The 'Losing' Side of Legal Business Trends

Recently, my partner Mike Short and I highlighted the current divide in the legal profession between “Winners and Losers” in a recent edition of LawVision Group's Newsletter (www.lawvisiongroup.com). Here, I would like to focus more on our advice to those firms that currently find themselves on the “losing” side of the divide. Before diving into that, however, it is worth summarizing the basic issue.

The Legal Industry Today: Winners and Losers

As has been discussed in depth, “growth” in the U.S. legal market has been minimal since we experienced a significant drop in demand in the fall of 2008. While individual practice demand has fluctuated and a few areas of practice have experienced some significant growth, overall the demand for lawyer time from U.S. commercial law firms has grown marginally at best, since 2008, in spite of a gradual improvement in the overall economy. There are multiple potential reasons for this general lack of growth, including shifting work in-house, increased usage of LPOs and other alternative providers and, most importantly, constant demands for efficiency improvements. Although happening slowly, project management and process improvement efforts, both formal and informal, are gradually improving the efficiency of U.S. legal practice, and in the process, off-setting whatever demand growth the economy would otherwise have produced.

However, a flat overall market does not mean that individual firms are sitting still, and in fact some are doing quite well (the winners) while others are either treading water or worse, losing ground. As it turns out, roughly a third of U.S. firms fall into each of these three categories. Beginning with 2010, a year that saw the beginnings of stabilization in the legal industry after the initial worst effects of the financial crisis, an analysis of the change in demand from 2010 to 2012 for each firm in the Peer Monitor program at Thomson Reuters is shown in the top chart below.

As can be readily seen, almost half (56 of 119) of these firms experienced a two-year decline in demand for their services. The story gets more dramatic, though, when you consider that 34 of these firms experienced two consecutive down years following 2010. Their cumulative results are seen in the next chart below.

The firms above have seen at least two, and likely in most cases more than two, consecutive years of decline in demand for the time of their lawyers. For most firms 2013 is also not shaping up as a year for demand increases. While market demand overall stays roughly flat, some firms are “winning” and growing at the expense of the losers who are shrinking while a third group holds on ' hoping they don't fall into “loser” grouping. In the good old days, before the recession, most firms were growing constantly as the demand for lawyer time kept expanding. The “losers” back then, for the most part, were the firms that grew less ' but still grew. We are in a whole new era.

Advice for the Losers

(And for those who might be headed there ' ) Arresting a multi-year decline can be a difficult challenge for any firm, not least because for many firms just the process of taking a long, hard look at themselves and honestly facing the issues is extremely difficult. The good news about being in this situation is that it does have a way of forcing people to focus on reality. When this occurs, it is likely that the firm's real leaders (in power or not) will wake up to a range of long-simmering but generally ignored issues. The firm is likely to face a number of challenges, such as:

Leadership

In most situations of long-term decline there is significant weakness in the leadership team and/or model. In some situations, the wrong leaders are in place and these people are unwilling, or unable, to do the hard things that are necessary to right the ship. In others, the leaders are unwilling even to acknowledge the problems, often because they were allowed to develop and metastasize on their watch. Changing something amounts to an admission of failure. We have even seen a few (unusual) situations where the Managing Partner personally was the problem ' and failure to get that person out of the role resulted in complete failure of the firm.

More often, though, the leadership team is simply not up to the task. Perhaps the EC is populated with people who are big business generators with little actual management skill or leadership instinct? Is the structure a representative democracy where each member protects a constituency rather than doing what is best for the firm as a whole? Perhaps the Managing Partner was the right person to lead when times were great, but does not have the skills needed to deal with the bad times? Maybe the leaders understand the issues but don't have the personal strength to fight the battles? (Why make your life miserable when retirement is only a few years away?) Perhaps the Managing Partner is the right person, but he's hamstrung by the firm's rules and power structure? Whatever the issue, a turnaround is only possible if the right leadership team, with the right skills and authority, and the will to get things done is empowered.

Culture

In almost all firms seeing year over year declines, cultural issues play a part. Obvious cultural issues, such as a reluctance to deal with underperforming partners, have been talked about for years, but more subtle challenges are also evident in many situations. For example, a culture of deference to founders and senior rainmakers, whether they are good leaders or not, can result in a situation where no one is in a position to do anything, because the senior lawyers want to protect people, usually out of loyalty and the best of motivations. Another example is a culture that does not force lawyers to continually strive to improve throughout their careers.

While we see many successful lawyers who have remade themselves time and time again in response to market forces, in declining firms today we see far too many lawyers whose personal human capital has grown obsolete. Culture, in the form of compensation priorities, also plays a part when an unusually strong emphasis on personal billable hours results in work hoarding and under-investing in client development and cultivation.

