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.

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

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.

The previous post got published just before the start of the summer holiday season. At that point in time across Europe the most stringent limitations on movement and freedom had been lifted. Most of us were feeling fatigued and in need of an opportunity to unwind. Perhaps things would return to normal during summer. Now September has arrived, we know these hopes are dashed. The virus did not take a brake and flared up in most countries. For the foreseeable future we will have to adjust to a new normal, which differs from the normal that used to be. By now the insight has grown that we cannot infinitely hide from the virus. There cannot be zero risk, unless we all stay at home and avoid all in-person contact with other individuals. That would destroy our mental health and destroy our economy. We are social creatures. In order to function and to flourish, humans need to interact. Throughout the centuries hermits have contributed little or nothing to any form of progress. In prisons, solitary confinement is used as a punishment for convicts that misbehave. Ideas and inspiration are born out of interactions. A sense of belonging, relationship, trust and corporate culture can also only be created through human-to-human encounters and interaction. This cannot be replaced by Zoom or Teams. The other day I had a conversation with the CG of a large multi-national. Even though the legal team has always been spread over different locations and time zones, he told me that everyone working from home over the past 5 months has hampered the performance and effectiveness of Legal. Files and assignment could perfectly be handled while working from home. It was the lack of random encounters and watercooler/coffee machine moments that did the harm. “You know Jaap, we used to get much of our business out of accidental encounters: “now that I see you, could you help me with this or that”. Now we don’t have those anymore and we don’t get involved so much, or only when it is too late”. Also in law firms people need face-to-face interaction. Young and inexperienced lawyers are increasingly struggling. They need guidance and mentorship to grow and develop. The barriers to ask for advice or discuss a matter are very low in an office environment. One can instantly gauge if someone is behind his/her desk and approachable or engaged. This becomes less spontaneous when remote. In order to thrive we must get back to the office. In order to grow our practice we need in-person meetings with clients and prospects. Safety first, but not zero risk In the 1980-ties Aids emerged as an incurable deadly disease that spread like wildfire among gay communities across the world. At first the general public was terrified and did not want to shake hands or be in the same room with and Aids patient. When it became clear that Aids was not limited to homosexuals, for a moment it looked like no-one would ever have sex again. Today, there still is no vaccine to protect from the HIV virus and since the start of the epidemic, an estimated 74.9 million people have become infected with HIV and 32 million people have died of AIDS-related illnesses. As recent as 2018, 770,000 people still died of AIDS. Despite these grueling numbers, we have managed to establish a new normal and continue -cautiously- with our (sex)lives. Now with the Covid-19 we will have to do the same. We have to establish a new normal and find a way to continue with our lives while mitigating most of the risk. By now it has been established that the SARS-CoV-2 virus spreads through droplets and aerosols expelled predominantly through the respiratory system (and to some extend through stool) of an infected person. Social distancing is effective and very good ventilation indoors will further reduce the risks. Under the right conditions the risk of bringing people back to the office will be outweighed by damage done by everyone working from home. We at TGO Consulting have by now gathered a lot of best practices and creative solutions on how law firms can safely return to the office. Please do not hesitate to inquire. A new normal requires a new strategy As said before. We simply cannot hide inside forever to avoid any potential danger. We have to ask ourselves the question what sort of life that we want to live and what risks we are willing to accept for ourselves and for others in order to do so. With Covid-19 we have to find a new normal and have to accept that this will be different from the normal we were used to before. As we managed to get to grips with HIV, we have to get to grips with Sars-CoV-2 (and its successors) Even as we find a way for life to continue, things will not be the same. Unprecedented harm has been inflicted on every economy around the world. For some sectors it will be very hard, if not impossible, to adapt and in those sectors many companies will go out of business, while in other areas new opportunities will be created. For law firms this is the time to adapt and redefine the strategy. The past few months have taught us a number of things about the way we work, our support staff, office space, technology, internal organization and communication, our finances and profit distribution, just to name a few. We need to incorporate what we have learned. The new normal will also change the way in which we interact with clients, prospects and talent recruitment. Webinars have worked remarkably well, but everyone is tired of them now. Law firms will need to invent new ways to engage with clients and students. For many companies that are the clients of law firms, because of the economic situation, the priorities have changed. This will create pressure on price in certain areas. Law firms need to be aware which areas these will be and how this will spread through their client portfolio in order to effectively mitigate the negative impact on revenue and future profitability. It might also be wise to prepare for a flood of pitches and panel reviews. These are just some selected highlights of topics that need to be re-addressed by law firms right now. You might want to incorporate most of the new strategy when drafting the budget for 2021. We at TGO Consulting have all the expertise you need to successfully navigate these challenging times. Please inquire how we could help your firm to make the best of it. Did you know our latest book 'A New Dawn' is now available on Amazon. You can order it through amazon.de or your own national Amazon site.

Remember six months ago, when all of us celebrated the start of a new decade? Traditional media and social media were sprawling with articles and posts highlighting all the nice and inspiring things that lay ahead. The economy was in great shape and things were looking rosy. As late as 24 January 2020 (a day after Wuhan went into lockdown) the International Monetary Fund predicted in 2020 the world economy would strengthen and global growth would accelerate to 3.3%, up from 2.9% in the year before. Today, six months down the line, January seems like ages ago and earlier this week the IMF has again published their forecast. This time the global economy will contract by 3% this year. That is an unprecedented change in the outlook by minus 6,3% from January. A lot has happened since we cheerfully and full of optimism celebrated the new decade. Whereas January may seem like another era, we all distinctly remember March, as this was for most of us the month in which collectively our dreams got shattered. None of us could have ever imagined that we would be deprived of some of our most fundamental civil rights. We were placed under ‘house arrest’, were not allowed to meet with friends and relatives, shops and restaurants and businesses were closed, as where borders. The world suddenly did not look rosy, but dark and grim. Despite the traumatic life changing nature of the events, most of us have coped really well. I have been impressed by the speed and effectiveness how many businesses shifted from office work to home work in just one-week time. The legal world no exception. For some weeks within law firms the mood has remained good and action oriented. Uncountable webinars and news letters have been produced to inform clients. Virtual Friday afternoon drinks were organized to keep the mood. Now people are fatigued Tomorrow is solstice, the day on which we have the longest day of the year. In some countries this event kicks-off the Summer holiday season. Seems like a good moment to take stock and establish where we are today. As of this week most borders in Europe have reopened and in many countries the lockdowns have ended. After three months many seem desperate to return to normal. Unfortunately the Coronavirus does not take a Summer break and it’s still out there as it was before. People are fatigued. Three months of being on high alert are taking their toll. Working from home lawyers have been very productive. The line between work and private life has gradually blurred and many have put in more work hours than before. Fewer people have reported sick. Normally if you didn’t feel well, you stayed at home until you felt better. Now that we are at home anyway, why not do a bit of work? As there was no place to go, also fewer holidays have been taken over the past three months as compared to any other year. As a result for most law firms production went up and many have not experienced the