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

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

The Wharton Business School of the University of Pennsylvania has recently published a very interesting article “Family Firms in the Middle East:  The New Rules of Engagement.”

A significant number of Walker Clark clients are “family” law firms in emerging legal markets. We have observed how the strategic management of such a law firm sometimes requires a thoughtful balance between:

• A compelling business need to complete a transition from what has been essentially a “family business” to a modern “institutional” law firm; and
• The continuing strengths provided by close family relationships, “traditional” workplace values, and the visibility and reputation of the family in the legal market and business community.

The Wharton article points out several important changes that family businesses in the Middle East are now undertaking.

• Creation and documentation of a formal system of governance, to replace informal ad hoc decision-making by family members
• Introduction of contemporary management structures, such as management boards, audit boards, and independent advisory boards
• A better definition of the relationship between the family and the business, with a clear segregation of ownership of the business from the operation and management of it

These changes are similar to those that Walker Clark, LLC, has helped family law firms to introduce and manage in emerging legal markets in Africa, the Middle East, and Latin America. If you practice in a family law firm, the Wharton article could be quick, but interesting and potentially valuable, reading for you and your colleagues.

Norman Clark

I think that it is very appropriate that South America will be the venue for three major international legal management events in the first half of 2010. During the past ten years, Latin American lawyers have emerged as global leaders of the legal profession; and some of  the best-managed, most progressive law firms in the world are based in the region.

Mark these three major events on your calendar, and click on the links for more information:

• Biannual IBA Latin American Forum Regional Conference , 17-19 March 2010, Santiago, Chile - This major international conference is produced by the Latin American Regional Forum of the International Bar Association. It  will include a showcase session on 19 March 2010 dedicated to law firm management issues, including interactive audience polling. I will be co-chairing this session with Jaime Carey, the managing partner of Carey & Companía, one of Chile’s leading law firms.
• Arbitration Practice Management, 12 June 2010, Asunción, Paraguay – This half-day program is produced by CEDEP, on of South America’s leading continuing legal education institutes in association with the Law Firm Management Committee of the International Bar Association. It is a special session of CEDEP’s annual Latin American Arbitration Conference, which attracts leading international lawyers worldwide. I will moderate this session, which will be a roundtable discussion focusing on the special issues in the management of an international arbitration and dispute resolution practice.
• Managing a Modern Law Firm, 14 June 2010, Buenos Aires, Argentina – This one-day conference is produced by the IBA Law Firm Management Committee and the IBA Latin American Regional Forum. It will cover four contemporary challenges for modern law firms: writing and executing a marketing plan; a business approach to law firm strategy; career management of associates; and know-how and knowledge management in a small or midsize law firm. My Walker Clark colleague Fernando Moreno will be one of the panelists during the session on marketing plans; and I will chair the session on law firm strategy.

Although these programs are being held in South America, I recommend them to any lawyer anywhere who is responsible for the management of a law firm or practice group, but especially for those from small and midsize law firms. Each one is also an outstanding networking opportunity, especially for lawyers from North America and Europe who are interested in meeting top lawyers from some of the best law firms in Latin America (and the world).

Norman 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

National Law Journal has a very interesting piece on-line this morning, “Billing Out of the Box,” by Sheri Qualters.  It describes some of the creative approaches that small and midsize law firms are taking to revising their fee structures to meet clients’ economic realities in hard times.

There are two interesting points that I need to be make:

1. It is not about price competition. It is very significant (and adds a lot of credibility to the piece) that  NLJ  does not prattle on about how small law firms must try to remain competitive by charging the lowest price in the market.  A reasonable fee only keeps your firm in the market.  It does not create competitive advantage.   All it takes to lose the “low price” competitive advantage is for a competitor to charge one dollar less.  Moreover, such a race to the bottom is usually suicidal for small and midsize law firms.
2. This is nothing new. All of the fee structures described in the article have been around since the introduction of “alternative billing” in the 1990s.  My colleagues at Walker Clark, LLC, and I have been advising small and midsize firms on fee structures and pricing for years.  We have helped law firms work with each of the fee structures mentioned in the NLJ article, as well as some that it doesn’t include.  We have also helped them to use flexible fee structures as a component of their marketing strategies.

What NLJ describes is important, but it is not “out of the box.”

To learn more about Walker Clark’s fee structuring  services for small and midsize law firms, send me an e-mail.

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

No lawyer is ever truly unemployed.  You can always start your own firm.

After 15 months of a record-high number of lawyer layoffs and law firm failures, there is renewed interest in solo practice and startup law firms.   Consider a business mini-case:

• Even lawyers with only minimal experience in a law firm usually have a sufficient number of contacts with clients and prospective clients to seed a new, independent practice.
• A professional announcement sent to those contacts, informing them of the creation of the new firm or solo practice, usually produces a much higher rate of instructions than any other marketing activity.  Most clients identify with the lawyer, not the firm.  They have a high propensity to follow a lawyer out of the firm, if they are reasonably confident that they will receive equal or better service from the new practice.
• Professional announcements are beyond the reach of non-compete restrictions in most jurisdictions.
• Startup costs for a new practice are low.

For years, Walker Clark LLC, has offered two practical guides to starting a new law firm.  Both are available for free download in PDF format at our website:  www.walkerclark.com. They have always been popular among visitors to the site; and we have noticed a sharp increase in visits and downloads in the past six months.

Frequently Asked Questions About Starting Your Own Law Firm is available in the Performance Tools section of the Walker Clark Resource Library.  This short paper outlines some of the practical, but very important, planning issues, such as:

• How do I develop realistic financial expectations?
• How much start-up funding do I need?
• What are the most effective cost-management strategies for new firms?
• How substantial are the non-economic investments?

Infrequently Asked Questions About Starting Your Own Law Firm is available in the Articles secton of the Resource Library.  It probes the subtle personal dimensions to taking this big step.    What impact will your personality, intellectual processes, and insights into how law firms operate have on your early survival and long-term success?

Norman Clark

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