What’s in store for the practice of law in the Midwest during 2012? We invited the people running four of the largest law offices in Chicago to provide their forecasts during a panel discussion in April at the city’s Union League Club. Citi Private Bank had just issued a report warning that the demand for legal services was spotty, that expenses were up at law firms and that profitability was under threat.
For all that, our panelists tended toward optimism about the future — a very Chicago predilection, it would seem.
|Nancy Gerrie, partner in charge of McDermott Will & Emery’s Chicago office||Michael Morkin, managing partner of Baker & McKenzie’s local office|
|Fritz Thomas, partner in charge of Mayer Brown’s Chicago office||Susan Levy, managing partner of Jenner & Block|
David Brown, editor in chief of The National Law Journal, asked the questions.
DAVID BROWN: I would like to start with each of you just going down the line and giving me a brief two- or three-minute description of how 2012 is looking thus far for your firm.
NANCY GERRIE: We have a very strong base of different types of practices, with a lot of tax. Which is a little different from a lot of firms in Chicago. We had a good 2011. First-quarter collections for 2012 are a little slower than anticipated, but they seem to be coming in and we seem to be billing and collecting at the rates that we set last year, so that’s pretty good. We were able to hold expenses down very well last year, so I don’t think we’re having the same challenges that some of the other firms are on the expense side.
Our budget forecast is sort of at the high end of the range for 2012. I think we have some challenges. Obviously, the [mergers and acquisitions] market is tricky right now and [initial public offerings] are kind of undetermined at this point, but I think we’re projecting a pretty good 2012 as well.
FRITZ THOMAS: 2011 was a very good year for Mayer Brown Chicago. It was extremely strong in terms of profitability and revenues and the like. It was also a very good year for the firm as a whole worldwide — solidly up. I’ve been somewhat surprised and pleased with the first quarter of 2012. The revenue per lawyer, partner utilization here in Chicago have all held up very strong. I would say that’s fairly widespread in terms of practice areas.
As Nancy said, mergers and acquisitions work is a little tricky right now. A lot of the characteristics and things that you look for in a robust M&A market are there — there are low interest rates, a lot of cash. Banks are prepared to lend these days. There are a lot of things that are working in the direction of a strong M&A market, but we’re not seeing it yet. The first quarter was relatively soft.
The initial public offering market was actually pretty good — the first quarter of 2012 was higher than any quarter since 2007. The securities markets are reasonably robust, so we see a lot of positive signs in the corporate world. Finance practices are very, very strong. Litigation is holding up very well. Tax practices are very busy. Real estate is going gangbusters, so there are a lot of good signs.
But then there is the big “but” to all of that, and that is I think there is a lot of uncertainty. The confidence level is much lower than any of us would have had five years ago, for example. It’s a function of Europe, it’s a function of the election, it’s a function of the uncertain progress out of the financial difficulties of the last three or four years — uncertainty as to what taxes are going to be in the future, and I think most prominent to the people on this panel is the uncertainty in our clients’ minds. The caution and a wariness of not only management but boards as to what the future holds impacts what our business looks like, because our business is driven by movement, by activity. And unless businesses are moving and active, our business is not as profitable and robust as it should be. So that uncertainty, I think, casts a pall over what the future may hold.
SUSAN LEVY: Jenner & Block is probably a little bit different from the other three firms represented here. We are, according to The American Lawyer, the only Chicago-based law firm in the top Am Law 100. That means our Chicago office, which has about 350 attorneys, is larger than all of our other three offices, which are in Washington, New York and Los Angeles.
I think we’re the only firm represented here that has no international office. Nevertheless, last year was a record year for Jenner in terms of profitability. This is only April, but so far we’re busy in our office. We’re actually busier than we were last year at this time in terms of utilization. Our associates are busier than our partners, which is good. Our associates are busier than our staff attorneys, which is also good. So the pundits who say the demise of the associates is nearby or coming, I don’t really believe that. Our litigation in particular is very busy right now — and that’s business litigation, securities, complex commercial, government contracts, media and entertainment. Our transactions are slower. Intellectual property is slower for us right now and bankruptcy is slower.
