Walker Clark Worldview

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

Once upon a time, only 15 years ago, law firms could learn many valuable lessons from all aspects of the Toyota management model. Toyota showed us how to identify and focus on our core business, understand how internal business systems operated, and — above all — the importance of quality management. Law firms that adapted principles of total quality management from Toyota and other leading Japanese companies saw remarkable improvements in client satisfaction and long-term profitability.

Now Toyota has another important lesson for law firms everywhere — the importance of not sacrificing quality to profitability and growth. To do so is a fool’s choice, as the recent Toyota debacles demonstrate. For every thousand dollars saved by cutting corners on quality assurance, a business can ultimately lose millions of dollars in customer goodwill and market reputation.

An article in this morning’s Washington Post provides interesting insights about what happened inside Toyota to produce the recent quality fiascos. As Blaine Harden points out in his article “‘Toyota Way’ was lost on road to phenomenal worldwide growth,” the blunders were not isolated mistakes, but the natural result of a long-term deterioration in the quality mind-set that accounts for much of Toyota’s success in the 1980s and 1990s.

But now, as the company recalls millions of flawed cars around the world, there is an expert consensus that growth itself derailed the Toyota Way, blurring its focus on quality, thinning its stable of expert mentors and undermining its capacity to respond to consumer complaints.

This one paragraph presents an excellent checklist for law firms of any size:

• As your law firm has grown, have you blurred your focus on consistently delivering “best-in-market” levels of professional quality and client service? Quality assurance is not “nice to have” or a sideline. It should be at the core of your operations.
• Are you making a serious resource commitment to quality assurance? Quality assurance is more than having “spell check” on your computers. It requires probing into the operations of your firm to identify and prevent the causes of errors, rather than trying to catch them and fix them after they happen.
• How do you respond to client complaints? The real test of a law firm’s commitment to quality is not their slogans, but how they respond to client complaints. Unfortunately, most law firms do not have any systematic procedure to address client complaints, but instead rely on crisis-to-crisis damage control, which is much more expensive and usually much less effective.

Harden’s article also reminds me of something that a senior partner in a large, international law firm in London told me about 12 years ago, as his firm was embarking on a campaign of dramatic international expansion:

No matter how big we get, we still get only one chance to get it right with our client.

Norman Clark

There are an interesting discussion and several related links in this morning’s National Law Journal posting “Spotlight on Laterals.”

The panel discussion focuses primarily on large law firms; and some of the comments and observations might not be entirely applicable to small and midsize firms. Also, as appears to be customary with the National Law Journal‘s American focus, none of the discussions take into account local market situations for law firms outside the United States. With those caveats in place, “Spotlight on Laterals” might be interesting and worthwhile reading for those of you who are NLJ subscribers.

Whether to bring in a lateral partner is one of the riskiest business decisions that most law firm partnerships will ever make. The opportunities can be very attractive, but like most things with the potential for great rewards, admitting a lateral partner also carries high risks, which much be identified, defined, and managed in advance.

I recommend to my firm’s clients that they use a methodology that is similar to that used to evaluate the business case for a law firm merger, and that they be satisfied that they have solid, factually supported answers to all of the questions.

We sometimes have to make business decisions based on a large component of faith and goodwill. Admitting a lateral partner into your law firm should not be one of them.

Norman Clark

Lovells and the Hogan & Hartson have agreed to a trans-Atlantic “merger of equals” to form one of the ten largest law firms in the world.

This could be a very smart move. Walker Clark’s market research team rates both as solid “second tier” firms in their respective home countries. Can they find the synergy that they will need to climb those last few hundred meters into the first tier of international law firms?

Most commentators rank London-based Lovells ranks just outside the Magic Circle in terms of overall reputation. With respect, we think that Lovells has been under-rated.  In some practice areas, they have capabilities and a reputation that rival those of some of the Magic Circle members. We regard their litigation and dispute resolution practice as one of the top 15 or 20 in the world. If there are any “holes” in their international portfolio, it would probably be in the Americas, particularly in Latin America.

This is where Hogan & Hartson appears to be a good strategic fit. This Washington-based firm is about 2/3 the size of Lovells. They have a similar geographic spread, but, in our opinion, have not been able to develop the “brand name” that Lovells has.  Hogan & Hartson adds an excellent international business practice, particularly in trade, government regulation, and tax.  They could also provide a missing geographic component — Latin America. Hogan & Hartson already has a 10-lawyer office in Caracas, plus a good regional reputation in arbitration, corporate, and energy.