feared drop in billable hours. Whether all these hours will actually result in fees-collected remains to be seen. Will we have a V-shaped recovery? The past three months have been pretty rough on the economy. Placing two-thirds of the world population in some sort of lockdown has been an unprecedented and dangerous economic experiment. Governments have pledged trillions to help businesses survive. No-one knows for sure if this is going to work. Much will depend on how the virus continues to spread and the government measures to contain it. From a rational point of view there seems no reason to be cheerful. Hence the pessimistic outlook from the IMF this week. Various governments and financial institutions have similar projections: economies are going to shrink more than they have ever done since WW2. There is no agreement on whether there will be a V-shaped recovery, U-shaped, W-shaped (in case of a second wave of the virus) or even L-shaped. As said, closing down the global economy, is a dangerous experiment. There is no past data that we can use to help predict how things are going to develop. One thing we have already seen is that it is highly unlikely that developments will follow a rational pattern. Most short term forecast have turned out to be wrong. Employment in the US is recovering much faster than anyone had anticipated. Travel organizations are reporting an unexpected surge in demand for Summer holiday destinations and accommodations. The coronavirus hasn’t gone away; so why are people acting as if it has? We should not underestimate how much people have been worn-out by the stress and the restrictions of the past three months. People want to return to normal; they want their lives back. Niels Bohr once famously said: “Prediction is very difficult, especially if it's about the future.” The truth is that nobody knows what to expect. We are now in some sort of interbellum: the state of active alert has ended. Businesses have started to reopen as have parliaments. Lawyers have -in part- returned to the office. We are all looking forward to the Summer Holiday. All Corona and crisis response related topics have become sort of irrelevant, but it is still not business as usual. To be honest, we do not know what to expect. Most of our clients have done well during the past three months. More or less on par with same period 2019. Now that we are in the quiet of the storm, law firms are bracing for what might or might not lay ahead. Will there be an increase or decrease in demand for legal services? Your guess is as good as mine. One thing is however clear: we are not out of the woods yet. There might be a vaccine and/or cure for Covid-19 in a year’s time. It is highly questionable if there will equally be a quick cure for the economy. This will mean that law firms will have to adapt their business model to a new reality. This is our last weekly article before the summer. Right now you do not need corona-crisis related information anymore, but you are also not quite ready for ‘business as usual’. Let’s use the Summer to gauge how things are developing and to establish a new baseline. We will be back with fresh articles Friday 4 September latest, but earlier if needed.

Because of the pandemic most universities had to close their campus and move to online education. In countries where getting an education is expensive, this has already led to numerous court cases of students demanding a refund. Even the most prestigious universities such as Harvard and Yale have serious challenges to meet students’ quality expectations. All this may be bad enough as it is for existing students, for those who were to graduate the situation is even more disheartening. Some final exams have been cancelled or postponed. Schools around the world have postponed their graduation ceremonies, moved them online, or canceled them outright. You may have seen pictures or video footage of ‘virtual graduations’ where robots acted as stand-ins for teachers and students. It is not a happy time to graduate right now. It is also not a happy time to enter the job market. The legal market no exception. Uncertain how the future will develop many law firms have installed a hiring freeze. Also many summer intern programs got cancelled, leaving graduates and students wondering about their future. I can only hope that you see this is a great waste of talent. The legal profession is people business first Not recruiting during the pandemic could be wasting a great opportunity. In any other year law firms have to spend sizable budgets to attract the most talented law students. Today, with most firms having a hiring freeze, there are great opportunities for those who are bold enough to hire. At TGO Consulting we have developed an innovative recruitment tool for law firms that can be employed remotely and that have proven to be highly successful. Students love it. Employed in practice our recruitment tool has also showed to open a door to more cognitive diversity as they seem to attract a wider spectrum of students than the usual recruitment methods do. This not only creates interesting group dynamics, bust also further widens the potential talent pool. Despite all the excitement about the future of Legal Tech, being a great lawyer remains very much a human thing. Law firms are only as good as the lawyers they employ. The business of law is peoples business. That is also one of the reasons why some clients prefer to follow a lawyer when that lawyer moves to another firm. Law firms very much need human talent more than anything else. The Creation-Production Divide Concept© Pre-pandemic, most law firms have used legal cases as part of their recruitment process. The tier-1 law firms focus on straight-A students as they are looking for the most brilliant legal minds. The evidence however strongly points towards the opposite: Academic excellence is not a strong predictor. Across industries, research shows that the correlation between grades and job performance is modest in the first year after college and trivial after year-one. If we ask companies for the reason why they select a more expensive tier-1 law firm over a mid-market firm, legal excellence does not make it into the top-3. Invariably knowledge of best market practice and people skills come out on top. For your clients legal knowledge is not a differentiator. Also mid-market law firms will have sufficient legal knowledge to get the job done. Clients just do not consider their strategic insights, negotiations skills, creativity and so on the be on par with the best. Back in 2018 we at TGO Consulting were first in describing the Creation-Production Divide Concept©. Studying tons of data and interviewing real-world companies, we concluded that the actions of a lawyer can be split up in two distinct parts: creation and production. Creation is the part that is completely connected with the human skills that make a great lawyer. It encompasses defining a smart strategy, the ability to find workable solutions, creativity, pragmatism, negotiation skills, and so on. Typically ‘creation skills’ are strongly reflected in positive quotes from clients in legal directories such as Chambers and Legal500. For your clients the value is in creation. As creation is about the brilliant mind and personal skills, production is about a process. Production encompasses everything that needs to be done to materialize the fruits of creation. Production is execution. It is typically labor-intensive work such as drafting and reviewing documents. This is legal technical and operational execution. On this level there is very little distinction between a first-tier law firm and a second tier or mid tear law firm. All lawyers with decent qualifications can get the execution right once the strategy is set. For your clients there is very little value in production. You should be looking for a new breed of lawyers For law firms operating in the upper segment of the market, the justification of the higher price is in the extraordinary human skills, which are part of creation. Production -execution- is not significantly better to justify the mark-up in price. Clients do not turn to premier law firms because of their great knowledge of the law. Clients are looking for the best possible ‘creation’. So if the value is in human skills, why are you still looking for straight-A students? We have already established that top grades are not a predictor of success and now we also know that it is not knowledge of the law that brings you the best clients. We strongly believe that law firms in our segment of the market (high-end) should prioritize human skills over technical legal knowledge. This will require a revamp of the recruitment process. Less focus on students that have the highest grades, more focus on students that are smart, creative, curious and emotionally intelligent. It will also mean that there needs to be less emphasis on solving legal cases and more on teamwork, curiosity and legal creativity. As mentioned, we at TGO Consulting have developed a unique tool that can be used with students in times of social distancing. The tool focuses on the aspects mentioned above. The feedback we got so far has been tremendous: students love it! It opens their eyes to what working as a lawyer could be. If you are interested to learn how this tool could be used in your firm, please drop us an email. There is so much talent out there, that it would be an enormous waist of opportunity not to act right now. Be bold, be courageous and start hiring talent again.