MICHAEL MORKIN: Our last fiscal year was a record year for us. In Chicago, we had record revenue, record profitability. This year we’re playing catch-up. We think we’ll probably end up ahead of last year’s revenue. We think we’ll be close to flat in profitability because of the slow start of our fiscal year, but in Chicago, our transactional practice is busier than it’s ever been in the 24 years I’ve been there — which is a little surprising, given everything you read from Citibank and the other studies out there.
Our transactional practice is what’s driving us. We have hired, I think, eight people, eight lawyers, full-time lawyers, since January. We have 13 lawyers from our other offices currently in Chicago because we’re trying to even out workloads in different places. So it’s a very good picture. We’re cautiously optimistic.
We’ve had plenty of false starts, as we all know, since ’08. But as Fritz said, it’s a fascinating time to be in our industry. I wish I was studying it instead of trying to manage an office in it. But the opportunities and the cash that’s out there — assets are still cheap. We’re on the verge of, I think, our industry really bouncing back, even to pre-’08 times. There will be some changes, but like Susan, I don’t think those changes are going to be as dramatic as people have been saying through this downturn. Our associates also are as busy as they’ve ever been productivity-wise, so all the alarms we hear about the end of the associate, we’re not seeing it. We’re very optimistic with the start of the calendar year.
BROWN: Great. So all of your firms naturally work around the country, work around the world, but let’s continue to stay local for a moment. Michael was talking about the Chicago market. Nancy, could you add to that? How would you describe the health of the Chicago market and what factors are in play here?
GERRIE: Well, it’s interesting because I do think the Chicago market is stronger than some of the other markets in the other cities, and I’m not really sure why. Obviously, we’re not as transaction-oriented in Chicago as they are on the coasts, but other firms are still setting up offices here in Chicago and there’s something that’s drawing them. I don’t know how well they’re doing, but they are setting up offices in Chicago.
In our Chicago office, our trials practice is really busy. Some of our corporate lawyers are very busy. Even our private-equity guys’ things are starting to move. Health and IP is very strong — we just hired a number of IP attorneys in the last quarter. So I’m not sure if it’s a particular practice area that’s driving it, but I’m having the same experience that my panelists are having — that we are in a hiring mode. People are looking to the Chicago market. People are interested in the Chicago market.
One of the areas that’s starting to take off for us is on the regulatory side. There are so many compliance-oriented initiatives out there now, and I think this is an area that I see a lot of growth in. And I don’t think that’s specifically Chicago, but we are seeing a lot of growth in that area.
BROWN: Fritz, do you have anything to add to Chicago — the factors that are making firms want to open offices here?
THOMAS: I think that there are a couple of things at work. One is, I think, that Chicago is a better business environment than we sometimes give it credit for. Now, there’s been a lot of bad press about Chicago and to some extent certainly Illinois, between corruption and budget problems, level of debt, et cetera. People outside of Illinois, I think, have perhaps a very bad impression. In fact, I think Chicago and Illinois are a better market for businesses than people give them credit for, and if you kind of drill down the statistics and take away the veneer of recent press, you can see some of that.
There was an article in the Chicago Tribune this morning by the chairman of the Illinois Manufacturers Association that does just that. He talks a lot about what the effective tax rate is in Illinois versus Wisconsin and the like, and he talks about how for businesses, in fact, Illinois is a very viable place to be. So that’s one dynamic at work that strengthens Chicago.
Chicago is a terrific place not just to practice law and for businesses that are in Chicago and even the Midwest, but it’s a terrific base for a law firm to practice from. You can be on the East Coast in two hours and on the West Coast in four hours and you’re relatively centrally located between Asia and Europe. It’s a place, because of its culture and its robust environment, that’s a magnet for young people who are graduating from law school, who want to live and work in a bigger city but for various reasons don’t want to be on one of the two coasts. The opportunity to work in Chicago, with its robust business environment and its strong service sector, is really appealing. So you get people who grew up in Minnesota and Iowa and Kentucky and Michigan, et cetera, that are naturally drawn to Chicago.