The primary obstacle to change in most firms is culture. How often have leaders met resistance to any hard moves based on the move being “against our culture?” This single refrain has stopped progress in more firms than any other, and the cultural flag-waving is typically carried on by those who are a big part of the problem. The partners must agree that they will not let “culture” get in the way of doing what is in the best interests of the firm.

Coalition of the Capable

Most underperforming firms have spent the past five years beating up, and occasionally firing, their underperformers. The goal, of course, is to get them to perform better. Sometimes they actually do, but even if the underperformers improve, this will do relatively little to change the trajectory of the firm (though it might slow a slide and add to the profitability in the short-run, which does buy time.) Shifting the direction of the firm requires that the people who are capable of changing things in a meaningful way change what they are personally doing in order for other related and needed changes to come about, whether the necessary changes are strategic, operational, cultural or otherwise.

This issue is often among the hardest, because it forces the firm's most successful people to change their personal behaviors, and these are the same people who have benefitted the most by doing what they have been doing for many years. A mid-50s partner, at the top of her game with a large book of clients and a hefty income, has little incentive to change anything, but collectively the lawyers in this category are the ones that can make change happen. Their involvement, participation, and unconditional backing will be necessary for any firm-wide change to occur. They will also have to change what they personally do. The real leaders of the firm will need to get these people on board.

Conclusion

Once these three large categories have been addressed, the (right) leadership team can get on with addressing the other, more specific, changes that are necessary to arrest the firm's slide and begin to compete more effectively. Those changes will likely cover a wide range of efforts, from economic performance and capacity management, to streamlining processes, to building a new firm strategy and others.

None of this is easy, but the alternative for firms in this category is worse. Law firms, like companies, have no natural right to existence or to success. They must earn both day in and day out. Failure to keep up will result in market irrelevance or worse over the long term, and in unhappy lawyers, staff and likely clients in the short run. For those who see themselves in this situation, the starting point is to face the facts as directly and honestly as you can ' and follow them where they take you.

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Joseph B. Altonji, a member of this newsletter's Board of Editors, is a founding Principal of LawVision Group LLC. He has worked extensively with distressed law firms to restructure and reposition themselves for renewed success. He can be reached at [email protected] or 312-466-5648.

Recently, my partner Mike Short and I highlighted the current divide in the legal profession between “Winners and Losers” in a recent edition of LawVision Group's Newsletter (www.lawvisiongroup.com). Here, I would like to focus more on our advice to those firms that currently find themselves on the “losing” side of the divide. Before diving into that, however, it is worth summarizing the basic issue.

The Legal Industry Today: Winners and Losers

As has been discussed in depth, “growth” in the U.S. legal market has been minimal since we experienced a significant drop in demand in the fall of 2008. While individual practice demand has fluctuated and a few areas of practice have experienced some significant growth, overall the demand for lawyer time from U.S. commercial law firms has grown marginally at best, since 2008, in spite of a gradual improvement in the overall economy. There are multiple potential reasons for this general lack of growth, including shifting work in-house, increased usage of LPOs and other alternative providers and, most importantly, constant demands for efficiency improvements. Although happening slowly, project management and process improvement efforts, both formal and informal, are gradually improving the efficiency of U.S. legal practice, and in the process, off-setting whatever demand growth the economy would otherwise have produced.

However, a flat overall market does not mean that individual firms are sitting still, and in fact some are doing quite well (the winners) while others are either treading water or worse, losing ground. As it turns out, roughly a third of U.S. firms fall into each of these three categories. Beginning with 2010, a year that saw the beginnings of stabilization in the legal industry after the initial worst effects of the financial crisis, an analysis of the change in demand from 2010 to 2012 for each firm in the Peer Monitor program at Thomson Reuters is shown in the top chart below.

As can be readily seen, almost half (56 of 119) of these firms experienced a two-year decline in demand for their services. The story gets more dramatic, though, when you consider that 34 of these firms experienced two consecutive down years following 2010. Their cumulative results are seen in the next chart below.

The firms above have seen at least two, and likely in most cases more than two, consecutive years of decline in demand for the time of their lawyers. For most firms 2013 is also not shaping up as a year for demand increases. While market demand overall stays roughly flat, some firms are “winning” and growing at the expense of the losers who are shrinking while a third group holds on ' hoping they don't fall into “loser” grouping. In the good old days, before the recession, most firms were growing constantly as the demand for lawyer time kept expanding. The “losers” back then, for the most part, were the firms that grew less ' but still grew. We are in a whole new era.

