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How to Succeed in BigLaw While Really Trying: A Four Act Unfinished Play, Now Playing at a Law Firm Near You


Is that Herman above the tree?

Is that Herman above the tree? (Photo credit: mali mish)

Jerome Kowalski

Kowalski & Associates

March, 2012

 

Dramatis personae:

Herman Laforge; 64 year-old chairman of Biglaw, Global and Powers, an international law firm with roots in the Midwest.

Marvin Shades; managing partner of BG&P;

Sheila Shuster; CFO of BG&P;

Setting:

Tower floor of Manhattan skyscraper overlooking the canyons of Manhattan.  Act I takes place in late January 2009.

Act I

Laforge:

I am still breathless.  What a year 2008 has been! Those banks going out of business weren’t as harmful to our business as I feared.

Shuster:

I don’t know Herman. We had some deals and some litigation work from these banks for which we collected fees through the third quarter, but then new deal flow stopped and the lawsuits were then stayed by the bankruptcy filings. New matter openings in the firm slowed by about 40% in the fourth quarter and hourly billings were down about the same in Q4.  I don’t see those picking up during the first few weeks of this year. We could be in for a disaster this year. We just don’t have enough work to keep everybody busy.  If this continues, we may be in for a disaster this year.

Laforge:

Have we got the preliminary numbers for 2008 yet?

Shuster:

Yes, Herman, they are in your packet. Be careful about these – these are the real numbers – not what we release to the media.  As you can see, our gross was down 11% and our net was down by 14%.  The net might have been worse, but, fortunately, we laid off about 60 lawyers and about 100 support staff.

Laforge:

How does our profits per equity partner look?

Shuster:

We took a pretty big hit here. PPEP was down about 16%.  We may take a beating from the media on this one, but from what I hear, there are lots of firms that are in the same shape.

Laforge:

That doesn’t make me any happier.  Look, I built this firm by growing, merging and opening offices in the major US markets. I was only able to do that by boasting about our growing PPEP and showing potential acquisitions that our PPEP was up there with the top New York, California and Washington firms.  I had to get it out of everybody’s head that we were just another sleepy Midwestern law firm. That’s why I move to New York. If our PPEP takes a dip, I am afraid that we’re going to have trouble growing.  We’ve got to get our PPEP back up there.  Shirley – you got any bright ideas?

Shuster:

Well, Herman, PPEP is just a function of dividing up profits among our equity partners. We could increase PPEP by either raining profits, which are is going to pretty impossible in this economy or having fewer equity partners.

Laforge:

You may be on to something there, Shiela. Look, our partners are actually paid pretty much what I tell them they are going to be paid. Our budgeting is pretty good in stable years. Why don’t we take a bunch of our equity partners and take them out of the equity class – we’ll de-equitize them. We’ll just call them income partners. We’ll just explain to them that at the end of the year, they’ll make as much money as before and that we just have to make this adjustment temporarily to please the media. We’ll give them contracts so that their incomes will be protected.

Shuster:

But, Herman, we already have a problem with our non-equity partners. They weren’t as busy as they had been in the past. In fact, their hours billed were down about 20% last year.

Laforge:

Tough times require tough decisions. Let’s lay off about 10% of our income partners. That should seal the deal. And as long as we’re at it, let’s take another look at our associates and support staff and see if more cuts should be made there. If we’re going to take on some hard nasty news, let’s do it all at once. Get O’Brien in the media department to have a press release ready if word about this gets out to Above the Law. Say something about aligning our partnership and support structures to an ever changing and challenging economy.  And throw something about how we are very strong and confident. Oh – and say something about how we’re looking forward to a great year.

Shades:

Can we do all of this?  I mean, legally. These guys are partners, after all.

Laforge:

These are tough decisions, but we get paid big bucks to make these tough decisions. We made these folks partners and I guess we can unmake them as partners.  Everybody will understand that we are doing this for the good of the firm. Let’s also be strict about our mandatory retirement policy. No waivers. Period.

Act II

January 2010.

Laforge:

It’s been another doozie this year.

Shades:

At least cutting some of our equity partners last year kept our PPEP respectable.

Laforge:

But our gross still keeps slipping. We have to pump that up.

Shades:

Any ideas, Herman?

Laforge:

Let’s get back to our game plan for growth. We got to 1,200 lawyers by lateral hiring. Lots of it.  A lot of other law firms have done what we have done – de-equitize partners.  Partners at law firms are just free agents. Let’s now hire some real big producers and shell out some real money for these guys. Real money invested begets real returns if you hire carefully. If necessary, we’ll lean on some of our partners to defer some of their comp to cover these costs. After all, it’s for the good of the firm. Make sure O’Brien sends out a great release saying how we are continuing to grow.

Shades:

Sounds like a plan.

Act III

January 2011

Shades:

It looks like we are beginning to bounce back. We got some really good talent and bought some nice business. Even after paying for our ramp up expenses, we are showing some real improvement in gross, net and PPEP.

Shuster:

Yes, but the expense side keeps going up at a higher rate than the profit margin.

Laforge:

Sheila – you’re going to have to cut some support staff again.

Shuster:

I’m on it, Herman.

Laforge:

What are we going to grow the revenue side this year, Marvin?

Shades:

We are going to continue to buy talent and business. I’ve also been speaking to a bunch of other managing partners whose firms have pretty good numbers. A lot of these guys have pretty good networks of international offices. They say that these networks of international branches are great for servicing clients with global needs. They also say that having these networks gets them on the short lists for big ticket items where clients have the needs for international resources on matters where the stakes are high and they can charge big bucks. They also say that these international offices are pretty good feeders of business to the US offices.