And when they’re in Chicago, they’re practicing nationally and internationally. I suspect that if we can drill down on the four practices represented here, we don’t necessarily have a majority of our individual or firm practices in Chicago connected to Chicago-area businesses. Most of the businesses that I work with are well outside of Chicago.
The other thing at work in Chicago is, I think, the people that we attract or the kind of people that practice in Chicago tend to be fairly straightforward, transparent, not a lot of agendas, not a lot of egos, hard-working, well-meaning, reliable people. I think that resonates well with clients and prospective clients, and all of our firms benefit from those things.
BROWN: Susan, when we spoke prior to the event, you pointed out that, “Well, we have our biggest outlets here, but Chicago isn’t necessarily where we do the most of our business.”
LEVY: Right, as I said, we’re the only Chicago firm [on this panel], but our practice is really national in scope. I just checked, and of our top 25 clients in terms of billings, only five to six are local or from the Chicago area.
BROWN: Susan, if I can stay with you for a moment, which practice areas here or beyond Chicago are performing well for your firm at the moment and where are you seeing challenges?
LEVY: We have a big litigation department at Jenner & Block, and our litigation is very busy. Our securities practice, our white-collar practice, our government-contracts practice, our media and entertainment practice — you know, they’re all doing very well as of right now. The one challenge for us right now is [that] the transactional practices are probably slower. They’re busier than last year, but they are a little bit slow.
BROWN: Fritz, you’re in a transactional practice and yet you’re very busy. Why is there this sort of disconnect on transactional at the moment? Why are some firms viewing transactional as trouble and you seem to be seeing a pretty positive environment?
THOMAS: A couple things. In the last 10 years, we’ve grown to approaching half of our lawyers are outside of the United States, and that has created quite a bit of activity in both representing non-U.S. companies with regard to U.S. transactions and U.S. companies doing things outside of the United States. So that has been one phenomenon at work.
The other thing is that we aren’t as busy in private equity here in Chicago as some firms have been. Our transactional practices are more driven by our relationships with strategic clients — businesses as well as investment banks — and the strategic buyers, particularly because of the amount of cash and strong stock prices, seem to be relatively interested.
The other thing that’s happened is kind of the flip side of what happened four or five years ago when the downturn took place. You had a mismatch between expectations of sellers and the expectations of buyers. You had sellers that still had in mind the pricing of businesses that were reminiscent of 2005 activity, and buyers who were traumatized and their lenders who were traumatized by the financial markets. So you had buyers not prepared to pay the numbers that the sellers expected. Now that we’ve gone through a prolonged period of softness, you’re seeing a different receptivity by sellers to prices that align with buyers’ ability and desires, and that creates deal flow that wasn’t there three or four years ago.
BROWN: Mike, you talked about this a little bit earlier, that you’re optimistic, yet most of the surveys and reports that have been coming out lately, including the Citibank report, have been pretty pessimistic about the year ahead. Why do you think there is so much pessimism about the state of the legal business and that you seem to believe that we may be on the verge of another boom?
MORKIN: The pessimism is [that] our clients aren’t going to spend more money. I mean, they’re spending a lot of money. We’ve had this period up to ’08 of huge increases in spending, and now our clients are wisely spending that money better.
What I found to be actually creating some optimism through those studies is where they’re spending it. They’re moving that money around. If you look at where they’re choosing to spend that money going forward — and not just from the studies but in talking to our clients — the dramatic growth is in the money that they’re spending outside of the United States to expand globally. The amount of money that they’re spending on compliance, which has been on a bit of a cycle, it’s going back up again.
Compliance and global transactions, global expansion, global management of the distribution and the supply chain is what we do. So I disagree a little bit with the studies that say [that] to increase your revenues and to increase your profit, you’re going to have to steal work from other firms.
I don’t really think that’s true. I think our clients are choosing to spend their money elsewhere, and the firms that are positioned in the areas where they’re choosing to spend are finding that there’s more money out there for them to win in niches or even just by being well positioned in those markets. And those are primarily compliance and global supply chain and multijurisdictional and cross-boarder transactions and disputes.
