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- Let's try to be better persons
This is the first article of 2021. I have decided to resist the temptation to look back on 2020 and speculate on to what extent 2021 is going to be better. At this point in the pandemic, there is really nothing original to be said. It is eerie how the situation regarding the virus, the vaccines and the economy has exactly developed like we predicted in our book back in April 2020 (read A New Dawn, Chapter 1). However stressing ‘I told you so’, also is not very helpful, so right now let’s leave the virus for what it is. As by tradition, the first article of a new year is supposed to be reflective or inspirational. I have chosen to focus on a topic that is close to my heart, but not very popular in the world of Big Law where our clients are. So please bear with me. Be assured, from next week onwards it will be practical information as usual. Let’s start with a question: What do Thierry Herzog (France), Alex van der Zwaan (United Kingdom), Tobias Teufel (Germany), Ulf Johannemann (Germany), Skadden Arps and Freshfields have in common? The answer is: they are all either very reputable lawyers, or very reputable law firms. More interestingly, they are each on trial and are convicted (or about to be convicted) to imprisonment or financial penalties. Herzog is on trial in his capacity as the lawyer of former French President Nicolas Sarkozy; Van der Zwaan and Skadden Arps for their dubious role in relation to Trump and the Ukrainian Government; Teufel, Johannemann and Freshfields for their involvement in the Cum-Ex scandal. These four individuals and two law firms merely serve as an example on how a highly regarded reputation and standing are no safeguard against ethical misbehavior. Those who still believe that ethical misconduct is something that could only happen to ‘shady lawyers’ or ‘fixers’ such as Michael Cohen, Rudy Giuliani or Sidney Powell, could not be more mistaken. It can happen in the elite firms and to highly regarded celebrated lawyers. You would probably be shocked if you knew how many examples I have personally seen from close by over the past years. Ethical misconduct can come in many shapes and forms and only very few catch the attention of the public prosecutors and the media like the examples above. There are cases of Me-Too behavior, partners that charge for hours they did not make, lawyers that facilitate money laundering, bribery or corruption. There are lawyers that give false statements, lie to their clients or to the regulators, that antedate documents and so on. You name it, it happens but it shouldn’t. Often it is in the culture of the firm To my experience, in the elite law firms, lawyers seldom are inherently bad people. They do not have criminal intent by nature. Only every now and then one of the lawyers over time gradually ends up on a slippery slope, after which it typically goes from bad to worse. Often this process is fueled by the pressure to perform. Pushed to generate revenue, a desperate partner might give in to the temptation to accept a ‘shady’ client or facilitate a ‘shady deal’. Under pressure to perform a partner might resort to unfair billing practices. Fearing to lose a client, the lawyer might accept to produce a document that is not in line with the truth. Please don’t get me wrong, any behavior that crosses the line is in the end the full responsibility of the individual, but there are certainly things that the firm could do and should do to help avoid bad things from happening. So, as a law firm leader, what should you do? Make sure that every new partner meets high ethical standards. Discuss ethical dilemmas structurally and on a regular basis. Embed it in the training of young lawyers from day one. Walk-the-Talk and refuse clients that request lawyers to facilitate or enable crossing legal or ethical boundaries. Create a culture where it is safe to raise ethical questions or challenge perceived unethical behavior. Both internally and with clients. Have a zero-tolerance policy if it comes to clearly crossing the line. Those who are found guilty of ethical misconduct should be forced to leave the firm. Regardless who it concerns, even if it is your Star Partner. Walking the thin line Over the years, I have had many discussions with lawyers on this topic. The argument that I probably have heard most is that ‘it is the duty of a lawyer to do everything for the client and therefore to push the line and look for the limits of what is allowed’. While in general this holds true and a lawyer must maintain his/her commercial edge, it does not mean that all is allowed or ethically justifiable. This is exactly the reason why lawyers need an exceptionally good moral and ethical compass. The mere assumption that Cum-Ex was within the law, does not mean that it is the right thing to do. You want the lawyers in your firm to have a special radar for this. It is this radar that needs to be honed. For other types of misbehavior one need no radar: Me-Too and Over-Billing are never acceptable. Let’s try to be better persons The new year 2021 has only just started. We are looking back at a year in which polarization in society has reached unprecedented heights. In the US this culminated in the storming of Capitol Hill. In many other countries similar tensions between parts of the population have arisen. The year 2020 has been highly stressful for everyone. Everyone is physically and emotionally tired of the whole situation and therefor short tempered and more extreme. As a law firm, we cannot change that, but in fact we can contribute in our own small way. Trying even harder to do the right thing is definitely part of that effort. So let’s work on bolstering our ethical standards and let’s defend the rule of law.
- Some Rainmakers cause Thunderstorms
Mankind has always had a fascination for ‘Super Humans’. People just like you and me, but with some extraordinary power. The Greek had Heracles, the Baby Boomers had Batman and our children have Harry Potter. What these characters have in common is that on first sight they are just like us, ordinary people. Only if the world is in danger they come out and protect us from evil. Being at the core human, makes them relatable and enables us to fantasize that perhaps we also could be special. Such mythical creatures are also present in the Legal Industry. Here they are called Rainmakers. At first sight they seem to be just like all the others but when it comes to creating revenue, you can see their Super Powers. Like magnets they seem to be able to attract prestigious clients and big mandates, and that is how they come to the rescue of their firm. Rainmakers have the ability to create reputation and profit out of thin air. Thanks to this ability Rainmakers have mythical status and are highly sought-after as lateral hires. Typically a lawyer is not outgoing by nature. If asked, most would prefer to work on client files, rather than having to go out and find new clients. Perhaps deep down, they would like to be more confident and sociable, but like the children who fantasize about being Super Humans, they know that they are not. That is why they envy and admire the Rainmakers, as they represent what they would wish they could be. Rainmakers, sometimes not quite what it seems Partners whose revenue is in the upper 10% of their firm, are commonly considered Rainmakers. This would suggest that the fact that they have high revenue is predominantly thanks to their amazing reputation and/or acquisition skills. In reality this is not always the case and requires closer examination: Some ‘Rainmakers’ have simply ‘inherited’ a large part of their practice from a partner before them. Unless they cannot live up to the standard, those clients will typically remain loyal. Building one’s practice on a high quality 'inheritance' is much easier than building from scratch. Succeeding a renowned partner will also be a definitive advantage in building a reputation. Some ‘Rainmakers’ just got lucky once on landing a very large mandate, maybe because another lawyer was conflicted. This is especially known to happen in litigation. Some ‘Rainmakers’ go to great lengths to get files put in their name. Sometimes ‘Rainmakers’ claim that they are the Client Partner even if other partners do the actual work. Sometimes ‘Rainmakers’ are tempted to open a second file in the same matter which is then under their name. These ‘Rainmakers’ are very protective as it comes to their Book of Business. Some ‘Rainmakers’ purposely create weak offspring by appointing their ‘helpers’ to partner while expecting them to keep serving in their practice. We know of many instances where ‘Rainmakers’ did never make partners that were better or equally good as themselves. Some ‘Rainmakers’ only allow new partners to be appointed in their practice area on the condition that they will not compete and focus on a different segment of the market. As you will understand, above are just a few examples to illustrate that not every lawyer who is perceived as being a ‘Rainmaker’ actually possesses the ‘magical skills’ required. Just