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MANAGING CHANGE: HOW LAW FIRMS ARE ANSWERING THE WAKE-UP CALL

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LAW PRACTICE ROUNDTABLE

MANAGING CHANGE: HOW LAW FIRMS ARE ANSWERING THE WAKE-UP CALL

SETTING THE STAGE. Leading a law firm is challenging in the best of times, but when big changes are occurring, with few precedents to guide you, the challenge is even greater. Today is clearly a case in point. After many years of solid profits, 2008 and the first part of 2009 have for many been a wake-up call to really look at the law firm business model. However, the legal profession is also undergoing changes that would be occurring with or without a recession—changes because of technology, for example, and because of shifts in client demands. The recession, though, has accelerated the need to respond to some of these long-term trends. How do you cope with the short term while continuing to address what is critical for the long term? In this roundtable, Ed Flitton and Karen MacKay lead a discussion with five law firm leaders—Norm Bacal of Heenan Blaikie, Carl Barton of Holland & Hart, Mark Foster of Stinson Morrison Hecker, Patrick Lamb of Valorem Law Group and John Robertson of Hartzog Conger Cason & Neville—as they talk about the challenges and the opportunities that the raft of changes are presenting.

Ed Flitton (EF): The impact of the recession has been considerably different in each geographic market. How do you think the downturn is affecting your region, and to what extent is the recession masking changes that were occurring anyway? Also, how are firms rising to the challenge to adapt?

John Robertson (JR): Neither the Oklahoma economy nor the legal business in Oklahoma has been hit as hard as other parts of the country. That said, we realize that we cannot sit back and expect there will be no change to our business in the future. If the market is changing, if clients are suffering, eventually law firms in Oklahoma City will feel the effects. In anticipation of that, we have been focusing more attention on our existing clients to solidify our relationships with them. We have also been analyzing our core practice areas to develop plans to generate additional business in those areas. And we are looking to hire additional lawyers to fill in gaps in experience within certain of our practice areas.

Mark Foster (MF): The market in Kansas City has generally been pretty resilient. Still, here as elsewhere, I think there are definitely some significant changes under way. One relates to how firms compensate associates. At our firm, we have abandoned lockstep incremental increases for associates and moved to a single-base salary instead. In any period of time after year one, an associate’s salary is dependent on performance with various bonus potentials on top of salary. This allows us to pay top dollar to people who are performing without locking ourselves in to high salaries for average performers.

We’ve also spent a lot of money in the past several years on technology and enhancing our ability to deal with clients through electronic billing, extranets, webinars and so forth. We’ve cut back on travel in favor of videoconferencing, too. We are shaking up the old assumptions and finding that it’s actually more efficient, and it will be a permanent fixture with us. We even have some lawyers who don’t live in a state where we have an office who are working remotely for us on a permanent basis as a result of advances in technology. If you can go for days without seeing lawyers on another floor, then why can’t some of your lawyers work from Montana?

Patrick Lamb (PL): Chicago is one of those markets with a combination of very large national and international firms, regional firms and local firms. The national and international firms are getting hammered by the recession in large measure because of the falloff in financial services-related work and the falloff in M&A work as a result of tightened credit markets. In addition, they’re being victimized by their rates as clients, forced to cut back, switch to firms that either charge lower rates or price things on a non-hourly basis, as we do.

Frankly, I’m not seeing many of the larger firms responding in meaningful or permanent ways to the pressures that are being brought to bear by the recession. Time will tell, but their attitude, especially when fees are discussed, seems to be that this is a blip and things will be better soon. Clients, on the other hand, have been forced to make changes that will likely be far more permanent than a lot of big firms anticipate.

Carl Barton (CB): I agree that the recession has affected certain sized firms and certain practice areas very differently. Also, yes, some of the regional firms, including in the Midwest and the Mountain states, have definitely been the beneficiaries of clients seeking out law firms with lower billing rates. Here in Salt Lake City, for example, most of the local firms have remained very busy.