The new firm, Hogan Lovells, will start operations in May 2010, with approximately 2,500 lawyers. Based on 2009 estimates, they should end 2010 as the world’s ninth or tenth largest law firm in terms of fee revenue — somewhere in the range of US$ 1.7 billion to US$ 1.9 billion, we would expect. This will depend to some extent on the ability of the Obama administration to get a genuine economic recovery underway in the United States by the end of 2010, which we sadly do not expect to happen. Nonetheless, the longer-range prospects look very good for Hogan Lovells.

In the interests of full disclosure, I must point out that Walker Clark, LLC, does not have any financial or professional interest in or with either Lovells or Hogan & Hartson.

But we will be very interested to how they pursue what appears to us to be a smart trans-Atlantic strategy.

Norm Clark

Has the current economic crisis changed the economics of legal practice for the next ten to twenty years?

Some of the clients of Walker Clark, LLC, tell me that they have not noticed a significant reduction in the volume of legal work, except in a few areas, such as real estate and mergers and acquisitions, which traditionally are particularly sensitive to business cycles.  In some practice areas, such as restructuring, litigation, and bankruptcy, the volume of instructions has actually increased.

What is different, however, is that clients now expect lower fees and more responsive service than before.  They are challenging fees and demanding better value.

These are not just short-term responses to cash flow issues in the clients’ businesses.  It is becoming clear that many clients regard these adjustments in fee structures and rates as a permanent change in the relationship with their legal service providers.  As one partner in a firm in New York told me recently:

We don’t like to admit this, but we know that our “discounts” are really permanent price cuts.

This poses several interesting — but by no means academic — questions:

• Has the traditional partner-managed law firm become obsolete?
• Can law firms continue to expect multi-million dollar profits per partner?
• Will law firms need to change fundamentally the way in which they deliver legal services?
• Can the global mega-firms survive a legal market of lowered financial expectations?
• Can small speciality law firms survive a legal market of  higher service-delivery expectations?
• Will we see a surge in the size and scope of practice of in-house corporate law departments?
• Can today’s law school graduates expect the same highly-paid lifetime professional prospects that their parents’ generation have enjoyed?

What questions would you add to this list?

Norman Clark

For an interesting, but somewhat superficial, analysis of the crisis in big law firms in the United States, read  “A Study in Why Major Law Firms Are Shrinking” by Alan Feuer in today’s New York Times.

I use the word superficial with respect for the space limitations under which the author wrote.  Moreover, because each law firm truly is a unique business entity, it can be difficult to apply the “lessons” from the experiences of White & Case to all law firms, or even to another law firm.   Not all law firms — not certainly not all large law firms in the world — have had to deal with the same challenges as White & Case; nor are the White & Case responses necessarily the best course of action for another firm.

The article also fails to probe the real reasons why some of the most powerful law firms in the world — not just in the United States — have struggled, and in some cases failed, to respond to the economic crisis.  These reasons lie deep within the firm, not with obvious scapegoats such as credit unavailability or the bad economy.  Instead, the real reasons usually indict sensitive issues that many law firms — large and small — are sometimes afraid to recognize, much less to examine.

There are at least four phenomena that can be found in most of the law firms — big and small — that are “shrinking” (which in most cases is a polite substitute for struggling for their lives).

• Partners who have been more focused on their end-of-the-year profit distributions than on the long-term economic health of their firms

This has been an unfortunate characteristic of business generally in the United States.  However, in U.S. law firms, partner self-interest has been fed by the slavish pursuit of “profits per equity partner” as the primary measure of the business health of a law firm.  This obsession was also supported, to a large extent, by the legal press and consultants who have been mired in predominantly U.S-U.K. paradigms of what constitutes long-term success in a law firm.

Sometimes accompanying this factor is the abdication, by many partners in the firm, of any outward expression of interest in or responsibility for the management of the firm.  An “employee mentality” sets in; and partners focus intently on “their” clients and their individual practices, to the exclusion of almost everything else.

• “Dumb as we wanna be” business strategy

Thomas Friedman uses the phrase dumb as we wanna be in his book Hot, Flat, and Crowded (Farrar, Straus and Giroux, 2008) to describe an attitude that assumes that the successes of the past will transition smoothly to the future and that we do not have to do anything differently to prepare for it.