Having a global client base, for us at TGO Consulting it is important to constantly read-up on the situation in different markets and industries across the world. We absorb massive amounts of economic news on a daily basis. It will be no surprise that across the different economies and business sectors, the outlook is not particularly rosy. Many companies, big and small, face unprecedented challenges to survive. We at TGO Consulting, are working with law firms in the upper segment of the legal market. So far, the vast majority of our clients has been doing quite well. Despite the covid-19 situation over the past three months, revenue and profitability are mostly still in good shape. But it will hardly come as a surprise that the outlook on the months to come is still very cautious. The million-dollar question is: how to navigate the future? In last week’s article, we explained why we expect huge pressure on price in certain segments of the legal market and substantial less in others. For those of you who haven’t read that article, I suggest do so now, as it will help you better understand the context of today’s article. Understanding how partners are incentivized Law firms are like an archipelago: referred to as a group, but consisting of multiple individual islands of which some are interconnected by bridges, others by ferry and some only by boat. From the outside law firms may appear to be strong impenetrable institutions, but behind the scenes they are made of individual practices, some of which cooperate better than others. Many law firms are a 'firm' in name mostly. Behind the walls partners are competing with each other over issues as mundane as ‘who owns the client’. Clients are often not aware of this and go through great lengths to appoint the best firm in the panel. Pricing arrangements are typically made with the firm and also engagement letters are typically signed on behalf of the firm. The reality is however that almost invariably there is only one partner who acts as a liaison between the client and the firm. Law firms are composed of a fabric of individual practices. Some fabrics are very tight, others are loosely knitted. Much will depend on the way in which the profit is distributed among the partners. In general, the more strictly merit based profit distribution is, the more loose becomes the fabric. Some firms even have had to adopt a system of ‘origination credits’ in order to stimulate sharing clients between partners. Despite the fact that many firms seem perfectly happy with such systems, I would argue that this is actually a practice that you probably should avoid. (read this article on origination credits) Don’t get me wrong. I am not at all claiming that a lockstep profit sharing model is better than a merit-based model. Also the lockstep model puts a lot of pressure on individual partners to meet certain performance criteria. Sometimes even more so than a merit-based system would, since equal sharing is based on the assumption of equal contribution, something a merit-based system does not care about. The point is that almost all law firms have explicit or implicit incentives for partners to focus primarily on growing their personal practice before growing the firm. Being under permanent pressure to perform, partners prioritize their personal turnover. Working in silos does not help Today many lawyers in the upper segment of the market have become highly specialized. Having narrow but deep specializations is typically seen as a must. Only the top-firms would have experts on niche areas, having deep technical legal expertise and a wealth of knowledge of best-market-practice in this one area. Having these specialists will have great value to certain clients who come with very specific questions. The thing with specialization is however that the more you focus on one area, the less interested you become in other areas. More often than not, experts in a certain field are not at all interested in what happens outside their direct scope. The higher the specialization, the lower the connection with other areas (specializations) and the looser the fabric becomes. Maybe it is time to start putting clients first As stated at the top of this article, we at TGO Consulting monitor the state of the economy on a daily basis. We also dedicate a significant portion of our time to speaking with business leaders. What we see and what we hear is that businesses today are facing challenges they have never faced before. Challenges that are closely tied to the future and very existence of the company. What once would be classified as ‘bet the farm’ will be ‘save the farm’ today. Confronted with today’s reality amidst a limping economy and an uncertain future, business leaders are searching to find the right direction. Faced with clients who have to rebuild their business model (aviation industry, automotive, retail, restaurants, entertainment, just to name a few), lawyers have to adapt their service delivery. The most fundamental issues clients are having right now, go well beyond what any individual partner could solve. Many topics will also go beyond the limits of the traditional legal areas of specialization. This is the time for lawyers to truly start putting their clients’ interest first. That means before their personal interests. To be honest, it would be a bit unproductive, to say the least, to continue having internal discussions on who has what revenue on his/her name, while outside clients are going out of business. This is the time to finally put all your internal differences and interests aside and grant your clients access to the full power of your firm. Not while claiming origination credits, not while making sure the file will be on your name, not by thinking that you as a partner need to have an answer to every question and will be perceived as being weak if you would ask advise from your fellow partners. This is the time to start putting ‘swarm intelligence’ into practice. You will be amazed what can be achieved if you mobilize the collective experience, market intelligence and creativity of your firm. Law firms that succeed in having partners cooperate on creating value to clients, will likely have a larger slice of the type of work that has low pressure on price. Law firms that cling on to the traditional individual approach will increasing struggle to keep their rates and profitability. So maybe cooperating will even be in your personal interest after all.

Like many of you, I distinctly remember watching Bloomberg-TV on Monday 15 September 2008. It was unreal to see the bankers from Lehman Brothers carrying boxes with their personal belongings as they left the building for the last time. This image has since been engraved in our memory and has become emblematic for the 2008 financial crisis. I also remember having a conversation back in 2009 with the General Counsel of one of the world’s largest chemical companies. He told me that management had asked him to reorganize the legal department and reduce the headcount. In order to save costs, the in-house team was not even allowed their annual team-meeting, so he had decided to organize the meeting in his garden and pay for the expense by himself. Between 2007 and 2009 demand for legal services has dropped by about 7%. The ACC (Association of Corporate Counsel) launched the Value Challenge in 2008 heralding a decade of focus on the price of legal services. For law firms this was the start of an era of procurement, online auctions, and frustrating panel pitches. Ever since, we have heard General Counsel repeating prices should go down and lawyers complaining that all that seems to matter to clients was price before quality. This crisis is different from the financial crisis I guess that many of our readers were already a partner in 2008. Having gone through the aftermath of the financial crisis, one could be inclined to think that the current crisis might develop in a similar way. This however will be highly unlikely. The 2008 crisis was contained to the financial sector and most of the underlying economy was technically sound and in good shape. This time an almost universal global lockdown has crippled the economy, bringing it to a near standstill. Many companies have seen their markets, clients and supply chain evaporate within weeks. Without large scale government support many businesses would not survive. And even with rescue schemes the fall-out will be huge. This is potentially the biggest economic crisis in the history of mankind. Many companies will have to fight for their existence, and some will fail. Under such circumstances it is not hard to imagine that companies will be very conscious where they spend their cash. Even though legal cost is generally a negligible share of total cost for a company, some legal practices will likely be hit very hard by the effects of the economic crisis. Understanding the difference between Value and Price In order to understand where the pressure on price will be the most severe, you need to understand the TGO Value Martix©. Early 2019 we at TGO Consulting have developed a model based on extensive data analysis. We looked at the value perception of companies in relation to the absolute amount paid to outside counsel for a particular matter. Plotting the results on a graph, is looks like this: The vertical axis measures ‘return on investment’ for the client. In other words: to what extent are the legal costs part of the upfront investment for the company in order to make a profit or prevent a loss. The higher the value, the higher the return on the dollar. Down at the bottom of the y-axis, there is no return on the investment and any dollar spent only adds to the cost. Towards the top of the axis, there is an increasingly higher return on the investment: legal spend becomes relatively insignificant in relation to the gains (or loss prevented). On the horizontal axis, we measure ‘commoditisation’. Contrary to popular belief, commoditisation has no relationship to legal complexity. The level of commoditisation is a reflection of the number of lawyers qualified to handle a matter in a particular market. The more skilled lawyers around, the less ‘special’ the skill. The question is just how many lawyers are in a market, which are qualified, in the eye of the client, to do the job. It does not matter if the matter is legally complex and the outcome bespoke. Availability of many qualified experienced lawyers means a high level of commoditisation, just an handful of experienced lawyers: low level of commoditisation. Combining ROI (return on investment) and the level of commoditisation (in your market) in one model, the TGO Value Matrix© shows where companies perceive spending money on lawyers is good value. The higher the ROI and the lower the level of commoditisation, the