The End of the World or a Brave New One?

The past two years have been a truly remarkable time for the legal profession. Events (common in private industry for decades) such as layoffs, office closings, and reductions in profits have occurred if not for the first time, then certainly more frequently than ever before.

In the United States, there is a Web site (lawshucks.com) that tracks and graphs monthly layoffs of partners, associates, and administrative staff in the Am Law 200. As of March 2010, LawShucks' layoff count, which started in January 2008, was approaching 6,000 attorneys and approximately 9,000 administrative staff.

Several firms went bust in 2009: Heller Ehrman, Thacher Proffitt and Thelen, to mention the most obvious ones. Others have either merged or considered a merger as a way to address the economic downturn. The overall 2009 Am Law results for calendar 2008 were mixed. While gross revenue for the top 100 firms grew by 4.1%, their profits fell by 4.3%. The 2010 results, which reflect what happened in 2009, have just been published, and they are mixed. While overall AmLaw 100 revenue is down and profits per partner (“PPP”) are flat, there are some bright spots and encouraging signs among the reporting firms.

There is something curious afoot in the marketplace that my firm, KermaPartners, is learning about from our discussions with clients. The past year, 2009, was not the end of the world for everyone. Indeed, for every bust firm there is a boom one. One major New York firm saw its very impressive 2008 PPP grow by more than 12%. This growth was real, not manufactured by de-equitizing partners or accounting magic. That firm was not alone; as the just-published numbers reveal, there was a group of firms that reported significant increases in overall firm revenue per lawyer (“RPL”) and PPP.

And, they will have done it (with apologies to John Houseman and Smith Barney) the old fashioned way. They will have earned it!

KermaPartners believes that the firms that succeed will be the ones that have (over the years) followed a clearly defined path. They will have four distinct and unifying characteristics: a clear strategy; focused leadership; rewards systems aligned with their strategy; and a well-functioning (and efficient) administrative support structure. These are the firms that prospered in 2009 and will continue to prosper.

There is an old saying that goes something like “a rising tide lifts all boats,” and nowhere was that more true than in the legal profession. Many firms grew from mid-sized regional to mega-sized national or international organizations without coherent business strategies, adequate management, transparent rewards systems, or strong administrative support structures.

One client that we advised (after the firm had spent more than a year and invested more than $1 million in trying to build a Los Angeles-based talent representation practice) withdrew from the market when we documented the basis for this upper-Midwest, single-office, mid-sized law firm's desire to represent Hollywood stars: a single partner loved the movies!

While a 150-attorney firm trying to break into the LA talent market is an extreme example, there are many other examples where firms built platforms through merger and/or expansion with not much more forethought and similar results.

Four Defining Characteristics

KermaPartners has worked with numerous firms to develop or clarify their business strategies and prioritize each firm's investment of both capital and human resources. This prioritization of investments is at the heart of every law firm strategy. It forces firms to consider not just the “always small” or “no brainer” initial investment, but to quantify the total cost of success, and determine if the investment is within the capabilities and resource limits of the firm. Often it is not, and it becomes another failed effort that drains the limited resources of the firm.

Once the strategy has been set, it falls to the firm's management to execute it. And here too, law firms often come up short. A destructive phenomenon that we have observed in law firms is that work gravitates to those who are already busy. The partner with a multi'million-dollar practice is often assigned (or volunteers for) yet another administrative role or practice-related duty. The
result is that, try as they might,
the overworked attorneys do not get everything done, and what does not get done is almost always the firm-related matters.

The alignment of a law firm's compensation system and its strategy is a complex and arduous undertaking. It begins with the clear articulation of what the firm's strategy is, the identification of appropriate measures of the strategy's success, and then tracking of those measures. While many firms have succeeded in the identification of both a strategy and the measures, it is the execution where they often fail. All too often, the $5M partner syndrome takes over wherein, despite the individual's disruptive behavior, flaunting of all firm business requirements (client screening, prompt and appropriate invoicing, and meaningful collection efforts) and hygiene issues (time sheet submission, mentoring and committee participation) the individual gets rewarded solely on the amount of his originations. Conduct that would get an individual dismissed in private industry is rewarded in the legal profession.

The final characteristic of winning firms is the mastery of their administrative support costs. Firms need to look at both their technology (Why do you keep paper records for decades?) and service delivery models (Why are your accounting, IT, library, and marketing staff located in your main office?). Indeed, why are they your employees at all? Many low value-add positions such as the mail and messengers were outsourced years ago. It is now time to consider outsourcing the higher value-add positions where additional substantial savings can be achieved.

Conclusion

The Am Law results for 2010 will be interesting, and we eagerly await their publication. To the winners, we offer our congratulations on a job well done ' you have indeed “earned it.” To those whose results fall short, there but for ourselves
go us.

J. Mark Santiago, a member of KermaPartners in New York City, has been a consultant to the legal profession for more than 25 years. He has led teams in outsourcing engagements, law firm mergers, strategy and merger due diligence, restructuring, financial management, partner compensation, service center feasibility studies, and merger integration planning and implementation. Santiago is also the published author of one book and various periodical articles, as well as a speaker on topics relating to law firm management. He can be reached at [email protected].