Laforge:

You’re saying –

Shades (Interrupting):

Yes, let’s go global big time.

Laforge:

Sounds like a plan.

Act IV

January, 2012

Shades:

Hermann, on paper, we’re looking pretty good. Our gross is up 4%; Sheila got our net up by 11% but we are still getting killed with expenses rising quicker than revenues. On top of that, in order to get the cash in the bank, we have squeezed our clients to pay every bill possible before year end. We did a pretty good job on that with the help of Sheila’s staff. Sheila also did a great job on juggling our accounts payable, deferring payments until 2012 to keep our net as high as possible.

Shuster:

Thanks you, Marvin. But, we now have some new problems. Getting those clients to pay quickly ate in to our inventory. Our accounts receivable are at an almost unacceptable level.  The banks have noticed that and have raised some questions. On the expense side, we are cutting and pruning and we are way down on what we can cut. Our accounts payable numbers are much higher as a percentage of revenue than they ever have been. And while a 4% increase in revenue seems commendable, it is only slighter better than flat. We still need to increase the revenue side.

Laforge:

Look, guys – this isn’t a complicated business- we put in hours, charge by the hour and get paid by the hour. Just tell everybody to bill more hours. I’ve read that a couple of firms are doing that.

Shuster:

We have another problem, Herman. We lost a couple of our old time producers last year. They took a chunk of business with them and the press is starting to ask questions. The truth is that I tool this pretty hard – after all I’ve known these lawyers for thirty years and I found it hard to believe that they didn’t appreciate what we were doing for them in building the firm.

Laforge:

I don’t get it. What ever happened to loyalty?

Shuster:

It’s just not like the good old days, is it, Herman, is it?

But we have another problem brewing, you know when we went on that lateral hiring spree a couple of years ago, we asked some of our second and third tier partners to defer their comp to help pay for the new business. Well the total of deferred comp is getting a little out of hand and some of our partners and the banks are beginning to worry about that.  Some of the guys leaving are telling me that the whole deferred comp idea is one of the reasons they decided to bail out. And the press is starting to ask some hard questions.

Lafarge:

Look, Marvin, you get O’Brien to prepare another press release saying how we’re really doing well and that these partners leaving is part of our ongoing efforts to align ourselves with market realities. And you may as well let everybody know that we’re going to be laying off some more lawyers and support staff. You know, the alignment thing.  We’re not the only ones going through this.

Shades:

Herman – with all due respect, I think we need a more comprehensive approach on the media side.  Look, we saw Howrey go down last year.  The leadership there just didn’t appreciate how what they were telling the media helped sink them.

Lafarge (rising, very agitated):

Are you saying that we’re in danger of sinking? Is that what you’re saying?

Shades:

No Herman. Calm down. Every law firm is at its essence a fragile business. The point is that we need to recognize the realities. We must level with all of our partners. We need to make sure we are all working together as a team for a common purpose.

We also need to make sure that our partners understand that if we continue to get bad press and they continue to bail, we could, heaven forbid, be this year’s Howrey. We need to make sure that every partner understands that the personal consequences to the partners if we tank are extremely dire.

Let’s take our own statements seriously. Let’s really make sure that all of our partners are actually properly aligned and that all are compensated fairly.

Lafarge:

Sounds like a plan.

Curtains Draw to a Close

Author’s Curtain Call invitation to his audience:  Please help me with writing the fifth act. How do you think this production should end?

 

 

© Jerome Kowalski, March, 2012. All Rights reserved.

Jerry Kowalski is the founder of Kowalski & Associates, a consulting firm serving the legal profession exclusively. Jerry is a regular contributor to a variety of publications and is a frequent (always engaging and often humorous) speaker to a variety of forums. Jerry can be reached at jkowalski@kowalskiassociates.com or at 212 832 9070, Extension 310.

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Lateral Law Firm Partner Movement in This Winter of Our Discontent


Law Building

Image by University of Saskatchewan via Flickr

 

                                                                             Jerome Kowalski

                                                                             Kowalski & Associates

                                                                             November, 2011

 

With the lateral market heating up at year end, a quick reference guide for essential due diligence for law firms looking for successful lateral partner candidates and for the candidates themselves

Not quite like the precisely predictable annual migrations of the swallows of Capistrano, this winter will mark a greater movement than usual of law firm partners as partners are likely to seek lateral moves in numbers not seen in many years.  As recently reported by Citibank, many law firms are looking for lateral partners to meet recently declining revenues. Many partners are looking for lateral opportunities because of the opposite side of the same coin:  Declining profits per partner are taking large chunks of change out of their own pockets and, accordingly, they are looking for greener grass in other pastures.

Added to this are serious disruptions  at many firms caused by law firm partners who have engaged in various departures from acceptable behavior, such as one law firm partner who is alleged to have engaged in improprieties resulting in a $32mm loss to his law firm; another law firm which appears to be exposed to clients’ claims arising out of improper tax shelters promoted by a former partner; and the recent tragic tale of a BigLaw partner who allowed a client to launder some $19,000,000 in apparently improperly obtained funds through his firm’s escrow accounts. Some of these claims may be covered in whole or in part by insurance.  But these events are, in the very least, major disruptors, since nobody enjoys his or her income reduced by another’s improprieties and management diversions in dealing with the attendant issues keeps management’s hands off the till, which must be held steady in these stormy waters.

An increasingly significant additional disruptor is the disproportionate number of AmLaw 200 firms with rock solid middle market practices who are aspiring to elbow their way to be among the rarified few at the very top of the food chain whose practices involve the “bet the company” cases where $1,000+ hourly fees and waves of assault troops are deployed, without particular reference to the cost of the particular project.  These middle market law firms often have a fair number of productive partners with commendable and substantial practices of many years standing, but their middle market practices, while yielding many millions of annual fees to the law firm, simply do not fit the firm’s aspiration to serve only the titans.