like a Las Vegas magician is not a sorcerer like Harry Potter. Fear and the Stockholm Syndrome Within their firm, Rainmakers have a very special position. That almost invariably includes having an important voice if it comes to the management of the firm. Rainmakers rarely act as Managing Partner, but behind the scenes they want to pull the strings. This as such might seem logical, but it actually does not make sense. The qualities that make a Rainmaker are different from those needed to define the strategy or to manage the firm. So why is it that Rainmakers wield so much influence? The naked truth is it is all about fear. The other partners feel inclined to accommodate the Rainmakers on all their whims, simply because they are afraid that otherwise the Rainmaker might get upset and might decide to leave the firm. Putting Rainmakers on a pedestal is in a way a form of the Stockholm Syndrome. In our practice, over time, we have come across examples of Rainmakers that had shown atrocious behavior. Committing fraud, Me-Too, misuse of firm property, it all happens. The partners know about this, but prefer to turn the blind eye. This illustrates the lengths to which partners are prepared to go to keep the Rainmaker on-board. Afraid as they are to lose the revenue, profit contribution and the reputation. Obviously the majority of Rainmakers is not at all guilty of any ethical or legal misconduct. Still some among this group might be found guilty on bullying other partners or behaving like a dictator during Partner Meetings. Again, the other partners tend to refrain from taking action out of fear of displeasing the Rainmaker, who then might leave. All this to illustrate that the relationship between the firm and the Rainmakers is ultimately ruled by fear. No need to explain that this is an unhealthy situation. How to mitigate the downside of Rainmakers? Management guru Tom Peters is probably the most famous consultant McKinsey has ever produced. His influence on the firm was enormous and helped raise McKinsey’s profile beyond its wildest dreams. Yet in 1981 Tom Peters was asked to leave. His contentious departure has been well documented. McKinsey had a rule that The Firm is more important than the individual. When Tom Peters became a 'Prima Donna', McKinsey did not hesitate to ‘kill’ its most celebrated Rainmaker. Turned out that ‘firing’ Tom Peters did not harm the firm, as we all know today. Also Tom Peter has done quite well for himself. So for law firms, the first step is to recognize the Stockholm Syndrome and to overcome the urge to allow the Rainmaker to behave as a spoiled celebrity. Law firms could learn from McKinsey in recognizing that The Firm is more important than the individual. Don’t be afraid to part with a Rainmaker that is causing Thunderstorms. Secondly, and perhaps even more important, consciously mange the quality of your partner group. The ability to attract mandates and clients should not be an exception. It is a core requirement for every partner. Law firms are still focusing on legal competencies as it comes to nominating new partners. It should be recognized that commercial and relationship skills are far more important. Lawyers should be trained from the day they start, to develop those skills. When the average quality of the partner group increases, the Rainmakers will gradually disappear, as every partner becomes a Rainmaker. Being a Rainmaker should become the rule, not the exception. Then the creature will lose its mythical status. This is part of what we advise on for a living. Do not hesitate to contact us if you would like to discuss: firstname.lastname@example.org
- Stop making a business plan right now
Comes December, come familiar rituals. Every year law firms have to approve a budget for the next year, promote new partners and, every couple of years elect new management and discuss partner compensation. Part of this annual recurring ‘circus’ is requiring partners and practice groups to produce a business plan. This may sound like a sensible thing to do, but it is not. I do not recall ever having met a single partner that is looking forward to producing a business plan. Here’s what typically happens: the Managing Partner, the Practice Group Leader or Business Development sends out a template for the business plan, to be completed before a certain date. Partners have no clue how to deal with this and it is about the busiest time of the year, so they just leave it. When, after several reminders, the deadline approaches, they ask their assistant to pull up the business plan from the year before, make a few alterations and submit. A few weeks later, all the plans are discussed. Lawyers are highly skilled in discussing things that have been put on paper, so the discussion of the plan is navigated without any hick-ups or consequences. Shortly after everyone gets back to work as usual as if nothing has happened. A useless ritual performed once again and home-free until the next year. Just like they did it back in the days in the USSR Remember the Soviet Plan Economy? Under Joseph Stalin's close supervision, a complex system of planning arrangements had developed since the introduction of the first five-year plan in 1928. For every enterprise, planning ministries defined the mix of economic inputs (e.g. labor and raw materials), a schedule for completion, all wholesale prices and almost all retail prices. The planning process was based around material balances—balancing economic inputs with planned output targets for the planning period. On the whole, the plans were overoptimistic, and plagued by falsified reporting. In short: in theory plan-economy may have sounded like a great idea, but in the real world it did not go well. Every time I see a law firm requiring it’s partners to produce a business plan, I cannot help thinking of the Soviet Plan Economy. You will have to admit that the similarities are striking: a pre-defined mix of economic input (billable hours) and retail prices (rates), with planned output targets for the planning period and the resulting plans being over-optimistic. Requiring partners to produce a business plan, provides a rational false sense of control. Businesses are supposed to make business plans, that’s what we are taught. Law firms are businesses and should also make business plans. Never mind that these plans are almost invariably a mix of wishful thinking and a clear lack of market intelligence. Just like in the good old Soviet times, partners are required to put on paper how they are going to produce let’s say 2.5 million in revenue and what new clients and markets they are going to develop. Sound remarkably similar to “We are going to produce 10 million tons of potatoes that we are going to sell in South East Asia”. For the Soviets we know, this notoriously did not work well, so how has this been working for you so far? So if not a business plan, what should you do? Let’s start with highlighting that your firm should have a strategy. A strategy that clearly outlines where the firm wants to be after a period of five years. The strategy should describe at a minimum, what type of clients, what markets and what type of matters the firm is looking for. Preferably the strategy should also set clear targets and milestones against which progress can be monitored. This strategy is valid for let’s say a period of five years and should not be changed in the meantime unless a true Black Swan event occurs (which usually is not the case). Once you have a viable and realistic strategy, everything else is execution. Execution is a permanent process and not an annual ritual. This indicates that instead of the annual business plan, it makes more sense to work with quarterly targets for every partner and every practice group of which the execution is permanently monitored and evaluated. Execution and evaluation should be a joint orchestrated effort and not individual actions that could well be scattered all over the place. Law firms do not need business plans, they need a strategy and a permanent framework for execution. This execution needs to be supported by data. This would be accurate and up-to-date data on progress, and current data on external economic and business developments. Every month partners should sit together in small groups and discuss where they are and what should be done and/or could be improved in the month to come. At the end of every quarter there is a formal meeting with all the partners to take stock and define goals for the next quarter. Business development originates in the strategy. It focuses on the execution needed to reach the strategic goals. It is a permanent process that needs to be deeply embedded in the day-to-day workflow of the partners. The execution should be closely monitored and supported by internal and external data. No other method will help you reach your goals and targets, certainly not copy-pasted business plans done once a year. That is a pointless habit, that you should stop repeating as of today. If you need help with setting this up, or with your strategy or the execution thereof, drop us a note, we are happy to assist!