BROWN: Nancy, do you feel as optimistic — or do you feel that these reports should be making us feel more optimistic — about the state of the business at the moment?
GERRIE: I actually was surprised at how pessimistic the Citibank report was this year. I felt like we had turned a corner last year. It felt like we had gotten about as lean and mean as an industry as we could get. I felt that we were starting to understand how to leverage alternative fee arrangements and that a lot of the clatter and noise of 2008 and 2009 were over. I think one of the issues was expenses, and maybe this leads into your question —
BROWN: It does.
GERRIE: It was a good segue — that it’s a challenge for us to control our expenses as well this coming year; although, I also feel that perhaps the Chicago firms have historically done a little bit better job at controlling expenses anyway. Not just compensation expenses — which is, of course, the biggest one. But just regular expenses — nitty-gritty, housekeeping-type expenses. I think Chicago firms tend to be a little bit more modest in their spending styles.
BROWN: I’ve been to some offices in Chicago. They’re pretty nice. Well, Susan, let me continue on the expense-control tack here. I mean, if I’m an income partner or an associate or a staff member at a major firm — and if I had read the Citi report and it said that, well, firms have already plucked the low-hanging fruit in terms of expenses in the last few years — should I be nervous that, you know, the next wave of cuts is going to come my way?
LEVY: Well, at Jenner, as I mentioned already, last year was a record year for us in terms of profitability, and in the last few years we were a little bit countercyclical. So we’ve been busy all through the 2008-2009 dark ages, and, in fact, we’re still growing. We’re growing in our Chicago market. We’re growing in a lot of our offices, and we’re doing a lot of hiring. So if I were talking to my associates and partners, I would tell them not to worry.
But, on the other hand, we are very, very careful with our budget and our expenses. Our expenses went down, I think, in 2008, 2009, and now they’re going up again. You know, the low-hanging fruit has already been plucked, so it’s harder and harder to negotiate with our vendors and things like that. But I think our business model is working and we’re in a growth mode.
BROWN: Mike, I would like you to weigh in here, too, on expense control. Where does Baker go if it needs to look at those issues?
MORKIN: I think most of us did what we needed to do in ’08. I think we all did it a little bit differently.…The hardest-hit practice, obviously, in ’08 was transactional. And we had a number of people, large groups locally, they were the least busy people in the office. We wrung our hands about what to do, and we made the decision not to cut anyone. We went to the partners, and the partners agreed to make less that year. We agreed to, with our people, to pay them less temporarily, and we did that to keep what we felt was a really strong team together so that we didn’t have to go out and try to rebuild that with people we didn’t know, people our clients didn’t know, when things turned around. I think that if we had to, we would probably react the same way [in the future], given the success of that approach.
But as Susan pointed out, we’ve been growing, I would say, better than steadily over the last three to six months. So, we’re watching operational costs, but on the people side of things, I think we’re in good shape.
BROWN: Fritz, can you weigh in on Mayer Brown and expense control?
THOMAS: A couple of observations: I think that to the extent that an associate may wonder whether he or she should be nervous, we’re similar to some of the other firms that have been described here. We’re hiring now, and I think when the associates see offices filling up, that’s a good sign in their mind as to their job security.
The biggest expenses in a law firm are people, space and information technology — and people, I mean, are just a huge, huge factor in terms of controlling costs. Through the last four or so years, all of our practice leaders, all of our partners in charge of our various offices, have become much more thoughtful and disciplined about staffing decisions — whether it be hiring, whether it be mentoring, oversight and channelling of lawyers within the firm. There is much more rigorous monitoring and measurement and management of lawyers, and that’s very, very helpful. In the robust days of, say, 10 years ago, you’d just throw people at things. We’d have plenty of lawyers coming in and there was much less management, because the work flow was just almost taken for granted. I think it’s a much healthier environment [now].
To say that all of the low-hanging fruit has been taken out and that there’s no more to be taken out — I don’t believe it. I think there’s more that can be taken out. I mean, there’s better management that we can find. Lawyers are getting good at managing. I think we’re getting better, but I give law firm management a C-plus or a B-minus in terms of expense control. There is better achievement that can be obtained. There are still apples that aren’t that high on the tree that we can get.