The final disruptor is the fee pressure imposed on law firms in general, as the legal spend for outside counsel continues to diminish and, at the same time, competing vendors, not always traditional law firms, compete for pieces of the diminishing pie. More significant practice areas have become commoditized, putting more pressure on firm profitability.

            The short fact is that there are more partner resumes floating around than in many, many years. And all of these folks are looking for places to land the day after their final distribution for 2011 clears.

Hiring lateral partners falls someplace between a high end art auction and a cattle auction.

While I have previously discussed the due diligence essential for a law firm to identify a lateral partner as well as the due diligence in which a lateral candidate should conduct, given the likelihood of more lateral movement than in many years, there are some essential basic points that require repetition and emphasis.

  1. Client conflicts.  After the initial meet and greets, the lateral should be asked to disclose his or her fifteen or
    twenty largest clients. The law firm should disclose its 100 largest clients. The law firm should obviously conduct a thorough client conflict review. All too often, the client conflict check is left as one of the final steps in the vetting process.  Huge mistake.  The exchange of client information must be one of the very first steps in the process.  And a thorough client and adverse party check should be among the second steps in the process. If a client conflict makes the deal a non-starter, so be it – but this is something easily enough determined early on.  There are times when a client conflict is less than obvious, such as when identifying adverse and related parties. I was involved last winter in an unfortunate situation in which a firm spent months recruiting a nine lawyer group, during which all of the disclosures were exchanged and deals were ultimately made. Literally, as the laterals were packing their boxes and preparing to move in the next day or so, the law firm’s conflicts department began to input all of the laterals’ detailed client matters, only to find that there was a serious conflict between one of the firm’s major clients and one of the lateral’s large clients.  The conflict could not have been discerned by any cursory review of a client list.  Yet, the conflict was irreconcilable.  The firm was compelled to withdraw its offer and the lateral had to go back to his management and essentially say “never mind, I think I’ll stay for a while.”

          2.      Historical Financial Performance.  As I discussed elsewhere, a thorough review of prior years’ performance is essential – both for the candidate and the law  firm.  Trendlines are of the essence. Has a major client or business segment been lost?  Is the graph showing a steady downward, upward or straight line?  A guide for a lateral candidate’s review of a law firm’s financial reports is available here.

3.    Business Plan.  Both the lateral candidate and the law firm should have a business plan and each should familiarize himself or himself with the other and make sure they mesh. Is, for example, the law firm about to embark on a major hiring campaign or is it looking to be acquired or merge with a firm of equal size?  If that’s in the cards, the firm you will ultimately be working for won’t be the same one you are negotiating with.

4.       Responsible vs. Originating Partner.  In reviewing the list of matters a potential lateral partner is bringing, carefully review whether the lateral partner candidate is in fact the responsible partner for the bulk of the work he or she is bringing with him or her. In these continuing finder, minder and grinder allocations of profits, partners are sometimes wont to overstate their roles.  Thus, a corporate lawyer with a close relationship with a client that has a rewarding penchant to engage in litigation, may be receiving a great deal of current credit for the litigation fees generated by the client.  But, when the rubber meets the road, the client may well leave a great deal of its litigation work behind under the care and feeding of litigators who have been doing work on particular matters for years. By the same token, an outstanding service partner, who may have been performing the same type of work for particular clients for which another partner may be taking the originating credit for historical imperatives, is often likely to walk away with that client’s business, since clients are largely indifferent to “origination” or “responsible” partner nuances. Clients simply prefer to call the lawyer they have known for years and who the client knows will get the job done.

5.      “Why have you decided to leave your law firm?”  Every interviewer asks this question and every lateral candidate has a rote response.  The recent instance of a lawyer joining a new law firm the day before he was apprehended for allegedly absconding with some $2,500,000 in client funds held in the trust accounts of his former firm, suggests that the response to the question requires more than unblinking acceptance of any rote response.

6.   Prior litigation. Most, but not all, law firms include in their questionnaire for lateral partners questions concerning prior litigations in which they have been named as a party. In the case of one disgraced former BigLaw partner, who not only had an impressive number of law firms at which he served, he also left a long trail of litigation, most sounding in malpractice, in his wake. I don’t know if his last stop, before pleading guilty, asked the question, but if the firm did, it does not appear to have either been fully answered or whether somebody thoroughly read the answers. Similarly, every lateral candidate should be informed of pending or threatened litigation in which the firm is involved.

7.    Fiduciary Relationships. Every lateral law firm questionnaire typically asks if the candidate serves as an officer or director of any corporation or LLC.  Few ask if the lawyer serves as a fiduciary, such as an executor, guardian or other legal representative of another party.  Serving in such capacities, which is not an automatic disqualifier, frequently involves managing the financial affairs of another party, which is not covered by any standard malpractice policy. The firm should obtain a solid understanding of the lawyer’s role and impose standard checks and balances to assure that all funds are properly monitored and disbursements subject to a triple set of signatures.  In addition, the firm should also be sure it has adequate fidelity and E&O coverage.

8.     Unfinished Business.  I recently discussed the long arm of Jewel v Boxer clawbacks. Under this doctrine, if a firm dissolves, the revenue derived by a partner of the defunct firm as well as the revenue derived from his new firm based on matters begun at his current law firm are assets of the defunct firm. Some mistakenly believe that Jewel v Boxer is an aberration of California jurisprudence. It is, for better or worse, good law in New York and elsewhere. The point is that if you, as a hiring or managing partner have a large pile of resumes of partners from a given law firm and you are hearing troubling news about the financial affairs of that law firm, stand up and take note.  Be aware that a lateral coming from that firm, should it fail, will be the payee on your firm’s accounts payable schedule for the duration of those matters.

