Walker Clark Worldview

A new wave of interest in transatlantic mergers is forming in the waters between the United States and the United Kingdom.  (Living in Florida, I am always drawn to hurricane metaphors.)

Anthony Notaras has posted a good summary of recent and likely future developments at the International Bar Association website:  “Transatlantic mergers 2.0 – just don’t call them defensive.” There are several other similar  possible matchups that are currently being considered in Europe and North America, but which I cannot discuss at this time.

I would not necessarily call some possible transatlantic law firm combinations “defensive.” As noted previously in this blog, the merger that created Hogan Lovells made a lot of strategic sense in terms of moving each of the two excellent antecedent firms up to the “next level” of international capabilities.

But one also has to wonder whether there is a subtle herd mentality now at work among some excellent second-tier firms, on both sides of the Atlantic, that has contributed to this urge to race to the seashore.

Norman Clark

P.S.,  If you have not visited the IBA site in the past year, you have not had the opportunity to discover that it is now one of the best sources of reliable information (not rumors) about developments in the law and in law firms throughout the world.  We recommend to our clients that they visit the site at least once each week.

After you read Anthony Notaras’ article, click on the links to learn more about the IBA Law Firm Management Committee and its programs at the IBA Conference in Vancouver on 3-8 October 2010.  (In the interests of full disclosure, the author of this blog is currently the Chair of the IBA’s Law Firm Management Committee, which has 3,300 members worldwide.)

Sometimes finding the right strategic partner is like looking for a new romance in a bar. The key to success is finding points of affinity upon which to build a relationship, whether for the rest of the evening or for a lifetime.

This is a second of a series of posts about common mistakes law firms make when trying to establish a strategic alliance with another law firm.

The second big mistake is a lack of actual points of affinity between the two firms.  These relationships have to be based on more than professional friendships or an occasional referral of instructions in the past.

When our firm conducts market research to help our clients find strategic partners, we look for points of affinity that are based on current and recent events, cases, and transactions — such as the candidate firm having clients with significant business interests in the home jurisdiction of our client.

The notion of “build it and they will come” simply does not work in this situation. Two firms cannot simply set up a strategic relationship and then try to create the client base and inter-firm work flow needed to support it. The basic elements must already be there.

This is a major problem for most contemplated strategic relationships between law firms. Too many of these efforts are the products of friendly conversation and wishful thinking over drinks at a conference. While it is always good to be optimistic, it is better in this situation to be realistic.

Norman Clark

A surprising number of otherwise sophisticated law firms spend a horrifying amount of time and money pursuing strategic alliances, partnerships, or other relationships with other firms. Some of these relationships work well. Most, however, produce disappointing results for both parties.

This is the first of a series of posts that outline some the mistakes that law firms make when considering a strategic relationship, whether in a one-to-one relationship or in a law firm network.

By far the biggest cluster of mistakes is poor research. Law firm partners often waste hundreds of hours every year on “road shows” to meet other law firms. Most of these meetings a little more than cold calls. Not surprisingly, they produce few benefits other than an occasional free lunch in a law firm conference room.

We advise our clients to be sure that they have thoroughly researched the law firms they want to visit and the position of those firms in their respective legal markets. When we conduct this market research for our clients, we look for points of affinity between our client and the target law firms. Before we recommend that one of our clients visit a candidate law firm, we want to be reasonably sure that there are specific reasons to believe that any relationship that emerges from that free lunch in the conference room will be productive for both firms.

Norman Clark

Let’s continue this week’s  discussion of the business challenges facing smaller U.S. law firm in smaller legal markets (i.e., metropolitan areas with populations of less than 500,000).

An article in yesterday’s New York Times, “U.S. Home Sales at Lowest Level in More Than a Decade,” is somber news for the thousands of smaller U.S. law firms for whom residential real estate is a significant part of their practice.

The seasonally adjusted annual sales rate for residential real estate in July 2010 was more than 25% lower than a year ago — during the depths of the recession.  This drop occurred despite the lowest mortgage interest rates in decades.  As one observer, quoted in the article, said:

“… sales volume will probably be in the tank at least until next spring.

This news tends to support what many observers have perceived for at least the past six months — that the so-called “recovery” in real estate was largely an illusion, fed by wishful thinking in the residential real estate industry and a bottom-feeding frenzy among predatory investors in distressed sales in the lowest quartile of the market.

It also suggests that there might be fundamental failure of the U.S. economy even to consider, much less to address, fundamental weaknesses in the economic foundations of the American economy, which may have increased the likelihood of chronic unemployment, economic stagnation, and deflation in the years to come. Unless the Obama Administration can find a way to help millions of people get back to work — notwithstanding an increasingly dysfunctional Congress — the sales volume in the U.S. real estate markets is unlikely to improve.

Some real estate lawyers in the U.S. report that their practices continue to sink with no signs of recovery or rescue on the horizon. At the same time, some real estate practices appear to have stayed more or less afloat during the continuing rough times in real estate — both commercial and residential — in the United States.

