All Rights reserved.

The Law Firm of the Twenty-first Century


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The Future of the Law Firm in the New Economy

 

                                                                                                                                               Jerome Kowalski

                                                                                                                                               Kowalski & Associates

                                                                                                                                                November, 2010

 

The past, present and future of the legal profession: How we got here, what we are doing now and what the future portends: continued revolutionary changes.  The seminal analysis.

    

        

          The Rock Center for Corporate Governance at Stanford University recently published what is, at least for me, and likely for any interested reader, what is perhaps the most seminal recent study of large law firms, from both an historical perspective, an analysis of the law firm in the face of current economic conditions as well as some hedged and qualified predictions for what the future holds for the legal profession.

This remarkable piece of scholarly work, authored by Bernard A. Burk, Academic Fellow at the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford University and David McGowan, Lyle L. Jones Professor of Competition and Innovation Law at University of San Diego School of Law, entitled “BIG BUT BRITTLE: ECONOMIC PERSPECTIVES ON THE FUTURE OF THE LAW FIRM IN THE NEW ECONOMY” is required reading for every law firm manager, and, indeed for every practicing lawyer, both for law firm practitioners and lawyers serving as in house general counsel.

But, until you find the time to do so, you will find this modest piece, relying heavily on the work of Professors Burk and McGowan and some of my prior work with scores of law firms around the country, an essential guide.

A thoroughly researched work of scholarship, relying on a tomes of work of economists, sociologists and an array of highly regarded academics, heavily footnoted (I was personally rather flattered and a bit humbled to find my own previously published work among the myriad notes), it is a compelling work, laying out in detail how we got to where are now, how we got here and where we are going. My own recent note regarding the deployment of associates in the emerging law firm model certainly pales in comparison to this detailed work.

I encourage you to print the entire piece, read it thoroughly over a quiet evening, a long weekend or an airplane ride so that you can give it the attention it demands.

Professors Burk and McGowan divide their paper in to three sections: The first, describes the golden era of the past 40 years during which the large law firm emerged as a dominant business model; the second provides an analysis of steps taken by law firms or imposed on law firm by current economic exigencies to allow them to survive The Great Recession; and, third, some predictions for the future.

As the authors note, “past is prologue,” an understanding of the historical perspective is essential.  While their historical narrative is compelling, here, I will only deal with the here and now and what lay ahead.

Where we were

           The second half of the 20th Century witnessed the explosion and proliferation of large, very large and mega law firms.  Headcounts, billing rates, associate salaries, demand for new law school graduates, demands for legal services  partners’’ salaries were all on head spinning upward arc. Law firms, perhaps like real estate prices rose 5% annually, and law firms assumed that rate of annual growth would continue inexorably.  Accordingly, planning was in material measure seemed easy:  Resting on the assumption of continued growth at this level, firms based hiring, real estate and technology acquisitions to keep pace with this continued rate of growth. By the 1980’s the rate of growth increased to 8% and law firms adjusted their planning accordingly. The world was jolted when it realized that 5% annual growth of real estate prices was not a product of divine command.  Hence, the housing bubble bust. Similarly, the legal profession suffered a shock to its system when it too realized that 5% annual compounded growth was not the product of a heavenly decree. The legal services bubble burst.

As the second half of the 20th century began, virtually all firms were based in a single city.  By 1980, 87% of the country’s largest firms had branch offices.  In 1968, the largest law firm in the United States had 168 lawyers. By 2008, 23 law firms had over 1,000 lawyers. In 1975, an elite miniscule number of firms had profits per partner edging up to $100,000. By 2007, 100 of the most profitable firms had PPP averaging $1,300,000.

At the start of this golden era, law firm partners considered their admission to partnership as a grant of lifetime tenure and a general commitment by each partner to bind with the firm as a lifetime commitment. Lateral partner movement was virtually non-existent.  By 1980, lateral partner movement was rampant. Law firm partners were the LeBron Jameses of their era:  free agents available to the highest bidder.

My own career path as I began my quarter century of law practice is demonstrative of this pattern. In 1978, as I was being recruited by various law firms, I elected to join a firm considered a titan of Wall Street. It had 70 lawyers and boasted of the fact that 4 of its 20 partners earned $100,000. Three years later I was actively recruited to join a firm pursuing an accelerated growth plan. Based in New York, Finley Kumble had a branch in Los Angeles and plans to open new branches.  It was the 84th lawyer in the firm.  By the end of 1987, when it imploded, it was the second largest law firm in the world with over 500 lawyers and eight branches.