9.    Google.  Conduct a Google search for every lateral candidate and ask about any entry that is of any concern to you. Similarly, every lateral partner candidate should conduct a Google search concerning the law firm and ask the hard questions where appropriate,

10.    References.   Every firm asks for at least three references.  I have yet to meet (as I doubt you have) any lawyer who would provide anybody other than one who would provide a reference that might make a mother blush. Dig a little deeper.  Seek out former partners and adversaries.  And ask the tougher questions. The candidate should ask about the last four or five partners who left the firm and should not hesitate to reach out to them. Sure, there may be some sour grapes, but there will also be some newly acquired wisdom.

11.   Know the Market. Cattle prices are fixed by the market and are easily accessible. Similarly, there is literally a bluebook for checking on market prices for fine art. Partner compensation is similarly market driven. A lateral candidate with a known amount of portable business has a fairly good sense of what his or her compensation should be in any given market.  If he or she doesn’t know, he or she can figure it out fairly quickly (and if you don’t know, just call me).  Lateral partner compensation bears virtually no relationship to PPEP.  If a law firm offers a partner compensation dramatically disproportionate to the market, politely decline and move on.  Similarly, a lateral candidate demanding compensation materially above the market is probably not going to be a colleague whose company you enjoy.

12.   Practice Integration Plans. I have too often heard managing partners complain that lateral hiring is a hit or miss proposition.  When I inquire about the firm’s disappointments, I always ask what the firm did to integrate the lateral partner in to the firm’s practice, the response is that the lateral partner was given an orientation to the firm’s IT system and was taken to a number of lunches by various partners.  I am afraid that this just doesn’t do the trick.  A practice integration plan is a carefully crafted written plan jointly prepared by the candidate and the firm laying out in detail how the lateral partner will be fully integrated into the fabric of the firm, maximizing synergies, making the lateral and his or her client base a vital organ of the firm, while simultaneously marketing his or her services to both other partners and clients of the firm. Failure to prepare and execute a practice integration plan assures that you will have more misses than hits.

Follow these important steps and you will end up with either an exquisite masterpiece or a prize steer.

© 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 .

Are Law Firms Going to be Replaced By Internet Based Providers of Legal Services?


Image representing LegalZoom.com as depicted i...

Image via CrunchBase

                                                                                      Jerome Kowalski

                                                                                      Kowalski  & Associates

                                                                                      August,2011

             Some time ago, I warned that lawyers should beware because their jobs might be replaced by computers.  I was then referring to automated document review software developed, by among others, IBM.  But, today, I would suggest that lawyers should become even more concerned because their jobs are more widely threatened by the Internet and, more particularly, Internet based providers of legal services, acting in direct competition with lawyers and law firms.

I’ve previously discussed the potent force of www.legalzoom.com .  When I wrote about legalzoom.com in April of this year, it had $48,000,000 in capital and some 500 employees. In
late July of this year, Legalzoom.com announced it had raised another $52,000,000 in capital, with a view towards issuing an IPO. Since its formation, Legalzoom.com has served over 2,000,000 clients, is realizing revenue in excess of $100,000,000 annually and is running at a profit. Without minimizing Legalzoom.com’s successes, I daresay that few intelligent law firm leaders or entrepreneurs would have difficulty in building a successful law firm with that kind of capital base, outlandish advertising and marketing budgets,  while not paying BigLaw salaries and without incurring major midtown office rental expenses.

To suggest that Legalzoom.com is not actually involved in actively practicing law, which Legalzoom.com consistently denies, does require some suspension of belief.  The array of services it performs, as described on its web site, rivals that which is offered by the majority of law firms in the United States of almost any size. Certainly, no law firm of any price can match Legalzoom.com’s pricing.

While the debate looms large regarding non-lawyer ownership of law firms, as is about to be legally permissible in the United Kingdom and is now being contemplated in the United States, Legal Zoom.com is anxiously tiptoeing through various raindrops in this regard since it is unabashedly non-lawyer owned (one of its founders, Robert Schapiro, a minority stockholder is a lawyer) and once it goes public, it will rather brazenly be owned by non-lawyers. Two lawsuits, one in Alabama (which was apparently dismissed) and the other in Missouri (which seems to be still pending) took the issue head on.  An interesting aside is that Jacoby & Meyers, which once enjoyed its 15 minutes of fame as national franchisor of its brand name, recently instituted an action in New York recently attacking the rules which precludes non-lawyer ownership of law firms. The gravamen of Jacoby & Meyers’ complaint seems to suggest that without having non-lawyer investors, it is impossible for smaller  law firms compete with more established law firms. New York’s Attorney General, as is his statutory duty, is vigorously defending against the suit. Nothing in the public record suggest that this  same attorney general has any issue with Legalzoom.com, despite its ubiquitous television commercials.

[Update:  On August 2, 2011, the United States District Court for the Western District of Missouri, central Division, ruled on cross motions for summary judgment
in
Todd Janson, et al v LegalZoom.com. The court found, inter alia, that Legalzoom.com’s document preparation service did in fact violate Missouri’s penal laws prohibiting the unauthorized practice of law, while the company’s delivery of blank legal forms did not.   The court further held that the issue of LegalZoom.com’s preparation and filing of trademark, copyright and patent applications were not subject to Missouri law, since admission to practice before the Patent and Trademark Office were preempted by federal statute.  The reasoned opinion is well worth reading, since it provides a rather good explanation of LegalZoom.com’s method of doing
business and the various algorithms and methods it deploys to conduct its business.]