less the price of legal services becomes an issue. The lower the ROI and the higher the number of qualified available lawyers in a market, the higher the sensitivity to price. In times of economic crisis understanding the TGO Value Matrix© will help you understand where price pressure will be the most severe. Pressure on price will be felt unevenly in the market. In the months or years to come, most companies will be fighting for their existence. Under such conditions, companies will mostly restrict their spending to those areas/matters that help them directly improve their bottom-line financial results. As a lawyer you need to understand where you are. It will make a huge difference if you are part of the opportunity or part of the costs. Being part of the opportunity, there will likely be little or no pressure on price, even in times of crisis. However, if what you do is -mostly- part of the cost, then prepare for a few rough years as there will be less work, huge competition and high pressure on price. So how do you figure out if you are part of the opportunity or part of the costs? From the perspective of the lawyer all matters are created equal. Lawyers only look at the complexity of a matter and the amount of resources (billable hours) needed. Lawyers also work under the (false) the assumption that there is a linear relationship between time and value. If a lawyer spends twice the number of hours, the matter will become twice as expensive to the client. This would suggest that the final product has twice the commercial value to the client. This is by no means the case. Spending twice the number of hours does not mean that the commercial value is twice as high. It might even be nearly the same. To avoid ending up in a situation where there is huge pressure on price, lawyers need to better understand how their clients makes money. Only if a lawyer has good understanding of their client’s business model, he/she will be able to understand how to contribute to the client’s bottom-line. Lawyers that focus on helping their clients grow their business will be largely unaffected by the effects of the economic crisis. Lawyers that are focusing on legal technicalities rather than on contributing to their clients’ bottom-line, will be considered part of the cost. This category should prepare for a ‘pricing winter’ and adapt their business model accordingly. More information on this topic can be found in our books Data & Dialogue which is available on Amazon A New Dawn which is still available for fee until 1 June 2020

Last weekend I had a little dental malfunction. Due to mysterious reasons a small piece of metal ended up in my food. As I obviously not anticipated this, it struck me by surprise. As normal chewing does not go well with pieces of metal, part of a tooth broke off. Fortunately, on Monday morning, I managed to get an emergency appointment with my dentist and all is well again now. I assume that you are not the least interested in my dental experience, but it turns out that there is a striking similarity between dentists and lawyers, so bear with me. Like many lawyers, a dentist has a very narrow specialization. They know everything about your mouth and the teeth that are in it, but little or nothing about any other part of the human body or psyche. Even if you have the best of relationships with your dentist, you would not go there to discuss general health issues. A dentist is a highly educated and experienced one-trick pony. Last week I published an article about lawyers being tone-deaf. This too has led to a remarkable observation. Each Monday I get the statistics on the article that was published on the Friday before. After having published close to one hundred weekly articles, we have reliable metrics on readership and this article appeared to be an outlier. Looking at the 3-day readership numbers, the article was part of the all time top-3. What made it even more remarkable, is that 80% of readership was from client side (law firm clients that is). As the TGO Consulting client base is 80% law firms, this usually is exactly the other way round. We also received some 25 messages from GCs over the weekend underwriting the observations by the GC quoted in the article. How come lawyers are not interested in this topic while their clients are hugely interested? In other words: why are lawyers not bothered by the GC of a global NYSE listed company saying in his opinion right now lawyers are a bit tone-deaf? I will look further into this as I do not have an explanation straight away. Maybe it is because many lawyers are like dentists: clients/patients only consult them with a very specific issue within a very narrow area of specialization. For a dentist it is very hard to solicit new business if people do not have dental issues or have bigger problems and their teeth are not a priority right now. If patients would complain that doctors are tone-deaf, would I feel that this applies to me as a dentist? Probably not. We need Swarm Intelligence to find better solutions Monday 4 May the renowned magazine Nature Communications published a peer reviewed article that scientists have created a monoclonal antibody that can defeat the new coronavirus in the lab. The antibody known as 47D11 targets the spike protein that gives the new coronavirus a crown-like shape and lets it enter human cells. This discovery could potentially mean a breakthrough in the fight against Covid-19. The research had been conducted by teams from 3 universities and lead by 10 leading scientists. Like most breakthrough inventions, this was not accomplished by one smart professor, working on his/her own. It is almost invariably Swarm Intelligence, which leads to big innovations. Even the prestigious Nobel price typically goes to more than one laureate. The current economic crisis caused by the Covid-19 virus, is unlike any other crisis any of us have seen before. It is more severe and more complex than 9/11 and the 2008 financial crises combined. Governments, the economy, businesses, and societies in general are trying to stay afloat in uncharted waters. In finding workable solutions to help businesses and the economy survive, we are in desperate need of new, creative, and innovative solutions. Last week Satya Nadella, the CEO of Microsoft, stated that he had seen two years' worth of digital transformation in just two months. Given the severity of the situation, businesses are pressed for time as it comes to finding new ways to operate in order to stay in business and weather this storm. When the GC I spoke with last week said he found law firms to be tone-deaf, it was exactly this what he meant. While he and everyone else in his team and throughout the company were fighting for survival, lawyers kept behaving like dentists who keep sending reminders for an annual check-up while their patient is in hospital fighting for his life. What should lawyers do? So, to those of our readership that are practicing lawyers, you that did not read last week’s article, I would say: “don’t be dentists”. For the next two years or so (and probably beyond), you will only be relevant to clients if you can really help them to survive the crisis. Dental care will not be a priority unless, like in my case last weekend, there is some unfortunate one-off incident. Many of our readers are partners at some of the most prestigious law firms across the world. This league of firms has some of the smartest people in the industry. But like the scientists doing research on Covid-19 remedies, you don’t get far working on your own. Come to think of it, it is inexcusable for law firms not to tap into Swarm Intelligence to provide better and more relevant solutions to clients. You will be surprised what partners can achieve if they join forces to find new, relevant, creative, and innovative legal solutions for their business clients. What is needed in today's market goes way beyond what any individual partner can achieve. So, break down those walls, stop only focusing on your own practice, stop worrying about origination-credits and start putting your client’s interests first. Unleash the power of the firm and tap into other partners, exchange information & insights and cooperate to find new solutions for businesses that are the clients of your firm. TGO training program At TGO Consulting we are working with our clients to execute (training) programs that focus on educating partners on the impact Covid-19 will have on the economy. The programs stimulate partners to engage in meaningful conversations on business with their clients and foster sharing of market intelligence between partners. The better partners understand the impact on the economy and the more they know about their clients’ business model, the better they can engage in strategic conversations and the more relevant the advice they will be able to offer. As stated before: clients do not have legal issues, they have a business to run. Under the present conditions companies will likely only spend money on lawyers who help them protect their bottom line. The programs we have developed are conducted through video conferencing and no in-person meetings between lawyers are required. We have been running them for four weeks now and they have proven to be highly effective. If you would like to know more about these programs or are considering running them at your firm, please send an email to hakanson@tgo-consulting.com and Lisa will answer all your questions. IBA Webinar For those of you interested, I will be doing a webinar for the IBA on Monday 18 May from 14:00 – 15:00 CET. Registration is free, also for non-members (but you are all members anyway). You can register here: https://www.ibanet.org/Avoiding-juristic-park.aspx We are here to help TGO Consulting is there to help you navigate the crisis. We have just finished writing a book on this topic, that we are now starting to edit. The book will be launched on May 18 at the IBA webinar. This book will be made available for free to all our clients during the month of May and will be available on Amazon thereafter. We will also continue to publish weekly articles on topics that are most relevant to you right now. Our experience with law firms in China gives us a two-month head start in knowing what best to do. There will however remain many important unknowns and things can change really fast. This is where our unparalleled creativity has proven to be extremely valuable. We have a proven track-record to find effective solutions faster and better than anyone else. In the meantime, our TGO Consulting Research Team keeps monitoring the state of the economy literally 24/7 to ensure that our approach always remains fact-based. Please do not hesitate to contact us to find out how we could help your firm navigate these challenging times.