BROWN: Excellent. Michael, could you describe for me the state of the lateral market? How active would you say it is in comparison to years past and what is your firm on the lookout for?
MORKIN: We’re seeing the same thing everybody else here is seeing. It’s a great time to be a headhunter. There is a lot of movement. Uncertainty, you know, breeds opportunity, and we’re seeing a lot of movement. We’ve been more active in the lateral market globally and regionally and in Chicago than we’ve ever been, and I think that’s for a couple reasons.
One, obviously, is…that there is a lot of uncertainty out there. People with business can move. They’re looking around to see whether they’re at the right platform for their clients.
And the reason we’re seeing an awful lot of interest and success — and this is really probably over last six months, maybe nine months at most — people are reading about clients wanting to shrink the number of firms they’re working with. They’re reading about clients going global or expanding more than they already have. They’re seeing firms expand globally, merge to get a global footprint. And we’re fortunate to have that footprint.
We can all be doing things better, but we do the global thing pretty well, and people are getting a taste of that. Clients are getting a taste of that, and it’s working better at some firms than others. So I think there’s a lot of interest in lawyers around town and clients, quite frankly, to have their lawyers look and evaluate the various global platforms that are out there. And that’s helped us in the lateral market recently, and I expect that to increase going forward.
BROWN: Susan, how about at Jenner? What are you looking for at the moment in the lateral marketplace?
LEVY: We’re very active in the lateral market in all four offices, and it’s really based on what our needs are in our practice groups. Our most successful laterals occur when we’re not just buying a corporate business. We never try to do that. The successful laterals for us are when they come in and they add value to an existing client relationship or an existing practice group. So it’s sort of the one plus one equals three. That doesn’t always happen, but that’s what we want to do.
BROWN: Speaking of laterals, when you have this kind of uncertainty and there are a lot of folks in the market, firms bring in laterals and we’ve all read stories where that hasn’t quite worked out. Nancy, I’m wondering if I can start with you on this question: How do you work on integrating laterals into the firm and bringing folks who you know have been out in this uncertain marketplace and make them feel like they’re part of McDermott?
GERRIE: We are experiencing the same thing that the other panelists are. I’ve never seen such an active lateral market before in my practice. It’s very exciting, both in Chicago and outside of Chicago. Globally, we’re seeing a lot of people interested.
We’ve done a much more rigorous job of looking at big lateral partner hires before we bring them on — really vetting them, doing our background work, talking to their clients, talking to other people in the industry. And when we do make a move, obviously, you want to make it as quickly as you possibly can, but you want to do it with the best background information you can.
The first piece in integrating somebody well is finding out exactly what they do and how they can fit in. And as Susan said, law firms in the last few years have gotten a lot savvier in how to integrate laterals — not all of us, but some of us — to realize that we’re integrating them into the platform.
If they’re not interested in all of our practice areas and how they can help buttress an existing client relationship or fit into an area where we have needs or leverage or a particular area that they have expertise in, too — if they’re not interested in doing that, that takes away a large benefit that they can bring to us. We’re a lot more savvy in what kind of cross-selling opportunities these people have, how are they going to fit in — not just their books of business, but how are they going to fit into our firm and all of our different practices.
So in order to integrate these people, you have to do your background research first before you even let them in the door. Once they’re in the door, you have to stay with them for a year and make sure that you’re continually keeping up with their progress and making sure that they’re getting the opportunities that you had identified for them as they were walking in the door. It’s very important.
BROWN: That’s a very positive way of putting it. But right now, though, there’s a situation with Dewey & LeBoeuf where you have laterals integration. It’s making a lot of headlines right now, obviously, that that firm has been facing some problems. I’m wondering, in looking at that situation from afar, if there are any takeaways about some of the issues that have come up there. Fritz, can I throw that to you?
THOMAS: Thanks a lot.
BROWN: Yeah, a hot potato.
