I am at the ALM / Incisive Law Firm Leaders Conference. This session is the The Current State of the Legal Profession. Here are real-time notes.
– Richard Rosenbaum, Greenberg Traurig, LLP
– Dan DiPietro, Client Head Law Firm Group, Citi Private Bank
– Aric Press, Editor in Chief, The American Lawyer
Opening Remarks by Richard Rosenbaum:
- Sloppiness in management works during the good times. Now in the bad times, the problem shows.
- Too many firms follow the pack in opening new practices instead of anticipating future client needs.
- Is money the only organizational glue that holds together some firms today? Recruiters will tell you that many groups have been at the firms only a short time. What will happen when the money is not as good?
- The idea of merger as the savior of firms is not the answer for most firms, especially in this cycle. Too many firms have protracted discussions, which then break down, and then partner groups splinter off. Expensive leaseholds will be a problem in mergers because firms will want to avoid that overhead commitment.
- Management always need to focus on minding the business. That just becomes very apparent in tough times.
Conversation between Dan DiPietro and Aric Press (and potentially audience): Dan and Aric have identified several questions to discuss.
What lessons do we learn from 2000 to 2007 that will help law firms cope with 2009?
- This period characterized by aggressive growth and rate increases, with control on expenses
- Partners see an 11th commandment that equity partners per profit should grow by 10% + per year.
- The good news, however, masked the gathering storm clouds. First, growth in per equity partner profit was dramatically slowing growth in the number of equity partners. You can only do that once. Second, expense began to grow, mainly in rising associate salaries. Third, leverage changed: post-2000, leverage increased. This works when demand is strong but is bad when demand shrinks. So firms go into current downturn with higher leverage. Leverage also became more “top heavy,” meaning that the numbers of income partners and counsel increase disproportionately. This groups has not been as productive (that is, they have billed on average 200 hours per year less than other lawyers). Fourth, profit gap across firms grew noticeably. That was not a huge problem with profits going up all around. Now, this disparity will be a problem
- Aric: from my conversations with law firm leaders, I see that many firms are preparing for very tough times, eg, not making any new partners
How different will 2008 be from 2007?
- Rates did not to go up as fast.
- Some practices disappear.
- Partners will still make healthy profits.
- First six months of 2008 has weakest revenue growth in this decade. Expense growth is significantly higher than revenue growth. So margin compression is significant. This is all demand driven – demand is falling, gross hours are falling. The old cliche that law firms are recession-proof has been de-bunked.
Which firms will get hit the hardest?
- The most profitable firms will be hit the hardest. Top tier was driven by Wall Street practices, so not surprising, with economic disruption, that these firms would be hardest hit
- But Main Street firms will be hit too in near future
- The increase in associate salaries has not bought large firms much. Loyalty and retention are not up. Firms need to consider how they manage their labor costs.
- Firms have a chance now to align associate compensation with performance instead of following the traditional lock-step model. This would help with margin compression
Is a global footprint making a difference in 2008?
- It looks like yes, especially for the leading UK global firms. It has taken a long time for UK firms’ investment to pay-off. These are firms with roughly 2/3 of their lawyers outside of London. Last year, for first time, more than 1/2 their revenue is non-UK.
- But London firms face big challenges because of financial market turmoil. The global platform may not suffice to hedge against the local problems. But the UK firms are better hedged than US firms. Us firms have a much smaller “hedge” outside US.
- Citi tracks global, international, national, and regional firms. Global firms have outperformed the others. Some of this driven by exchange rates but much by demand outside of US. This year, however, the picture is more nuanced. Firms doing business mainly in US, UK, and Europer (“international” firms) have not done as well as those truly global (with offices in Asia). But now, the slowdown appears to be truly global, so a global footprint could end up hurting firms near term. But the solution to the problem – a coordinated global regulatory response and changes in how M&A will work – will make the global footprint much more valuable going forward.
- How should firms view alternative staffing models?…. Some firms have used contract lawyers to grow their businesses. This trend will increase in importance. Reliance on temp lawyers eliminates need to invest in space, technology, and headcount. It provides more flexibility. Properly done, not only will law firms but also clients, will want to rely more on flexible resources.
- Contract attorneys and others “off track” will grow beyond litigation. Some firms will use non-traditional staffing models for lower margin practices. There are several “off track models” (ways to employ lawyers other than supposedly partner-track associates)
- Firms that can go to GCs and say, “we can disaggregate our services to apply different cost resources to different parts of your problem” will be the ones that win. this includes offering up services in India. Applying the right resources at the right cost to different elements of the work will be the most valuable offering.
- If there are some permanent trends to emerge from this crisis… One big one will be clients taking greater control of their matters… If you accept that you need to be more responsive to clients…. If you believe that top quality means the ultimate competitive factor is controlling delivery costs… How do you think most firms are set up to delivery high value service and to respond to these trends? Also, would you undo some recent trends if that were possible? In a lot of matters and for a lot of clients, controlling cost is paramount but there is still an elite group of matters (e.g., investigations), where litigation budgets still will not matter very much. But many firms have grown so much that they really cannot focus on this sweet spot. So some larger firms find that they have to compete on cost. But surveys show that while GC complaining is universal, their will to act, to change, to exercise control is far from universal. Many clients are not willing to act on costs if they get decent service and results. If you look at the current crisis, clients have had a flight to quality (that is, high price firms). So cost-sensitivity may not be as acute as some think or say.
- If firms do anything different this year, they should go talk to clients. It’s surprising how few firms – in spite of all the talk – actually talk to clients.
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