- The single most important predictor of success
As the year draws to an end, a familiar discussion emerges. Whenever law firms are inching closer to completing their fiscal year, discussions on partner remuneration flare up. 2020 no exception. If one would look at it from a distance, it seems as if in law firms the discussion on what would be the best and fairest way to divide the profit among the partners never ends. Like ‘Groundhog Day’ it keeps repeating itself. There is no one way of doing it right With a global practice like ours, we have probably seen more partner remuneration systems than we could count. As every lawyer knows, the two main categories are: Merit-based and Seniority-based. Partner income is either closely tied to their individual performance, or to the performance of the firm as a whole, of which each partner receives a cut based on seniority. The former is commonly referred to as ‘Eat What You Kill’ and the latter as ‘Lockstep’. Basically it boils down to remuneration being either ‘Me-based’ or ‘We-based’. Looking at global market data, the law firms that operate a pure lockstep profit distribution system are a minority. In the Legal Industry, sometimes it seems like ‘lockstep’ is considered some sort of ‘Holy Grail’. When on 10 September Davis Polk announced that they were moving towards a ‘Modified Lockstep’, this immediately made headline news, on which I was asked to comment. Moving from Lockstep to Modified Lockstep is presented as another ‘defeat’ for the lockstep. Reality is, that all this attention for Partner Compensation is overrated. After years of experience we found that there is little or no relation between a firms compensations system and its commercial success or profitability. We see market leaders with a lockstep and we see ‘losers’ with a lockstep. The same goes for Eat What You Kill. The reason that firms like Davis Polk shift to a Modified Lockstep has mainly to do with boosting their ability to attract expensive lateral talent. Attracting Star Partners requires a lot of money and this typically does not fit well in a rigid Lockstep. We need to talk about the Spread One of the main advantages of a Merit-based compensations system is that it allows for a much larger spread between the top performer and the one at the bottom. The average spread in partner compensation in law firms is about 10 : 1. This means that the highest earning partner earns ten times as much as the lowest earning partner in that firm. Although this is the market average, we have come across firms that have a 33 : 1 ratio (highest earning partner gets 33x what the lowest paid gets). In a pure lockstep the compensation spread would typically be between 5 : 1 and 3 : 1, so much lower than market average. As it comes to Merit-based compensation, the spread in remuneration reflects to a certain extent also the spread in quality between the partners. I must say ‘to a certain extend’ since there are also other factors in play because most firms have highly complicated formulas for calculating the remuneration of each partner, which take different aspects into account such as ‘Origination Credits’. However as a rule of thumb: the bigger the spread, the bigger the difference in quality in the partner group. What is the single most important predictor of success? So if your Partner Compensation System is not a predictor of success, what is? This is where data analysis comes in. We applied a tailor-made algorithm to a data-set that we pulled from different data sources and supplemented with some of our own data. The data clearly shows that a narrow quality spread between the partners combined with a high average quality is the single most important determining factor as it comes to success and profitability of a law firm. Even tough this may seem obvious, we see only very, very few law firms act accordingly. If the average quality and the spread in quality of the partner group are so important, one would expect law firms to be extremely critical as it comes to partner promotions: every new partner should preferably help raise the average quality of the partner group. We know from experience and from looking at data, that this is rarely the case. Partner appointments remain at large opportunity driven political events. We even know of firms that introduce weaker partners on purpose in order not to have too many ‘Prima Donnas’. Actively managing and continually improving the quality of the partner group is going to make you more money as a partner, than any Merit-based system can do. Partners that are on the same level, perform better as a team, as all will have similar quality of mandates and clients. A comparison could be made with football (soccer): the Champions League teams have better players over all and a very narrow spread as it comes to the quality of the individual players. Any team where a few players would be top-level and earn accordingly, while the others are mid-level, but with a lower salary, would not perform well. In order to be successful as a team the players must have a comparable quality. Yes there will always be a Lionel Messi or a Cristiano Ronaldo in a team, but the 10 other team members are still damn good. For law firms that want to be successful, this is no different. Become a Talent Breeding Machine Now that we know for a fact that in the end the only thing that matters is the average quality and the spread of the partner group, we also know that scouting and developing talent is the best investment a law firm could make. Like the Champions League teams all have extensive professional talent training programs with the sole purpose to breed better talent than their competitors, law firms should do the same. Rather than discussing Partner Remuneration again and again, firms should focus on raising the quality with every new partner appointment. The higher the average level, the more money a partner will make. Even if the system is an undiluted Eat What You Kill. The law firm that becomes the best Talent Breeding Machine, will be the one that wins in the end.
- How COVID-19 impacts partner promotions
The other day I was interviewed by the economist of a large international bank. The economist is writing a report on the economy in 2021 and wanted the hear my thoughts on the legal industry. Based on an analysis that was underpinned by trends in global trade and the development of GDP, their model had projected that employment for lawyers in the legal industry would shrink notably in the coming year, an outcome with which I said I tend to disagree. After the 2008 financial crisis, law firms were shedding jobs and significantly reduced their headcount. When from 2010 onwards the economy picked up, the legal industry struggled to rehire lawyers with the right level of experience. Firing lawyers in a panic turned out to be a costly mistake. Looking at 2020 it is clear that law firms have learned their lesson back then. So far there has been no sign of mass redundancy of lawyers. On the contrary: law firms are not just keeping their lawyers, but some are even handing out massive bonuses. At the same time some 64.000 legal secretaries, support staff and paralegal jobs quietly disappeared since March 2020 in the US legal market alone. Other jurisdictions are showing a similar picture. Also partner promotions seem to remain on-track. There is not a single law firm we know of, that has postponed of cancelled partner promotions. This being said, we see two major questions arising: 1. How are the new partners going to build their practice? The present year 2020 has been very good for law firms. There have been no signs of an overall decline in demand and clients have hardly been asking for discounts. According to our outlook, 2021 will be different. Building your own practice as a young partner is difficult enough as it is in normal times. It could prove to be very hard in 2021. At many law firms, partner promotions tend to be based on personal relationships and internal politics, more than they are on the argument of a strong business case. Lawyers get promoted partner because they have served their partner loyally for many years and partner promotion is their reward. In law firms that have a merit based compensations system and reward ‘origination credits’, the more senior partners could even have a financial incentive, as they will profit from the origination credits in providing the new partners with work. Not scrutinizing the business case before making the appointment is ill advised in normal times, it could become a serious issue in times of a massively shrinking economy like we are seeing now. Law firms should double up the effort to help newly appointed partners build their practice in 2021. Even if this could mean that the sitting partners need to handover part of their business and will see their income reduced as a consequence. This is the question you need to ask yourself before voting-in the new partners next month: “am I confident that there is a good business case, and am I prepared to invest some of my own income to make this a success?” If you hesitate or if the answer is no, perhaps don’t do it… 2. Looking forward: will there be partner promotions at the end of 2021? This year has been in many aspects an extraordinary year. For one, the legal industry has been working remotely for most of the year. Even though Pfizer and others have shared promising data regarding their vaccines currently under development, it remains unlikely that the world will return to normality before the end of 2021. It would be realistic to assume that working from home will remain the norm for the foreseeable future. Partner promotion decisions are a marathon, not a sprint. Being promoted to partner requires a level of sponsorship and connection to the firm. These are things that will be very hard to create remotely on-line. Not being physically together will become an obstacle when it comes to evaluating and developing the next generation of partners. It is hard to imagine how this could be done without sufficient in-person interaction. We see the lack of personal interaction as one of the major obstacles as it comes to talent development in the year to come. On top of that we also expect that in 2021 the financial effects of the economic crisis will kick-in and we foresee overall demand for legal services will shrink by 6%. Obviously some legal areas will be more affected than others, but is seems reasonable to expect that 2021 will not be nearly as good as 2020 for most law firms. A decline in revenue and PEP will also not be encouraging for new partner nominations at the end of 2021. What to do? As the legal industry is changing and emerging technology is gradually augmenting lawyers to be more efficient, human talent becomes more important than ever. Law firms will have to step-up their efforts to educate and train their young lawyers in a more structural and broader manner. Just putting a trainee behind a screen and let that person make the ‘flying hours’ starting with stupid simple work and gradually becoming more complex over time, will no longer be adequate. At TGO Consulting we are working with clients to set-up professional structural permanent education and training programs for their lawyers of all categories. These training programs not only prepare for future partnership, but they also create much more points of evaluation and interaction, even when working from home. The young lawyers who have been participating so far, show an increase in sense of belonging and a much better understanding of what their potential career path might look like and what it takes to become a partner at the end. If you are considering implementing a structural education and training program at your firm, please do not hesitate to get in touch. We would be most happy to share our insights and our experience.