Where we are now

Among the pertinent points made by the Big But Brittle authors, (all  completely consistent with my experience counseling scores of law firms, my prior written work, my media interviews and speeches) regarding the radical changes wrought over the past two years are the following:

  •  Huge reductions in force.  Since January, 2008, AmLaw 200 firms acknowledged laying off nearly 15,000 personnel, including 5,632 lawyers. We all know that these figures are grossly understated.  They do not include hundreds of “stealth” layoffs,  in which firms purported to dismiss lawyers for inadequate performance (largely making those affected almost permanently unemployable again as lawyers), thousands of layoffs in middle market and mid-size firms falling below the AmLaw 200 metric and hundreds more lost by simple attrition.
  •  Drastically reduced recruiting and restructuring associate compensation systems.  We’ve previously addressed this issue.
  •  Increased reliance on value billing.  My own work on the subject, among the most widely read on the issue of Alternative Fee Arrangements describes the concept, its need and application is certainly recommended reading.
  •  Proliferation of specialty boutiques.  These firms, largely populated by large law firm refugees, are simply stopgap measures, fraught with peril. In my view the staying power of these shops is in serious question.  Those that focus on specialty practice areas in vogue now risk extinction as their wave of demand ebbs as the economy goes in to its next cycle.  Those small boutiques which offer a wider array of services may be able to survive based on competitive pricing. However, these boutiques are frequently self limiting; they are typically undercapitalized, function often on an “eat what you kill formula” and lack the diversity of practice that cushions larger firms as particular practice areas ebb and flow. The “eat what you kill” formula, not at all confined to boutiques, is an invidious concept.   Those lawyers who prove to be more facile hunters will always be susceptible to overtures from firms which offer a larger bounty for their kill and certainly from firms that offer richer hunting grounds, with practice and geographic diversification.  The successful huntsman typically has little institutional loyalty; rather, he or she is motivated only to increase his or her kill and the portion of the bounty he or she can bring home.
  •  Lower margin and cyclical work are slipping down the food chain.  Large firms seeking to maintain high profitability are stripping out lower margin work. In my view, supported by the paper’s analysis, practices such as labor and employment, estate planning, transactional real estate work, trademark and patent prosecution will be disfavored at large firms, find homes in mid-size firms where they can be handled more efficiently and at lower cost
  • Demise of partner lockstep compensation. Academic economic analyses suggest that large law firm models work well, since practice diversification theoretically allows for evening out the cyclical nature of many practice areas. Thus, theorists suggest that partners would seek comfort in an environment in which downward trending of his or her practice would be counterbalanced by the ascendancy of other practice areas.  Accordingly, these theorists suggest that a partner would sacrifice significant compensation enhancements for stellar performance periods, comforted by the knowledge that their compensation would be protected during downturns in their practices because other practices within the law firm would be on the rise. Increased partner mobility, lack of institutional loyalty and the fact that performance based compensation increases or decreases tend to be “sticky” and long lasting all served to bury lockstep compensation.
  •  Client and practice diversification.   The last two decades amply demonstrated that client and practice concentrations can easily be fatal. Technology law firms which made considerable fortunes during the dot.com boom have been eulogized. Firms which fed on the securitization feeding frenzy are gone. Firms that made fortunes servicing now gone Wall Street mainstay financial institutions are still largely reeling.  In my view firms that rely on any one client for more than 10% of its revenues or one practice area for more than 30% of its revenues are courting disaster
  • The death of the up or out rule.  In a world once populated only by associates and equity partners, with those associates not being admitted to the partnership being simply terminated, we now live in a world of associate caste systems, counsel, special counsel, senior counsel, contract partners, equity partners and more. Professors Burk and McGowan have an interesting discussion of some law firms that create the illusion of opportunity for associates by engaging in what they characterize “promotion-to-partner” tournaments, often illusory and arbitrary with current supply and demand factors make largely irrelevant. These issues must be viewed with an eye towards the necessity of maintaining associate morale and job satisfaction.
  • Law Firm Branding  There has been and likely always will be an elite group of top tier law firms which always rate the highest in profit per partner profitability and whose client base is not rate sensitive. The divide between these firms and those below this elite status will likely increase in the future. Nonetheless, law firm branding at every level is vital. Similarly, individual personal reputations and individual reputations of particular expertise also continue to be main drivers for attracting clients. We previously reported on the effectiveness of blogging in establishing the bona fides for enhancing and publicizing expertise and reputation.  
  • Clients will likely turn to individual lawyers, rather than law firms.    Individual partner qualifications and recognized personal expertise in particular practice areas is a main driver. Many such partners have been successful in parlaying their retention by cross marketing, relying in material part on firm branding.
  •  Cross marketing.  Nothing new here; the simple fact is that the most effective marketing is to existing client bases. In only a slightly different vein, internal referral networks are effective stimulators of business growth factors. Plus ça change, plus c’est la même chose. 
  • Corporate legal departments have grown increasingly sophisticated both substantively and in numbers at individual corporations.  The result is that these corporate law departments reduced the amount of business referred to outside counsel. Corporate law departments essentially became competitors of law firms for the sale of legal services. In evaluating retention of outside counsel, corporations evaluate “make or buy” decisions the same way they evaluate the acquisition of other goods and services. The lesson is obvious: make the case that a “buy” decision is economically advantageous as a key marketing strategy. Make or buy decisions are influenced in part by the fact that the a recent national survey by Hildebrandt shows that the average hourly rate for law firm partners is $400, while in-house partner level lawyers cost a company an average of $232.
  •  The “make or buy” calculus is rendered incredibly complex currently; corporate departments have been required to reduce their internal budgets by at least 2% and their budgets for outside counsel by 5% and more (Altman Weil recently reported that its survey results indicated a reduction of corporate budgets for outside counsel to be as high as 40% ( http://www.altmanweil.com/dir_docs/resource/473ed6e1-1c5d-4a8d-ae00-085ad1b2bd14_document.pdf.    )Elsewhere, I have addressed some options to deal with this conundrum. 
  • New technology, downsourcing, insourcing and outsourcing are key factors in the new economy. Much legal work, particularly time consuming repetitive work is downsourced to temp staff lawyers, not only bay law firms but corporate general counsel as well. Legal process outsourcing (LPO) is more frequently shipped overseas. Smaller firms with high end technology have various competitive advantages for corporate work, both because of the ability to charge lower hourly rates and being more agile in alternative fee arrangements.  Concomitantly, lower rates and the cost of technology acquisition obviously also lowers profitability. Nonetheless, as I have pointed out many times, law firms based in cities with lower costs of than in major metropolitan areas will continue to have significant advantages.  
  • Show me the money.  Capital is essential for law firm growth and simple survival; it is needed for expansion, acquisition of new talent and technology. Capital was also essential for the typical law firm model in which all profits were distributed at year’s end and new cash was required for the firm to function often through the first two and sometimes three quarters of the year. Most law firms typically operated on a cash loss basis for at least the first half of each year. Tightened credit markets have had a profound effect on law firms, particularly as their need for cash unpredictably increased beyond prior norms, since they also had to pay for real estate and technology acquisitions no longer necessary as headcounts and business shriveled.  Banks, once delighted to loan bags full of money to law firms and lawyers, have now turned a very cold shoulder. Underwriting criteria have become more dramatically stringent. Compliance with loan covenants is now closely monitored. Vital cash is now extracted by increased partner capital requirements (sometimes even from non-equity partners, who, in essence are now paying to keep their jobs), longer term payouts of capital for departed partners, lowered draws. A new breed of high end litigation funding companies is emerging and servicing AmLaw 200 firms. Seeking equity capital from non-lawyers does not seem to be a viable option.   