[Update:  On August 22, 2011, Legalzoom.com issued a press release announcing that it had settled the Missouri class action.  Under the terms of the settlement,  egalzoom.com, according to the release, can continue to offer its services to Missouri residents with certain business modifications.”  There is no reference in the release to any payment of damages, although I would suspect that plaintiffs’ class action counsel will make an application for an award of legal fees, as is often the case.]

[Update:  On September 19, 2011, Legalzoom.com unveiled a new service under which for a fixed monthly fee, subscribers to its gold service can obtain live online unlimited consultations with lawyers working for the company. Details are available at http://www.portfolio.com/companies-executives/2011/09/16/legalzoom-introduces-subscription-based-access-to-attorneys and on Legalzoom.com’s web site ]

In any event, I do not pretend to be privy to Legalzoom.com’s business plans, but it seems to me that the logical next step for that company to use proceeds of either its venture capital nvestments proceeds of its initial public offering and establish a series of kiosks in the malls that dot the nation and leave its protected Internet nest and compete head to head with the bulk of the law firms in America.  A UK based company is even now pursuing a similar strategy.

The simple point here is that the overwhelming number of lawyers in the United States practice in law firms of fewer than five lawyers and the bulk of the work they do, short of litigation, is in direct competition with Legalzoom.com. And these lawyers simply cannot compete with the pricing of Legalzoom.com’s services, nor can they compete with the ubiquity of Legalzoom.com.

The story hardly ends here.  Sniffing a profitable Internet business, Google is entering in to direct competition with both Legalzoom.com and a great number of legal practitioners in the nation.
Google today announced that it was investing $18,500,000 in Rocket Lawyer, which bills itself as the “fastest growing online legal service.”  Forbes reports that the “firm has 70,000 users a day and has doubled revenue for four years straight to more than $10 million this year. Rocket Lawyer provides online legal forms, from wills to Delaware certificates of incorporation, that non-lawyers can fill out and store and share on the Web. For $19.95 a month, consumers can also have their documents reviewed by a real lawyer and even get legal advice at no additional cost.”

[Update: On January 5, 2012, Rocket Lawyer announced that it added another $10.8 million in funding, just five months after it announced its initial $18.5 million in investments.]

Seventy thousand clients a day at Rocket Lawyer and over two million clients at Legalzoom.com. Commoditization aside, how many AmLaw 100 firms can boast of those kinds of numbers?  Actually, the commoditization issue is of little moment, since given the lower operating costs and rich capitalization of both companies, their margins are substantially higher than most law firms
and their capital resources literally shakes the foundation of much of the profession.

Whether we do suffer a double dip recession, we must recognize that the core business of law firms is being eaten away at both the top levels by legal project outsourcers and at the lower end of the spectrum by Internet based providers of legal services.

The various bar associations and state regulators will doubtless dither for years about modifying extant rules barring non-lawyer ownership of law firms, but the market has already spoken, and rather loudly and clearly on the subject.

But all is far from lost. Law firms, at every level, must recognize that they are in the knowledge management business.  They have the resources and experience to deliver substantially higher quality – and consistently higher quality services – than the new kids on the block.  Law firms at every level will be required to invest in new technologies as well as even new pricing models to compete with the new kids on the block.  Failing to recognize these new realities may prove disastrous.

Let us also not ignore the fact that the Internet based providers of legal services as well as legal project outsourcing companies are completely unregulated.  In many respects, these organizations are akin to Bernie Madoff; not that they are engaged in patent illegality (other than perhaps their practicing law openly without adequately being licensed and are owned by non lawyers), they are simply too big and brazen for the regulatory agencies to deal with.  Before Madoff, the SEC could grab a malefactor in a heartbeat for insider trading. But the Commission could not wrap its regulatory muscle anywhere near a $65 Billion Dollar Ponzi scheme.  Similarly, if a lawyer would perchance improperly direct $25 out of its escrow account, the local bar association would be at his or her throats in a nanosecond.  But, running a $100,000,000 provider of legal services is owned by non-lawyers, is like the SEC in confronting Madoff, simply too big for the regulators to wrap their muscles around.

© Jerome Kowalski, August 2011.  All Rights Reserved.

It Takes a Village to Build a Successful Law Firm; Fewer Residents of that Village are Actually Lawyers


Bangladeshi Village

Image via Wikipedia

Jerome Kowalski

Kowalski & Associates

May, 2011

Jordan Furlong, a brilliant analyst of the legal profession and an important thought leader, recently authored a thought provoking piece entitled “Law Schools and the Laws of Supply and Demand.”  Jordan’s enticing opening salvo was “If law schools were publicly traded companies and you held some in your portfolio, I would be strongly advising you to sell. Fast.”

With all of the noise emanating from across the pond about private equity investments by non-lawyers in law firms (to which I confess to having contributed), a similar thought occurred to me: If existing corporate law firms were currently publicly traded, now may well the time to sell.

The business model of the existing business model for corporate law firms is that they are generally built on the Cravath pyramid model, which is breathing its last, as Larry Ribstein reported last year. Jordan correctly notes that the profession needs “fewer, differently skilled lawyers than it has during the past several decades” and that law schools are not providing graduates with those required skills. Professor Ribstein describes the increased fragility of BigLaw firms and the diminishing leverage extant in BigLaw.