Thomas Carlyle (1795-1881)

With news like this, it is no wonder that Thomas Carlyle called economics  the “dismal science.”

But the prospects are not necessarily all bad.

Our firm has not done any in-depth research on these “survival secrets,” but four characteristics appear to be consistent in our observations of the “survivors” among real estate practices in smaller law firms in smaller markets in the U.S:

• First, there is a strong correlation between the absence of a real estate bubble in these smaller markets in 2005-2007 and the relative mildness of the impact on the local real estate markets now.

• Second, the real estate practices that appear to have done the best are in firms that had already established themselves as having specialized real estate practices — not just one or two lawyers who “do real estate work.”  This does not mean that a firm has to be a real estate boutique to be successful; but real estate law must be more than a sideline.

• Third, most of these firms operate ancillary title insurance businesses, which frequently reflects an integrated, and usually more profitable, approach to the management of a real estate practice than one might find in a law firm without an ancillary business.

• Finally, most of these firms have well-established banking practices, supported by long-term client relationships.

These four elements are not a guaranteed recipe for continued survival and future success.  However, they do suggest a possible strategy for smaller law firms that want to have competitive and economically viable real estate practices in what promises to be another bad year.

Norman Clark

Nobel Prize laureate Paul Krugman has a very important column in today’s New York Times. His title “The Third Depression,” along with the thoughtful analysis that he presents, communicate a clear warning to law firms that depend heavily on clients in the United States and Europe.

His main point is that it is too early to celebrate an economic recovery.  He writes:

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression [of the years following the Panic of 1873] than the much more severe Great Depression [of the 1930s]. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

Krugman warns us not too take too much comfort from signs of “recovery.”

…future historians will tell us that this wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.

What does this mean for law firms?

I think that there are at least three important admonitions implicit in Krugman’s views:

1. Take a long view when planning strategy. We need to think ahead beyond the end of this year or even next year. Do not base optimistic strategic plans only on economic improvements over the past six months.  Instead, law firm partners should ask, “What do we need to do in the next 12-18 months to support survival and sustainable business performance over the next five to ten years?” Taking the long view usually involves questions such as succession planning and improved productivity of internal operations, which are often overlooked in shorter-range strategic planning exercises.
2. Consider alternative economic scenarios. Strategic objectives must be supported and managed by reliable, relatively simple performance measurements. Because law firm revenue is often a lagging economic indicator, the strategic management of a law firm must include an increased alertness to economic and geopolitical events. Some law firms are now planning for a set of contingent scenarios. In other words, what will be the early signs of the next economic crisis and what should we do if they appear?
3. Do not count on policy makers to do the right thing.  Krugman has some very blunt criticism of the response of politicians and economic policy makers in the United States and Europe. He characterizes current government policy in both economies as:

…the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.

And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.

This blog has previously communicated our firm’s concern that future financial crises, equal to or worse than the crisis of 2008-2009, are almost certain; because economic policy makers have failed miserably to address the underlying structural defects that caused the recent crisis and that remain relatively untouched.

In the United States, those basic structural weaknesses include:

• An alarming widening of the gap between rich and poor in the United States
• The continued submersion of formerly middle-class people into the ranks of the “working poor”
• “Permanent unemployment” for millions of otherwise able and willing workers
• A Federal taxation system that has collapsed under its own political weight
• The corrupting influence of wealth on the U.S. legislative and regulatory process

I want to be clear about one thing.  I think that the Obama administration has prevented things from getting worse than they could have been. But the weak foundations remain as weak as ever.

Fortunately, the world is no longer as dependent on the United States economy as in the past; but the failure of U.S. policy makers to address any of these basic issues in any rational way will continue to have worldwide effects.

And these effects will continue to be felt by law firms.

Law firms in many parts of the world — and their clients — have just come through very difficult economic times. Paul Krugman reminds us that the conditions that produced the recent economic crisis are still there; and wise law firm partners and managers need to plan for the next episodes in what is likely to be an extended period of economic uncertainty.

Norman Clark

“We all know that we should be cross-marketing and cross-selling, but we’re just so bad at actually doing it.” I frequently hear comments like this from law firm partners.

There are a number of reasons why a law firm can be so bad at cross-marketing.

• Lack of available, shared information about the best cross-marketing opportunities
• A partnership culture that produces a “my client” mentality rather than “our client”
• A partner compensation systems that do not reward — and in some cases discourage — cross-marketing
• Lack of adequate marketing support
• A misdirected marketing strategy that focuses on opportunities with relatively low return on investment

All of these are important factors; but, in our experience, the most important obstacle of all is simply that the partners lack the basic skills to work together as a high-performing business team. Unless and until partners can learn to organize themselves for the achievement of specific goals, manage internal disagreements productively, and build genuine trust based on the free flow of information and ideas, they will never — repeat never — achieve their full potential, whether at cross-marketing or any other worthwhile goal.

This sounds like a dogmatic statement, but there is simply too much overwhelming evidence — both in law firms and in other businesses — that supports the importance of group development as the make-or-break factor in the ability of a business group — like a group of partners or a practice group — to achieve its goals.

