Walker Clark Worldview

Perhaps the most difficult challenge for small law firms in small legal markets is to recruit and — sometimes even more difficult — retain high-quality associates. The assumption is that the small markets and the small law firms are at a substantial disadvantage. Our firm’s observations, advising smaller law firms, confirm that there is a lot of truth to this perception. However that disadvantage can be overcome.  Here’s how:

• Expand the scope of your recruiting in law schools. Many small law firms still allow their recruiting strategy to be shackled by the myth that the only the “best” law firms and only the “top quarter” of the law school class produce good lawyers. Research has not established such a correlation and, if anything, the it appears that lawyers who graduate in the second and third quartiles of their law firm classes actually are more successful as law firm partners.

• Remember that retention is seldom about money. Over the years, our firm has conducted focus groups of almost 1,000 law firms associates worldwide. When asked, “What makes you want to remain in this firm?” money is never one of the top factors mentioned. Instead, associates — especially in smaller firms — tell us that the more important factors include: opportunities to learn legal skills and gain experience; the opportunity to work with, and learn from, a successful partner; and to perform increasingly important responsibilities for clients.

• Invest in professional development and career management. The successful management of professional talent seldom does not require a lot of money.  It does require a serious investment of partner time and attention. It is no surprise, therefore, that the small firms that are the most successful in retaining legal talent have serious mentoring programs, in-depth performance evaluations, and a clear career path for each associate in the firm.

Norman Clark

Prague

Last Friday we launched our new Central Europe Group, to deliver global experience and local expertise to law firms practicing in five dynamic legal markets in Central Europe:  the Czech Republic, Hungary, Poland, Romania, and Slovakia.

The Central Europe Group originated from suggestions and comments by Walker Clark clients, as well as professional friends in the region, who are seeking a multidisciplinary approach to business strategy, management, and operations, that is not readily available from traditional consulting firms at a reasonable cost.

The Central Europe Group delivers country-specific services in:

• Strategic planning and implementation
• Profitability analysis and improvement
• Establishing clear competitive advantages
• Evaluation of mergers, networks, and other growth opportunities
• Improving the marketing performance of the firm and each of its lawyers
• Building the firm’s national and international visibility
• Law firm governance and partnership structures
• Compensation systems
• Performance management to get the best results from each person in the firm

The Central Europe Group has also published a series of country pages with up-to-date news and analysis of the major business and economic trends affecting the business of law firms in each of the five countries. We are also publishing a series of in-depth Background Papers on each legal market. The first of these, Foundations of the Modern Czech Republic, by Daniel E. Miller, Ph.D., one of the coordinators of the Central Europe Group, was published this past weekend and is available for download from www.walkerclark.com.

If you would like a complementary consultation about how the Central Europe Group can assist your law firm, please contact me by e-mail or by telephone at +1.239.466.8370.

Norman Clark

As my colleagues and I advise law firms on governance issues, such as managing the growth of the partnership, partner compensation, or capital requirements, we and our clients sometimes discover that it has been many years since the partnership agreement, partnership deed, by-laws, or other corporate “constitution” has been reviewed.

Although signing the partnership agreement is a time-honored ritual of becoming a partner, we have actually seen partnership agreements that do not bear the signature of any current partner.  In a very few cases, the partners have been unable even to locate any copy of their partnership agreement.

I hasten to point out that these law firms are not bunches of  bumbling incompetents.  Almost all of them are otherwise well-managed and reasonably successful. With all the demands on partners’ time, sometimes the basic foundations of law firm governance are overlooked, assumed by the partners to remain solid despite the passage of time.

This assumption ignores a fundamental risk in business. Past success guarantees nothing in today’s legal markets.  The fact that your law firm has done well in the past does not mean that your governance system will be able to respond appropriately and efficiently to future challenges.

Should your law firm review and update your partnership agreement or other corporate documents? Here is a quick and very reliable diagnostic checklist:

1. Has it been more than 10 years since you wrote or last revised your agreement?
2. Has your partnership grown by more than 30% since then?
3. Are any of your partners over 50 years old?
4. Are your younger partners unhappy with their compensation?
5. Are you thinking about a merger with, or acquisition of, another firm?
6. Is is harder to make decisions now than before?

If you answer “yes” to any of these questions, now is good time to review your partnership agreement to see whether it might need to be updated.

Norman Clark

How do you and your partners typically refer to clients:  ”my client” or “our clients?”

The difference is very important. There are variations among individual law firms, of course; but there are also patterns that my colleagues and I have observed in law firms worldwide.

For example, “my client” firms typically:

• Rely disproportionately on a small number “rainmakers” to generate most of the new clients and new business.
• Prefer “eat what you kill” compensation systems.
• Have high levels of internal competitiveness among partners.
• Rely more on individual performance than group collaboration for the overall business success of the firm.
• Measure lawyer performance primarily in financial terms, such as billings and value of originated work.
• Do not make cross-marketing a priority.
• Must overcome internal resistance in making major shifts in the firm’s business priorities and marketing strategy.

