Thomson Reuters' 17th Annual Law Firm Leaders Forum held on November 15 to 16 at the St. Regis Hotel in San Francisco focused on "Managing Your Firm New World Order: How Economics and Politics Are Impacting the Legal Market." It was co-chaired by Ralph Baxter, outgoing chair and CEO at Orrick Herrington & Sutcliffe, and Bradford Hildebrandt, chair of Hildebrandt Consulting.
Day one featured a keynote presentation from Joe Scarborough, co-host of MSNBC's Morning Joe show (and a former four-term Congress member). It continued with sessions on "The World Economic Outlook and Its Implications for Law Firms" and "Pricing Pressure: Addressing the Market's Declining Revenues. The second day featured "How Law Firms Access the Necessary Capital to Support the Scale of Businesses They Have Become" and "Improving Lawyer Performance in Turbulent Times."
In the session on accessing capital to support Big Law, Baxter moderated the discussion with panelists Terry Conner, managing partner at Haynes and Boone; Dan DiPietro, chair at Citi Private Bank; R. Bruce McLean, chair at Akin Gump Strauss Hauer & Feld; and Jay Rains, co-chair at DLA Piper.
How do you raise the capital to maintain adequate funding to stay in business when you cannot raise equity capital from outside parties? "This is a substantial limitation on law firms," said Baxter. The options, he continued, include:
obtaining after-tax money from an equity partner;
deferring distribution of income to partners; and
borrowing from a lender.
The panelists agreed, however, that there are a wide variety of schemes within the available options. For example, the amount or percent of unallocated cash reserve on hand, vis-à-vis total capital; whether or not the firm delays the annual distribution of income to partners and, if so, for what duration; and whether or not the firm pays interest on partners' paid-in-capital.
Baxter and the panelists had access to an automated response system where attendees could answer questions posed by a speaker using a wireless remote control device. Answers were cumulated and displayed on a projector for the audience to review.
Baxter asked the audience, "Assuming you're a law firm leader, does your law firm incur debt?" Seventy-one percent of the audience said yes. "Do you retain an unallocated cash reserve that exceeds 5 percent of total capital?" continued Baxter. Twenty-five percent said yes. Fifty-six percent answered yes to whether or not the firm deferred the distribution of annual income to partners for longer than one month; 21 percent admitted that their firm pays interest on partners paid-in capital.
One strategy to make for a better balance sheet, according to McClean and Conner, is to finance your own tenant improvements rather than have the landlord make improvements, which leads to higher rent.
DiPeitro, from a lender perspective, had a few noteworthy observations. The longer the collection cycle from clients, the more likelihood that the firm will borrow or withhold partner income for periods of time. And from the bankers' data, loans to lawyers have now exceeded loans to law firms, which is an indication that firms are relying more on paid-in partner capital than direct loans, DiPeitro added. For more of DiPietro's Big Law observations, see "The Bankers Know Where the Money Is," by WiredGC blogger John Wallbillich.
Although most panelists claimed to be debt-free and retaining capital investment exceeding fixed assets, only Rains expounded on growing DLA Piper in geographic markets and practice areas, and described a long-term debt structure that was winding down. With that growth, he continued, there are operating expenses (such as travel to bring partners and associates together) as well as telepresence systems in every office. It all goes to partner retention, said Rains, which leads us to the lessons gleaned from the second session by Larry Richard, principal consultant at LawyerBrain.
Richard spoke on "Improving Lawyer Performance in Turbulent Times." He echoed Terry Bacon, a consultant who did management training for Baker & McKenzie, saying that conceivable competitive advantages [among law firms] have dissipated. Competitive firms have the same technology and nonlegal services. The internet has leveled the playing field. Selecting, developing, and training people is left. Some of the best organzations have figured out how to get the right people on the bus and in the right seats, and did it through training and engagement, Richard asserted.
Richard presented five areas for law firms to work on to improve lawyer productivity. But before he got there, Richard discussed the profound effects of change, which can come from new technology and the increasing speed of information available. Among other things, change produces uncertainty and increases stress.
Lawyers are "highly autonomous," with "high abstract reasoning skills" and "high urgency" [responsiveness], but "low resilience," said Richard. He defined resilience as the ability to bounce back or deflect criticism and negativism. Low resilience in changing times magnifies the effects of change, he said. In effect, what most people see in lawyers as risk-averse is actually "change averse," which allays lawyers' low resilience.