The Firms

October 27, 2008 5:45 AM

Welcome to the Future: A Tale of Two Cities

Posted by Paul Lippe

It's not the best of times, it need not be the worst of times.

Last week I spoke to a group of law firm leaders and asked two questions:

"Over the last ten years, whose world has changed the most, clients or law firms?," to which 100 percent of the audience answered "clients."

And, "Over the next ten years, whose world will change the most, clients or law firms?," which resulted in 80 percent of the audience choosing "law firms."

We've come through a period of dramatic and accelerating change for clients, but relative quiescence for law firms. As change further accelerates for clients it will cause whiplash for law firms. What will that look like? Here are two scenarios.

In ClientVille, the conversation goes something like this:

Legal Department Finance Manager: I just came from the corporate planning meeting. Until we have more visibility in '09, we're not giving any guidance to the Street. Company-wide, we've frozen all hiring, and most travel and discretionary spending, and we're targeting a 12 percent spending cut, but all non revenue generating functions are supposed to cut 16 percent. We need to have a plan in place in two weeks, otherwise our shareholders/private equity investors/government bailout-ers will have our heads."

General Counsel: Don't they realize that we can't control spending? We can't control litigation. What case do they expect us to lose? The law firms will be hitting us with 5 to 7 percent rate increases in a few months. What about marketing, they've got all these people who sit around and never do anything? Why not cut them?”

Finance Manager: Marketing has a 20 percent cost reduction target. And the CEO has told the CMO that if he can't find a way to make the numbers with that target there will be a new CMO. So let's focus on some specific expenditures:

-Our biggest litigation is an IP dispute for a product line that is being terminated.

-We can move to more standardized contract terms to reduce the time it takes to negotiate a deal. Besides, we'll be doing fewer new deals.

-We've finished all our SOX work and the board is pretty stable.

-Our CFO says M&A is off the table.

-We should open up our mid-size litigation to competitive bidding and success-based pricing.

-If we bring some of our employment advisory work in-house and outsource some of the IP asset management, we can probably save money.

General Counsel: Hmmm...The CEO really said that about the CMO? OK, do a report on our top 20 law firms by spend and ask each of them to tell us how they can cut costs while keeping quality constant, and tell the first five that come up with better ideas that we'll commit to new work opportunities for them. Do me a favor, you sign the letter so that I can still be the good guy, and you might want to drop a hint that if we can't get the savings we need we'll have to bring in purchasing.

In Law FirmVille, the conversation goes something like this:

Managing Partner: When I was elected, I promised everyone I'd increase partner profit by 6 percent a year. I'll be damned if we fall behind Smith & Jones, but I'm not sure 6 percent is realistic now. Over the last ten years, the financial industry has gone from accounting for 20 percent of our revenues to 45 percent. We walked away from clients in retailing and manufacturing because they were too rate sensitive. We've got nine laterals on guaranteed plans for next year, and a commitment to take an additional 40,000 square feet of office space. And in the last three weeks, eight GCs have asked us to 'discuss innovative partnership proposals.' Our accounts receivables are up to 81 days, with over $14 million due from clients who are in bankruptcy. We're technically in violation of one or two of our loan covenants. The bank has never bothered us before, but in this environment....

Key Partner: Are clients prepared to accept less quality for less money? Don't clients realize we have to pay top dollar to get the best and the brightest, that all our costs are going up, that our key partners will leave if we don't pay them what they're worth--we still don't make as much money as the CEOs of most of our clients anyway. Why don't we fire some of our staff people, and get rid of some of the less productive partners? If the clients really complain, just offer them a 3 percent additional discount.

Does either exchange sound familiar? A fairly stilted starting point for a dialogue, but understandable as a legacy of a boom. As John Maynard Keynes wrote, "Worldly wisdom teaches that it is better for reputation to fail conventionally than succeed unconventionally." But these are not normal times, so let me suggest four quick, unconventional steps for firms in this unprecedented environment.

1. Put everything on the table. Law firms have operated according to a set of outmoded assumptions, most importantly that the only way to deliver quality is to charge a lot, and that the only direction for profits is up, regardless of whether clients' profits are moving in the same direction. These may be conclusions, but they can't be the starting point of every conversation, because then it's not a conversation.

2. It's all about value and market share. In a downturn, winners figure out how to gain market share by delivering more value. That, in turn, drives organizational learning and client trust. The goal must be relative performance--strengthening the firm relative to competitors--rather than absolute performance and assuring partners of a certain income level.

3. Lead the conversation with clients. Your clients are having these conversations internally, and your competitors will figure out how to have them with your clients. If you wait to be called on, you can only lose.

4. Lead the conversation internally. Lots of folks in law firms are spending part of their day updating their resume, gossiping with or about friends who've lost their jobs, and running down rumors. It's an anxious time. At a minimum, firm leaders should be honest about the status and the priorities of the firm. Is maximizing partner profit the only priority? Is the firm really on track for its plan? Is there a sense of community that will be reflected in decision-making? Could the firm increase investments to strengthen itself for the future? Most people can tolerate hardship, provided it's honestly described and sensibly shared, especially when it's not unique.

My friend Mark Chandler, the GC of Cisco, often talks to firms about where the world of law is headed in the future, a world that he and I agree will be more efficient, more transparent, and more aligned.

When skeptics point out that law firms are doing quite well, thank you (at least until last month), he asks, "What will the practice of law be like in 100 years?" The answer invariably is that the world will be transformed in that time, and that the practice may be as different in 100 years as it was 100 years ago.

It seems what we're all disagreeing about is how long it will take, not that transformation will come.

As I see it, the current economic environment is going to give law a chance to cram twenty years of change into the next three to five years.

After penning the immortal line paraphrased at the opening of this essay in a Tale of Two Cities, Charles Dickens went on to write:

"In both [England and France in 1775] it was clearer than crystal...that things in general were settled for ever."

Of course between 1775 and 1793 two events called the American Revolution and the French Revolution made life a little less settled.

So while no one will handle this change perfectly, those who handle it better, and sooner, than the others will come out on top.

Paul Lippe is a founder and chief executive officer of Legal OnRamp.

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Interesting commentary. In your research did the issue of how does a firm attract and retain top talent beyond financial rewards? I am lawyer researching those issues in relation to attitude and emotion at the Univ of Pennsylvania.

Unbeknownst to many large, major law firms, these changes have already been happening. Due to the boom, large law firms did not see how much work was getting shifted away from them or did not care. They traded an erosion in law firm relationships for a focus on "high end" work. No other service provider has had fees increasing at 6%-10% per year over the past 10 years. Now the "high end" work will be at a lower volume and large firms will suffer. Every GC I know has already been through the steps outlined above many times.

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