Last week I had a conversation with the general counsel of a large global company that is listed at the New York Stock Exchange. This company is in the business of designing, marketing and producing consumer goods, through an extensive network of resellers and a number of owned stores. Their brands are among the most recognizable and celebrated in the world. In other words: this is a true blue-chip company. Business was bad, the GC acknowledged. This was obviously no surprise. With most of the world in lockdown and stores closed, it was unavoidable for their sales to take a massive hit. The legal department was now mostly occupied with shareholder communications, refinancing existing debt, renegotiating commitments with suppliers and with clients. This certainly was not business as usual and the large team that would normally look after the trademarks, licenses and copyrights had now been redeployed to other areas. What really had surprised this GC was just how tone deaf most of their panel firms seemed to be. The legal department had been inundated as of mid-March with countless Covid-19 newsletters, which this GC and his team had found mostly useless and to some extent a bit insulting. “You know Jaap, I have a stellar legal team here, some of the best lawyers in the industry. We have years of experience between us; we know our business and we can read. We don’t need law firms to tell us what ‘Force Majeure’ is and what the latest government measures are”. The GC also shared his frustration that the majority of the panel firms kept acting as if it were business as usual. “My company is facing an existential crisis and we have totally different priorities right now. It seems that the lawyers fail to recognize this. It all seems a bit tone-deaf to me” Is it true that lawyers are tone-deaf? Most of us have been in lockdown for more than six weeks now and all of us are desperate for something pleasant to look forward to. For a lawyer, what could be nicer than the prospect of meeting friends from all over the world at a conference? The IBA annual conference is scheduled from 1 – 6 November in Miami USA. AIJA has scheduled their 58th International Young Lawyers’ Congress from 24-28 August 2020 in Rio de Janeiro Brazil. Many other international lawyer networks have scheduled similar events. So, how realistic do you think it is gathering hundreds or even thousands of lawyers in a conference room and at social and networking events any time soon? It seems that lawyers are somewhat slow in recognizing that the world has changed. April 27 Norwegian Airlines (Norwegian Air Shuttle ASA) announced to its investors that, in order to survive, most of its debt needs to be converted into equity and that it intends to keep almost its entire fleet grounded for the next 12 months only to start gradually ramp-up its flights as of summer season 2021, hoping to resume ‘normal’ operations as of 2022. Bear in mind that Norwegian Airlines is one of the most successful and profitable airlines in the world. Norwegian does not see the return of flying as we knew it anytime soon, if at all. Much-lauded Airbnb, whose business is currently at an all time low, announced that it will publish a stringent Cleaning Protocol for its hosts by end of May. Under the cleaning protocol program, hosts must clean every room in a rental following strict Airbnb enhanced guidance and procedures, and there will be a certification process. There is a 24-hour between stays requirement even with the rigorous cleaning protocol program, and currently the booking buffer default is set at 72 hours. That is a mandatory 3 days vacancy between two bookings to keep guests safe. Hotel chains like Hilton and Marriott are implementing similar measures. How come lawyers still expect to meet in Miami or Rio any time soon? Can’t they see how much the world has changed? How much do you actually know about your clients’ business? Going by the example of the conferences and the comments of the GC, maybe lawyers have gone a bit out of touch. About a year ago, I published an article ‘Clients don’t have legal issues, they have a business to run’ and an other article raising the question whether a lawyer should be considered ‘part of the opportunity or part of the costs’? And if you are interested here and here are further articles on the same topic. As it is even in non-crisis times extremely important for lawyers to understand how exactly their client is making money, it is even more important right now. When the whole economy unravels like it is now and everything is shifting, companies will have completely new agendas. Lawyers should know what these agendas are in order to remain relevant. At TGO Consulting we are working with our clients to execute (training) programs that focus on educating partners on the impact Covid-19 will have on the economy. The programs stimulate partners to engage in meaningful conversations on business with their clients and foster sharing of market intelligence between partners. The better partners understand the impact on the economy and the more they know about their clients’ business model, the better they can engage in strategic conversations and the more relevant the advice they will be able to offer. As stated before: clients do not have legal issues, they have a business to run. Under the present conditions companies will likely only spend money on lawyers who help them protect their bottom line. The programs we have developed are conducted through video conferencing and no in-person meetings between lawyers are required. We have been running them for four weeks now and they have proven to be highly effective. If you would like to know more about these programs or are considering running them at your firm, please send an email to hakanson@tgo-consulting.com and Lisa will answer all your questions. IBA Webinar For those of you interested, I will be doing a webinar for the IBA on Monday 18 May from 14:00 – 15:00 CET. Registration is free, also for non-members (but you are all members anyway). You can register here: https://www.ibanet.org/Avoiding-juristic-park.aspx We are here to help TGO Consulting is there to help you navigate the crisis. We have just finished writing a book on this topic, that we are now starting to edit. The book will be launched on May 18 at the IBA webinar. This book will be made available for free to all our clients during the month of May and will be available on Amazon thereafter. We will also continue to publish weekly articles on topics that are most relevant to you right now. Our experience with law firms in China gives us a two-month head start in knowing what best to do. There will however remain many important unknowns and things can change really fast. This is where our unparalleled creativity has proven to be extremely valuable. We have a proven track-record to find effective solutions faster and better than anyone else. In the meantime, our TGO Consulting Research Team keeps monitoring the state of the economy literally 24/7 to ensure that our approach always remains fact-based. Please do not hesitate to contact us to find out how we could help your firm navigate these challenging times.