- Prepare for a long harsh winter
Tuesday 3 November, I read a slightly bewildering article on Bloomberg. In Europe banks are lobbying regulators to restart dividends and bonusses while we are still in the worst economic recession in living memory. The tone struck by Europe’s lenders is in stark contrast with a deteriorating backdrop of new infections and restrictions that threatens to bring more economic pain. Coming at a time when taxpayer money is being used to soften the impact of lockdowns that could bankrupt companies and throw millions out of jobs, the dissonance risks putting bankers on a collision course with regulators. The banks look extremely good at the moment because governments take the biggest burden of the crisis. Thanks to governments, the biggest banks in Europe in Q3 set aside the least amount of money for doubtful loans since the onset of the coronavirus -- at a combined $7.2 billion, it’s a fifth of the $36.7 billion provisioned in the first half. Reading this, it seems that the banks are completely out-of-sync with reality. It is a question of when, not if, banks’ asset quality will deteriorate in this crisis. This is interesting as there are some striking similarities with what we see happening in the legal industry right now. For many law firms 2020 will be a bumper year. When the crisis first hit back in March, generally law firms feared for the worst and immediately started taking measures to brace for the impact. Cashflow was for most the first concern. All available credit lines were drawn to the max. Some firms put staff and lawyers on government furlough schemes. Some firms – temporary – reduced salaries of lawyers and staff. Payments to creditors were deferred and partner payments were halted or reduced. Anything to save cash and secure liquidity if revenue would drop. There was huge concern that clients would pull back on collections or would defer work. Some law firms anticipated no less than a 30% drop in revenue. Today it is November and we are seven months into the crisis and we have seen that the legal industry so far has steered clear of the worst case scenario. Very few clients pulled back work or adopted substantially longer payment terms. Looking at the tier-1 segment of the legal market, there have been surprisingly few discount requests from clients. Like the banking sector, the legal industry has taken all precautions and braced for an impact that did not come. Production so far has been on par with 2019 Year-on-Year or sometimes even better. Law firms have taken large provisions for client fees that they would not be able to collect, but clients are paying and paying on-time. Things are looking particularly bright right now. At the same time costs are down YoY compared to 2019. There is almost no travel and expenses, no events and lower cost of marketing. Many firms have asked part of the furloughed assistants and staff to leave and have been lowering their salary costs. Some partners have been ushered into early retirement or asked to leave the firm. With a healthy revenue, normal collection rates and lower cost, profits are expected to be higher than in 2019. Despite the pandemic and the economic crisis, many law firms are in for a bumper year. The impact is yet to come! [ source OECD data by 31-10-2020 ] With the rapid rising number of Covid-19 cases in Europe and the United States and many economies back in lockdown, all hopes for a rapid V-shaped economic recovery have evaporated. On top of that we have the US-elections which took place on 3 November which adds further to the uncertainty, then there is Brexit and in 2021 Angela Merkel will step down. As the graph shows, the European economy is projected to contract by 11.5% over 2020 and the US economy by 8,5% and this does not yet take into account the outcome of the elections. With such numbers, it is unavoidable that many companies will be affected. Many SME are going out of business as a consequence of the forced closures and mandatory lockdowns. The hospitality, travel- and airline industry, the retail sector, the car industry, just to name a few and all their suppliers are facing hard times. Millions of jobs will disappear and the damage does not stop here. Also large multinationals that still make a more than decent profit are shedding jobs. On 29 October Royal Dutch Shell Plc reported $955 million of net profit over Q3. This beat even the highest analyst estimate. The company reported lower net debt and strong cash flow. Still 9000 jobs at Shell are to disappear and Shell is not exception, they are just an example. In an article that I published on 9 April 2020, I predicted that the 2020 legal market in a worst case scenario would shrink by 10%. At that time the article was meant to dampen the ‘panic’ at law firms and the fear that the market would collapse. My prediction back then was that this was unlikely to happen and with today’s knowledge I was right. My forecast today, seven months down the line, is less optimistic than back then. I fear that things will get much worse before they will be getting better. It is unlikely that revenue and profitability for law firms in 2021 will be as good as they will be in 2020. I would advise to err on the side of caution. For those law firms where the fiscal year ends on 31 December, I would advise not to distribute all the profit as usual, but make provisions for the year to come. If this is not possible for tax reasons or just because the partners do not trust the firm with their money, then at least manage expectations and prepare the partners for weaker results. It would also be advisable to take an extremely conservative approach as it comes to advance payments to the partners. You do not want to end up in a situation where partners have to refund payments received. I think law firms could learn from the banks. Just as the banks right now are pushing to pay dividend and bonusses to keep shareholders and traders satisfied, law firms are under pressure to distribute all profit in full to keep their partners satisfied. Just like the banks seem out-of-sync in their demands, law firms will be out-of-sync if now they do not save for a rainy day. For the banks there is no doubt that their asset quality will deteriorate in 2021, just as for the law firms it is hard to imagine that they will once again be spared from the effects of the economic crisis. Just like the 2008 financial crisis led to a 5% contraction of the legal market in 2009, the current economic crisis will again lead to a drop in demand and revenue. Only this time the economic crisis is much deeper and more wide spread and not limited to the financial sector, so the impact will likely be more severe. Get ready for a long dark winter!
- The best player is often a worthless captain
[Guest post by Lodewijk van der Peet - Leadership Coach] In 2004, there were several scouts in the stands of the Amsterdam Arena, all watching Raphael van der Vaart, one of the most creative players of the highly successful Ajax football team. The team’s technical director, Arie van Eijden, was excited and nervous. His trainer, Ronald Koeman, insisted on keeping “Raffie,” his star player. So after consultation, Arie decided to raise the price considerably. Ronald was instructed to make Raphael captain and to always keep him in the starting team. In confidence, he told a journalist from De Telegraaf, the country’s most widely read newspaper, that the Ajax planned to offer Raphael a new contract. Don't tell anyone! It was international news within hours. Bad atmosphere Raphael’s teammates rebelled against him. The guy might play great football, they said, but he shouldn't tell anyone what to do. Who does he think he is? The bad atmosphere affected the team’s performance to such an extent that Raphael lost his position as a top transfer. He opted for the huge salary at Hamburg SV, a mediocre team where he was the top player. Then to Real Madrid. Not a success. Actually, Raphael has never had the success predicted for him. Even a top player needs a coach Quite a few managing partners have gained their positions by being the best players on their team. Because of their exceptional intelligence they usually manage to make it work (unless they’re too vain). They listen to their predecessor and probably know a CEO of some other large company to whom they turn to for advice over drinks. But at the Champions League level, no one can make it with intelligence and commitment alone. Like the very best football players in the world, a managing partner needs a good coach. Serving players Sometimes managing partners are appointed who are not the best players. They have to ensure that the best players can continue to excel and are not bothered with trivial corporate matters, like automation or HRM. Those are the serving players. The disadvantage of this position is that they have little authority within the group and less mandate to represent it. Get to work Mistakes are inevitable in both cases. The managing partner is paid well and continues pushing on, trying to figure out how make it work. They are offered no support. Don’t complain. Keep working. Loser! In the legal world, it’s seen as a weakness to admit you don't know something. It’s even a loss of face to admit that some things make you nervous. But addressing a group of employees is quite different from convincing a judge. Dismissing an employee is quite different from reaching a settlement agreement. Motivating, exciting, persuading, orating, and looking someone in the eye while delivering bad news is new territory for a new managing partner. Burnout I spoke with several managing partners who from their first day on the job started their one-way trip to a serious burnout. They had completely underestimated the job and hadn't counted on being given so little time, credit and goodwill. They spoke of being mercilessly and frequently criticized by their colleagues, who were once their peers, but soon saw them as targets. A burnout is the ultimate loss of face in the world of elite lawyers. And a unnecessary waste of talent. Coaching It’s high time for law firms to provide sufficient guidance during the onboarding process. Give the new managing partner a dedicated coach. A mentor. Give her a few months to learn the required skills—skills that no one is born with. A coach doesn’t even need to know anything about the legal profession. Perhaps it’s best if they don’t, actually. The coach must have knowledge of people and communication. Because a managing partner must suddenly deal with a completely new set of challenges and processes, entirely distinct from those pertaining to law for which she was trained. And the fees charged by a good coach are miniscule compared to the enormous risks they will reduce. Reappraisal of experience Is it a bridge too far for your firm to hire a professional coach? If so, I have another suggestion: ask a for help and tips from people on the floor. They will admire you for being vulnerable at the start of your new mission. You might be surprised how helpful they will be. This article is written by Lodewijk van der Peet - certified leadership coach
- Perhaps we should worry about the next generation
