On Dec. 8, the Legal Institute for Forward Thinking launched its inaugural meeting at Jackson Lewis’ office in New York. LIFT was formed with the purpose of convening some of the legal community’s most important thought leaders to discuss trends, challenges and trajectories within the evolving legal market. Along with covering topics such as leadership, knowledge management, technology, branding, academia, innovation, firm finance, procurement and employment, Elliott Portnoy, Global CEO of Dentons joined us to discuss the global legal landscape.
Below are excerpts from a portion of our day’s discussions:
Financial Hygiene
Law firms don’t fail for lack of profits, they fail for sufficient cash to operate. Most firms that fail have multiple strong indicators two, three or even more years in advance. Plenty of time to take corrective action, as long as the partners are informed and are prepared to take corrective action. In most instances, the partners never have the chance to make that decision in time to save the firm, even though the firm leadership knows or should know that action is required. Below are but a few of the metrics that CFOs and law firm leadership can apply on a continuing basis to help keep the firm on track for success:
The working capital line of credit – (The ratio of the highest daily balance to the average daily balance -"HDB/ADB"- and their relation to the day each year that the loan balance is paid in full, the "BPF" date). The lower the HDB/ADB ratio falls, and the later in the year the firm reaches BPF, the more brittle the firm's financial position becomes.
The working capital ratio ("WCR") - The WCR is the excess of current assets over current liabilities, typically expressed as the number of times liabilities can be divided into assets. This computation should be made at the close of each month for a dynamic picture of the firm’s liquidity position throughout the year, and for comparability from year to year.
Profit margin on operations ("PMO") - PMO is simply the partner profit pool divided by firm revenue, presented as a percentage. The profit margin on operations provides insight into income volatility for partners. Every percentage point of PMO is precious; and the lower it goes, the more brittle the firm’s financial position becomes.
Compensation – If a firm’s median compensation is moving closer to its average PPP, then all the partners may be benefiting; if not, there is a distribution toward the top of the firm’s ranks. If the average PPP is rising, the median point is falling and the compensation spread is widening, the firm may be headed for rough times.
Increasing Revenue in Tough Markets
Though corporate demand for legal services continues to grow, the share going to law firms keeps shrinking because GCs are hiring internally and sending work to alternative service providers. Consequently, law firms face robust competition and price pressure. As price takers, to thrive, and in some cases, survive, firms must sell smarter, reduce delivery cost and improve quality of service.
Smarter selling means knowing clients, prospects and industries in more depth – an exercise in increasing networking, CRM, business and sales skills and knowledge.
Reducing delivery cost requires better utilization by delegating to lower cost lawyers, developing and sticking to budgets, boosting efficiency with technology, improving law practice process and deploying effective knowledge management.
Better service means shifting to, or further utilizing, an external perspective to develop a keener focus on what clients need, from crisper answers to value-add services such as online offerings.
Building Business and Differentiation Through Micro-Niches
2018 will be a year in which law firms experience ever greater frustration in trying to figure out how to organize their groups to best serve clients. Why? Because we are headlong into the age of the micro-niche.
Consider firms that have a “healthcare practice,” comprising “healthcare lawyers.” This is interesting in light of the health care industry now being divided into well over 40 different sub-segments. From the client’s perspective - which should be paramount - if they are looking for legal counsel in emerging litigation risk assessment with CRISPR genomics editing, a firm having hundreds of lawyers in some healthcare group really has little significance for them; proven expertise in their particular niche, however, does.
This pertains to technology, in particular. Clients are not looking for a “technology practice team.” They are looking for the specific legal experience you have in, and about, the business issues related to, say, applying 3D printing to the energy management industry; in utilizing AI to develop treatment plans for brain-cancer patients; in using industrial robots for remote construction site surveillance; micro-chipping employees to enhance workplace surveillance; or how synthetic biology is being used to produce wine without grapes – all things that are happening right now, as you read this.
Many law firms are recognizing the tremendous growth opportunities available to them in targeting and serving “tech-driven hybrids.” These are not purely substantive legal practices, nor are they correctly categorized as being industry practices, but rather a hybrid of both in that as a partner or law firm you can choose to serve AI companies (e.g. deep learning) and/or some specific sub-industry niche (e.g. FinTech) that may be dramatically impacted and disrupted by AI. And while this is creating opportunities, it is not without its challenges.