Advice for the Losers

(And for those who might be headed there ' ) Arresting a multi-year decline can be a difficult challenge for any firm, not least because for many firms just the process of taking a long, hard look at themselves and honestly facing the issues is extremely difficult. The good news about being in this situation is that it does have a way of forcing people to focus on reality. When this occurs, it is likely that the firm's real leaders (in power or not) will wake up to a range of long-simmering but generally ignored issues. The firm is likely to face a number of challenges, such as:

Leadership

In most situations of long-term decline there is significant weakness in the leadership team and/or model. In some situations, the wrong leaders are in place and these people are unwilling, or unable, to do the hard things that are necessary to right the ship. In others, the leaders are unwilling even to acknowledge the problems, often because they were allowed to develop and metastasize on their watch. Changing something amounts to an admission of failure. We have even seen a few (unusual) situations where the Managing Partner personally was the problem ' and failure to get that person out of the role resulted in complete failure of the firm.

More often, though, the leadership team is simply not up to the task. Perhaps the EC is populated with people who are big business generators with little actual management skill or leadership instinct? Is the structure a representative democracy where each member protects a constituency rather than doing what is best for the firm as a whole? Perhaps the Managing Partner was the right person to lead when times were great, but does not have the skills needed to deal with the bad times? Maybe the leaders understand the issues but don't have the personal strength to fight the battles? (Why make your life miserable when retirement is only a few years away?) Perhaps the Managing Partner is the right person, but he's hamstrung by the firm's rules and power structure? Whatever the issue, a turnaround is only possible if the right leadership team, with the right skills and authority, and the will to get things done is empowered.

Culture

In almost all firms seeing year over year declines, cultural issues play a part. Obvious cultural issues, such as a reluctance to deal with underperforming partners, have been talked about for years, but more subtle challenges are also evident in many situations. For example, a culture of deference to founders and senior rainmakers, whether they are good leaders or not, can result in a situation where no one is in a position to do anything, because the senior lawyers want to protect people, usually out of loyalty and the best of motivations. Another example is a culture that does not force lawyers to continually strive to improve throughout their careers.

While we see many successful lawyers who have remade themselves time and time again in response to market forces, in declining firms today we see far too many lawyers whose personal human capital has grown obsolete. Culture, in the form of compensation priorities, also plays a part when an unusually strong emphasis on personal billable hours results in work hoarding and under-investing in client development and cultivation.

The primary obstacle to change in most firms is culture. How often have leaders met resistance to any hard moves based on the move being “against our culture?” This single refrain has stopped progress in more firms than any other, and the cultural flag-waving is typically carried on by those who are a big part of the problem. The partners must agree that they will not let “culture” get in the way of doing what is in the best interests of the firm.

Coalition of the Capable

Most underperforming firms have spent the past five years beating up, and occasionally firing, their underperformers. The goal, of course, is to get them to perform better. Sometimes they actually do, but even if the underperformers improve, this will do relatively little to change the trajectory of the firm (though it might slow a slide and add to the profitability in the short-run, which does buy time.) Shifting the direction of the firm requires that the people who are capable of changing things in a meaningful way change what they are personally doing in order for other related and needed changes to come about, whether the necessary changes are strategic, operational, cultural or otherwise.

This issue is often among the hardest, because it forces the firm's most successful people to change their personal behaviors, and these are the same people who have benefitted the most by doing what they have been doing for many years. A mid-50s partner, at the top of her game with a large book of clients and a hefty income, has little incentive to change anything, but collectively the lawyers in this category are the ones that can make change happen. Their involvement, participation, and unconditional backing will be necessary for any firm-wide change to occur. They will also have to change what they personally do. The real leaders of the firm will need to get these people on board.

Conclusion

Once these three large categories have been addressed, the (right) leadership team can get on with addressing the other, more specific, changes that are necessary to arrest the firm's slide and begin to compete more effectively. Those changes will likely cover a wide range of efforts, from economic performance and capacity management, to streamlining processes, to building a new firm strategy and others.

None of this is easy, but the alternative for firms in this category is worse. Law firms, like companies, have no natural right to existence or to success. They must earn both day in and day out. Failure to keep up will result in market irrelevance or worse over the long term, and in unhappy lawyers, staff and likely clients in the short run. For those who see themselves in this situation, the starting point is to face the facts as directly and honestly as you can ' and follow them where they take you.

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Joseph B. Altonji, a member of this newsletter's Board of Editors, is a founding Principal of LawVision Group LLC. He has worked extensively with distressed law firms to restructure and reposition themselves for renewed success. He can be reached at [email protected] or 312-466-5648.