Yet, as the recent AmLaw rankings reveal, BigLaw may have either recently experienced flat, nominal or negative growth in gross revenues, most have reported increases in net profitability. Assuming the reliability of these public reports, a proposition, not universally accepted, the increases in profitability is largely attributable to the stark differences in the work force deployed by law firms in service of their clients. In short, law firm profitability and survival no longer depends on the ability of law firms to recruit cadres of bright law students; rather, the key to profitability and law firm survival is hiring talented professionals with entirely different skill sets. I posit that it is indisputable that the proceeds of any equity investments in law firms will not be invested in talented lawyers; they will be invested in a combination of infrastructure and infrastructure.

Corporate clients and law firms have been rudely awakened to the fact that law firms are in the knowledge management and processing system. And they have also awakened to the fact that traditional law firms do not have a monopoly on the delivery of legal services. Market realities are rapidly eroding ancient guild rules of bar admission require law firms to either compete directly with or sub-contract to off-shore entities, “virtual” law firms, systems and purely automated computer driven systems.

This just isn’t your Granddaddy’s style of law firm any more. And the important folks in the law firm are increasingly likely to be those with virtually no formal legal education.

First, start with the intake process:  The strong likelihood is that new clients as well as existing clients which are referring increased amounts of business to the law firm are influenced more and more by marketing directors.  Moreover, many new engagements are secured through responses to RFP’s – Requests for Proposals. The personnel involved in preparing these responses are dominated by non-legal personnel; often a team effort by the firm’s marketing and accounting functions.

Procuring a significant engagement through an RFP is not like putting in the winning bid on E-Bay.  You don’t simply exchange billing and shipping instructions.  Rather, the next step is often a discussion of an Alternative Fee Arrangement, which requires significant input from a firm’s risk management function and its legal project management team.

The next steps involve performance of the engagement within the scope of the AFA.  Before this work even begins, the law firm’s own data archives need to be mined for work previous product that may be instructive with respect to the current engagement, calling on the expertise of the firm’s information sciences department.  Finally, the issue of law firm legal staffing presents new challenges. This means decisions need to be taken about staffing, for which lawyers with the firm are only a component. Some of the work may be out-sourced, some down sourced, some assigned to automated computer based models.  Important players in this function are members of the legal project management team and the client relationship managers.

As the engagement proceeds, the informed client will also require some real time transparency, requiring the deployment of an extranet, a portal through which the client will have real time access to the work as it progresses.

So, let’s recap here: Increasingly important stakeholders in the future success of a law firm are those schooled in marketing, business management, accounting, risk management, information management skills and legal project management.  The day will soon arrive when the successful law firm will boast of the fact that its support teams are trained in outstanding business and information sciences schools just as its smaller number of lawyers are the products of outstanding law schools.

The effects of this brave new world are far-reaching and some yet not even completely understood.  Work will certainly be increasingly commoditized. Processing information already at the law firm will play an increasing important role. Processing accumulated information forms and templates will be key components in servicing client demands. Price pressures will continue to increase. In days of yore, a lawyer might have roamed the halls and inquired “anybody ever do a brief on a forum non-conveniens motion?” or “anybody ever do an S-1 for a B2B dot.com?”  Modernity changed those hallway chants to circulated emails with similar inquiries.  We’re now past both of those as IT specialists mine the firm’s data banks for answers to those questions with nary a lawyer’s hand involved.

We’ve previously addressed what we anticipate the effects will be once law firms will be permitted to accept equity investments by non-lawyers.  Those proceeds will largely not be for new legal talent, but in required ancillary services.  A number of forward thinking enterprises have opted simply not to wait until bar associations proceed at their typical glacial pace. These include www.legalzoom.com and www.clearspire.com .  Jacoby & Meyers just entered in to the fray by commencing litigation challenging the prohibition of non-lawyer ownership of law firms.

We believe that these efforts will have material adverse trickle-up effects in the profession. Mark Cohen, Esq., a Clearspire founder (and a former law partner of mine) made it very clear to me that Clearspire’s objective is to be a very real, credible and viable alternative to AmLaw 200 firms. Clearspire is apparently using the bulk of its initial $5,000,000 capital investment to build infrastructure.

Similarly, it appears that Legalzoom.com is utilizing its remarkable $46,000,000 capital investment in investing in technology and infrastructure. Compare the array of legal services offered by www.Legalzoom.com  with those offered by many fifty and under lawyer firms and the overlap is remarkable.  The price differentials are breathtaking.

Both the business models of Clearspire.com and Legalzoom.com pose real and present dangers to important components of the business model of BigLaw based on both price and quality.

Business success is not simply a function of supply and demand; it is also a function of meeting competition and deploying the appropriate assets.

We are not yet adequately focused on assessing the competition or deploying assets now required in a changed world.

Until we adequately understand and plan for what warriors we need to house in our law firm village and are sure that they are adequately trained for the tasks,, we may be at a serious competitive advantage.

© Jerome Kowalski, May, 2011.  All Rights Recerved.

It Shouldn’t Suck to be an Associate at a Law Firm


English: Icon of Law Firm--owned by user.

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Jerome Kowalski

Kowalski & Associates

 April, 2011

 

Improving the quality of associates’ lives and job satisfaction enhance a law firm’s profitability.  A user’s guide for law firms.

             At a recent cocktail party, I bumped in to an old friend, Murray. We exchanged pleasantries and small talk, and the conversation turned to the economy and business.  Murray bemoaned the fact that his business was investing hundreds of thousands of dollars each year in income producing assets which should have useful lives of at least ten years and often should be providing his business millions of dollars in revenues over forty or fifty years.  Yet, money was pouring out the door in vast amounts, as too many of these assets failed after only three or four years.  “Why is that, Murray?”  I asked.  Murray told me that too many of his partners were ignoring the manufacturers’ guides for utilizing these assets as soon as they were acquired, demanding more production from them than could be reasonably expected and the result was that they simply collapsed after three or four years.