Less than two months ago, we experienced an end to life as we knew it. Many businesses had to close and some of our fundamental civil rights were suspended. It is not the Corona virus that is the main problem, it is the lockdown. Never before almost the entire world population got placed under ‘house arrest’. We have witnessed outbreaks of deadly viruses before. In 1981 HIV emerged as a deadly virus. At the time we had little understanding of the virus and there was no vaccine or cure. Since the beginning of the AIDS epidemic, 75 million people have been infected with the HIV virus and about 32 million people have died of AIDS. The point is we have had deadly viruses before (HIV, Ebola, SARS, Marburg, Hantavirus, MERS, Influenza, ea.), but never before have entire populations been placed in lockdown. "It is not the Corona virus that is the main problem, it is the lockdown" So, how did we get here? The answer is surprisingly simple and straightforward: insufficient healthcare capacity. We are by now all familiar with the phrase ‘flattening the curve’. If we all get ill at the same time, our hospitals will be overwhelmed and unable to cope. People will be dying in the streets. No-one likes the prospect of dying, so flattening the curve makes perfect sense. We all accepted that in order to protect ourselves and our healthcare system, we had to stay at home. There was no viable alternative. Businesses had to close and civil rights got suspended. Almost invariably the popularity and approval rates of our leaders spiked. We all believed that they did what they had to do to fight the virus and save us from a deadly threat. After a few weeks the battle would be over, and things would go back to normal. As we are now in week six of being confined to home, patience is running out. People are increasingly desperate to get their lives back. "Lockdown is not a solution; it is just a way of buying time" The inconvenient truth is however that nothing has changed. Lockdown is not a solution; it is just a way of buying time. Time that should have been used to structurally ramp up medical capacity. Most countries didn’t. Unless we continue to flatten the curve, hospitals will still be overwhelmed, and many people will die. Governments are caught naked: there is no exit strategy. There is no cure, there is no vaccine, there are not enough ventilators, not enough tests, not enough hospital beds, not enough trained nurses and not even enough protective equipment to keep them safe. Increasingly governments are under pressure to lift the restrictions. Some countries have already set some baby steps, others have set provisional end-dates. Governments are aware that they cannot keep populations locked up forever. It would be so much easier if there would be a cure or a vaccine. There is a global race to develop a remedy. The US government alone is spending over a billion to help speed things up. Normally it can take five or more years to develop a drug and move it into human trials. No one wants to wait that long. AstraZeneca, Vir Biotechnology, and Eli Lilly and its biotech partner, AbCellera Biologics, as well as several academic labs, are hoping to start human trials by the end of summer. Developing drugs are one of several strategies scientists are pursuing against Covid-19. The long-term goal is a vaccine that would teach the immune system to make antibodies against the virus. But testing a vaccine takes time—likely 12 to 18 months or longer—and it might not work, or, like the flu shot, be only partly protective. Even when at some point an effective medicine or vaccine has been developed, it still needs to be produced in huge quantities. Do you have any idea how many Olympic swimming pools of vaccine are needed for the entire world population? What would you say is easier to manufacture: face masks or vaccine? Right, now think about how we are doing with the face masks. The future does not look too bright as it comes to a cure or a vaccine for Covid-19. Not to mention the logistical nightmare of administering the vaccine to more than 7 billion people across the globe. No, dear readers, there is no reason to believe that things will go back to normal any time soon. Unfortunately. Adjusting to a 1.5-meter society So, there we are stuck with a virus and our economies shattered. For as long as there is no structural solution to the Covid-19 virus, we have no choice but to keep flattening the curve. This will mean that social distancing will be the new normal and people will have to continue keeping 1.5-meters apart. It will be immediately apparent that this will have serious consequences. Let’s take public transport for instance. The very nature of public transport is trying to get many people from A to B at the same time. Observing the 1.5-meter norm will reduce the capacity of trains, buses, trams and airplanes to around 20%*. Not only is this not a viable business model, it also creates major logistical issues in transporting people between home and work. Even if we are allowed to get back to work, most of us will not be able to get there. Once you start thinking about it, it becomes clear how much of our economy is based on mass gatherings or huge numbers of people. Tourism, sports, events, amusement parks, air travel, cinemas, restaurants, just to name a few. In some countries these sectors count for 25%* of the economy. It will be hard or impossible for these businesses to survive if occupancy rated drop below let’s say 75%*, and yet that is what is likely to happen. The 2020 Olympics have now been postponed to 2021, but experts have already warned that even that is unlikely to happen. As long as there is no viable solution, we will have no choice but to keep flattening the curve. For as long as there is no permanent answer to the Corona virus, we will likely go back and forth between periods that are more relaxed and more restricted. If the number of hospital beds gets near maximum capacity, we will have to abide to very strict social distancing. Once the number drops to 75%*, it will be a bit more relaxed. This pattern will then continue. The trillion-dollar question is what this will mean for our economies. Any investor might want to look at what companies can still return a profit in such scenario. I’m not even sure if most of brick-and-mortar non-food retail could survive. It might just not be sustainable to run let’s say a fashion store when only 1 customer per 3* square meter is allowed in, you have to disinfect the fitting rooms after each customer and even might have to disinfect the returned items before you hang them back. On top of that the store may have to close for several weeks, each time the hospitals reach max. capacity. It might very well just not work. What about law firms? The economic crisis caused by the lockdowns will on the short term bring many economies to their knees. As always, on the medium term, things will be all right and probably even better than before. For the legal industry the outlook remains more positive. I will write about this topic in detail in a separate article in which will explain where the opportunities are and what should be done today to emerge from the crisis with little or no damage. Within the framework of this article I will limit myself to what measures law firms should take to resume working from the office after the government restrictions will be lifted. The starting point of all preparation should be 1.5-meter social distancing between everyone in the office, and to limit the spread of any contamination by taking additional measures. Implementing 1.5-meter social distancing will be much easier for law firms that still have traditional office space than for law firms that have more modern open-plan offices. Depending on the size of your firm and the layout of your office space you might want to introduce one-way traffic in the corridors and restrict traffic between floors. The capacity of meeting rooms has to be reduced in order to respect the 1.5-meter social distancing. An area of special concern will be the elevators. If your offices are in a high-rise building, taking the elevator will be the only way of access. In accordance with the distancing the capacity per elevator will probably be reduced to 2 -3 persons at the same time. You will need to coordinate with the operator of the building to make regulations on how elevators can be used in a safe manner. For high-rise buildings this will create a logistical nightmare that will severely limit the amount of people that can realistically use the building. Besides social distancing, law firms also need to put in place a methodical and rigorous cleaning regime. Elevators and door handles must be disinfected all the time, as must toilets, taps, light switches and printer areas. You might want to restrict the use of the coffee corners and close the canteen/restaurant as freshly prepared unpacked food could be a source of contamination, potentially infecting everyone in the office at once. Just remember the bartender of Kitzloch, a popular restaurant and bar in the Austrian ski resort town of Ischgl, who single handedly contaminated over 100 guests with the