In many law firms, including some of the biggest ones, “strategic planning” has consisted of placing a ruler along side the past performance curve and extending the line upward on the same trajectory. Size and past achievements has been seen as  certain predictors of future success; and if a business downturn should happen, the firm will deal with it when the time comes.  To suggest otherwise was viewed a not being a team player or as disloyalty to the firm.

I get very annoyed when I hear law firm partners whine, “nobody could have foreseen this.”  Nonsense!  Our firm saw the first warning signs as early as 2002 and started to advise our clients back then to begin to plan for a serious financial crisis.

• Viewing associates as fungible commodities

There are some exceptions, but one of the characteristics of most of the law firms that are now in deep trouble is that they badly under-invested in the development of business, marketing, and practice management skills in associates.  “We pay them enough already,” was a statement that I frequently heard.

“This stuff is ‘nice to have,’ but they can pick it up once they make partner.  For now, all we need for them to do is to bill fees,” was another all-too-common comment.

Not surprisingly, many of these same firms have made a pig’s breakfast of the layoffs — not only giving up long-term fee earning potential in order to make the ends meet short-term, but also making enemies for life in the legal profession.

• Woefully inadequate cash reserves

The short-term obsession with putting money into the partners’ pockets created intense pressure to reduce cash reserves in large and midsize firms alike.  These same firms also usually have relatively low capital contribution requirements for their partners.  Many of these firms are now learning the hard way the truth in the old proverb “Even the best law firm is only six months from bankruptcy.”

Norman Clark

DLA Piper apparently has set a new low in mismanagement of redundancies.  Kit Chellel at The Lawyer broke the story this morning.  Unlike other major British firms, DLA Piper has chosen to offer the 140 victims only the statutory minimum severance package: the notice period required by the employment contract plus one month.

Read the article for the details.  The unfortunate part of this shabby tale is that DLA Piper appears to have done a horrible job of putting forward what might have been a sympathetic case outlining significant measures that the London-based giant has already attempted to reduce the need for redundancies.  Perhaps a little more transparency would have helped.  Maybe not.

Nonetheless, the apparent bungling of this very sensitive issue has created ill-will against the firm that will last for decades — especially among the 30 lawyers who were sacked.  These folks are not going to disappear.  One commentator to Kit Chellel’s posting observed:

I once worked for DLA, was promised partnership, etc I brought in my own work. After 9 months I left due to their shabby employee practices so this is not surprising. As a General Counsel with a £1 mill budget guess what- DLA never will get any work from me! So they should remember poor behaviour now is remembered.

The firm also will have to deal with a serious short-term consequence as well: the heightened fear and suspicion among those who remain employed.

The most difficult decisions must also be the best executed.  Regardless of all the thought that may have gone into DLA Piper’s decision, it looks as if they might have blown it during implementation.  The results will be serious and long-lasting.

Norman Clark

Assuming that the London rumors are reasonably accurate (and they usually are when first uttered), an analysis of the pending lawyer layoffs at Linklaters, as reported by Jeremy Hodges in LegalWeek, provides an interesting picture of where the global giant now finds itself overstaffed. There are no big surprises:

• banking: 14
• general corporate: 16

Earlier leaks from the neighborhood of One Silk Street also suggested additional redundancies in:

• capital markets: 30
• IP/TMT: 1
• projects: 8
  
• real estate: 8
• specialist corporate areas: 13
• tax and trusts: 6
  

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. 

One news item this morning, courtesy of LegalWeek, suggests that some firms are doing reasonably well in these challenging economic times.

Despite hard economic times — and perhaps because of them — Allen & Overy’s New York office has been hired for two separate debt offerings worth a total of approximately $6.5 billion. They were lead U.S. counsel to Novartis on its $5 billion debt offering and also represented the underwriters in Unilever Capital Corporation’s $1.5 billion debt offering.

A&O’s success suggests several points:

• The ability to project reputation and competitive advantages in one part of the world (Europe) into another (the United States)
• Flexible response to changing legal needs in changing economic circumstances
• The importance of top-of-the-market reputation

Even though most law firms lack the resources of a firm like Allen & Overy, these three points do not apply exclusively to large, global firms.  Smaller firms with international practices and well-recognized expertise also can deploy similar competitive advantages, even if not on the scale of A&O’s two recent successes.

Click here to read the article.

Norman Clark