Remember when you started out as a young lawyer straight out of university? Well, I certainly do. Most of us have been incredibly lucky. We graduated at a time when the legal industry was experiencing unprecedented growth. Basically, when we started, everyone with a ‘decent background’ and a law degree, could make it as a lawyer. The demands back then were way lower than they are today. Law firms have professionalized and grown over the past 25 years. Partner incomes today are much higher than anyone would have thought possible back then. Anyone who is a partner at a law firm today has in a way had a tremendous tailwind when making a career. These days the reality could not be more different. Many more young people acquire a college degree in Law. October 24 The Economist published an article stating that each year America produces some 25.000 “surplus” lawyers. Please let that number sink in for a moment. Universities are churning out more graduates than the market can absorb. Over 30% of British graduates are “overeducated” relative to their jobs, according to that same article. Having a ‘decent background’ and not being a ‘total idiot’ is no longer enough to make it. The tailwind all of us experienced, has turned into a headwind. Many of us probably would not succeed if we had to do it all over again today. I hope this insight will make us somewhat humble. On Friday 23 October I hosted a Virtual Roundtable with a number of international experts on education. This is a topic which is close to my heart and I am deeply worried by how we (the haves) are robbing a generation of their future. With large parts of the world now deep into the second wave, education of the future generation is severely hampered. While this time governments are trying to keep schools open, schools themselves are struggling because of teachers falling ill or having to self-quarantine. Large numbers of schools have switched to blended-learning, a combination of in-class and on-line. For those students who are in vocational education, the situation is particularly bad since on-line education is not an option and also traineeships at companies are extremely hard to find right now. We are not only robbing the young from their right to get a decent education, but we are also depriving them of their social and emotional development. The journey from childhood to adulthood is not only about acquiring knowledge, but also about social interaction and learning to stand on your own two feet. It is impossible to learn how to function in a job if you have had your education largely alone at home behind a computer screen. Perhaps you are familiar with the film ‘Being There’ (1979) directed by Hal Ashby and with Peter Sellers playing the lead character, a gardener who only learned about the real world by watching television. Having acquired virtual knowledge and wisdom, he turns out to be socially and emotionally inept. The problems do not stop here. Also the opportunities to find a good job after graduation are fading fast. Thanks to governments’ response to Covid, we got caught in the worst global economic crisis in living memory. Many SME are going out of business as a consequence of the forced closures and mandatory lockdowns. Millions of jobs will disappear and the damage does not stop here. Also large multinationals that still make a more than decent profit are shedding jobs. On 29 October Royal Dutch Shell Plc reported $955 million of net profit over Q3. This beat even the highest analyst estimate. The company reported lower net debt and strong cash flow. Still 9000 jobs at Shell are to disappear and Shell is not exception, they are just an example. Please remember that it will be the future generation that has to repay all of today’s government debt created to support the economy. We are spending their money, we are depriving them of a good education, we are denying them a normal social life and are blaming them for being young and careless. It goes without saying that this is all not black and white. But the contrast between the ‘baby boomers’ who are now in power and who’s career path has essentially been a-walk-in-the-park, and the future generation who will have far less opportunities and is facing an uphill battle, is pretty stark. What you could do to help I am aware that all this is not your fault and that law firms have little or no influence on government measures, education and the economy. Still there are a couple of things that you could do to help: Do not stop recruiting, but hire more trainees than you would need. Sounds stupid? Look at it from this way: most tier-1 law firms will likely have a bumper year. Revenue over 2020 is typically on-par or up from 2019, while the costs are down at the same time. This would allow for being generous while hiring. Even if you already know today that you do not want to keep all recruits after three years or so, you can still give them now a valuable education that will enhance their job opportunities further down the line. So take your social responsibility and become a mini-training center helping young people on their way. Develop a purpose made training program for your young lawyers. Due to work-from-home guidelines, there is limited or no opportunity for lawyers to work from the office. This is especially bad for those who are fresh from university now starting their professional career. Remember how your own start as a lawyer was back in the days? Remember how much you had to ask and how much you learned by simply observing how the partners operated and behaved. We at TGO Consulting are right now helping our clients to develop tailor made training programs for their trainees (and associates) to teach them important skills and the firm culture along the way. Team-up with the universities. This is something we are doing ourselves: we reached out to universities and are offering free guest lectures to help bridge the gap between the theoretical education and the real-world needs in (tier-1) law firms. We would encourage law firms to do the same. Try to pull some of the training you would normally do within the firm forward and offer it to students. This should not be about the law, as universities have this already covered, but it could be about drafting, negotiating, how to divide risks and how to communicate with clients. I mentioned the roundtable with international experts on education that I hosted on 23 October. It goes without saying that the experts are deeply worried and raised a lot of concerns. At the same time, all of them had confidence in the ability to adapt and the resilience of the young generation. Having two daughters myself, I think this is true. At the same time I feel that it is our (the haves) duty not to be selfish and to do whatever we can to help. Only by actively reaching out we can avoid that the future generation will become those who ‘have not’
- In fear of retirement
Last week I published an article on Partner Retirement. This seems to have struck a nerve and triggered a lot of response. Since I had already planned to write an article on the emotional aspects of partner retirement, due to popular demand, I have decided to pull that forward. So here you have it, a glossary of emotional considerations for partners who are facing retirement from their law firm. 1. I am too young to retire Depending on the law firm, partners may have to retire as early as their late fifties. Partners at that age bracket are still relatively young and will likely have some forty years or so ahead of them. Being asked to retire feels like a disqualification and is a harsh confrontation with one’s own mortality. Up till the moment of retirement life seems endless. Retirement signals that one has entered the last stretch of the education-working-retirement divide. For most partners retirement just does not feel right. They feel way too young to retire. 2. I don’t know what to do next Most partners who are close to retirement have been with their firm for over 30 years. Many have even never worked anywhere else. Being a partner is typically an all absorbing high stress occupation. Once retirement comes in sight, partners often have no idea of what to do next. Most certainly do not what to sit at home staring out the window for the rest of their lives. They want to remain relevant and contribute to society. Many partners dream of being appointed to the boards of companies. Reality is that this is not going to happen for 95% of them. So if not board member, then what else can they do? Many partners do not have hobbies or interests. Lack of perceived alternative options make that they will try to hang on to their practice for as long as possible. 3. I need the money Partners at law firms make a lot of money and many have the lifestyle to reflect. Despite the high income, you might be surprised by the percentage of partners that is not financially independent by the date of their scheduled retirement. One does not need to be an actuary to calculate that it takes a lot of money to maintain a wealthy lifestyle for forty years or more without a steady flow of income. A surprisingly high number of lawyers still burns through too much money during their active career, while saving too little for later on. On top of this there are those who went through a costly divorce, taking a huge chunk out of their savings. Whatever the reason, part of the partners who are facing retirement just need the money. 4. My wife does not want me home I am taking the male partner perspective here, as the overwhelming majority of partners retiring today are male, reflecting the lack of gender diversity back in the days. The partners who are in their late fifties/early sixties today have basically spent most of their time at the firm working on client matters. I literally know a partner who, when his wife visited the office to show their first born son to his colleagues and his team, accompanied her home after the visit with the pram filled with dossiers and she having to carry the baby. The practice came first, family often came second. With their husbands spending so much time away from home, no wonder these wives have developed a life of their own. A life with lots of freedom and things to do, can be brutally disrupted if the husband is suddenly at home 24/7 and starts to interfere. Matrimonial tensions do arise after decades of stable marriage if the status quo gets disrupted. 5. I do not have any friends Having spent 30 years or so practicing at the same firm, most of the people you know will be business related. They are either colleagues or clients. This whole network will fall away overnight after the moment of retirement. This can be hard on partners, all their cherished relations turn out to be just business related. People valued you, not per se because of who you are, but because of what you represented. Believe it or not, but I do personally know lawyers who get sort of emotional when they pass a building belonging to a former client where they have been in board meetings on a frequent basis, and have now, after retirement, no ‘ticket’ to enter anymore. Once an insider, now an outsider. There could hardly be a stronger signifier that life has gone on and you are not needed anymore. Partners can be lonely after retirement. Lonely and feeling ‘useless’. 6. I fear losing my edge Of all the emotional considerations regarding retirement, for me this is the most serious. While working in their practice partners need to be top-performers. Working permanently on the top of your abilities puts the brain in a ‘state of excellence’. Turbo performance if you may. This supercharged intellect is what makes the top-partners so special. They have unparalleled analytical skills, they are razor sharp. They are inspiring to hang around with. You have seen what happens to Olympic athletes, world champions and professional sports players. After their career has ended they often grow old and fat, much faster than anyone would expect. The same is – mentally – true for lawyers. I have seen it happen, more than once. When a partner does not use his brainpower in supercharged mode anymore, part of that brainpower just disappears. The brilliance fades away, and the person is not special or inspiring anymore. This is what I would personally fear the most. There is a limit to the length of these articles. The six emotional considerations regarding retirement are absolutely not exhaustive. There are many others that are also relevant to consider. Not all partners are subject to all these fears. And, yes, there are partners who happily go into retirement without any fear or any regret. This article is not for them. It is for those who resent retiring from the firm. As outlined in last week’s article, retirement of a partner is merely a contractual event. It has nothing to do with judging the partner as a person. For law firms we advise to set up a formalized ‘Partner Retirement Program’ to coach the partner in overcoming the fears and develop a positive perspective on a meaningful future. Such program should also deal with a smooth transfer of matters, clients and contacts. If managed well, both the partner and the firm will benefit. TGO Consulting has all the required knowledge and expertise to help you set up such a program. Please inquire how we could help you as a partner, as a firm, or preferably both.