Murray is the managing partner of a four hundred lawyer regional law firm.

In recent weeks, the media and the blogosphere were on virtual overload with stories about abusive conditions imposed on law firm associates and tales of law firm associates throwing in the towel and leaving large law firm practices en masse within three or four years of graduation, in spite of the fact that law firms have invested hundreds of thousands of dollars in recruiting and training these associates and these departures largely occur before law firms can obtain a reasonable return on their investments.

Among the recent pieces on the subject was a piece written by Mark Herrmann on March 17, 2011 in his regular Inside Straight column in Above the Law.  Herrmann, a former BigLaw partner and currently in house head of litigation at Aon, catalogued in “How to be a Crappy Partner”  the routine rudeness and incivilities which are too often visited on law firm associates and invited readers to report on their own experiences. More than eighty comments were posted with similar tales of torture and worse, as this piece was going to press.

Previously, Professor Steven Harper wrote about the work-life balance addressing the fact that demands by law firms that associates bill ginormous amounts of hours produce fatigue, inefficiency and poor judgment.  Said Harper: “A fatigued mind is fuzzy, irrational, less efficient, and prone to error. Most clients paying for an attorney’s 3,000th billed hour in a year are getting very little for their money. Yet some lawyers do that year after year — and some clients encourage such behavior.” One would think (perhaps hope) that with the increased focus on value billing and alternative fee arrangements, minimum annual billing requirements would have fallen by the wayside and metrics measuring lawyers’ efficiency would gain in popularity.

Serendipitously, the April 17, 2011 edition of The New York Times Magazine published a piece entitled How Little Sleep Can You Get Away With?   In that piece, the Times described various scientific studies regarding the result of sleep deprivation. The conclusion is that people require seven to eight hours a night of sleep. In the absence of adequate sleep, cognitive performance deteriorates, incrementally, as sleep is deprived in greater amounts. Attention and judgment lapses as required sleep is deprived. Noted the Times:  People who sleep less than seven hours a night are simply not “thinking as clearly” as they should be. Somebody who has been deprived of sleep for 24 hours straight is “the cognitive equivalent of being drunk.” (So much for boasting about pulling all nighters in the service of client needs.)

With that science well researched and understood, one would wonder why law firm risk managers do not monitor the sleep and rest that the firm’s lawyers get.  After all, truckers, pilots and even hospital residents are required to have minimum rest time and document their rest time. Perhaps more surprisingly, in spite of RFP’s that sometimes go to 100 pages, clients never inquire about what steps law firms take to assure that their lawyers are well rested, focused and alert. I have certainly never seen a firm pitch a client for business boasting about the fact that the firm’s lawyers are all well rested, focused and alert, minimizing the risk of malpractice and assuring the delivery of high quality work.

[Update:  On June 30, 2011, Above the Law reported  on the recent passing of 32 year old associate at Skadden from a heart attack.  ATL said that the associate, Lisa Johnstone, died while working at her home on a Sunday and that her colleagues had reported the late Ms. Johnstonewas pulling 100-hour weeks and was under intense pressure. Multiple sources tell us that she had her vacation cut short after being called back to work… Sources also report that Johnstone had shown some disturbing signs of overwork Multiple people told us that she was suffering from hair loss. Again, we don’t have the autopsy report, but multiple sources speculate that under these conditions, Johnstone had turned to “the lawyer version of performance enhancers,” just to stay awake.”]

Professor Harper also recently called to task a law firm managing partner for excoriating associates for failing to timely record their time and suggested that the appropriate remedy might be to randomly select a wayward associate and simply fire him or her as an example.  Harper’s issue was the nature of the rant of the managing partner.  Reminding associates about the need to timely record time may be appropriate, but as Harper said, this rant “morphed into a tirade that reveals pervasive equity partner hubris, especially among big law managers: He believes his own press releases.”

Another recent piece was authored by Will Meyerhofer, a former BigLaw associate, who gave up his BigLaw career early on and returned to school to obtain a degree in social work, with a plan to build a psycho therapy practice largely dedicated to a client base of law firm associates, helping them cope with the tribulations of BigLaw life. In his piece, “Not Worth It,” Meyerhofer posited the question as to whether it was worth opposing Mike Tyson in a boxing ring for $3,000,000.  No, he concluded it wasn’t worth it.  He concluded that no rational person would do so and went on to further opine that no rational person should work at a BigLaw firm either. Said Meyerhoffer:  “No one would consider fighting Mike Tyson for ordinary money, either. And it’s not worth it for $3 million. Big law isn’t even worth it for $160k a year.”

Meyerhofer went on to catalogue the miseries of law firm associates:  Sleep deprivation, partner greed, degradation of associates, partner’s indifference to associates, the increasing elusiveness of being promoted to partner and the like.  Said Meyerhofer: “The bottom line: Mike Tyson will destroy you in the ring because that’s what he does. He’s a heavy-weight champion and they destroy people in the ring. A big law firm is just like Mike [Tyson]: it will destroy you because that’s what it does.”

Meyerhofer’s piece resulted in 67 comments (as this post is being written), most of which added individual tales of woe suffered by associates and derided those who tremulously suggested that life as a law firm associate was indeed worth it.

We add to this genre of literature a piece featured in the April 25 edition of Canadian Business Magazine  entitled “Losing their Briefs: Young lawyers once had big pay and big perks. Now they have big headaches. Law’s golden age is over.”  (Also available here: http://www.canadianbusiness.com/article/21204–losing-their-briefs ).  To make its point, the magazine featured the piece on its front cover with a banner headline entitled “Why it sucks to be a lawyer.” This piece focused largely on the waves of layoffs we have seen in the last two years, the dwindling demand for young lawyers and the concomitant loss of job security among law firm associates.