Nonetheless, to ensure that we have an “emergency disaster plan” to follow if things get worse, in early 2009 our management committee implemented a detailed plan with very specific steps for dealing with the economy. The effect has been that people are generally more tuned in to getting more bang for the buck in everything from marketing and sponsorship dollars, to using videoconferencing as opposed to traveling, to how you staff matters and the kinds of billing arrangements you set up with clients. All of these things have come onto firms’ radars in a way that I don’t remember for a long time, and I believe a lot of the change under way today is going to be permanent.

Norm Bacal (NB): The press would have you think that what is happening in New York is happening everywhere, but as my colleagues here have pointed out, that is not the case. In many U.S. markets and in Canada, firms are hunkering down, and carefully reviewing things. And if they are making layoffs, they are making them in smaller versions or culling their associate talent pool more selectively.

In many ways, we’re seeing that—despite the many challenges it presents—this economy also presents some opportunities for firms to make positive changes and for us, as firm leaders, to get more buy-in more easily.

EF: How are you seeing firms meet the challenge of reducing costs in response to the recession, apart from the layoffs in the big firms? Also, which cost reductions will become permanent?

JR: Every law firm, regardless of its location and how well it is doing right now, is taking a hard look at its operations and talent costs. Starting salaries in Oklahoma City, for example, have increased at least 50 percent over the past 10 years. As we have seen, many firms have begun changing their compensation systems for associates. Our firm, as Mark’s firm has done, moved away from a lockstep compensation system a number of years ago. Today all our associates, regardless of experience level, receive a comparable base salary and then receive a bonus based on, among other things, the various contributions that they make to the firm and its profitability as a whole.

In addition, today’s technology clearly allows firms to take a second look at staffing ratios, particularly with younger lawyers who have grown up with all types of technology. I also expect all firms to reconsider how much and what type of space they are going to need going forward as technology makes it easier for people to work outside of the office.

NB: This crisis certainly presents a unique opportunity to get smarter with our support staff in some permanent ways—by, for example, pooling administrative staff into support teams and balancing workloads.

Generally, the era of entitlement is over. The mind-set has shifted from “Is it worth the trouble?” to “Why wouldn’t we?”

PL: Personnel and real estate costs are most firms’ biggest expenses, and there are fundamental limits on how much savings you can squeeze from them, particularly once you sign a lease. Recently, I was at a prospective client’s office and all the lawyers—including the general counsel—were in cubicles and I thought, “If the general counsel of this very large company can sit in a cubicle, why do I have to have an office?” Or perhaps we could just have 10-by-12 offices. As we renew our firms’ leases, I wonder if we shouldn’t rethink those questions.

And here’s a related point of interest: As part of the Association of Corporate Counsel’s Value Challenge, they put together a group of clients to design a theoretical law firm, and the first thing the group did was to move the firm from its downtown space to an out-of-the-way space where the lease was going to be much, much cheaper as a way of immediately cutting costs. The need to be in premium A-level buildings is not what it used to be, and clients today understand that they are the ones paying for that space. They’re looking for firms that have a different view on those kinds of costs or for firms in cities where the rents are not what they are in New York, Chicago or Los Angeles.

CB: We’ve found that there’s a difference in mind-set with clients, big and small, in different markets, and this has an impact on how the lawyers view their relationship to their space, including the ability to work remotely or have virtual offices. Certainly, working remotely is on the increase, but there are still markets or practice areas where it just doesn’t work because clients still want to come to a lawyer’s physical office.

MF: Since many of our clients (25 to 30 percent) are demanding electronic billing, we digitalized all our recordkeeping systems as well as our conflicts system. We then eliminated a number of staff positions in our accounting, records functions and secretarial areas because we were overstaffed. We no longer needed all the people we had to handle paper because the paper wasn’t there anymore. Also, with our younger lawyers, all of whom are very computer-savvy, we no longer need the kinds of attorney-to-secretary ratios that we had in the past. We are in the process of moving to a 4.5:1 ratio because our newer lawyers tell us they simply don’t have a need for a full-time secretary. I can’t say that we’ve made these changes as a direct result of the economic downturn, but we’ve accelerated some changes because of it, and those changes will be permanent.