- Retirement: What if stars go out with a bang?
When stars in our galaxy reach the end of their life cycle, they turn into ‘White Dwarfs’ and fade away. Occasionally there is a star that does not obey to these rules. These stars become ‘Supernovas’ and go out with a bang. A Supernova is the biggest explosion known in the universe. An unimaginable force of destruction. This article is not about astrophysics, it is about partners reaching the age on which they are to retire. Ideally law firm partners beyond a certain age should gracefully ‘fade away’, leaving their practice and address book to the generation below. Every once in a while there invariably is a partner that refuses to facilitate that transition. These partners then become ‘Supernovas’ that go out with a bang, causing lots of collateral damage. We need to address the Baby Boomers Partners who are today hovering around the age of 60, started their career as a lawyer more than 30 years ago. The legal world in 1990 is in many aspects incomparable with the legal industry today. During that timeframe the legal industry has seen exponential growth. The Business of Law has been professionalized beyond recognition, in part thanks to pioneers such as Harvard professor David H. Meister who published his book Managing the Professional Services Firm in 1993. Partner incomes have quadrupled and many partners are earning more today than they ever imagined when they became partner some decades ago. Baby Boomers have built their career with an incredibly strong tailwind. Not only their professional career, but also in their private lives. For example the value of their property has risen tremendously. Not only thanks to their extraordinary talent, but also thanks to the favorable circumstances, the Baby Boomers have built impressive practices with big revenue, high profitability and a strong reputation in the market. Now that they are around the age of sixty, they start to think about their future. Most law firms have set an age limitation to equity partnership. This age limitation now has come in sight. This is often causing sleepless nights for the partners concerned. Baby Boomers don’t want to retire because they are still too young Certainly today, no one around the age of 60 would consider himself/herself ready for retirement. Thanks to a better lifestyle and medical advancement, people are getting older and stay in great shape much longer. Any lawyer approaching in his early sixties will still consider himself/herself fit for practice for many years to come. And rightly so. Partners in law firms have to retire, not because they are old and tired, but because they have to make way for the next generation. Being a partner is different from being an employee. Partners have entered into a contractual relation and in this contract is stipulated when it ends. It is a business arrangement, not a personal or emotional one. Whether or not the partner is still fit to maintain a high level practice at the age of retirement is not part of the equation. The contract ends, and that’s all there is to is. Nothing personal. Reality is however that most ‘senior’ partners do not see it that way. They have developed a kind of amnesia as to why the partnership agreement is formulated as it is. When they were still young partners, it seemed like a great idea to set a fixed age limit to equity partnership an make room for younger partners to grow their business and their profit share. When reaching the age limit themselves the perspective has completely shifted. Now it feels as if they are being cut-off at the height of their career. TGO Power Curve© When we work with our clients, we often use a TGO Power Curve© analysis. This analysis uses a smart calculation for each of the partners based on the size of the practice and the reputation in the market. The result is plotted on a base line, representing the age distribution of the partner group. The graph below represents two different situations. Figure-A reflects a partnership where revenue and market reputation are concentrated with partners who are now in their late fifties and early sixties (the Baby Boomers). Figure-B represents a law firm where the strongest and most successful partners are in their early fifties. As you can see, in Figure B, partners are transferring their practice towards the end of their professional career. Why smooth, well managed succession is in everyone’s interest. “Do not go gentle into that good night, Old age should burn and rave at close of day; Rage, rage against the dying of the light. Though wise men at their end know dark is right, Because their words had forked no lightning they Do not go gentle into that good night.” These words of Dylan Thomas come to mind when we see the internal struggle some partners – especially Rainmakers – have as the contractual end of their partnership comes near. Part of that struggle is emotional and has to do with uncertainty and fear. I will address this in a separate article in the weeks to come. From a pure business perspective it is in the interest of the firm that partners start transferring some of their practice and clients early on. Ideally this starts as soon as the partner makes a new partner. New partners should get part of the practice as a form of ‘starting capital’ the day they become partner. Splitting a successful practice in two, is the most efficient way to grow revenue and profitability for a law firm. Around the age of sixty a partner should once again actively start to transfer mandates, clients and reputation to the younger generation. The problem is that this requires a great amount of trust. Obviously the partner should have complete trust in the quality of the next generation (I can tell you that this is not always the case). The partner must also get the comfort and the guarantee that transferring part of his/her practice and revenue, will not lead to loss of respect, status or income. Rainmakers have special status in any law firm. No partner will want to risk losing that special status. Sometimes rainmakers do want to continue practicing until they are 70 or beyond. They then rather take their practice and move to another firm towards the end of their career. For them, not transferring their practice is part of an ‘insurance policy’ that they still have market value. Again, as understandable as this might be, this is not in the interest of the firm and of the remaining partners. Succession is an important and complex topic. Now that the Baby Boomer generation is about to retire, succession has more than ever become a strategic issue for law firms. We at TGO Consulting have a wealth of experience. We would be more than happy to advise and help put together a process that perfectly fits your firm.
