October 23, 2012

Positioned to Profit: How Three Law Firms Are Riding High in Changing Tides

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November/December 2010 Issue | Volume 36 Number 6 | Page 26


Positioned to Profit: How Three Law Firms Are Riding High in Changing Tides

Many managing partners, consultants and industry pundits predicted the rotten economy would force a major transformation in the way law firms do business, particularly on the fiscal and management fronts. As we head toward 2011 with the economy ever-so-slowly improving, we may be able to assess those prognostications more clearly. Are firms experiencing a major overhaul, or a sea change, in management and operations? Probably not. But maybe a new tide has come in, exemplified by a few flexible, forward-thinking firms that have showed how to ride atop the tide, rather than be submerged by it.

Here’s a look at three firms that serve as guideposts in focusing on how to stay financially and organizationally strong, come what may in the economy. What’s striking is not that these partnerships felt the heavy strain of the recession and revolutionized themselves—it’s that they positioned themselves to seize opportunities during the downturn.

Embracing Creativity in Fees to Achieve a Win-Win

For years now, many within the profession have been ringing the death knell for the billable hour, claiming that law firms would have to restructure their fee systems because clients would demand it. Well, the billable hour is hardly dead, with the vast majority of partnerships continuing to rely on it.Yet more and more firms are devising creative alternative fee arrangements (AFAs)—and perhaps none has been more aggressive in this regard than Kansas City-based Shook, Hardy & Bacon, which has one of the nation’s premier litigation defense practices.

While the 500-plus-attorney firm’s use of AFAs predates the recession by almost a decade, it has increasingly utilized such structures during the past few years. So much so, in fact, that today AFAs account for one-third of Shook Hardy’s revenues—that’s right, one-third—or more than $300 million per year.

“It’s been clear to us for some time now that clients were looking for ways for their law firms to be more creative and innovative,” says the firm’s chair, John Murphy. “We saw this as a real opportunity to use alternative fee arrangements as a means of aligning our interests with those of the client and to show a willingness to share the risk.”

When asked if clients are increasingly requesting AFAs in the face of the tough economy, Murphy’s quite definitive. “Absolutely,” he says. “I would say that 100 percent of the time clients include a section in their RFPs that asks if responding law firms would consider an alternative means of billing their time. I’m not suggesting, obviously, that 100 percent of the time the clients decide to go that route, but they at least always want to talk about it.”

The obvious benefit of AFAs for clients is that they can more easily, and more certainly, budget outside legal expenses; that is, it eliminates surprises that sometimes exist with the billable-hour system. And for Shook Hardy, the shift to alternative fees helps simplify billing and tighten operations, which can lead to higher levels of profit. That’s especially the case with one of its major clients, Tyco International. Several years ago, the global manufacturing giant consolidated its outside counsel for its product liability litigation from some 100 law firms to one: the Kansas City partnership.

Soon after becoming Tyco’s counsel, Shook Hardy implemented an AFA program in which the company pays the firm a flat fee each year, in monthly installments, to handle all of its products liability work. This is the sixth year of that arrangement—and every year the fee has decreased and the firm’s profitability has increased, according to Murphy.

“It’s clearly been a win-win situation,” he says. “The reason is, when you’re working like that you gain efficiencies. You understand the business of the client and you understand what the client’s needs are moving forward. And you can use that to provide value. So that’s been a real success story for both the firm and the client.”

To help keep such AFA programs running smoothly, Shook Hardy has a project administrator to make sure that the legal teams and the technology that supports their work are functioning well—and that the budgets line up. “Matt [Bohnen] performs a role that’s very similar to a project manager in the construction industry,” Murphy says. “If we’re getting paid a certain amount of money on a monthly basis or a yearly basis, he’s going to let us know from a budget standpoint how we’re doing against that.”

Murphy expects that, in time, 50 percent of all revenues will stream into the firm on an alternative-fee basis, whether it be through flat fees or hybrid arrangements. The key to success with AFAs, he adds, is creating a trusting and open environment for lawyers to communicate to clients early, often and fully.

For advice to others in the profession, he offers this: “Coming out of this recession, clients are going to be looking even more for their law firms to be creative and innovative and for their law firms to partner with them. I think you just have to embrace that creativity and not be reluctant to change.”

Standing Strong with a Culture of Debt-Free Wheeling and Dealing

As even casual observers of the legal profession know, some prominent firms have imploded and disappeared in the past few years. While there can be multiple causes for a firm’s demise—among them, poor management and internal bickering—neck-deep, long-term debt is usually at the top of the list. And even for firms that are able to survive tough times, carrying debt can slow them down and hinder their ability to add talent, technology and other resources necessary to compete.

That’s never been a danger for Cleveland-based Baker Hostetler, which has more than 600 lawyers and 11 offices across the nation. Its partners have perpetually had the satisfaction of operating in the black—but in times like these, that appreciation deepens and, more importantly, it allows them to expand their corner of the market while other firms are stuck in place or falling behind.

“We’ve been around since 1916 and we’ve never had long-term debt,” says Steven Kestner, the firm’s executive partner. “We pay for the investments we make—new markets, facilities, talent, technology—when we make them. This is just part of our culture. We’ve got a strong paid-in capital position and it gives us a very solid balance sheet. Of course in this economic envi-ronment, it has helped us considerably.”