Covid-19 virus. As there are strong indications that the virus is airborne, you will also have to take a close look at the office’s ventilation systems. Given all limitations it seems unlikely that all lawyers and staff will return to work from the office anytime soon. More realistic would be that on each given day 50% of the workforce will remain working from home, while the others work from the office. Colleagues who have a higher risk profile (age and/or health condition) might not be allowed to return at all (employer liability?). Do not expect to have normal meetings with clients or seminars any time soon. We are here to help TGO Consulting is there to help you navigate the crisis. We are currently writing a book on this topic that will be finished by end April. This book will be made available for free to all our clients. We will also continue to publish weekly articles on topics that are most relevant to you right now. Our experience with law firms in China gives us a two-month head start in knowing what best to do. There will however remain many important unknowns and things can change really fast. This is where our unparalleled creativity has proven to be extremely valuable. We have a proven track-record to find effective solutions faster and better than anyone else. In the meantime, our TGO Consulting Research Team keeps to monitor the state of the economy literally 24/7 to ensure that our approach always remains fact-based. Please do not hesitate to contact us to find out how we could help your firm navigate these challenging times. *estimates

Most of us have been working from home for five weeks now. While some EU countries contemplate to take the first cautious steps out of corona-virus lock-down, most of us will still be confined to working from home for weeks to come. As the lock-downs started law firms spent most of their energy in making the transition from working at the office to working from home. From an IT perspective this fundamental change has mostly been an incredible success. You might want to officially thank your IT team for that. In the second and third week, we adapted to working from home and spirits were still high. The now ubiquitous video calls were kind of fun and often offered a sneaky insight in your teammates' and colleagues' private lives. We could see how their interior looks, their pets and sometimes witnessed their family lives. Some teams have organized virtual after-work drinks. Many were still convinced that all this would not last long and that we would all be back to the office pretty soon. From week four onward, that attitude has started to change. Over Easter, the Financial Times reported that “lawyers’ mental health is taking a hit as a result of the corona-virus pandemic, with studies finding partners and associates feeling stressed and isolated.” Sadly, to most partners this has gone largely unnoticed. Feeling stressed or depressed is hardly the thing you would share as a young lawyer/partner during the regular team calls with your partner. The legal world is still a ‘macho’ world with little or no room for the ‘weak’. The big social experiment of forced working from home in isolation, could go terribly wrong for some. How much do you actually know about your associates and staff? Under normal conditions we all live our two separate lives: we each have a professional life and a private life. Typically, the two are almost entirely separated and we know very little about the private situation of most of our colleagues. As this holds largely true on the immediate team level, it certainly holds true on the firm level. Under normal conditions, this is how things are supposed to be and it works just fine. When today, due to permanently working from home, the two have merged, it may become an issue. On the most basic level, law firm leadership and the partners should be aware of who the associates/staff are that have young children. These colleagues will now be forced to spend time on home schooling and providing some distraction for their kids. As a manager you have to take this into account, and it could be unreasonable to still expect the same level of availability and output. So, question number one is: do you know exactly (on a firm level) who has young children to attend to (or an elderly relative with fragile health for that matter)? Second thing you might want to know is whether or not both parents are working from home, as this might lead to having them to share resources. Can both do a video call at the same time? Maybe, as a law firm, you might like to know what is the occupation of your associate’s or staff-member’s life partner? Working from home it might be difficult to keep telephone conversations, video calls or computer screens entirely private and confidential. Other members of the same household could overhear conversations or see documents on screen. All this would under normal conditions be an absolute no-go. Why would law firms be more lax now? I am by no means suggestion a surveillance state where big brother in the form of firm is watching all the time. I am just suggesting that there are good arguments for leadership and partners to have more situational awareness regarding associates and staff. MP must communicate with your associates and staff! Two weeks ago, when we were in the third week of the crisis, We published an article on ‘partners panicking’. Today we are two more weeks down the line and many law firm leaders have set-up structured and data supported communication with the partner group. Having fact- based briefings on cash-flow, current production and projected production, will give the partners a feeling of a certain amount of control. Communication between the leadership and the partners is now reasonably up and running. But the flow of information is not equally distributed within the firm. Many associates and staff are totally in the dark on how their firm (employer) is really doing an what the future might look like? For assistants and secretaries, working from home has turned out to be a problem from day one and many are sitting almost idle. Some firms have already furloughed some of their assistants. No wonder assistants (and catering, receptionists, cleaners, mailroom, library, etc.) are worrying if they will still have a job tomorrow. Staff that is able to work from home such as finance, HR, BD and marketing, may worry slightly less about their job, but may worry about the future of the firm. Also associates have reasons to be worried. They have always had billable hour targets that they are expected to meet. Do they still have to meet these targets while working from home? We see associates are working less efficient and taking more time for the same task than under normal office work conditions. This could be because they are more often disturbed or distracted while working from home. It could also be spreading the work thin in order to avoid being the first in the team having to admit that maybe there is not enough work. What if their practice group or the partner they work for sees a downturn in work? Will some associates get fired? Associates are afraid and uncertain about their future. Legal headhunters report a significant decline in spontaneous candidates. Like rabbits caught in the lights, when struck with fear lawyers do not move. In times of crisis it is more important than ever that law firm leadership communicates openly and frequently with everyone in the firm and not only with the partner group. Do not use a ‘cascade’ communications strategy in today’s situation, where the leadership communicates with the partner and the partners are expected to communicate with their team. Partners are not known for being great communicators and you will end up with as many messages as there are partners. In times of crisis we all like our country’s leaders to be visible and communicate. It is no different at law firms: managing partners should be visible (and audible) and communicate once a week with the whole firm. Communication should be unambiguous and concise. Do not use formal language, show empathy and be honest. Handled right, this crisis a great opportunity to create strong bonds and lasting loyalty. Handled wrong… We are here to help TGO Consulting is there to help you navigate the crisis. We are currently writing a book on this topic that will be finished by end April. This book will be made available for free to all our clients. We will also continue to publish weekly articles on topics that are most relevant to you right now. Our experience with law firms in China gives us a two-month head start in knowing what best to do. There will however remain many important unknowns and things can change really fast. This is where our unparalleled creativity has proven to be extremely valuable. We have a proven track-record to find effective solutions faster and better than anyone else. In the meantime, our TGO Consulting Research Team keeps to monitor the state of the economy literally 24/7 to ensure that our approach always remains fact-based. Please do not hesitate to contact us to find out how we could help your firm navigate these challenging times.