“Our client” firms usually:

• Expect all partners, as well as experienced associates, to participate in marketing and business development.
• Have a more collegial partnership culture.
• Prefer compensation systems that reward professional development and mentoring of junior lawyers, as well as financial contributions.
• Emphasize teamwork and group effort as being of equal importance to individual performance.
• Make cross-marketing an important priority and are usually successful at it.
• Adapt to changing market conditions with agility.

The next time you are discussing clients with one of your partners — or even more importantly with one of your associates — listen closely to the pronouns. They will tell you a lot about your own firm,

Norman Clark

This is how a partner from a mid-sized law firm described the departure of several of his firm’s highest-billing partners to competitors over the previous six week, who collectively took almost one-quarter of the firm’s potential billings with them.

“We knew that they weren’t happy with last year’s distributions, but none of us were. They seemed to like practicing with us. We never expected this. It was like a time bomb that was so quiet that we didn’t even hear it ticking.”

Over the past 14 years, I have spoken with many newly-arrived lateral partners. Whether in good financial times or difficult ones, when I ask why they left the their former firms, three words almost always come into the conversation: recognition, opportunity, and fairness.

• Recognition – “My former partners did not adequately value my contributions to the firm.”
• Opportunity – “I didn’t have the incentive or the opportunity to earn what I can earn and deserve to earn from my practice.”
• Fairness – “The compensation plan at my former firm produced results that weren’t just unfair. They were bizarre.”

Each of these points involve more than money. Partners seldom jump ship because they are unhappy about a single year’s pay or profit distribution. Money is only a measuring stick that suggests fundamental flaws in the way that the firm rewards and incentivizes its partners.

Is your law firm’s compensation system a time bomb that could someday blow apart your partnership?  Here are some questions to help you listen for the faint ticking:

1. How long has it been since you conducted a thorough review of your partner compensation system? If you haven’t examined your partner compensation system within the past five to ten years, this could be a good time to do so. My colleagues and I have worked with some partnerships in which not a single active partner had any role at all in the creation of the partner compensation system years ago. Also, business priorities sometimes change. If you have a compensation system that is largely performance based, does it still reward the activities and behaviors that your firm needs today?
2. Have you increased the size of your partnership by more than 20% in the past five years? Some of your newer partners might not share the same priorities that are implicit in your compensation system. A new partner  – particularly one who is being promoted from associate status — sometimes agree with almost anything in order to be admitted; but acquiescence can quickly deteriorate into resentment.
3. Does your system produce wide disparities in compensation? What is the ratio of the total cash compensation received by your most highly-paid partner and the lowest-paid partner.  If the ratio is approaching 3-to-1 within the same class of partners, your system might need adjustment.
4. What do your partners really think about compensation? Some law firms avoid any serious discussion of partner compensation for fear of hurting their collegiality or teamwork. One of the best ways to manage this sensitivity is a confidential partner compensation survey, conducted and reported by a third party such as Walker Clark, LLC. It can confirm the level of consensus and support for your current system and define the few critical issues that might need attention.  A sensitive issue can be defused, in that, as presented by the survey results, it is no longer “George’s issue” or “Maria’s complaint,” but an issue for the entire partnership.

A comprehensive review of partner compensation at your law firm need not be expensive, complicated, or divisive. Instead, it is a prudent investment to manage a quiet but potentially explosive risk.

Do you hear a faint ticking in your partnership?

Norman Clark

After weeks of decimation of the associate ranks at some prominent firms, it is refreshing to learn about several firms that have faced up to the more likely source of their current financial woes: unproductive partners.

Dewey & LeBoeuf earns respect for reducing the monthly draw of 66 of its 350 partners by up to 80% from 2007 levels. Given the bleak profits picture for 2009, this is tantamount to a pay cut.  This has been part of the New York-based firm’s long-range initiative to replace under-performing partners with more productive lateral hires.  Interestingly (but not surprisingly), most of the partners who have suffered pay cuts have remained at the firm, at least for the time being.  Half-pay at Dewey is still better than life on the street.  Read more about Dewey’s actions in Legal Week.com.

CMS Cameron McKenna has taken a different, and interesting, approach to its partner compensation system. This London-based firm has simply asked all of its equity partners to volunteer to be paid on a fixed-share basis.  They would not be “de-equitized,” and would retain voting rights.  Without forcing anyone to act, the hope apparently is that the underperforming partners will “get the message” and accept the limitations of fixed-share equity partnership as a face-saving alternative to expulsion.

Will either of these gambits work?  It is too early to tell.

