All-Star Briefing Thought Provoking Insights That Will Keep You At The Top Of Your Game

One

John Ettinger (Davis Polk & Wardwell) examines the challenges of responding to clients seeking to ensure value and efficiency in a difficult economy

Two

Michael A. Ross (Blaqwell, Inc.) assesses the impact of economic stress on law firm hiring, training and revenue generation

divider

John Ettinger: Even in troubled times, clients still need top-quality legal assistance, but they may want it delivered on more custom-made terms



PLI: In this complicated economy, what are the challenges of responding to clients seeking to ensure value and efficiency?

JOHN ETTINGER: The demand for legal services continues even in this downturn. Requests for certain types of transactional services were quiet, although there has been a notable uptick more recently. The prior transactional work was, and to some extent continues to be, replaced by an increase in distress matters often involving "bet the company (large or small)" matters.

The Focus by Clients on Legal Spending: The economic downturn has generally and appropriately increased clients' focus on legal expenses. In-house legal departments, if taken to be cost centers only (which I would argue is highly debatable), are only able to affect their spending. Many have undergone significant reductions in force and are examining their legal spend even more carefully. A November 2008 study by Altman Weil based on a survey of 115 general counsels indicated that 75% of the respondents are facing budget cuts and the number one target for reducing costs is spending on outside counsel. ("Law Department Cost Control, An Altman Weil Flash Survey of General Counsel," Altman Weil, Inc. (December 2008)).This is understandable and law firms must be responsive to client concerns.

But to suggest that the focus of clients on the amount and nature of their legal spend constitutes a quantum change may be a real overstatement and is a disservice to generations of prior general counsels. Law firms with diverse practices have been subject to careful scrutiny over legal bills for years. A result of the change wrought by the economic downturn may be that conversations on these points are taking place more frequently, but that may not be the case. It may also be that these conversations are simply involving lawyers on both sides who, given the prolonged period of prosperity (including the relatively mild 2001 downturn), did not previously witness the full impact of prior recessions. Also, the impact of the current economic upheaval on the supply and demand of legal services may affect the conversation at least as much as any longer-term change in focus or philosophy.

Responding to Client Needs: Whether this is a continuing or a materially increased degree of client demand for value, the fact remains that dealing with it requires a considerable degree of attention on the specifics of each situation. Identifying the general trend alone that such a focus is occurring is not useful. To take an extreme — and in that sense easy — example, thirty years ago my firm had a client which sold a type of investment product to the public continuously marketed in a variety of different forms. The products at one point represented a startlingly high percentage of the entire new issues markets. The client required a specialized expertise, virtually daily turnaround, ability to reduce time to market to the barest of minimums and a cost structure that fit the situation. The solution which emerged involved very early and high usage of computerization, creation of a dedicated team of lawyers and legal assistants specially trained so that the client was not economically burdened with the expense of unnecessary generalized training, a system for rotating generalists whose broad skills sets were also crucial, and per issue pricing which compensated the firm for its considerable investment, but also provided the client with an important degree of certainty as to the overall legal cost. A more traditional law firm training, staffing and pricing model would not have been suitable for this client, no matter how great the exhortations to the law firm lawyers to deliver increased value and efficiency.

Law firms are increasingly meeting these types of client needs for solutions tailored to the situation. Consistent with my belief that this client focus on value and cost is not a new development is the belief that law firms are generally pretty good at delivering customized solutions in response to meet the demands. At the very least, every firm needs to be good at this or someone else will solve the client's problem.

This example may illustrate reasonably well the workings of the initial discussion about analyzing and dealing with trends and changes: (1) it was helpful in crafting the solution in that case to recognize the historical antecedents, including both what had previously succeeded, and what had not; and (2) rather than just reacting to a general trend towards proliferating retail investment products and reduced time to market, this solution quite specifically took account of (a) the significant value of highly specialized lawyering and training, (b) the firm's technological capabilities at that time, (c) the best means of involving generalist lawyers in light of the firm's staffing model and (d) the extent of the business activity by the client in this area.

In fact, this particular solution was not the best model for other client situations we then confronted, although the needs all originated from the same general trend in the demand for investment products. It turned out also that our model looked very different from those of other firms, which was irrelevant to us and to them.

The perhaps unusual needs of the client in my example does not mean that this type of customized solution to client needs is not the general rule. Examples abound. The client with a large in-house law department, for example, is best served differently from the client with a small department. In the former case, the question is often how most efficiently to leverage the in-house capabilities of the client. In the latter, the focus is on providing a wide range of services on a cost-effective basis. Training and maintaining a large number of lawyers without adapting to increasingly specific clients is not going to work for law firms. And likely most firms recognize this to the point that those of you who have continued to read to this point may find all this blindingly obvious.