THOMAS: I was wondering which one of us would be the lucky panelist.
BROWN: I’ll open it to everyone.
THOMAS: Well, let me say a couple of things as a preface. One, I would like to second some things that Nancy said, which I think are really important. In lateral hiring, it’s a little bit like M&A. You want great due diligence — and, just as Nancy said, I think we’ve all gotten a lot better at that. And then you have to plan for the integration almost as much as you plan the acquisition itself.
You don’t want to buy a big book of business. That’s not what it’s about. When somebody says, “I can bring $5 million or $10 million in business,” it’s a warning signal to me sometimes because it starts getting into what Nancy described — that at their old firm, they set up relationships with clients that made that client so readily portable. It’s a signal of that partner’s ability and desire to integrate the client into the broader platform of that prior firm, and we don’t want seconds. Like Nancy described, we want lawyers who see Mayer Brown as a rich collection of resources and want to take advantage of that for their clients, and that’s the value. It’s not something that will bring people in that can crank out lots of invoices to a client they’ve represented for a number of years. You add to that the strategic fit. You add to that the importance of character. You don’t want to add jerks no matter how professionally or financially viable it may seem to be. In the long run, it doesn’t pay. And then, as Nancy said, you really focus on integration.
Now, how does that tie in with Dewey? Dewey has expanded a lot in the recent years — and I should preface my Dewey comments by saying I very much wish them well and I hope they work through their present difficulties. It’s a very fine firm. I think the topics that come to mind as you look at their situation are debt. Mayer Brown leadership, and I’ve been involved for a long time, hates debt. The idea of borrowing money to pay people is just totally out of bounds. And so, level of debt is an eye-catcher.
Guarantees of compensation to laterals, I think, is a tricky topic. The marketplace has been up over the last several years. The compensation levels of laterals, I think, are extremely challenging and were extremely challenging to firms that did that in 2008 and 2009 and 2007.
I think another takeaway is mergers. Just as we talked about with lateral hires, mergers are very tricky transactions and, obviously, at Dewey & LeBoeuf there will be a lot of thinking about what was done, what was done well, what was not done as well. And so I think we’ll look at that and go, “Hmm, what are the lessons to be learned here about how one goes about things of that nature or condonation?”
Another thing that I think is probably a takeaway is that you need to be very careful about how you value your legacy lawyers versus your new lawyers, and the signals you send to your legacy lawyers about the importance that they have to the firm currently and going forward. You signal that in compensation and you signal that in other ways, but those legacy lawyers are the primary cylinders in the engine, and you have to make sure that you don’t take them for granted and value shiny pennies over older nickels.
BROWN: Let me throw that out to the rest of the panel. I’ll move the hot potato to Susan.
LEVY: You know, I too wish Dewey & LeBoeuf well, and I only know what I’ve read in the papers like all of you. But to me, the takeaways are there is something to be said about conservatively managing the law firm. We’re really boring at Jenner & Block. We are well-capitalized. We only pay our partners out of our profits and not from the bank.
We’re also very transparent. We just finished our compensation. Jenner & Block’s compensation takes four months, so we’re almost done. But it’s all wide open. All of our partners see the schedule and know what the other partners make, and I think that ensures that our partners feel like they’re actual partners. I think we’re all going to look closely at guarantees for, you know, new partners coming in. I think that was an issue, as I read, about Dewey.
We’re also — you know, at Jenner — we are fully capitalized. We increase our capital commitment every year for our partners, so our partners and our revenues are one fund, which I understand can be difficult to tap into.
MORKIN: I think the only thing I would add is: What a scary thing to read about every day. You know, Dewey & LeBoeuf has some phenomenal lawyers. It’s a good organization. They’re doing all of the things that we’re all talking about doing, right — expanding, bringing in laterals. They’re making strategic decisions. Those decisions are the same decisions we’re all considering making every day.