The challenge for many law firms will be in organizing groups capable of effectively serving these hybrids. For instance, U.S. law firm LeClairRyan has just launched a “new cross-office, cross-disciplinary Technology & Innovations practice team focused on ramping up service for companies that sell—or are heavily dependent upon—technology.” Across-the-pond Clifford Chance (UK) has pulled together 400 of its lawyers to form a new technology group to be deployed across different practice areas.
We are told that one of the very specific strategic goals at both Deloitte and McKinsey is recognizing that within the next three years, by the end of 2020, one-third of firm revenues need to come from services they do NOT now provide. Law firms can achieve that same goal if properly organized and strategically focused.
Ushering in Change in A Change Resistant Industry
If a successful large law firm faced an innovator’s dilemma, what would it look like? On the one hand, the firm has a wonderful set of endowments: (i) longstanding and lucrative relationships with industry-leading clients; (ii) a business that requires very little operating capital yet generates significant cash and profits; and (iii) an established brand that makes it the safe choice against upstart new entrants. On the other hand, when the traditional service offerings hit a plateau that is likely permanent, the firm struggles to use its superior endowments to reinvent itself in a way that locks in another generation of prosperity.
Many law firm leaders understand the innovator’s dilemma and worry about the timing and execution of reinvention. Thus, at numerous firms, there are internal innovators, or “intrapreneurs,” who are running carefully vetted projects designed to deliver tangible benefits to their firms. In its idealized form, this strategy raises awareness through small wins, which, in turn, create buy-in and momentum for more ambitious change.
Industry Knowledge and Purchasing/Negotiation Expertise Will Continue to Exert Pressure
Major legal consumers are increasingly leveraging what was formerly a sleeping asset: in-house procurement professionals. Generally reserved for other areas of procurement within an organization, GC’s are now utilizing the formalized procurement skill sets to negotiate lower rates, alternative fees and otherwise more predictability from providers in their legal consumption. And as the industry data continues to grow and aggregate, these procurement professionals will have stronger tools by which to shore up their positions.
Law firms can expect: (even) stronger, emboldened clients with the help of legal procurement professionals; substantially more tracking and measurement of legal services; objective comparisons of work product and time and resource expenditure will become the norm. Perhaps most shocking is that the traditional "trusted advisor" relationship will - for large companies, in particular - be replaced by strategic supplier relationships/partnerships aimed to maintain quality, increase efficiency and increase cost avoidance.
Leadership Duties
To climb to the top of the legal food chain is a daunting and consuming task; so is becoming a top of the food chain leader. In a market that is already over pressurized, law firm leadership is tasked with the huge effort of not only running their firms but also becoming good at it. When you consider the gravity of steering a $100M, $500m, and especially a $1B+ corporation, its leadership will have often spent decades climbing the ladder and building their skill set. Most law firm leadership does not have that luxury, leaving them in a position of playing catch up, all the while having limited time and resources to do so – particularly when still practicing while leading. There are particular areas where their development should focus:
Culture – Culture dictates a whole host of attributes and criteria within a firm, including things such as acceptable behavior, expected workloads, the allocation and implementation of resources and more. As a result, culture and organizational performance directly correlate, with culture often acting as an internal policeman, and sometimes a judge, in lieu of policies and procedures. It is immensely important, and as such, care needs to be taken in understanding what it is – i.e., all of its parts and its origination – how it is fostered and developed, and how it can come apart and fail. As stewards, and in some cases, architects of their firm’s culture, it is incumbent upon leaders to become experts on the subject.
Strategy – Many firms need effective strategy at this stage of the market’s evolution if they are to survive, much less thrive. Even the “Elites” should be investing in strategy – Rome didn’t last forever. With that in mind, the creation of a succinct strategy – i.e., (i) a coherent plan of action that is, (ii) composed of sufficiently proximal steps, which (iii) builds off of current strengths, that are (iv) governed by an overlying norm or policy and (v) lead a firm from their current (practical) position to one of measurable competitive advantage – takes significant and deep understanding of the process, the information to be collected, the advisement to seek, the appropriate allocation of resources, market knowledge, one’s firm’s station in the food chain and so much more. It is not sufficient to read a book or take a class. It needs to be studied and understood at a deeper level if one is to be truly competent with it.