How law firms deal with these client needs will depend even more on the client base they serve and the product base they offer. The firm bringing expertise to a higher percentage of clients with continuous issues and large in-house capabilities should not respond to the trend of increased needs for value and efficiency in the same way that a firm whose expertise is more often directed to clients or product areas where in-house capabilities are less relevant. If the drive towards value and efficiency is in fact accelerating, there is every reason to believe that law firm structures will diverge more in some meaningful ways rather than collectively move towards a norm.

More from Johnn Ettinger — Download Some Thoughts on Dynamics in the Legal Services Industry
divider

40% off PLI course handbooks — Save when you order PLI Law Firm Leadership & Management Institute 2010.

CLE for $99! Order either or both of the following On-Demand presentations and save:

  • The Law Firm in Today's World (101 minutes)
  • What Do Clients Want Today? (94 minutes)

    divider

    Michael A. Ross: For law firm hiring, training and development practices, the times they are a changing

    PLI: Can you compare traditional law firm management practices re hiring, training/development and revenue generation with how they have changed in light of the difficult economy?

    MICHAEL A. ROSS: In regard to hiring, for large law firms, the principal source of new associates has traditionally been law schools. This has led to law firms making hiring decisions at the beginning of the second year of law school for their summer programs and then offering permanent positions to virtually all of the law students in their summer programs to start after completing law school. As a result, hiring decisions were made two years before the new lawyers begin as permanent associates. In recent years, there has been more lateral hiring of associates from other law firms, particularly by firms opening or expanding their presence in new markets. But, the principal source of new associates remained law schools and the large law firms tended to focus on obtaining most of their new associates from their summer programs.

    As for training or development, traditionally, law firms provided their lawyers with little formal training. Lawyers learned and developed their skills from mentoring by the more senior associates and partners for whom they worked. Law firms then decided that it made sense to provide brief orientation sessions for their entering class of new associates, to provide some technical training in specific practice areas principally to their junior and mid-level associates and, as various states adopted formal CLE requirements, to develop and provide programs to enable their lawyers at various levels to satisfy state bar CLE requirements. Few firms focused on providing programs tailored to the needs of senior associates or partners and it was a rare firm that provided training on marketing or on the development of management skills.

    In the area of revenue generation, for the past few decades, most billing by large law firms has been on an hourly rate basis. Therefore, the focus has been on hours, the more hours charged on client work the more value the lawyer was seen to provide. The firm management then focused on hourly rates, increasing them annually. Matters that can support higher leverage (i.e., more associates per partner) tend to be more profitable and therefore are seen as more valuable. These three factors — hours, hourly rates and leverage — were seen as the keys to a financially successful firm. In addition, partners were pushed to avoid write-downs of time charged on their matters and to bill and collect promptly. Realization rate and the timing of billing and collecting were also seen as relevant to profitability.

    The current recession has resulted in a significant diminution in the type of legal work typically done by large law firms. The transaction business has been dormant and, while reports are that there has been some increase in litigation, it has not been significant enough to make up for the loss of transaction business. As a result, many firms have laid off large numbers of lawyers (partners and associates) and non-legal staff, have encouraged lawyers to take sabbaticals, have cut back hiring for summer programs as well as permanent positions and have reduced the length of summer programs and deferred the start dates for permanent associates.

    In addition, clients have been pressuring their law firms to reduce billings. This has put pressure on hourly rate billing and more and more general counsel are reporting that a higher percentage of what they are spending on outside counsel is being billed to them on a fixed fee basis or based on some other alternative fee arrangement. Billing pressure from clients, in turn, has put pressure on law firm staffing, as clients want the minimum necessary staffing and don't want to pay for the training of junior associates. This, in turn, has put pressure on the use of leverage and has raised the question as to how firms can train their lawyers more quickly to be useful to clients.

    When the economy does eventually recover, the expectation is that law firm management practices will not revert to what they were prior to the recession. Some changes in hiring practices, lawyer training and development and the relationship between law firms and their clients are inevitable.

    Many large law firms have announced that they are significantly reducing the number of new associates they are looking to hire. This has resulted in a reduction in the number of firms interviewing at law schools. In addition, many firms have shortened the length of their summer programs and reduced the number of participants. A few firms have eliminated their summer programs entirely. But, law schools are likely to remain the principal source of new associates for large law firms. Lateral hiring is now almost nonexistent among large law firms.