- The hourly rate is both dead and alive
In the garden of Huttenstrasse 9 in Zürich (Switzerland), you will find a life-size sheet-metal cat. The cat is movable, so one can never know beforehand where it will be. Between 1921 and 1926 the famous Austrian theoretical physicist Erwin Schrödinger lived in the house while he sojourned in Zürich. In 1933 Schrödinger received the Nobel prize for his contribution to the wave theory of matter and to other fundamentals of quantum mechanics. Most of us lawyers may not be familiar with Erwin Schrödinger, but you might have heard of ‘Schrödinger’s Cat’. Schrödinger’s Cat is the product of a thought experiment in 1935 explaining one of the fundamentals of quantum mechanics in which a quantum system such as an atom or photon can exist as a combination of multiple states corresponding to different possible outcomes. I know this is way too complex for simple lawyers like you and me, and therefor you only have to remember the cat. Schrödinger’s hypothetical cat is locked in a sealed box with a poison that could kill it. As long as the box remains closed there is no way to know if the cat is already dead or still alive. Only after opening the box it becomes certain if the cat is still alive or not. As long as the box remains closed the cat is dead and alive at the same time (both assumptions are equally valid). Schrödinger’s Cat and the Hourly Rate Thinking about the hourly-rate, I cannot escape thinking of Schrödinger’s Cat. Some say that the hourly rate should be dead and that there is no longer a case for time based billing. As I will explain further on, I myself pivot towards that point of view. At the same time, as we all know, time-based billing is still the norm and the hourly rate seems very much alive indeed. So how can the hourly rate be both dead and alive at the same time? Why is the time-based billing like Schrödinger’s Cat? It may seem like billing by the hour has always been the standard, but it became only widely used after 1975. Throughout the 20th century, legal fees in the U.S. were largely capped by state law and lawyers were using fixed-fee schedules, published by the courts and the ABA, to establish prices. Although Sherman and Sterling started tracking time as early as 1945, the minimum fee structure stuck until it was challenged and struck in 1975 when the U.S. Supreme Court agreed, ruling in Goldfarb v. Virginia State Bar, that the minimum-fee schedules violated federal antitrust law. This paved the way for the adoption of the billable hour. Ever since 1975, the billable hour has been the de-facto worldwide industry standard. The use of timesheets in combination with billing by the hour has brought great riches to the lawyers. By the 1950s lawyers had fallen well behind the pay scales of fellow professionals such as doctors and dentists. After 1975 lawyers not only caught up but outpaced their fellow professionals. Though today the billable hour is often criticized, it remains the standard for both lawyers and clients. Even today’s Alternative Fee Arrangements are ultimately based on the expected number of hours multiplied by the applicable rates. The end of the hourly-rate? When I was still a very young lawyer, some of the senior partners used to weigh a file on their hand after completion, to establish the fees for services rendered. Despite this being an outdated and disappearing practice at the time, it had an element of fairness because it took not only into account the efforts of the lawyers, but also the value to the client. One of the assumptions on which time-based billing is based, is that there is a linear relation between time and value. If time is used as a measurement, spending twice the time will double the costs. Assuming that double the cost equals double the value is clearly not right. There is no linear relation between time and value. Actually there is no relation whatsoever between time and value. As I have explained in an earlier article, something that takes little or no time could be invaluable to the client (Picasso Principe), as where something that has been time consuming could only have little value. If there is no linear relation between time and value, then from a client’s perspective this renders the hourly rate unfit for purpose. Not only from a client’s perspective is the hourly-rate a poor choice, also from the perspective of the lawyer it is. The Creation-Production-Divide-Concept© as established by TGO Consulting, clearly demonstrates that in the whole process of handling a matter, the unique human skills that distinguish a great lawyer from a mediocre one, are not time consuming. It is the processing hereof by junior lawyers that consumes most time. It is exactly here where law firms and lawyers are hard to distinguish and add little value to the client. One could say that lawyers undercharge for their unique skills and overcharge for processing of documents. In a way the processing is ‘subsidizing’ the ‘Creation’ (unique skills of the partner). Artificial Intelligence and Legal Process Outsourcing will reduce the amount of time spent on Production, thus undermining the ‘subsidy’ needed to deliver Creation. In the end the hourly-rate will turn against lawyers once efficiency on Production will be increased. Why does time-based billing remain the de facto industry standard? As demonstrated, there is a strong business case to be made that the hourly-rate is dead. It is flawed as a measurement and will fundamentally undermine the business model of law firms. Yet at the same time, looking around, the hourly-rate seems very much alive. One can only speculate as to why this is the case. Perhaps clients find it difficult to put a value to the work of a lawyer, perhaps they do not like to haggle, or perhaps in the bigger scheme of things the legal budget is simply not significant enough to be bothered. Right now I do not have the final answer to that question, but I will further discuss this with GC’s and business leaders in the months to come. Time based billing is very much like Schrödinger’s Cat: alive and dead at the same time as long as the box remains closed. Upon opening however, I am prepared to bet that we will find that it is dead after all. To be continued.
- The – billable – days are getting shorter
Last Tuesday, 22 September, at 13:30 GMT the Northern hemisphere had Autumn Equinox as the sun was directly above the equator and day and night had precisely equal length. From then onwards the days are getting shorter and there will be increasingly longer periods of darkness. Also since the last couple of days, politicians started talking of a ‘second wave’ and are openly discussing the possibility of a second lockdown. Meanwhile businesses are suffering and support among the population is diminishing. It seems as if from several perspectives we are entering into the night. After the lockdowns ended, politicians and business leaders were sort of hopeful that there would be a reasonably fast V-shaped recovery. The graph - based on data compiled by Goldman Sachs - seems to justify that optimism. Until summer the global economy recovered pretty quick and as people went on holiday the trend somewhat slowed down. Now that we are facing the serious prospect of a second wave and people are urged to work from home again and lockdowns cannot be ruled out, the mood quickly starts to deteriorate. The graph below is illustrative for the grim new reality. In April, after most restrictions had been lifted, the aviation industry projected to be back at 80% of pre-pandemic levels by the end of the year (red line). Until end of August they seemed to be reasonably on track (black line). Now, faced with the new reality the expectation is the industry will be at just 40% of pre-pandemic levels (blue line) by the end of the year. Many other industries are making similar downward adjustments to their outlook. How this will affect legal spend Corporate clients represent over 80% of all legal spend, the remainder being government related and private individuals. So if businesses are facing strong headwind, how will this influence their legal budget? I have had several one-to-one conversations with General Counsel over the past three weeks and the pattern seems to be fairly consistent: companies are in full cost-saving mode. On average companies spend 0.5% of total revenue on legal (looking at it from the cost perspective: large companies spend typically <2% of their total cost on legal). Even though legal does not count for much of the cost (and potential savings), GC’s tell me that they have to contribute like all other departments and potentially even a bit more. None of the GC’s I spoke was happy about this at the time. It is fair to assume that legal budgets will go down. Certain things will be postponed or not done at all (the nice to have) for other mandates there will be an increased pressure on price and a tendency to ‘push work down’ to less expensive law firms in a lower tier or to an Alternative Legal Service Provider. What impact does this have on law firm revenue? There is no escaping, law firm clients will start scrutinizing their budgets. Most law firms that operate in the upper segment of the legal market sailed pretty smooth through the first few months of the crisis, reporting equal or better numbers compared to 2019 (which for most has been one of the best years in recent history). This may, after an initial shock, have created some misguided sense of optimism. Most law firms who initially cut partner payments had reinstalled them by start of summer. There seems to be cautious optimism in the business of law. In the weeks and months to come, darkness will descend upon us. The economic outlook is grim and legal budgets are under pressure. The impact will be felt differently across different legal markets. In western-Europe national legal markets are small as compared to the US or China. Needing a minimum of 3-5 high-end law firms in a smaller market, the tier-1 law firms have to rely for a large part of their revenue on bread-and-butter type of work. There simply is not that much strategic work around. This is exactly where the problems will soon arise. As illustrated in the TGO Value Matrix© strategic matters and bread-and-butter matters each have completely different pricing dynamics. Even through times of severe economic crisis corporate clients are prepared to spend on lawyers that can have a significant positive impact on their bottom-line. Lawyers that contribute to the business opportunity will not face pressure on price. On the contrary, in bet-the-farm situations money will be no consideration. It is results that count. How different it is, as it comes to the bread-and-butter matters that count for about 60% of western-European tier-1 law firm revenue. These are the matters for which high-end law firms are overqualified. This type of matters could equally well be dealt with by mid-tier firms that are far less expensive. Which is great news for mid-tier firms but not so great for the tier-1. If a tier-1 law firm would lose 10% of the bread-and-butter work (either in volume or in revenue after discounts), this would cause revenue to drop by about 5% and, everything else equal, reduce profit by 12,5%. That’s something to think about when drafting the 2021 budget and strategy. Fortunately there are a number of strategies to mitigate these effects. We are happy to discuss.