Considerably indeed. For starters, it allowed the firm to avoid doing what many of its competitors across the nation were forced to do in the depths of the recession: Baker did not defer any associate starting dates, withdraw offers or cut back starting salaries. “In those regards, we’ve kind of stayed the course,” Kestner says. “And, we’re in a position to continue to grow and expand because of that.”

But the firm did a lot more than “stay the course” in other ways. It continued to beef up its New York office, which opened in 2001 with three lawyers, so that it now has more than 120 attorneys there. Plus, in the past year the partnership has grown its ranks firmwide by nearly 50 lawyers. And it also defied the logic many law firms employ—don’t expand to new competitive markets in a recession—by opening an office in Chicago in 2009.

Kestner says it was anything but an inopportune time for branching out into the Windy City, a move the partners had discussed for years and a location that seemed to be a natural market, given Baker’s Midwest roots. “From my standpoint the timing for us worked out well in Chicago because it’s a great legal market, there was out-standing legal talent available, and it’s also an advantageous real estate market,” he points out. “It was part of our planning process and didn’t require any special financial arrangements.”

But geographic expansion during a downturn isn’t the only way Baker has bucked conventional wisdom. It has also doubled its intellectual property practice in the past five years, a period of time when IP activity at many firms slowed or held steady.

When Kestner looks to the future, he sees no reason the firm should apply the brakes to its expansion and growth. After all, the sentiment seems to be, why let a little economic crash slow you down? Again, the key is that ledger book. “We are looking to continue to grow, even in this environment, but we do so coming from a foundation of being a well-capitalized firm,” he says. And that’s a healthy approach, for sure.

Successfully Shifting from “An Excess of Democracy”

Consensus certainly has value—but requiring it for every decision can tend to slow a law firm’s wheels and draw partners away from billable tasks. In so many words, that’s the conclusion the partners at a 31-attorney Vermont firm came to about a year or more ago. The result: The partnership of Primmer Piper Eggleston & Cramer consolidated their decision-making mechanism, shifting away from a consensus approach that involved all 19 partners on most policy matters and implementing a more centralized team, consisting of the chair and three executive committee members.

This move helped the firm gain new efficiencies and remain fiscally stable during the rocky 2010 economy. “We’re poised to have a really great financial year in 2011,” says Anne Cramer, who became PPE&C’s chair in January and will rotate away from the role after a two-year term.

The shift effectively builds on another move that occurred when the firm first became PPE&C, after Primmer & Piper and Eggleston & Cramer, both Green Mountain State partnerships, merged in 2006. Soon after the combination, the partners hired a professional administrator, Cindy Bauer, to serve as chief operating officer and run the daily business aspects of the firm, helping the lawyers focus on bigger-picture matters. Still, they continued to set decisions only after getting input from all the partners, until it became clear they needed a change to streamline management operations more.

“When we brought the two firms together we realized that all the people involved are very collegially oriented, and so consensus management had always been, frankly, a high priority for us,” Cramer says. “But at some point we understood that it was just taking up too many hours of too many attorneys’ time, particularly since we opened up a New Hampshire office in 2008.”

So now, if the management team is considering something as major as expanding to another market or hiring a lateral partner, the firm still wants buy-in from all the partners. But if they’re hiring an associate or doing a computer upgrade, they don’t. “This has definitely streamlined things,” Cramer says.

There’s a challenge here, of course, as there is with any such management modification. “The challenge is to change the culture and think consultant Robert Denney, who has advised PPE&C. “It’s also critical to build confidence that this realignment will lead to greater efficiency and better decision making. And it already has.”

Denney says centralizing management often is more effective than the all-inclusive approach, especially when it comes to managing revenues and assets. A key reason is that the team approach can falter because not all players are experienced—or adequately interested—in such matters. “It’s axiomatic that in a firm of any size a very high percentage of the partners don’t look at the financial and management reports, or if they do, they don’t understand them,” he says. Consequently, having one person or a small team committed to being in the know offers better guidance and stronger fiscal health

Another concern presents itself: The potential for ego-clashing. After all, when an organization of any sort makes such a move, it’s essentially taking away a degree of control from some members. But that’s a problem that PPE&C has wisely taken steps to avert.

“I’m not going to promise you that I’ve got people who don’t feel bruised from time to time,” Cramer says. “But I think we’ve worked hard to ensure that our experienced and talented people play different roles in governance. You don’t want to lose collegiality, so you can’t have people feeling disenfranchised. I think we’ve taken advantage of our information systems to make sure that shareholders have access to the information they need [about the workings of the firm].”

The ultimate idea, of course, is that operational and decision-making streamlining gives the lawyers more time to practice their craft and bring in higher revenues—which, in turn, helps grow the firm and enhance its market share. “That’s the goal and I think we’re attaining it,” Cramer says. “Everybody understands that we have a good sense of where we’re going and what we need to get there.”

About the Author

Steven T. Taylor is an award-winning freelance journalist living in Portland, OR, who writes on various subjects in the legal media.