To quote the American comic strip character, Pogo, “We have met the enemy and he is us.”

The good news is that business groups develop their achievement potential through specific behaviors and skills that can be learned and improved with practice.

To learn more about how to do this, contact Lisa Walker Johnson by e-mail or through the walkerclark.com website.

Norman Clark

On Monday 14 June 2010, I had the privilege of moderating a panel discussion about the adoption of a business approach to law firm strategy.  This was part of the very successful Managing a Modern Law Firm conference, organized by the Law Firm Management Committee and the Latin American Forum of the International Bar Association, and was held in Buenos Aires.

As part of my comments, I discussed three general lessons that many law firms worldwide have learned from the economic crises in 2008-2009 (and continuing into 2010 for some countries).

1. The need to be alert to emerging economic and geopolitical trends before they arrive in the form of a crisis
2. The need for a more intense focus on profitability, particularly with respect to lawyer productivity and efficiency
3. The need for fully-informed business decisions, based on facts, not hunches or hopes.

Norman Clark

Business succession and generational transition are no longer just theoretical issues or problems to be deferred until sometime in the future. By our estimates, a majority of the law firms in the world — perhaps as many as 75% of them — are now or within the next ten years will be, confronting the need to pass leadership, management, and fee-producing responsibilities from the older generation of partners to the younger generation.

Moreover, they will be doing this for the first time.

These firms are past the point for succession planning.  They need succession management.

As many of these firms are already discovering, succession in a law firm involves much more than redistributing the departing partner’s files and filling an empty office. There are some subtle and very difficult issues that my colleagues and I have observed as otherwise well-managed firms deal with succession.

• Should we have a mandatory retirement age?
• If not, how will we know when it is time for a partner to retire?
• Can we continue to handle retirements on a case-by-case basis?  Is this wise flexibility or crisis-to-crisis improvisation?
• How do we calculate the amount of money that we owe the retiring partner?
• How can we manage the buy-out of a retiring partner without jeopardizing the incomes of the partners who remain in the firm?
• What do we do about partners who are no longer fully productive, but are reluctant to leave?
• What do we do about partners who want to remain affiliated with the firm in some way?
• What do we do about younger partners who are reluctant to assume management duties being given up by the older partners?
• When is the right time to “pass the torch” of ownership control and management responsibility to the next generation?
• What should we do about a partner compensation system that rewards financial performance but also discourages partners from transitioning to retirement?

Interestingly — but not surprisingly — the law firms that have the most difficulty with transition issues and succession management are those with partnership agreements that are vague or even silent on the subject. (I use the term partnership agreements in a generic sense, to include shareholders agreements, operating agreements, and other corporate “constitutions.”) This is why, for law firms with partners who are over age 50, one of the most important first steps toward successful succession planning and management is to review the firm’s corporate documents to ensure that the policies and rules governing partner retirement are clear, support the long-term business and financial interests of all partners, and are consistent with the professional culture of the firm.

Norman Clark

The Law Firm Management Committee of the International Bar Association will participate in two outstanding legal management conferences in South America in June.

• Contemporary Management Issues in International Arbitration and Dispute Resolution Practices – Saturday, 12 June 2010, in Asunción, Paraguay.  This is a half-day roundtable conference aimed at the special challenges in the management of international arbitration and dispute resolution practices in law firms.  It is presented in association with CEDEP (Center for Studies in Law, Economics, and Politics), one of South America’s premier continuing professional education organizations.  It is part of the annual multi-day conference on international arbitration, which organizers expect to draw approximately 1,000 lawyers from Latin America and abroad.
• Managing a Modern Law Firm - Monday, 14 June 2010, in Buenos Aires, Argentina.  This one-day conference, co-sponsored by the IBA Latin American Forum, will investigate four key challenges for law firms in the decades of the 2010s:  (1) a business approach to strategic development of the firm; (2) marketing; (3) associate career management; and (4) management of knowledge and know-how.

For more information, please click on the two links above.

Norman Clark

Walker Clark Worldview has been in a state of suspended animation for the past 30 days, while I have been heavily involved in client work, primarily in the Caribbean and South America.  But today we resume…

The Lawyer reports that the merger discussions between New York based Orrick and London based SJ Berwin have broken off, with Orrick becoming at least the third merger candidate recently to decline SJ Berwin overtures. It appears that SJ Berwin’s financials were not to Orrick’s liking.

Trans-Atlantic merger discussions have revived robustly since the start of 2010, and my colleagues at Walker Clark and I expect them to continue, with one or possibly two significant mergers being announced by the end of the year. However, we also notice — and applaud — what appears to us to be a new sense of business prudence.  Great opportunities may be out there, but firms on both sides of the Atlantic are also saying, “Show me the money.”

We advise our clients to think through carefully the business case, when contemplating a merger with another law firm, and to exchange information — under appropriate confidentiality agreements, of course — early in the discussions. Every merger discussion between the firms should produce answers, not just more questions.

Norman Clark