One of the takeaways, I think, for all of us is that it really doesn’t matter how they made the decisions. It doesn’t matter if they made them perfectly, because it’s the perception now that’s driving what’s going to happen to Dewey. It’s a hard train to stop. In our industry, it’s all about our talent and our clients, and if our clients lose faith in us and if our talent loses faith in us, they start peeling off. And you lose your top two or three people or your top two or three clients, and then the next one starts getting nervous. The lesson for me is really just how fragile our industry is, and I think it’s probably made us all better managers as we look at this industry.
BROWN: Another thing, obviously, is rates, and Nancy, I would like to ask you this question. Yesterday there was a study released by TyMetrix Inc. Its annual report rates them, and it said partners at the upper end of the scale were able to increase rates by the largest percentage since the beginning of the recession — more than 5 percent, I think. On the lower end of the scale, the increases were far smaller. I’m wondering if you could talk a bit about how clients are reacting right now to increases and how much pressure there is that you’re feeling about raising rates this year.
GERRIE: I think it’s incredible. The pressure is just phenomenal, and I don’t have a client that hasn’t paid attention to their bill. What I’m seeing my clients object to is not necessarily a specific rate increase, but just that they want to see discounts. We struggle in trying to communicate that what they should really be looking at is the bottom-line spend and not necessarily the rates. But that’s a very difficult message to send to anyone who has to defend the hourly rates to their board.
So although we try to get people thinking, rearrange it and look at how they spent overall less even though our rates might be higher than our competitors in some cases, it’s a difficult message to get across. It doesn’t seem to be the actual rate or the rate increase that they object to. They just want to see a discount, so it seems to be a real shell game. I’m surprised that more GCs are not looking at the bottom-line spend and are reacting to this kind of artificial billing-rate number. But I don’t see that trend going away.
BROWN: Let me open it up to the rest of the panel. Are there tactics or tips that you can pass along about communicating with clients on rate issues when you have an increase like this? Don’t all chime in at once.
THOMAS: Well, I guess I would say that if I were a GC, on this topic, rates clearly fall under suspicion. One of the subtopics with the general partner would be cost, but I think there is a danger of over-focusing on rates, because there are a lot of other components to what a bill will actually be other than rates.
Now, obviously, No. 2 is discount, but No. 3 is how the matter is staffed. There are all sorts of ways of staffing that can drive up the ultimate cost even with lower rates and even with big discounts that drive up the cost to the client. How vigorously the matter is managed: Is the partner handling the matter really using a eye dropper as far as the use of resources or is he or she casual about it, and just at the end of the month saying: “The billable hours, I didn’t know they were going to be that high. Well, onward and upward.”
There are different ways of managing matters, the bottom line being there are a lot of components to cost, and if you don’t have good communication and good collaboration with your outside firm, just getting a victory on rates isn’t going to achieve any goal.
BROWN: Well, I’ll ask one more question here and then we’ll open this up to questions from the audience, but this leads to a discussion on alternative fees. Susan, I’m wondering if alternative fees — how important are they to your firm? It seems from most surveys and studies they’re still a rather small part of revenue. I mean, is it, in part, a public relations move to be able to show your clients, “Well, we have this available for you if you need it?”
LEVY: No, we try to be proactive with alternative fees. Last year somewhere between 10 to 15 percent of our revenue was some sort of alternative fee. It’s more than public relations. I mean, if a matter is well managed, that’s key. That’s especially key for alternative fees, but it’s really key for regular billable hours, because if you overstaff or overspend, your client is not going to be happy. But with our alternative fees, we have about the same overall profit realization rate as with our billable hours, so that’s pretty good.
And we have a special committee, which we formed four years ago, so if you want to bring in an alternative-fee matter that’s pretty complicated and it takes some time to work it through, we refer you to the committee and they help you do a budget and they give you various examples of what works under this kind of matter and that kind of matter. And we’ve been reasonably successful. So for our clients who want an alternative fee, we offer it and, in certain instances, the rates are better than the billable hours.
BROWN: Mike, how about Baker?
MORKIN: Well, like Jenner, we actually have a pricing model that we use internally to price an alternative fee structure for a client who wants that. We’re actually finding that clients don’t want that as much as sort of the press would have us believe they do. Most of our clients used to be in big firms — at least the general counsels — and big-firm pricing is what they know. That’s why we see more on the discount side as it plays out than we see on alternative fee structures.