I previously addressed the critical need for a law firm to maintain a high level of job satisfaction for its own profitability.   Nothing has changed to detract from this essential ingredient for law firm success.  I also separately addressed the need for law firms to appropriately recognize and reward all of the lawyers who contribute to a law firm’s success.

For people like Murray, who are charged with leadership roles in law firms, it is incumbent upon them to create a culture where it doesn’t “suck” to be an associate.  It is vital for the firms to insure that associates are indeed satisfied with their jobs.  Most important, it is financially vital for the law firm to realize a fair return on the sizeable financial investments they have made in their associates. I leave for last the plain civility that lawyers should exercise, as members of a profession of a higher calling. It is perhaps a sad commentary that the prolix Model Rules of Professional Conduct contains nary a word on the working relationship that lawyers should maintain with their subordinates, yet reams of ink are devoted to lawyers’ relationships with clients, adversaries, the judiciary and the public.

            The steps necessary to improve associate morale, job satisfaction and efficient productivity are simple, plain, logical and both business and professional imperatives:

  • Treat associates the way you would expect to be treated.  Yes, it’s the old do unto others.
  • Maintain an open and honest dialogue as to the firm and as to the associate’s progress.  Associates are important stakeholders in the firm’s success and have every entitlement to be leveled with and to operate in an atmosphere of abundant transparency.  BigLaw associates are smart and are motivated to succeed; they are not mushrooms, who can be left in the dark and fed gunk.  What you don’t tell associates will ultimately be exposed in the blogosphere.
  • Always recall that every study ever done concerning why people change jobs always yields the same result:  of all of the factors, compensation is among the lowest of possible factors.  Among the highest: general job dissatisfaction, conflicts with supervisors; lack of opportunities for advancement; having little or no say in decisions that affect an employee;  fear of termination; and  boring, repetitive or overly routine work that doesn’t tap in to an employee’s potential.  Managing partners and group practice leaders must be made to appreciate that these factors far exceed a large compensation base or a market driven bonus. In fact, the market driven bonus too often sends the wrong message:  It is frequently read by an associate as an indication that the firm doesn’t get it; it’s not just about the money, it’s about the general working conditions and the unnecessary stress created by the job.  Indeed, we have all seen that the largest exoduses of associates always follow the payment of these bonuses.
  • Maintain a genuine mentor program.  Mentoring associates should be embedded in the fabric and culture of the law firm.  It doesn’t simply mean an occasional lunch.  It means spending quality time with associates, providing real counseling and an always ready ear to lend to an associate, who needs some guidance.  Quality mentoring should be a requirement of law firm partners, ranked up there with lawyering skills, marketing and sharing in management responsibility. Not every partner can adequately serve as a mentor, just as not every partner can be a successful marketer.  But, those who can perform this important function should be recognized, their talents should be capitalized upon and they should be rewarded for the efforts exerted in this process.
  • Identify as soon as possible those associates who may be in crisis.  Be sensitive to early signs of disaffection, depression or anxiety.  Arrange, through the mentor and the firm’s HR function an early intervention program for these associates. Disaffection, depression and anxiety are contagious afflictions and should not be permitted to fester and infect others. These maladies also lead to drug dependence and worse.
  • Grab the 3,000 hour biller by the collar and tell him “slow down there, fella.”  He or she simply cannot continue at this pace without doing some serious damage to himself or herself and to the firm’s clients.
  • Be realistic, pragmatic and thoughtful in fixing deadlines for work assignments.  This means that when assigning work to associates, a factor that must always be considered is existing assignments already on the associate’s docket.
  • Create a mechanism – whether through the mentor program or otherwise – in which associates can and, indeed, are encouraged, to report partner’s abuses and excesses without fear of retribution.
  • Partners who toy with associates or otherwise engage in abusive conduct should be held personally accountable for their excesses. These excesses do and will continue to harm the firm financially.
  • Demonstrate real concern about associates’ work/life balance.
  • Rather than focusing on minimum annual hourly billing requirements, focus on whether associates are getting sufficient rest. It may be a great short term fanatical gain to have associates lumbering away at 2,500 plus hours, but it is a long term bust when a comma is misplaced, a date incorrectly noted, a key clause inartfully drawn, a case overlooked or a key citation omitted.  The malpractice claim will be made against the partnership, not the associate.  The client will take its business across the street. For want of a couple of hours of sleep, many millions of dollars will be lost. In monitoring associates’ hourly billing, the 3,000 hour biller shouldn’t be instinctively rewarded kudos; rather, a culture should exist in which a partner should sit down with the associate and counsel him or her on the need to take it a little easier and get some required rest.
  • Encourage and reward leadership at every level in the fashion championed by Google.
  • Associates should be treated as important contributors to the success of the law firm: their contributions are vital to the law firm and its future.  On the other side of that same coin, let’s always recall that the loss of well regarded and highly performing associates is financially punitive to the law firm and its clients.  Yes, there are vast armies of unemployed and underemployed associates available to fill any vacancy.  But the loss of a well regarded associate unnecessarily drains management time, depletes associate morale and the cost of ramping up a new associate is a completely unnecessary and avoidable expenditure.
  • Let’s take a small page out of the experience of professional sports teams.  They succeed because of the talents of the teams they field.  Recognizing this, team owners deploy a pool of trainers and coaches to assure their continued success. Law firms should embed in their cultures that it is vital for the firms’ partners to serve these functions:  trainers, coaches and boosters to assure and enhance the talents young stars bring to the game.

© Jerome Kowalski, April, 2011.  All rights reserved.

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