Competition – When asked who one’s competitors are, the list usually consists of law firms. In this fragmenting and increasing liberalizing market other law firms are just a part of the equation. Truly understanding one’s competition requires not only understanding where their firm actually sits in the private practice food chain – versus where they would like it to sit – but also understanding all of the other drains on revenue and profitability, including technology, off-shoring, outsourcing, the aggregation and leveraging of industry-specific data, consulting firms, in-house departments, procurement professionals, AFAs, attrition and more. This is an entire area that requires significant exploration.
Technology – Leadership will likely never be in charge of analyzing, at the deeper levels, the veracity of certain technologies that are under consideration. That said, technology creep is ever-quickening and will only speed up and grow. It is a hard reality that all firms will have to embrace, whether sooner or later, and those leaders that truly make the effort to (i) understand the entire technological landscape, (ii) make reasonably sound predictions about what technology(ies) will be important for their firm’s adoption in the next 2-5 years, and (iii) understand that technology at a deep enough level that they can effectively and intelligently direct, and work with, the professionals that will be in charge of adopting and implementing it, will have a significant advantage over their peers.
Client and Provider Alignment
Being that legal services are a credence good, providers have long enjoyed asymmetry of information between themselves and their clients. But with the significant advancement in the savviness of legal consumers of the past 20 (or so) years, clients have been turning much of the legal industry into a buyer’s market. They are largely no longer willing to pay for (i) work that can be performed cost effectively in-house, (ii) certain types of work that associates, particularly junior associates, used to do, and (iii) work that can be done faster and cheaper by technology or non-legal vendors. They are, however, still quite willing to pay for true commercial expertise, including demonstrably superior knowledge of their business and the regions in which they operate, and the convenience of quality service and business solutions beyond traditional legal counsel across multiple jurisdictions. To best provide for this, there are four areas of alignment that firms should focus on:
Price – including that which is aggressive and value-based, alternative fee arrangements, a mix of talent and vendors and pricing models that share risk.
Innovation – including that which gives lawyers the tools to do their jobs and serve clients better, and using technology to deliver service that is regarded by clients as being better, faster and delivering more value.
Talent – including providing more non-partner track lawyers, contract lawyers and multi-disciplinary teams.
Service – including high end, high-quality legal work that is delivered across multiple jurisdictions and business solutions that are beyond just legal counsel.
Predictions for the Coming Years
While predictions are difficult to make, the following are four:
AI/Technology is a ticket for admission. Clients expect all their law firms to adopt AI in some form. And as the market evolves, clients will only be able to notice AI through exceptional use or by its absence. AI, in particular, is still very much in its early stages of adoption, but the firms that embrace it and become market leaders in its usage will reap a significant advantage. And those that leverage technology to provide for a better, more predictable and affordable solution will be embraced by clients.
Law firms able to scale their client-facing operations will have a great advantage, as currently, 51% of large clients report their law firm delivers an inconsistent performance across the team serving them, across offices and across practices. These clients say this lack of uniformity stops them from giving these firms any new work or work in a new area. The law firms who learn how to deliver a world-class performance uniformly across their firm will have a significant advantage.
Compensation systems will close, but doing so will gut a few firms before open systems completely disappear. Why? Because the firms with flexibility in compensation are slowly picking the best performers out of lockstep firms. Scott Barshay departing Cravath was the glaring example of this in 2017. This trend will accelerate as time passes, forcing firms to develop subjective systems to keep their top performers and compete for laterals. The Magic Circle firms abandoning their full lockstep models for a modified model in recent years is a good example of “the locksteps” responding to this trend.
A small number of law firms will bet and win big on business development. It is impossible for law firms to operate without clients, yet only a small number of law firms are treating business development as a top strategic priority. Of course, most firms will incentivize business generation accordingly, but formally creating and implementing sales, marketing and cross-practice synergy programs along with allotting significant resources to education and attorney development in all of these areas are a different matter altogether. The firms that have made this a strategic priority are already stealing clients from other law firms and will steal more, of course leaving other firms with less profitable clients and a shrinking client base.
