AmLaw 200 — Revenge of the Third Coast
June 1, 2010 | Filed Under Cost Control, Law Firm Trends
The American Lawyer has posted the results of the second 100 that forms the Am Law 200 here.
While this tranche of law firms followed the Am Law 100 in experiencing declining revenues and profits, there were some bright spots. One geographic area showing strength was the Midwest, even firms based in Detroit. Here’s an example from the article:
The GM bankruptcy also generated work for Detroit’s Honigman Miller Schwartz and Cohn, where profits per partner rose 5.9 percent and revenue per lawyer increased 1.5 percent. Among other matters, Honigman represented the Tempo Group, a consortium of Chinese companies, in a $100 million acquisition of portions of Delphi Corporation’s brake and suspension division. Honigman chairman David Foltyn says that the firm’s fee structure helped it land the work. “We were competing with global law firms [to represent Tempo],” he says. “The transaction cost of using us is a percentage of what it is for law firms in money centers, and clients appreciate that value more than they have in the past.”
Law firms nationally who want to succeed will be opportunistic for episodic work (like auto industry reorganization or financial re-regulation) and compete for transactional work when it ramps up again (likely slowly). The article also notes that clients are becoming more demanding regarding litigation costs. This will continue as clients have more data on what things cost and therefore act with newfound confidence in unbundling components of the process.
So, two cheers for my home state of Michigan and those market-responsive law firms operating here. Hopefully they can continue to use their experience in dealing with clients facing serious challenges and capture work that would historically be sent to the Left or Right Coasts.
Value Doesn’t Have to be Virtual
April 15, 2010 | Filed Under Value, Law Firm Trends
There’s another article about former big-firm lawyers practicing in a smaller-firm environment.
This time it’s in the UK, and the firm is Temple Bright.
It sounds like there’s an office, but no staff or paper. (I always wonder about that last item…).
The three founders:
… have deliberately shunned the classic law firm pyramid structure, with Mr Summers saying SME clients are increasingly unwilling to pay for plush offices and large teams of junior lawyers and administrative staff.
“The market for legal services in the UK is worth £25 billion,” he said. “But how much of that is actually spent on the high quality legal advice clients need to make critical business decisions or conduct their transactions?
(Note: SME is small and medium-sized enterprises).
That’s probably one of the best ways to describe what clients are looking for. If a modest office in a less-pricey neighborhood helps get and keep clients or attract good people, it works. With technology, it’s not like you have to be at the office to practice every day. You could even be meeting with the client, face-to-face, something that many lawyers rarely do anymore.
As the value mantra works its magic on the legal industry, firms will work however good clients want them to and will pay for. The fact is that many large firms have legacy costs and delivery models that were supportable only by high fixed rates, applied topically daily. Even if they are fortunate enough to be busy and able to charge higher rates now, they understand that their clients have choices, and are more open to change than ever.
And there is one thing that any law firm doesn’t want to turn out be virtual: clients.
Law Firm Mergers: or the Lack Thereof
April 7, 2010 | Filed Under Law Firm Trends
Altman Weil has updated their scorecard for law firm mergers in the first quarter. (The MergerLine page is here, and it was picked up in the press here).
The news is not surprising: no big deals were announced. In fact, one of the “targets” on the list involved two attorneys.
The lack of major acquisitions can be attributed to a lot of things: slow economy, an even slower pipeline of new work, major clients shedding law firms, and even old-fashioned issues like conflicts.
It’s probably never been easier for healthy firms to attract partners or practice groups from firms that are wavering. The real challenge for law firm managing partners and their advisors is this: what is a firm or large book of business worth in the new legal economy? Traditional metrics (e.g. revenues, profits, work in process) can’t be as reliable today, when major clients are demanding rate reductions and new staffing models. Some of this staffing doesn’t involve law firms at all, and if those initiatives (like legal process outsourcing or commodity legal offshoring) are even mildly successful, that work isn’t coming back.
Large mergers used to be seen as a sign of strength. Today, I’m not sure that’s always the case. It can be compelling in the international arena. But in the United States, how does a new multi-office bi-coastal law firm differentiate itself?
To me, the bottom line is this: two law firms merging is rarely strategic. As usually practiced, it a tactic, albeit an important one. One of my favorite definitions of strategy is attributed to Bruce Henderson, founder of the Boston Consulting Group:
Strategy is a deliberate search for a plan of action that will develop a business’s competitive advantage and compound it.