- Profit Distribution, an eternal discussion
On 10 September, Thursday last week, at 8:15pm (CET) my inbox bleeped with breaking news: “Elite Wall Street Firm Davis Polk Moves to Modified Lockstep Pay”. Within hours I got a request from a Law360 reporter to comment on Davis Polk’s announcement. (you can find the subsequent article here). It is quite surprising how much media frenzy emerged from such a simple message. Some commentators even went as far as declaring the ‘Lockstep model’ dead. For me, I certainly am not one of them. Basically there are two main systems for profit distribution among law firms. One is merit based and thus a partner’s profit share is closely tied to that partner’s individual commercial performance. The other system is based on seniority. The best known example of the latter is the so called ‘Lockstep’ system where partners progress over several years on a ladder with the profit share increasing by a fixed percentage at each step. Both principal profit distribution models have their own distinct advantages and disadvantages. The merit based model allows for much more spread between the best performing partner an the one at the bottom. Commercial success is immediately rewarded and star partners remain happy. One of the principal disadvantages of a merit based system is that cooperation between partners does not come naturally. That is why most ‘eat what you kill’ law firms have adopted complex ‘origination credits’ systems that create a direct financial incentive for partners to cooperate. Since a merit based systems allows for a much wider bandwidth, it also allows for much greater variation in quality and reputation between partners and practices. So if ‘eat what you kill’ is not the holy grail, perhaps the ‘lockstep’ is? One clear advantage of the seniority based model is that there is no need to introduce complex financial incentives to have partners cooperate on matters and clients. Since personal performance is not determining an individual partner’s profit share, there is no hurdle to work on another partner’s matter. Typically in a ‘lockstep’ model there is more pressure on all partners meeting the same quality standards both legally and commercially. That is one of the reasons that traditionally the elite firms have (had) a lockstep model. So why did Davis Polk break rank? Money, money, money (Abba) The business of law is first and foremost peoples’ business. Being an outstanding lawyer is less about technical academic skills, than it is about human skills. This is different from other academic professions such as in mathematics, physics and chemistry, where technical skills are far more important than personal skills. Being a lawyer is not so much about excellent knowledge of the law, but about strategy, negotiation skills, empathy, creativity and more. For many areas of specialization a lawyer's knowledge of ‘best market practice’ is more valuable than detailed knowledge of the law. Not every lawyer, regardless how smart, has the talent to become a legal superstar. The qualities needed are quite rare. The legal world is not unlike the world of professional sports, where the team that manages to sign-on the best talent will likely become the winning team. Just look at how much some professional athletes make to understand the monetary value of extraordinary talent. Law firms have since long recognized this and there is a lively transfer market for lawyers. Just among the 200 largest law firms in the US, more than 3000 partners swap firm every year. Like in sports, talent is lured with vast sums of money to join another firm. Changing the compensations system to allow for disproportional rewards for the legal ‘superstars’ is often seen as a remedy against partners leaving or a prerequisite for persuading stars to join. These days there is a lively market and professional brokers are making a lot of money. Guess what: it is not about the money We have done detailed research and found that ‘making more money’ is rarely the prime driver for a partner to decide to join a new firm. Data shows that partners only start to be open to exploring a potential switch once they have started to lose faith in the strategy of their present firm or when they are experiencing personal issues with other partners. Lateral movers typically ‘move away from’ rather than ‘being attracted to’ (except in those rare instances when someone is offered the opportunity to move several tiers up and become partner at a firm that has much more prestige in the market). If this is the case, where does the profit distribution system come into play? Before we dive into this, it is worth highlighting that two-thirds of all lateral partner moves ends in disappointment within two years. Disappointment either for the firm if the new partner fails to live up to the promise and/or for the partner who feels lonely and frustrated. In the premier league of law, partners make a lot of money. Enough to own a second home with a heated pool. Earning more money on such levels does not have much added value. Looking at the table below*, you can see that there are only five firms that reportedly have a higher PEP than Davis Polk. Three of those are more or less in the same bracket and only Wachtell and Kirkland make over 10% more and my guess would be that this is exactly where the pain originated. Typically Davis Polk partners would consider Kirkland partners to be their peers and equal. PEP is seen as a yard-stick to measure against (a ‘pissing contest’). The thought of someone just as good as yourself to earn ‘considerably’ more can become unbearable and will invoke criticism on the management of the firm. This in turn can lead to dissatisfaction with the management and the strategy, leading to top-performers opening up to opportunities outside the firm (out of the top-6 Davis Polk also has the lower profit margin, which could corroborate any internal criticism; if Davis Polk would have had a 56% profit margin, their PEP would have been $5,054,000 and thus almost the same as Kirkland's) Parting shot As it comes to vulnerability against predators, do not solely focus on your partners. Take a close look at the most talented of the generation below. You might not want to lose today’s partner, you most certainly do not want to lose tomorrow's partner either. Cherish the talent, keep your talented associates happy. Both financially, development wise and future career path. More on this in a future article. Update 16-09-2020: since publishing this article, Davis Polk and Milbank have announced their associates will receive a “special one-time bonus” ranging from $7.500 to $40.000, to be paid out by next month. Milbank is also giving top performers an additional bonus that is equal to 50% of their respective class bonus. *source AML-all rights reserved
- Building a Book of Business in Times of Pandemic.
When back in March the pandemic hit and governments across the world imposed lockdowns or work from home orders, many law firms quickly announced austerity measures, and braced for the impact to come. To everyone’s surprise that impact did not come and many law firms booked similar or better results compared to the same period the year before. The reasons behind this are mixed. Associates working from home made on average more billable hours. This was in part caused by having fewer distractions and in part by the fear of being made redundant. Secondly the share of partner hours increased, which drove up the average rate. Thirdly in March there was still an existing portfolio of ongoing matters and new matters in the pipeline. On top of that came a flurry of Covid-19 related questions and matters. In short: without too much business development effort, law firms managed to perform well during the past 6 months. Menacing clouds ahead There once was a time when lawyers were not allowed to solicit for work and just had to wait until a client came with a new matter. These days are well behind us, but still developing new business feels weird and uncomfortable to many lawyers. Today many law firm partners have ‘inherited’ at least part of their practice from a partner that retired. This especially true for the baby boomer generation. As is comes to practice development there is a distinction to be made between the older established partners and the young and coming partners. The established partners have built their practice on the partners before them, have a large network and a recognized reputation in the market. An ALM analysis in 2018 found that about half of all partners in the 200 largest law firms in the US came from this category. So what about the other half? Building a book of business is much harder these days as every young partner can confirm. The baby boomers tend to hold on to power and are far less generous in sharing and/or transferring their clients and introducing young partners into the relationship. Having to start from scratch is hard in normal times, it becomes even harder in times of recession. As the pipeline of work is slowly drying up, and clients get more cautious in hiring lawyers, the younger partners are starting to feel the pressure. What we normally did In order to build a practice, potential clients at a basic level need to know that you are there. Being a partner in a reputable law firm helps, as there will be an existing network and quality reputation, but it is not enough. Young partners must build a network of their own. This involves attending networking events, business lunches and personal introductions. None of which are realistic options right now. Worldwide all but a few in-person networking events have been cancelled. There will be no conferences and no client entertainment. During the past six months we have tried to replace these by webinars, but despite the initial enthusiasm the general conclusion is that clients are now tired of webinars and do not want more. So how to build a book of business if there are no in-person events and virtual substitutes are not the answer? This is the million dollar question for lawyers. In the first few weeks after the summer holidays many law firms have held internal meetings on how to organize their business development and marketing over the months/year to come. No need explaining that these will be tough meetings as partners do not like business development in normal times, let alone that they will have a myriad of innovative ideas to adapt to the extraordinary times. Opportunities, opportunities! There is comfort in knowing that also your competitors are struggling to come up with innovative and effective methods of business development in times of pandemic. It reminds me of the classic joke from Billy Connolly about the two camera men filming a lion. The lion sees the two camera men and proceeds to chase after them. One camera man stops and puts on a pair of running shoes. His colleague tells him “You will never outrun the lion in those”. He replied, “I don’t need to outrun the lion, I just need to outrun you!!”. In a situation where everyone is on the brink of panic and clients are pushing the reset button, you just need to be a tiny bit smarter than your competitor to be much more successful. The current crisis creates great opportunities for those lawyers and law firms that succeed best in engaging with clients and attracting new business. It does not matter so much who was stronger in the past, as it is about who will be smarter in the future. At TGO Consulting, innovation is our hallmark. If anything, we have the ability to come up with new, effective and innovative solutions. We understand the business of law, like few others. If you are looking for inspiration and new business development ideas, contact us right now. On this aspect we can only accept one client in a certain market, so be quick.