The Future

Quoting Yogi Berra (“predictions are hard, particularly about the future”) and John Kenneth Gailbraith (“The only function of economic forecasting is to make astrology look respectable”), Professors Burk and McGowan, “with all trepidation and humility” do make some predictions about the future.  Some highlights and some of our own observations.

  •  Downsourcing, Insourcing, and Outsourcing will continue to grow. 
  • Market competition for commoditized work, coupled with technological advances   work will result in continued price pressure and profitability.   
  • The number of highly compensated associate partner track positions at large firms will continue to decline.  At the same time, those lawyers who obtain such positions will handle more sophisticated and intellectually stimulating work.  
  • The number of non-equity service partners will increase.  In my view, this but another iteration of the increasingly proliferating caste systems discussed elsewhere and above.  Equity partnership status will be far more difficult to obtain; developing, retaining and enhancing portable books of business will be increasingly the key to the magic kingdom, as never before. Again, Plus ça change, plus c’est la même chose. See, also, Ecclesiastes 1:9. 
  • Our system of legal education and training of lawyers will undergo revolutionary changes.  This subject is addressed at length in my book Navigating the Perfect Storm: Recruiting, Training and Retaining Lawyers in the Coming Decade (Ark Press, 2010) and in a different context in some of my previous essays on the subject.  

We continue to work with firms around the country and the world assisting them in navigating these challenging times. Please contact me at jkowalski@kowalskiassociates.com or at 212 832 9070, Extension 310 for more information.

 

© Jerome Kowalski, 2010.  All Rights Reserved.

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