For years many law firms have chosen to tolerate or ignore the financial drag caused by partners who are paid more than they are worth, even when intangible, but valid, concepts such as “long term contributions to the firm” are included.  The better course of action is to address — and, one hopes, to correct — partner performance issues when they arise, using strategies such as Walker Clark’s Performance Recovery counseling.

But when a firm no long has the opportunity to invest in correcting performance problems, it needs to act with courage and compassion.  Dewey & LeBoeuf and CMS Cameron McKenna each provide different examples of what law firm courage can look like during a crisis.

Norman Clark

The long-awaited restructuring of Allen & Overy was announced on 19 February 2009. Here are the pertinent features, quoted from the firm’s press statement:

In response to the unprecedented current, global market conditions, in early December 2008 Allen & Overy began a comprehensive review of its global business, and, with regret, today announces the following programme of measures and proposals.

• Partners – A global reduction in partner headcount of approximately nine per cent (47 partners) and around a further seven per cent (35 partners) subject to equity adjustments. Around half of those affected are in London. This process is at an advanced stage and will be completed by the end of this financial year on 30 April 2009.
• Other fee earners – A proposed nine per cent reduction in numbers of associates or other fee earners globally. Around half of these are proposed to be in London, where the redundancy programme is likely to result in approximately 100 associates or other fee earners leaving the firm. This will be subject to local employment processes which will start immediately.
• Support Staff – A proposed nine per cent reduction in support staff headcount. Again, roughly half of these people are expected to be in London, where around 100 staff are likely to be affected. This will also be subject to local employment processes which will start immediately.
• Trainees – Current trainees and those with future training contracts at the firm are not impacted by any of these proposed headcount reductions.
• Pay - For 2009, pay will be frozen for all staff globally – fee earning and support staff alike. This will be subject to local employment law, where applicable.
• Fee rates – Acknowledging the impact of the global financial crisis on the firm’s clients, Allen & Overy’s headline billing rates are to be frozen until further notice.
• Demerger of Private Client practice group – As part of this strategic review, Allen & Overy’s private client practice is to demerge and become an independent firm, Maurice Turnor Gardner LLP, with effect from 1 May 2009. Maurice Turnor Gardner LLP and Allen & Overy will continue to work together where it is appropriate and in the interests of clients. Staff in the Private Client group, with the exception of trainees, will be at risk of redundancy and will be consulted with accordingly.

Commenting on the moves, Wim Dejonghe , global managing partner, said, “In the rapidly changing environment in which we operate, the reality is that there is simply not enough work to keep all our people sufficiently busy and we do not see that changing in the near to medium term.  We have reluctantly taken the difficult decision to act now, from a position of financial strength, so that we can offer better terms to our departing people than might otherwise be the case.

“This plan is about the long term sustainability and competitiveness of our partnership, our ability to continue to recruit and retain the best people and our capacity to offer the best service to our clients at competitive prices. We must act decisively to get the business to the right size, with the right skills, in the right places and minimise the need for any future similar announcements. Our priority is to minimise the impact on the morale of our remaining people and continue to serve our clients well.”

The proposed headcount reductions are broadly proportionate across partners and staff and whilst they will be implemented worldwide, roughly half of all proposed headcount reductions, at all levels, are planned to be in London.

The cost of the restructuring will be paid out of the cash reserves of the firm. The impact on the current year’s financial results is forecast to be GBP44m.

I think that it is noteworthy that A&O elected to take a comprehensive approach to the financial challenges it faces in 2009, rather than engage in serial frenzies of unintegrated cost-cutting. My colleagues and I at Walker Clark, LLC, were not involved in the A&O restructuring, but the description demonstrates six basic rules of crisis management that we recommend to our law firm clients as part of our crisis response service:

1. Get all of the facts first.
2. Face reality.
3. Expect things not to work as you expected.
4. Do more than just fix the immediate problem.
5. Tell the truth.
6. Don’t panic.

The goal of crisis management is not only to survive a business crisis, but to emerge from it stronger than before. 

The decision by London-based Freshfields Bruckhaus Deringer not to cut salaries of its U.S.-based associates reflects a type of strategic thinking that is badly needed during an economic crisis.  

One of the principal reasons for Freshfields’ decision was the fear of an exodus of associates to other top-shelf New York firms, as well as long-term disadvantages in recruiting the best young legal talent. We can debate whether such fears are realistic; but the instructive point is that a major firm has resisted the temptation to go after a big cost-cutting target.

Our firm uses case studies as a central feature of our Core Business Skills Development curriculum.   Consider this excerpt from a case study from Understanding Law Firm Economics.  It is based on our observations during the 2001-2002 recession.  It is a good example of how a chain-saw approach to cost cutting can make things much worse.  All of the events described took place during a period of less than 18 months.