The past two years have been a truly remarkable time for the legal profession. Events (common in private industry for decades) such as layoffs, office closings, and reductions in profits have occurred if not for the first time, then certainly more frequently than ever before.

In the United States, there is a Web site (lawshucks.com) that tracks and graphs monthly layoffs of partners, associates, and administrative staff in the Am Law 200. As of March 2010, LawShucks' layoff count, which started in January 2008, was approaching 6,000 attorneys and approximately 9,000 administrative staff.

Several firms went bust in 2009: Heller Ehrman, Thacher Proffitt and Thelen, to mention the most obvious ones. Others have either merged or considered a merger as a way to address the economic downturn. The overall 2009 Am Law results for calendar 2008 were mixed. While gross revenue for the top 100 firms grew by 4.1%, their profits fell by 4.3%. The 2010 results, which reflect what happened in 2009, have just been published, and they are mixed. While overall AmLaw 100 revenue is down and profits per partner (“PPP”) are flat, there are some bright spots and encouraging signs among the reporting firms.

There is something curious afoot in the marketplace that my firm, KermaPartners, is learning about from our discussions with clients. The past year, 2009, was not the end of the world for everyone. Indeed, for every bust firm there is a boom one. One major New York firm saw its very impressive 2008 PPP grow by more than 12%. This growth was real, not manufactured by de-equitizing partners or accounting magic. That firm was not alone; as the just-published numbers reveal, there was a group of firms that reported significant increases in overall firm revenue per lawyer (“RPL”) and PPP.

And, they will have done it (with apologies to John Houseman and Smith Barney) the old fashioned way. They will have earned it!

KermaPartners believes that the firms that succeed will be the ones that have (over the years) followed a clearly defined path. They will have four distinct and unifying characteristics: a clear strategy; focused leadership; rewards systems aligned with their strategy; and a well-functioning (and efficient) administrative support structure. These are the firms that prospered in 2009 and will continue to prosper.

There is an old saying that goes something like “a rising tide lifts all boats,” and nowhere was that more true than in the legal profession. Many firms grew from mid-sized regional to mega-sized national or international organizations without coherent business strategies, adequate management, transparent rewards systems, or strong administrative support structures.

One client that we advised (after the firm had spent more than a year and invested more than $1 million in trying to build a Los Angeles-based talent representation practice) withdrew from the market when we documented the basis for this upper-Midwest, single-office, mid-sized law firm's desire to represent Hollywood stars: a single partner loved the movies!

While a 150-attorney firm trying to break into the LA talent market is an extreme example, there are many other examples where firms built platforms through merger and/or expansion with not much more forethought and similar results.

Four Defining Characteristics

KermaPartners has worked with numerous firms to develop or clarify their business strategies and prioritize each firm's investment of both capital and human resources. This prioritization of investments is at the heart of every law firm strategy. It forces firms to consider not just the “always small” or “no brainer” initial investment, but to quantify the total cost of success, and determine if the investment is within the capabilities and resource limits of the firm. Often it is not, and it becomes another failed effort that drains the limited resources of the firm.

Once the strategy has been set, it falls to the firm's management to execute it. And here too, law firms often come up short. A destructive phenomenon that we have observed in law firms is that work gravitates to those who are already busy. The partner with a multi'million-dollar practice is often assigned (or volunteers for) yet another administrative role or practice-related duty. The
result is that, try as they might,
the overworked attorneys do not get everything done, and what does not get done is almost always the firm-related matters.

The alignment of a law firm's compensation system and its strategy is a complex and arduous undertaking. It begins with the clear articulation of what the firm's strategy is, the identification of appropriate measures of the strategy's success, and then tracking of those measures. While many firms have succeeded in the identification of both a strategy and the measures, it is the execution where they often fail. All too often, the $5M partner syndrome takes over wherein, despite the individual's disruptive behavior, flaunting of all firm business requirements (client screening, prompt and appropriate invoicing, and meaningful collection efforts) and hygiene issues (time sheet submission, mentoring and committee participation) the individual gets rewarded solely on the amount of his originations. Conduct that would get an individual dismissed in private industry is rewarded in the legal profession.

The final characteristic of winning firms is the mastery of their administrative support costs. Firms need to look at both their technology (Why do you keep paper records for decades?) and service delivery models (Why are your accounting, IT, library, and marketing staff located in your main office?). Indeed, why are they your employees at all? Many low value-add positions such as the mail and messengers were outsourced years ago. It is now time to consider outsourcing the higher value-add positions where additional substantial savings can be achieved.

Conclusion

The Am Law results for 2010 will be interesting, and we eagerly await their publication. To the winners, we offer our congratulations on a job well done ' you have indeed “earned it.” To those whose results fall short, there but for ourselves
go us.

J. Mark Santiago, a member of KermaPartners in New York City, has been a consultant to the legal profession for more than 25 years. He has led teams in outsourcing engagements, law firm mergers, strategy and merger due diligence, restructuring, financial management, partner compensation, service center feasibility studies, and merger integration planning and implementation. Santiago is also the published author of one book and various periodical articles, as well as a speaker on topics relating to law firm management. He can be reached at [email protected].