Our clients many times do want this certainty. The budget is something that they’re concerned about, but they’re also concerned about feeling like the law firm got a windfall. And if they care about the relationship, and most do, they also want to make sure that you’re getting at least fair value. It may not be exactly what you think fair value is, but they are concerned about that.
It’s a relatively new structure for most law firms — and if you get it wrong, in a cash-basis organization, it can have a huge impact on a given year up-or-down. We found it very important to come up with some sort of modeling so that you’re accurately pricing that as well as you can — to make sure that you’re not going to get hurt, to make sure that you’re going to be competitive and that the client is going to get the value that they’re really after.
BROWN: I just want to open up the floor to questions from the audience.
AUDIENCE MEMBER: There’s been a lot of talk about the term “cost control” and a lot of discussion around costs and discounts and alternative fees, and I was just wondering: Over the last couple of years coming off the recession, do you feel you have improved in measuring — whether it’s measuring associate performance against an alternative fee structure — cash flow? Michael mentioned the modeling, which is really a great example, but are you better at measuring, which leads to better cost control, or have you always been good at that?
MORKIN: We’re certainly better at measuring the total price, right? What is still difficult to measure — and I think it will always be difficult to measure for a cash-basis business — is the timing of it all. We’re pretty good at pricing a deal or pricing a case or some other sort of assignment. The difficulty is that you’re not ever in control of how long that’s going to take, and usually with these alternative fee arrangements, it’s either front-loaded or back-loaded more than just a straight hourly rate. And where those fees fall in a given fiscal year can have a huge impact on your year, depending on how many of these you do.
BROWN: For the other firms, are you feeling stronger about measuring success on alternative fees?
THOMAS: I would say probably the most increased requests from clients over the last few years has been to box in total cost and give us a commitment of some sort — and commitments come in various flavors — as to what this deal or case will cost us. And that puts a lot of pressure on the firm to know how to calculate that. We’ve become much better at looking at precedents, and we’ve got nonlawyer staff that are expert in helping lawyers think through how to calculate those numbers and how to craft those commitments to clients regarding the contours of cost. So I think we’re definitely getting better, but we’re definitely a work in process. We’re not there yet.
AUDIENCE MEMBER: There has been a lot of discussion about bringing in new blood to firms, lateral partners, and all of the attention given to due diligence for them. What about the other end of the scale: How do you retain the institutional knowledge of the older attorneys in your firm? What are you doing about preserving their talents rather than mandatory retirement policies that I’ve always heard prevail?
THOMAS: I think I should let these younger managing partners up here answer.
LEVY: We don’t have mandatory retirement. At Jenner & Block, we have partners in their 60s, 70s and 80s, so we don’t have that issue. We talk about succession planning within each of the practice groups, so ideally there is a successor for each of the chairs or co-chairs of the practice groups.
BROWN: Do any of the firms on the panel have a mandatory retirement age?
THOMAS: Our experience is like Susan’s. If a partner is valuable, contributing, is able to manage his or her practice, age is completely irrelevant. Even if they don’t have those things, age is irrelevant. One of our busiest, most productive successful partners in 2011 is solidly in his 70s. We all treasure contributors too much to get hung up by age.
GERRIE: I think transition planning is a real challenge, though. It’s a difficult game to play because you want to make sure that you do have that — that you’ve institutionalized that client. But at the same time you don’t want to push out the senior partner who has been the relationship locus for that client for that long.
And we have had situations where we’ve had people who are not cooperating with us on transition planning. We have focused a lot more attention on identifying those situations earlier and earlier in the process to make sure — not so much to move somebody along, but more to make sure that we’re institutionalizing those relationships and making sure that we have backup plans. That we have people there who understand the client and the client’s needs in anticipation of the senior-relationship person moving along.
But it’s a real challenge and it’s a great dance. I’ve noticed it since taking on the role as office head that I’ve had a number of conversations on that topic, and it has been a very interesting experience.
Note: The comments above have been edited for length and to conform to NLJ style.