    Firms acknowledge that their hiring practices need to change. No longer can or should they hire as many "warm bodies" as they can find at the better law schools. Also, many firms have questioned the wisdom of making hiring decisions at the beginning of the second year of law school, two years before a law student would start working as a permanent associate. With a reduction in the number of new hires, firms will have to do a better job of identifying and attracting law students who have the potential to be happy and productive in the large law firm environment. With a reduction in the number of new associates to be hired, a greater percentage of the new hires must be successful hires. Some large firms are becoming more professional in their recruiting efforts. This development is likely to increase. It may lead to less reliance on summer programs as the principal source of permanent associates.

    As part of this effort to be more professional in their recruiting and hiring practices, some firms are considering a two-track system. Some new associates would be hired on the "partner track" and others on a separate track with different compensation. Some firms are also indicating that they plan to make greater use of contract or temporary lawyers, and legal process outsourcing firms in India and elsewhere, when they have large scale projects. This would enable the firms to handle projects with large staffing needs without incurring the expense of hiring and maintaining a permanent legal staff to support them.

    With a smaller number of new hires, and client pressures not to train junior associates at their expense, many firms are now considering more extensive training programs. In many cases, these training programs are not limited to junior associates. Some firms have even concluded that helping their mid-level and more senior associates and junior partners develop marketing and management skills would also make sense. Firms have decided that they need to make their lawyers more productive more quickly and also need to keep their lawyers longer.

    A few firms have indicated that, for the first year or two, associates will spend time in a classroom setting, shadow partners around at firm expense and handle pro bono matters where the firm is in a position to give them more responsibility at an earlier stage in their careers. In some respects, these ideas are reminiscent of residency arrangements for young doctors. Whether or not these ideas become widely accepted (and I have my doubts), they will undoubtedly influence how large law firms train their lawyers. The idea that professional development should depend on whether or not an associate happens to work for someone who is an effective mentor is not defensible.

    Other training ideas are also being explored. A number of firms are encouraging their associates to work as secondees with clients and one English firm recently announced that it would send five of its junior associates to work with a legal process outsourcing firm in India for a year.

    One consequence of the extensive layoffs among lawyers at large firms, and the current focus on training and development, is a more disciplined approach to evaluations. There seems to be a recognition that the value of a lawyers' contribution to the firm should not depend solely or principally on the number of hours charged to clients. There are other factors that affect value, such as the type of work handled, the skill and potential demonstrated, teamwork, leadership ability and involvement in activities that strengthen the firm as an institution. Of course, for training and development to be seen by partners as important, and therefore to be effective, partner compensation systems should be adjusted to give recognition to partners who play a significant role in associate training and development.

    Hand-in-hand with a more sophisticated evaluation process is the announcement by many large firms that they plan to move away from lockstep compensation for their associates and to move toward merit-based compensation systems. Instead of paying everyone at the same experience level, or everyone at the same experience level who achieves a certain billable hour target, the same amount, many firms plan to differentiate based upon performance and potential. There is, of course, no established compensation model, but generally speaking firms intend to pay a base amount to everyone at the same experience level who is in good standing and then differentiate with variable compensation or bonuses.

    More and more law firms are reporting that corporate clients are pressuring them to reduce fees and, in that connection, to agree to fixed fee or other alternative billing arrangements, such as the use of blended rates, caps, partial contingent fees or a performance bonus. Clients want to pay less and also want certainty or predictability. This pressure on fees, in turn, puts pressure on staffing. More clients are unwilling to accept large teams of lawyers or high leverage on their matters. To be profitable, firms need to figure out how to staff and get the work done efficiently. With a fixed fee arrangement, for example, the firm will be more profitable if it can do the work more efficiently with fewer lawyers and hours. This focus on efficiency rather than hours will affect how lawyers are compensated and how many firms are run. This fee pressure is one of the factors leading many large law firms to conclude that they need to place more emphasis on training. Their lawyers need to be better trained more quickly.

    The new developments that we are now seeing are not revolutionary. They have been around for awhile. What the pressures of the current environment have done is accelerate their consideration. As the legal industry evolves, the firms that are able to differentiate themselves by training their lawyers effectively and providing their clients with high quality work on an efficient basis will continue to be successful. But, the key to success will also require firms to differentiate themselves by the type of work, type of client and industry expertise for which they are known and respected.

    divider

    40% off PLI course handbooks — Save when you order Diversity in Law Practice 2010: Strategies and Best Practices in Challenging Times.

    Save 20% when you order the entire PLI On-Demand program Diversity in Law Practice 2010: Strategies and Best Practices in Challenging Times.