Karen MacKay (KM): Since we’re on the subject of technology, in his book The End of Lawyers? Richard Susskind talks about technology radically reshaping the practice of law in the coming years. Can you share some examples of the impacts that technology is having on top of those you’ve already shared?

JR: As we all know, the increased speed of the practice of law is now dominated by constant communication. While sometimes that speed can seem too great, clients expect and deserve prompt attention to their matters, and technological advances permit us to meet those expectations. Technology also permits us to remotely meet people, stay in touch with clients and generate business through firm Web sites, electronic newsletters and e-alerts, and social networking tools.

NB : Technology has greatly affected litigation, although ironically, e-discovery is, in our experience, making litigation more costly. Also, there appears to be a risk in some firms of a wasted generation of associates who are tasked with going through millions and millions of internal documents in the e-discovery process and not learning advocacy and advisory skills. This is the digital version of the due diligence experience, where associates jam into a room to go through countless boxes of paper documents.

PL: Technology is creating enormous opportunities as well as certain necessities for us. For example, instead of paying the freight of carrying offices and staff in different cities, now you can just as easily create temporary partnerships or joint ventures with lawyers from different firms because everything that you need for a case can be Web-based, so everyone has equal access.

But also, to add to Norm’s point about e-discovery, we’re now seeing the ability to prioritize documents in terms of how important they are to the different theories in the case. It’s really remarkable how accurate these software judgments are, compared to the judgments that a group of people reviewing the documents would make in the past.

One of technology’s other effects is that it can make the handling of a matter much more similar to the handling of any business problem, since technology facilitates using tools that businesspeople customarily use—for example, decision trees, detailed budget calculations and project management tools, all of which can be critical for handling matters and early case assessments. Plus, you speak the language of your client when you use those business tools. Project management is a classic example.

MF: Technology has changed our practice in a number of ways. Among the more significant ones, we have created client extranets for large deals or big cases and built online document databases that we share with our clients. Lawyers in our multiple offices and our clients’ lawyers from other law firms are all working together as if we were in one room.

CB: In the past 18 months, our firm has been moving toward virtual servers, meaning Internet-based computing with on-demand applications rather than having a dedicated server for every software application. The next move our IT people want to make is to implement virtual PCs or dummy terminals. Applications will be centrally downloaded and serviced with significant interaction with the Internet. In terms of both management and cost control (including license fees), this will have a tremendous effect in the next five years.

In addition, we recently acquired sophisticated analytical assessment software that, for marketing purposes, looks at clients’ consumption patterns—how much work we are doing for them in what areas, where we’re not doing work for them, and what the billing arrangements are for those different practice areas. The result of that technology is that we have different expectations with different clients, and we’ve also negotiated special billing arrangements with some big clients that have been very beneficial to us and to them.

EF: In terms of the changes being driven by client expectations, there has been a revival of talk about alternative fee arrangements. Do you think it will actually get traction this time? If so, what type of fee arrangements will be most acceptable to clients?

JR: A number of firms in Oklahoma City, including mine, use alternative fee arrangements in different situations. As you would expect, alternative fee arrangements tend to be more common in certain practice areas—for example, flat fee arrangements in the private placement, estate planning, lending and oil and gas regulatory areas and contingency fees in the litigation area. I believe we are going to see more and more alternative fee arrangements. However, so far most of our clients still seem to prefer to pay us on the traditional hourly fee basis.

NB: We’ve gone to some of our clients, ones where we were firm number four or five in terms of share of legal spend on their roster, and we’ve proposed a shared-risk arrangement with them. The upshot is that they’ve committed to send us a certain volume of work and we’ve guaranteed a percentage discount off of their total costs for the same volume of work based on their 2008 actual spend on outside counsel. This creates cost-savings but more importantly predictability, and we’ve had some good success in moving up the roster as a result. Plus, the quid pro quo is that the next M&A deals come to us.

Still, I have to concur with John that some clients aren’t yet open to alternative arrangements. We have been involved in the ACC’s Value Challenge events and we see general counsel pushing hard for new models. But many GCs are really only focused on discounting the billable hour because, just like lawyers, that is the model they know best. Clients want to have deeper relationships and build partnerships, but there are still issues and challenges on both our side and theirs as we seek to execute that concept. For example, when the in-house lawyer on the file is instructing you to “leave no stone unturned” but the GC has a different view on what’s important and when to settle, both the internal dynamic and the dynamic with you as outside counsel is complex.

