Walker Clark Worldview

The growth and recent tribulations of DLA Piper could easily fill a law firm management textbook with interesting case studies.

This blog has not been a big fan of DLA Piper in the past.  We criticized them for their mismanagement of staff redundancies in London. Their continued expansion into places utterly unknown to most lawyers raises honest questions about whether they have at last outrun their management and quality assurance capabilities.

As evidenced by the comments that any post about DLA usually attracts, the firm seems to have spawned a cottage industry of  folks (some of them whom I suspect to be unhappy ex-DLA lawyers and staff) who dance in abandoned merriment anytime the firm announces bad news.

However, the recent round of DLA-dashing, in response to its announcement yesterday of further reductions in its Middle Eastern staffing, is really over the top. So don’t forget to read (but disregard) the sniping comments when you click on the link to the post in The Lawyer.

Let’s give DLA Piper credit for what appears to be a smart strategic decision.

Yesterday’s post in The Lawyer website told of further cuts in DLA Piper’s staffing, to bring its total reduction in force in the Middle East to about 39%. Here is what Abdul Aziz Al-Yaqout, DLA Piper’s regional managing partner for the Middle East, said about it:

“In response to materially changed conditions in the UAE and wider Middle East markets, DLA Piper announces a reorganisation of its Middle East practice for 2010.

“The firm will expand further its restructuring capability to meet corporate and banking client demands while simultaneously addressing the excess capacity in its construction, real estate, project finance and development projects teams.

“The impact of redundancies on our people is deeply regretted and we’re assisting them to manage the transition, whether remaining in the region or returning to their home locations.”

Although unfortunate for the firm’s short-term prospects and its newly unemployed staff, this is really something of a bright light. Too many law firms suffer from “sunk-cost bias.” We see it when, in response to unmistakable signs that a strategy is not going to work, partners say, “We have invested so much in this. We can’t let that investment go to waste,” or “To give up now would dishonor the sacrifice that so many people already have made on this.”

Although we are not privy to all of the background on DLA’s decision in the Middle East, I see it as a difficult, but smart,  response to dramatically changing market circumstances. If conditions improve, DLA Piper can use its great resources and notable agility to rebuild in the region. This is one of the great strategic advantages of a big firm.

Resisting sunk-cost bias in this case is much better than “staying the course” and riding the ship to the bottom of the Arabian Sea.

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

An almost certain sign of the approaching end of a law firm’s economic life is a bunker mentality that we are seeing in many firms these days, including some that should know better.

The phrase “bunker mentality” describes a mind-set that believes that if the firm simply “tightens up,” it will be able to emerge relatively unhurt when the current financial crisis has ended.  Signs of a bunker mentality include:

• Laying off previously productive associates
• Slashing head-count among support staff
• “Witch hunts” and purges of “dead wood” among the partners
• Refusal to invest in improvements that the firm needs

In some instances, cutbacks in lawyer staffing are necessary to correct poorly thought-out over-expansion that should have never happened.  In others, however, the “slash and burn” crisis management style that we are seeing in some law firms can only be described as lethal panic.

The problem with a bunker mentality is that when a firm finally crawls out of its bunker — whether in six months or sixteen — it will be substantially weakened and, in most instances, unable to handle the increased client demand that the recovery will produce.  Worse yet, the “bunker mentality” firm may find that its competitive advantages and even many of its best clients will have been taken by firms who remained “above ground” during the crisis and continued to make the necessary, although difficult, investments needed to maintain its market position and to improve it.

For firms that retreat, these are, indeed, the worst of times — and they will probably get worse.  For firms that keep investing in themselves, their people, and their clients, these can truly be the best of times.

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

The journalists who cover the legal profession are naturally focused on the massive lawyer and staff layoffs in the big firms.  What most of the profession is missing, however, is a relatively small group of firms that are not cutting back, but actually taking advantage of a larger talent pool to expand in practice areas where the demand has remained stable or increased, as well as to make low-cost investments to prepare a stronger competitive position when the recovery begins.

There are exceptions, of course, but here are several characteristics that describe most of these firms that are now swimming against the tide:

• They are small firms, typically with fewer than 50 lawyers.
• They are based in smaller legal markets and jurisdictions.
• They use staff reductions only as a last resort, because they understand the long-term risks of the loss of intellectual capital, loss of client contacts, and loss of service delivery capabilities that each redundancy involves.
• They are looking for specialized skills and experience in “recession proof” specialties such as IP litigation, tax litigation, restructuring, and private wealth management.
• They are executing well-informed, sophisticated strategic plans that permit agile responses to changing economic conditions.
• The partners or owners  have an investment mentality about financial decisions in their firms, rather than one that focuses only on protecting their profit distributions.
• Their leaders tend to be realistic but optimistic, and patient but willing to lead and manage change in their firms.

Some of these firms have already been very successful in competing against the global giants.  We expect that they will emerge from the current economic crisis even stronger and more competitive than before.

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. 

To nobody’s surprise, the wave of lawyer and support staff layoffs, which began last year, is flowing into 2009. Here are some of the reductions in law firm staffing that were announced or confirmed in just the past two weeks.

• Cassels Brock & Blackwell (Canada): 38 staff
• Fish & Richardson (USA): 30 staff
• Linklaters (UK): 120 lawyers and 150 staff in London
• McDermott Will & Emery:  (USA) 60 lawyers and 89 staff
• Morrison & Foerster: (USA) 53 lawyers and 148 staff
• Wilson Sonsini Goodrich & Rosati: (USA) 45 lawyers and 68 staff

This is bad news for the people who have lost their jobs. It is also bad news for those who escape the axe. The relief that a downsizing “survivor” feels is usually replaced by increased apprehension about the future. “Will I go in the next round?” If not managed well, lower morale and, frequently, increased work loads can hurt productivity and push the firm’s business performance deeper into the whirlpool that management has tried so hard to avoid.

The good news is that the pool of available legal talent is growing. Contrary to popular assumptions, most of the associates and staff who are being terminated now are not “deadwood” or marginal performers.  In better times, they would have little difficulty finding a place in another firm.

This creates an opportunity.  Some law firms tell me that they continue to be working at almost full capacity.  Some are planning a limited number of well-defined, strategic hirings in 2009, in order to build their service delivery capabilities, work capacity, and expertise.

Moreover, in order to keep individual lawyer profitability high, some firms will be concentrating on increasing the number of skilled administrative and paralegal staff in areas such as insolvency, litigation support, and patent prosecution.

If successful, these counter-intuitive strategies (e.g., managed growth while everyone else is contracting) could result in significant competitive advantages when the economic recovery begins.

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