In an era of value pricing and services unbundling, a robust strategy may ultimately be rarer than a large merger.
The Law Firm Model - April Fool?
April 1, 2010 | Filed Under Pricing, Law Firm Trends
No, it’s not a joke: it’s an appropriate day for some law firm leaders to speak candidly.
In the New York Times, what starts out as another look at associate pay actually gets to the root of the problem.
Rather than the usual platitudes provided to the press, we have two insights on the traditional law firm model:
First, Douglas Cogan of Fenwick & West says it was:
“…invented by lawyers who were not very good at business.”
Ouch.
Next, Robert F. Ruyak of Howrey goes further, admitting the underlying “talent” fallacy (based upon the pretext of partners hiring associates who would work toward partnership on an eight year track):
“But they weren’t really selected for that purpose,” he said. “They came in and did rudimentary work for two or three years. Clients were overpaying enormous amounts for that work.” He added: “Associates were thrown in to sink or swim. Maybe they got good work, and maybe they didn’t. Maybe they worked for partners who cared about their advancement, and maybe they didn’t.”
Double ouch.
So 20 years of the BigLaw model are effectively demolished in two paragraphs.
The cherry on top of this upside-down cake is provided by Cisco GC Mark Chandler:
“…the attitude at firms has always been, ‘We can have every cost we want and simply pass it along to the client, then rely on our leverage model to produce the profits we need.’ ”
The NYT writer, Dan Slater, summarizes how this is playing out in some circles:
When the recession pinched corporate budgets, in-house legal departments were told to cut costs. Chief legal officers, in turn, called for reform at law firms.
To be clear, however, GCs have been focused on costs for the better part of the last decade. It’s just that all the low-hanging fruit was grabbed years ago. To keep costs in line with competitive pressures, GCs have to look hard at long-standing law firm relationships, improve some and end others. This opens the door for different firms, new service providers, and creative process improvement.
The first part of change is admitting you have a problem. While some firms “get it,” you can’t under-estimate the challenge in changing a culture. And it’s more than that. Most large law firms will have to change their business model.
And that’s the hardest thing: it has to be done on the fly, with a bloated cost structure that has staffing, offices and other overheads better suited to 1980 than 2010. And through it all you need to keep productive partners in the fold (who are weighed down with all the overhead) and valuable associates in the queue (who see little chance of “partnership” in the historical meaning of the term).
That’s change you want to believe in.
So give a kind word today to your friendly neighborhood managing partner. He or she will appreciate it.
Legal Rate Increases: Bold or a Boomerang?
February 15, 2010 | Filed Under Cost Control, Law Firm Trends
Some large law firms are trying to navigate the murky waters of rate increases. Not easy to do in this market; some would suggest it may not be wise, either, as most large corporate clients are looking to lower costs on an absolute and unit basis.
One thing for certain–it’s a hard issue to explain to the press. A case in point, as reported in Crain’s Detroit Business (reg may be required, sadly):
Rex Schlaybaugh, chairman and CEO of Detroit-based Dykema Gossett P.L.L.C., said his law firm pursued cost efficiencies to improve the bottom line during last year, and was still holding discussions with individual clients about rate increases for this year.
He expected the firm would not finalize rates for a few more weeks, but has generally raised rates an average of 3 percent-5 percent in recent years to keep up with costs.
I am impressed by the candor, and know that the annual rate increases (up until about 2007 or so) were something that managing partners counted on and corporate clients (sort of) expected.
But in the last few years, it’s harder to fathom for clients who are cutting costs themselves and seeing withering international competition for their own products and services.
It appears that some firms are initially using cost efficiencies to bolster profits and moving somewhat more gingerly about translating those actions into lower costs or clearer value for clients.
Mr. Schlaybaugh went on to say that alternative fees are about 15 percent of firm revenue, with volume-based discounts and fixed project-based fees the two most common options.
Of course, any firm with a history of rate increases is really just giving part of those back to clients, not really providing net savings. And GCs need to be able to show that sort of cost improvement to CFOs with a long memory and a short fuse.
Getting more guaranteed work (aka “volume”) in this market is hard for any firm. Saying we will raise your rates unless you do is the sign of a great firm whose talented lawyers are in consistent demand.
But you better be right, or it may come back on you when you least expect it.
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