MF: We’re seeing the demand for discounts on hourly rates, too. But also, for our upcoming partner retreat, we have invited five general counsel from our clients to speak on various topics, one of which is: How do they really want to be billed, what kind of fee structure are they really after? We want to get to a point where we can have flat rates or blended rates, success fee alternatives and partial contingencies. However, we’re still experiencing reluctance on the part of clients to venture into realms where they are not fully confident about what they’re getting. I think there’s always this concern that they’re somehow being taken advantage of, even when we’ve told them we’re willing to take a loss on a couple of projects and let’s see how it works.

CB: Holland & Hart has done contingency fee work in the litigation area for a long time, either straight contingency fees or monthly retainers with some sort of success fee. In our business department, too, we’ve started to do some non-traditional fee arrangements. For example, we had one engagement to do 60 tenant leases for a national retailer that requested a flat fee for specific services on those leases. We’ve done similar things for some lenders we represent and with our emerging growth and venture capital practice. Most of our clients are looking for some alternative to hourly billing rates—and I echo my colleagues here—these arrangements take some shared risk.

PL: Our approach is typically one of three methods. We have some pure contingency matters, and we have some matters where we’re paid a lump sum up front with the balance on contingency. But far and away, the most frequent arrangement for litigation matters is a fixed fee where we’re paid a stipend on a monthly basis and have an amount that goes into a “holdback bucket.” Then at the end of the engagement, the client determines whether we get none, some, all or a multiple of what’s in the bucket predicated on the litigation result that we obtained in terms of their business objectives. We leave the use of that bucket entirely to the client’s discretion. The key is that it places a premium on making sure we’ve got the happiest clients, and we always have skin in the game, so the outcome is always meaningful to us. I believe that kind of approach to fee arrangements could bring meaningful change to the whole profession.

KM: What other types of changes do you predict will affect the profession in the next decade?

NB: One is that the continuing investment in knowledge management will be huge and likely drive change in the quality of law firm IT systems and staff—how advanced they are, what we ask them to do and how they respond to the pressure. The risk is that the approach may be dominated by technology as opposed to the practice and clients being supported by it. Another big change will be ongoing commoditization, which is something that Susskind’s book discusses with regard to a number of practice areas.

PL: Susskind’s theory is that the practice of law falls into four buckets: process, content, advocacy and counseling. The Internet increasingly makes process and content essentially free and available immediately to everybody. Soon you won’t need to pay somebody to research a jurisdictional question or the meaning of a rule—you’ll find out what it means by going to Web sites where lawyers congregate. But what will still be needed from lawyers are advocacy and counseling, in the form of strategy development and solid guidance that is a combination of business and legal advice to help people navigate through a problem in a transaction or a lawsuit. Clients are happy to spend their money for these services so that’s where firms can really generate profit.

I think another thing that firms will be forced to do is find nonlegal professionals to do a lot of the work that historically has been done by lawyers. For example, due diligence has generally been done by younger lawyers who had no particular business expertise, when the work could’ve been handled for a much lower cost by nonlawyers who had some business expertise. Various cost pressures will drive people to consider new models and how to narrow the scope of what lawyers provide, making some services much cheaper, but probably driving the cost of the essential services up.

JR: I would make two other predictions. First, I believe we are going to see more lawyers and other firm employees who work past what we consider today to be the normal retirement age. This will increase a firm’s health-care costs and force firms to make changes to their compensation systems and policies and procedures. I also believe we are going to see an increased role for nonlawyer business managers.

MF: I agree that we’re going to have more professional leadership and management of law firms going forward. We’re already looking for people with MBA backgrounds to assist our practice division leaders in effectively managing and marketing their practices—not only how to sell services, but also how to profitably staff the work and determine the different kinds of fees structures that will be attractive to clients.

KM: Let’s wrap things up with a few closing thoughts.

