Never has it been harder—or more crucial—to break out of the pack. Still smarting from the recession and facing fierce global competition, firms had been hoping for stability in 2011. But what they got—as shown by the results of The American Lawyer ‘s ninth annual survey of managing partners, chairs, and other leaders of Am Law 200 firms—was slow-paying clients, struggling transactional practices, and, if they’re lucky, the prospect of modest billing increases in the months ahead.
Indeed, nearly a third (29 percent) of respondents said they expect their once-bustling corporate practices to be their most challenged practice group next year. Barely any respondents—just under 2 percent—said they anticipate a significant increase in deal flow in 2012, while 36 percent expect it to be flat. Meanwhile, many firms are seeing collection times lengthen: Forty-three percent of respondents said their clients are taking longer to pay, with one law firm leader explaining in an interview that 90 days is the new 30. And while almost all respondents (98 percent) said they expect to raise rates next year, only 5 percent anticipate hikes of more than 5 percent.
For this we all know where to point the finger. The economy seemed to improve one day and deteriorate the next, creating uncertainty—and a host of challenges.
“The first half of the year was quite busy for law firms, but in the last three or four months, we’ve seen a slowdown in transactional work, so that it is difficult to figure out where the economy is heading,” says Paul Pearlman, managing partner at Kramer Levin Naftalis & Frankel. Pearlman was one of ten firm leaders interviewed about the findings of the survey, which 120 respondents completed on an anonymous basis.
Clearly, firm leaders can’t rely on a skyrocketing economy to fuel growth in 2012. Instead, they have focused on adapting—honing strategies to pull themselves out of the mire and differentiate themselves from competitors. Many are paring back the size of their equity partnerships: Thirty-nine percent of respondents said their firms deequitized at least one partner in the past year, and 38 percent said their firms plan to deequitize partners in 2012. Firms are also deploying long-term efforts, such as embracing project management, strengthening client relationships, and developing new ways to bill and staff matters. Already, say firm leaders who were interviewed for this article, these moves are starting to pay off, albeit gradually.
Most survey respondents anticipate a modest increase in profits per partner next year: Fifty-eight percent expect growth of 5 percent or less (compared to the 41 percent who expected that level of growth last year). A sizable minority—26 percent—predict growth of more than 5 percent.
There are three ways that firms hope to achieve this increase: through new business; via lateral hires and changes to the equity partnership ranks (hiring attorneys who bring in work and letting go of partners who don’t); and by a combination of alternative billing arrangements and improved efficiency. All of these areas present challenges, according to the survey results and interviews conducted for this article, but some firms are steadily tackling them.
To develop new business (and protect existing revenues), firms are building closer ties with key clients—89 percent of survey respondents said they’ve accomplished this in the past year. While tighter bonds have always been a goal, in theory at least, firms are now putting more effort into it. More than half of respondents—53 percent—said they have a formal client feedback program in place. Interviews are sometimes conducted by outside consultants. “We get better feedback, more candor [that way],” says Joel Voran, chief executive officer of Lathrop & Gage. Client visits, surveys, and joint events have also been widely implemented. Says Pearlman: “In a competitive environment, firms are trying to be more proactive in how they develop relationships and business.”
Secondments, in particular, are on the rise: Seventy-eight percent of respondents said they implemented them this year, up from 70 percent in 2010. “When someone from your firm is physically located at the client, there tends to be an uptick in the other work you do for [that client],” Pearlman says.
In fact, relationship-building has become so important that it is now an essential skill for partners. “The old model had room for the entrepreneurial partner and also the partner who did a good job maintaining a relationship with a client,” says John Murphy, chair of Shook, Hardy & Bacon. “Now there is more emphasis on growing business, so the partner who is maintaining the status quo is falling behind.”
Firms are also pushing for greater efficiency in their internal operations. Nearly half of respondents (49 percent) say they have aligned partner compensation with a willingness to cooperate in new initiatives, such as project management, knowledge management, and rethinking staffing requirements. Mentoring programs have also gained traction. At Brown Rudnick, equity partners who are deemed to be strongest in relationship-building guide income partners in the process. Another program, also started this year, develops similar skills in midlevel associates.
“[Law] is a relationship business, but how you build [those] relationships is something lawyers had to learn on the fly,” says Joseph Ryan, Brown Rudnick’s chairman and chief executive officer. “We’re trying to systemize it a little bit. I think you’ll see more of that.”
