An article in a recent issue of the Am Law Daily authored by Dan Pietro and Gretta Rusanow at Citi Private Bank’s Law Firm Group indicates that more doom and gloom may lie ahead for law firms. Demand growth has slowed, inventories of unbilled time have grown little from the prior year, which is not a good omen for future collections, and signs indicate that realization will decline during the remainder of 2012, squeezing profit margins even further.
In light of this dire prediction, below are several strategies that lawyer-managers should consider to cope with these difficult times.
A Short-Term Plan
The complexities of life during an economic downturn require firms to have appropriate leadership and engage in some type of strategic planning, at least for the next year or two. This kind of planning may be described as the process by which a firm formulates its immediate goals and methods for achieving these objectives.
Need for Firm Leadership
If a firm is to survive during this anticipated economic downturn, its partners need to acknowledge the need for leadership. The designated leader, whether an individual or a committee, will not succeed unless and until all attorneys in the firm recognize that the impetus for successful management is derived from the willingness of all firm members to be governed.
In some firms, the leadership role is assumed easily and quite naturally, either because the individual is a founding partner or because he or she controls a significant client base. In firms where the partners are relatively young and inexperienced, the process of natural selection, as it were, may be somewhat more difficult. In situations in which no partner surfaces as a natural leader, or no one wants the job, the firm must take aggressive action if it wishes to deal with the professional, economic and personal challenges presented by its members.
When properly conceived and implemented, the planning process will enable partners to reach a consensus about goals, identify qualitative and quantitative benchmarks, and develop action plans that include timetables and lawyer accountability for performance.??The process entails the following steps.
• Survey partners.??The initial phase of this process calls for the lawyer-manager or management committee to survey all or a representative number of partners to obtain their perceptions about internal and external developments that will influence the firm going forward for the next year or two. The issues usually addressed during this process include:
(1) A reassessment of the firm’s objectives and current guiding principles;
(2) Partner/associate relationships, i.e., the ratio of associates to partners, classes of partners and associates, criteria for admission to partnership, and communications among and between partners and associates;
(3) Partner satisfaction with gross revenue and net profit, individual net income, hourly and billing expectations;
(4) Whether the partner compensation system rewards partners fairly for their total contribution and motivates them to perform those billable and nonbillable activities to progress the firm;
(5) The firm’s resources and capabilities, its perceived strengths and weaknesses, reputation and position in the marketplace;
(6) The willingness and ability of attorneys to sell legal services and cultivate new prospects within the firm’s current and potential market; and
(7) Profitable practice areas the firm offers to a limited extent, or not at all, that it should pursue because clients have a need for these services, and unprofitable practice areas (other than because clients are not paying their bills) that should be discouraged.
• Analyze the firm’s competitive position. This analysis should highlight internal and external factors that affect the firm’s competitive position.
For example, lawyer-managers should focus on the firm’s perceived strengths and weaknesses, its competitive advantages and disadvantages, and anticipated changes in the partner complement as the results of retirement, withdrawal, etc., to determine the effects these changes will have on the existing and potential client base.
• Partner Compensation System. This analysis should assess the extent to which the present compensation plan encourages or discourages partners in performing those consequential nonbillable activities, i.e., marketing the firm’s services, managing the firm and its substantive practice groups, etc., that are required to be performed by the partners to achieve the firm’s short-term objectives. Any formal or informal policies that affect the firm’s ability to attract and retain the required volume of profitable business, either favorably or unfavorably, must be considered.
• Analyze the firm’s economic position.??Lawyer-managers, assisted by the firm’s administrator, should identify and analyze the following trends for at least the last two or three years: fee revenue and expenses; gross fees per equity partner; gross fees per lawyer; expenses per lawyer; net income per partner; net income per lawyer; the aged inventory of unbilled time and accounts receivable; costs advanced; the number of billable and billed hours of partners, associates and paralegals; fee billing realization; fee collections realization; and the average length of time from when billable time is recorded until the fees are collected.??In addition, the analysis should include the fees collected from the firm’s top 15 or 20 clients, by the nature of the work performed.
While the essential fact gathering may be readily accomplished in-house, in some situations the firm may be better served by electing to retain the services of outside consultants knowledgeable about law firm management and economics to assist in the overall strategic planning process.
For example, perhaps the firm has expanded too rapidly without due regard of the market.?? Maybe the firm has lost important clients that have contributed to a disproportionate percentage of the firm’s revenue (law firms that are dependent upon an individual client that is responsible for providing 15 percent or more of firm revenue are vulnerable if anything occurs that reduces the volume of that client’s work) or if the firm has overinvested in lawyer and administrative personnel, technology or facilities. In such circumstances, the partners may be more willing to discuss their views and grievances with an objective outsider who will retain the partners’ identites in confidence, avoiding a confrontation among members of the firm’s management.
An experienced law consultant can expedite the short-term planning process.?? Familiarity with the economics and dynamics of law practice assists the consultant with interpreting partners’ responses in view of the firm’s financial and management information, procedures, economics and political trends.
• Identify objectives and develop strategies.??The information obtained from partners during personal interviews and the analysis of the firm’s financial, management and client databases should enable the lawyer-managers to formulate plans and strategies for presentation to the partners in each of the key areas that were highlighted during the analysis.
• Increase marketing efforts.??A firm should not wait for an economic downturn before organizing and implementing practice development activities.??However, in anticipation of a further downturn, a firm’s marketing activities should be intensified and coordinated by a partner who functions as a “marketing czar” or by a marketing committee, rather than implemented by partners in an ad hoc manner.
Partners should be accountable to the czar or the committee for their business development plans and efforts.??Personal marketing plans should be developed for attorneys who have demonstrated skills or the potential to generate new clients or to proliferate work from existing clients.
Variable hourly budgets of time devoted to business development activities by these attorneys should be recommended.??Their billable and marketing goals must be adjusted accordingly.
Selected partners and senior associates should be engaged to become active in at least one professional organization or activity.??Others may be encouraged to seek and fulfill appropriate speaking and writing opportunities with professional and business forums.
The czar or members of the marketing committee should counsel lawyers in their choice of activities and proposed commitments of time.
Generally, partners have the obligation to act in a collaborative, team-oriented manner, complying with firm policies, systems and procedures, treating all lawyers and staff with respect and putting the firm first.
During difficult economic times, law firm managers do not have the time to deal with the aberrant behaviors of recalcitrant partners, even on behalf of economically productive lawyers.?? In addition, tolerating such behavior sends the wrong message to other attorneys.??
Each partner should be expected to produce working attorney revenue, on a yearly basis, in an amount that would cover his or her compensation plus allocated overhead and an added profit factor.
Most law firms have learned that “benign neglect” works both ways. Partners are less willing to tolerate the problems created by others, particularly when their livelihood is at stake. The difficult partner soon learns that tradition, established hierarchy and age are no longer the shields they once were, especially when performance or lack thereof results in a stabilized or declining level of business.
During difficult economic times, lawyer managers must be prepared to cope in a straightforward fashion with those partners who are unwilling or unable to comply with the firm’s policies, initiatives and directives. With the agreement of the partners, lawyer managers must administer consequences and not be willing to sit by and let these recalcitrant partners take advantage of the firm or others. n