NB: Right now, it’s about picking your themes, developing a strategy and sticking to it. You can’t get too distracted by what you read in the newspapers or legal periodicals. More than anything else, you really have to be clear on who you are as a firm—your culture, practice focus and direction. It’s not rocket science, but it is very hard work.

MF: In making the rounds of our offices to talk to our people about their concerns in recent weeks, we wanted to let them know that, at least from our vantage point, while things are not tremendously rosy, they aren’t as bad as perhaps they’re being led to believe. I also tell people that change is the only constant in our lives and in our practice. All of us must be able to adapt to change, and we must realize that our clients are changing as well. That’s why we’re encouraging our lawyers to meet with their three to five best clients to ask how the economy is affecting them: What significant change do the clients see in their future? How does that alter the way they deal with suppliers and providers of legal services and accounting services, and how can we help? How can we be a part of it? The surroundings have changed around us, but let’s adapt and figure out the next move. Let’s position ourselves to provide the kinds of services our clients are going to need going forward, even though they may be delivered in a different way.

CB: Another change on the horizon is that the old models of evaluating the contribution of our lawyers are not going to work long-term. To have a good shot at keeping turnover costs down, we need to stop trying to force people into a model that tries to get them to do things they aren’t very good at and instead identify what our lawyers do best and pay them to do that, be it bringing in new business, grinding away and doing exceptionally good work, or being good mentors and managers. I’m afraid that if we don’t learn how to do this, mobility in our firms will only increase.

PL: I think we are near or at a tipping point for the profession in terms of how lawyers fundamentally serve their clients, and many of the issues that our clients are confronting are going to persist beyond the current recession. Firms that see this as an opportunity to develop and enhance relationships are going to be in a great position to get more business. Those that merely try to figure out how to re-create their past will struggle mightily. In that light, all of a firm’s shareholders must push for the kind of responsiveness and change inside their firm that will allow them to seize the opportunities.

JR: Like it or not, all of the changes that we’ve been talking about today are forcing law firms to rethink how we do business. The firms with good leadership will take advantage of the opportunities created by new client expectations, technological advances and the current economic conditions and make changes that could not have been implemented if things were still going great.

About the Moderators and Participants

Moderators
Ed Flitton is former Managing Partner and now Of Counsel to Holland & Hart LLP. He is a member of Law Practice’s Editorial Board and the ABA Law Practice Management Section Council and President of the College of Law Practice Management.

Karen MacKay is President of Phoenix Legal, Inc. Her practice is focused on professional talent. Previously, she headed up the Canadian legal practice of one of the largest human capital management consulting firms in the world and was COO of a large Canadian law firm. She is a member of Law Practice’s Editorial Board.

PARTICIPANTS

Norm Bacal is Co-Managing Partner of Heenan Blaikie and is a founding partner of the Toronto office. He is considered a leading expert in taxation issues related to the Canadian and international entertainment industry. Heenan Blaikie has more than 480 lawyers and 10 offices across Canada.

Carl Barton is a partner in Holland & Hart and was a member of the firm’s Management Committee until December 2008. His practice involves real estate acquisitions, sales, leasing, options, construction, development and 1031 tax-deferred exchanges. Holland & Hart has 450 attorneys across 15 offices.

Mark Foster is Managing Partner and a member of the Executive and Policy Committees at Stinson Morrison Hecker LLP, based in Kansas City. He has extensive experience in a broad range of business litigation issues, including securities, environmental, employment, banking and bankruptcy. The firm has eight offices and more than 330 attorneys.

Patrick J. Lamb is a business trial lawyer and founding member of the Valorem Law Group. Valorem is a seven-lawyer start-up firm, founded in January 2008.

Previously, he practiced at Katten Muchin Rosenman and the litigation boutique Butler Rubin Saltarelli & Boyd, where he served for six years on the firm’s Management Committee. He writes the blog “In Search of Perfect Client Service.”

John Robertson is Managing Partner and President of Hartzog Conger Cason & Neville. He is a business lawyer with a focus on business transactions, securities and employment law. The firm has 35 attorneys and one office in Oklahoma City.

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