As the recession extended into its second and third quarters, and fees began to decline, the firm calculated that they could save more than $500,000 by firing 15 junior clerical staff.  Most of these worked in the firm’s high-volume collections and trademarks practices.  

The staff cutbacks created a minor “avalanche,” as five more senior staff also departed the collections and trademarks practice within the first four months.  The firm did not conduct exit interviews, but one of the senior staff told colleagues that he was leaving because “the ship is sinking.”  These senior staff were essential and had to be replaced, with overtime, temporary staffing, and replacement costs totaling more than $60,000.  This was an unexpected and unbudgeted cost.

The collections and trademarks departments tried to work more efficiently with fewer staff.  As the recession deepened, the trademarks workload decreased slightly, but the demand for collections services increased.  The overworked “survivors” had to work faster and longer as they struggled to handle the work left behind by their fired co-workers.  Staff from other departments were temporarily assigned to try to respond to short-term surges in workload, particularly during the last ten days of each month.  

Despite these efforts, processing times for client matters and response times to client inquiries began to lengthen.  The two practices also experienced an average increase of 20% in recorded time arising from the need to correct an increasing number of errors.  Of course, this rework could not be billed, as the clients would have justly refused to pay for it.  

The clients began to notice that something was wrong.  Client dissatisfaction and fee disputes increased sharply approximately four months after the cutbacks.  By the end of the fiscal year, the firm had lost $1,000,000 in potential fees; and fee disputes had increased the average fee payment time for the two departments from 58 days to 147 days.  

The staff cutbacks had other impacts.  Absenteeism increased in the two departments, resulting in more than $20,000 in overtime and another $35,000 in temporary staffing costs in the first year alone.  These costs were unplanned and unbudgeted.

The firm “saved” $500,000, but its failure to anticipate and manage the risks of its cost-management scheme cost the firm more than $1.1 million  for a net loss of more than $600,000.  This does not include the intangible negative value of the long-term damage to the firm’s reputation among collections and trademarks clients, declining staff morale, and increased potential losses due to fee disputes.  The partner who manages the trademarks practice is rumored to be in negotiations to join the firm’s arch-rival.

This is not a time for panic disguised as “bold, decisive action.” Instead, law firm leaders and managers should consider the long-term consequences of cutting staff or other operational costs.  For every dollar, euro, or pound that is saved, there will usually be a long-term cost that must be considered, but is too often overlooked or not understood.  

Norman Clark

Legal Week reported yesterday (1 February 2009) that some leading London firms are sacking partners in order to protect profitability.   In his posting “City lawyers braced for widespread partner cuts,” Jeremy Hodges summarizes the results of a Legal Week poll taken of London partners recently:

City partners are preparing for a gruesome year, with half of all partners believing that firms are carrying too much deadwood at senior level and 97% expecting to see partnerships downsized.

The purge of partners who are perceived to be unprofitable has already begun.  Addleshaw Goddard announced recently that they were planning to reduce their partnership by approximately 10%. That would be approximately 17 or 18 partners.  (Ironically, in the previous three years, Addleshaw’s has been rated by the Sunday Times (London) as one of the 100 best companies to work for.)

As profitability becomes a more critical issue for most law firms this year, partners who are perceived to be “unprofitable” or “unproductive” will become big, attractive targets for cost-cutting. This prospect raises many risks and questions, because whenever a firm sacks a partner, it is also cutting off a long-term revenue stream, supported by expertise and, in most instances, established client relationships.

For example:

• Are there better, but perhaps more subtle, ways to manage costs?  Our firm’s experience with profitability issues, using diagnostic methods such as our Core Systems Diagnostic, suggests that there usually are bigger, longer-lasting cost reduction and property opportunities in the firm’s internal operations.  Many of these can be achieved without a single layoff.
• Has the firm made a serious effort to identify and correct the causes of underperformance?  This involves more than targets backed by threats.  The return on this investment is usually much better than the net financial gain from firing an unproductive partner. Our firm’s Performance Recovery program is an example of this alternative.  Efforts such as Performance Recovery do not always mean that the partner will remain with the firm. But they do ensure that both the firm and the partner will be making a reasoned, fully-informed decision, one way or the other.
• Do weaknesses in the firm’s partner compensation system contribute to substandard partner performance?  In other words, does partner remuneration adequately incentivize the business behaviors and performance that the firm needs? 
• What will be the lasting impacts on the professional culture of the partnership?  Will the “survivors” view the cuts as something that, although unpleasant, were undertaken only when all other alternatives were ruled out?  Or will it create a culture of fear, with the remaining partners wondering “Will I be next?”

None of these questions are intended to second-guess the difficult decision that Addleshaw Goddard (which has a reputation as a very well-managed law firm) or any other law firm has made. By asking these questions now, a law firm can sometimes discover alternatives to firing a partner and can better manage partner performance issues in the future.

Norman Clark