Such efforts aren’t always successful. In an open-ended question asking survey respondents to note their biggest disappointments, underperforming partners was an oft-repeated answer. This likely explains, at least in part, why 71 percent of responding firms plan on asking one or more partners to leave in 2012, even as overall head counts grow (89 percent of respondents expect to end 2012 with more lawyers than they had in 2011) and first-year associate classes start to get back on track (14 percent of responding firms deferred starting dates in 2011, compared to 46 percent that did so in 2010, while 29 percent anticipate a larger class next year, compared to 13 percent in 2010).
“To be a successful partner in a major law firm today, you still have to be an excellent lawyer, but you also must be able to manage teams and a budget, interact with people, and anticipate your clients’ needs,” says William Perlstein, co–managing partner at Wilmer Cutler Pickering Hale and Dorr. “That’s a broad set of skills, some of which were not being looked at by law firms 20 years ago.”
Hiring partners are certainly looking for those skills now, and laterals who have them—along with a healthy book of business—are in hot demand. To jump-start struggling corporate practices, 74 percent of respondents said they plan to hire lateral partners in that area next year. Litigation—a much brighter note with nearly half of the leaders (48 percent) expecting it to see the most revenue growth in 2012—will also see heavy recruitment efforts: Eighty-two percent of respondents anticipate hiring litigation partners.
But lateral hiring was also a disappointment repeatedly noted by survey respondents and in interviews. The challenges abound: rising stars who got away, promising hires who failed to live up to their billing, and candidates who ask tough questions about firm finances.
“A lot of large firms have disappeared over the last few years, and because of the uncertainty in our industry, quality candidates are going to be careful,” says Michael Tanenbaum, chair of litigation shop Sedgwick. “They want to know it’s a strong firm. We carry no debt—it gives us a leg up in the discussion.”
It’s a leg that a few more firms can stand on this year: Forty-six percent of responding firms reported carrying no debt, compared to 43 percent in 2010. At the other extreme, 22 percent of responding firms are carrying more than $10 million in debt, compared to 28 percent last year.
Perhaps the area seeing the most innovation is billing, where the mandate from clients to cut costs and the resulting need for firms to handle work more efficiently has spurred experimentation with the business model. More than 81 percent of respondents said they’re seeing more clients requesting discounts, and nearly 55 percent said clients are asking for deeper discounts.
Alternative fee arrangements are increasingly seen as a way to customize billing models to fit client needs. More than 92 percent of respondents said that they used flat fees for at least one entire matter in 2011 (the same percentage used them for some stages of a matter); 82 percent used collars or caps. While these figures were nearly identical to last year’s, the survey found evidence that the structural barriers to more widespread use of AFAs are falling. Last year, 88 percent of respondents said law firms and clients had insufficient experience defining or managing work on an alternative basis. This year, 73 percent think that’s true. In the 2010 survey, 53 percent said it was difficult to determine the value of the work. This year, just 45 percent agree with that statement.
“Lawyers have been very concerned about whether they can estimate accurately,” says Keith Vaughan, chairman of Womble Carlyle Sandridge & Rice, where alternative fee arrangements account for more than 25 percent of the firm’s annual revenues. “But as they start working with [AFAs], they’re finding that they can get within an acceptable range of risk and reward.”
What makes AFAs work, say lawyers interviewed for this article, is greater efficiency. Little wonder, then, that this has become a major focal point for firms. In an open-ended survey question asking respondents how they are driving efficiency, project management was mentioned more than any other initiative (IT upgrades came in a distant second). While computer programs can help drive efficiency—letting lawyers see in real time, for example, how their expenditures compare to their budget—the efforts require more than software. Project management, says Francis Milone, chair of Morgan, Lewis & Bockius, “is really a combination of skills people have and can develop, and technology that is now available.”
Nontraditional staffing models are also driving efficiency. (They can soothe relations with clients, too, given that 54 percent of respondents have clients who refuse to pay for work by first- or second-year associates, up from 47 percent last year.) Particularly popular is the use of contract attorneys working at the firm or within the client’s legal department. Seventy-six percent of respondents said they used this approach during the past year, up from 55 percent in 2010. “There are cheaper solutions, but they don’t bring the same quality control to the table,” says Robert Giles, managing partner at Perkins Coie, which has its own “review center” where contract attorneys recruited and employed by the firm do document review on a project-by-project basis. “We know the quality of the people. We can vouch for them,” he says.
Other approaches are gaining traction, too: Thirty-seven percent of respondents said they outsourced work to lawyers managed by third parties (up from 25 percent last year), and 28 percent outsourced work to nonlawyers managed by third parties (up from 15 percent).
The steps firms are taking may be born of uncertainty, but they have a clear goal in mind: creating lawyers who are more proactively developing business and more efficiently performing it. The economy may not yet be on the right track, but law firms, it seems, are well on the way.