Last week we published an article on ‘partners panicking’. Based on the amount of feedback, it seems that this topic has struck a nerve. Across the legal industry law firm partners have started to panic. So, what should law firm leaders do to calm down their partners? The answer lies in adopting a data driven crisis management communication strategy. What makes the present situation unique is that for the first time in history we have to navigate a crisis while all being confined to our own home. The absence of being in a communal office absolutely adds to the anxiety. People sitting at home are permanently exposed to unsettling news about the pandemic and the fast deteriorating state of the national and global economy. Given the severity of both crises there is hardly any other topics in the news these days. On top of that the news updates seem to only get grimmer by the day: more people dying from the virus, lock-downs extended, businesses in distress and the economy entering the most severe recession in our lifetimes. Working in isolation from home we check the news more frequently that we would do when working from the office (information overload). If at the same time we see the number of billable hours at our own practice and firm-wide starting to drop, it is hardly a surprise that partners will experience a sense of panic. It is the task of law firms’ wartime leadership to calm partners down and prevent anxiety from getting out of control. In order to do that, war-time leadership should restore the balance of information by implementing a data-driven approach. Today the information balance between what is happening in the outside world and what is happening in the firm is distorted: there is a tsunami of information on the outside and only droplets of information on how the firm is doing. Starting with the basics: the notion of fixed costs We at TGO Consulting work with some of the best law firms in the world. One might assume that this type of highly profitable, high quality, high reputation institutions must have an in-depth understanding of the key metrics for running a law firm. We know from experience that this is often not the case and that even those with a professional CFO have blind spots in their reporting. For any partner in a law firm it is paramount to understand the notion of fixed costs. Unlike many other forms of businesses, for a law firm cost are fixed and not influenced by production. As is shown in the diagram above, any drop in revenue will have a leveraged effect on profitability (PEP). The impact of this leverage depends on the profit margin. At a profit margin of 50% there will be a 1-2 impact and a 10% drop in revenue will lead to a 20% drop in PEP. At a profit margin of 25% the ratio is 1-4 and a 10% drop in profit will lead to a 40% drop in PEP. This means that the effect of a decline in revenue will depend on the profit margin of your firm. The most successful law firms will typically have a high profit margin of 50% or above. This makes them more resistant to the crisis. So, your partners need to fully understand the notion of fixed cost and the leverage effect of the profit margin. It is also important for management to make revenue projections for the entire fiscal year 2020. Profit will effectively only be calculated after the whole year has ended. For most law firms 2020-Q1 has been strong and above target. Q2 will likely be weak. Traditionally Q3 is a bit slow due to the effect of summer holidays. If the economy starts to re-open in Q3 (this is what we at TGO Consulting expect) and people will not go on holiday en masse (we do not expect summer holiday as usual due to restrictions), production in Q3 might in the end be close to target. We do not know what will happen in Q4 as some businesses will be strapped for cash and cut on external spending. When we take all this into account, it seems unlikely that 2020 will be an Annus Horribilis for the business of law. Law firm leaders should communicate this wider perspective with the partners. Let’s assume Q1 has been 10% above target, Q2 will be minus 30% and Q3+Q4 will be minus 10%. Then the cumulative effect would just be a 10% drop in revenue over the whole year: 110 + 70 + 90 + 90 = 360 (= 90% of 400). This is without any corrections for seasonal differences. The end of Q2 and the whole of Q3 in any normal year tend to be weaker and this will further dampen the effect of the lower production. So, unless your firm has a very low profit margin, there is no reason to panic just now. Making adequate projections If there is no reason to panic just now, that does not mean that the situation could not turn for the worse in the future. Therefor it is imperative that law firms implement a solid data driven monitoring system. Even though partners are not always aware of this: revenue is created by the associates and not by the partners. In any law firm there will be more associates than there will be partners. The utilization (billable hours/day) of associates is one of the key indicators to monitor. This monitoring should be done on a daily basis. Associates (and partners for that matter) should therefor be obliged to enter their time-sheet accurately at the end of each day. This should be communicated, checked and enforced. With penalties for those who do not oblige. In order to make reliable production projections we will need accurate data. It is not unlike the Corona pandemic: if the authorities do not have accurate numbers, hospitals can not accurately predict what to expect next. So, make sure every fee-earner closes the time-sheet at the end of the day. Secondly, you need to estimate how much future billable hours are still to be expected on the running mandates. For firms that have professional project management in place, this will fairly easy to accomplish. For those firms who do not have firm-wide project management, estimates should be made by each responsible partner. This should be done on a weekly basis and be adjusted as things develop. Looking at similar matters in the past might be helpful. We will need these data to make accurate workload projections. Thirdly, you will need to look at the pipeline. As this is looking at the future, the data will not be that reliable. Still an educated guess, based on conversations with clients, will be better than having no data at all. Combining step 1, 2 and 3 in a dynamic model will provide management and the partners with a pretty good picture of how production and revenue will develop over the next few weeks. Having these data supported insights, will help prevent partners from panicking. Things become less scary if you are not stumbling around in the dark. Index your clients It goes without saying that revenue does not materialize out of thin air. You need clients that trust you with mandates that will create billable hours. That is why, besides focusing on production, we need to look at the client base. Analyzing your client base will provide a valuable insight in where revenue has been originated so far. Different industries and businesses will be affected by the crisis in different ways. If Microsoft, Facebook, Google or Zoom are your client, the workflow will not be affected in the same way as when Marriot hotels or Lufthansa are your client. Some industry sectors are still doing well whereas others are in an existential crisis. Some companies have lots of cash, little debt and a good opex to revenue ratio, others are strapped for cash, heavily indebted and have a poor opex to leverage ratio. What we are saying here is that you should map your clients and attach a risk and opportunity profile to most of them. This will help you tremendously in making projections on how business might develop. The more data you have, the less your partners will panic. TGO Consulting has developed models and templates that are ready to use to help you get better grip on your production data and pipeline. If you have any question or would like to have access to these models, please inquire. We are here to help TGO Consulting is there to help you navigate the crisis. We are currently writing a book on this topic that will be finished by end April. This book will be made available for free to all our clients. We will also continue to publish weekly articles on topics that are most relevant to you right now. Our experience with law firms in China gives us a two-month head start in knowing what best to do. There will however remain many important unknowns and things can change really fast. This is where our unparalleled creativity has proven to be extremely valuable. We have a proven track-record to find effective solutions faster and better than anyone else. In the meantime, our TGO Consulting Research Team keeps to monitor the state of the economy literally 24/7 to ensure that our approach always remains fact-based. Please do not hesitate to contact us to find out how we could help your firm navigate these challenging times.

Most countries in Europe are now in their third week of working from home. The first week most energy was devoted to shifting all operations from centralized to decentralized. For many law firms this has been an unprecedented technical and organizational operation. During this first week lawyers were still working on existing client work and scrambling to keep up with new legislation and government measures, converting this to Corona-newsletters and webinars. So, in week-1 everyone was very busy. In the second week partners started to notice that the first M&A transactions were put on halt or aborted. Some countries closed the courts, which had an impact on litigation. It also quickly became apparent that associates working structurally from home were less productive than usual. So, in week-2, production started to drop. Not by much, but still. Now we are in week-3 and we are seeing the first signs of partners getting nervous. The prospect of having an empty desk is unsettling for partners even in normal times. It becomes even more unsettling when it looks as if the ‘empty desk’ is becoming structural and widespread. Some law firms have decided to defer partner payments. Although this is a sensible thing to do, it also contributes to making partners nervous. Once partners openly start to panic, the state of the firm will quickly turn from bad to worse. It is important that partners keep their nerve! Typically, in any law firm there are partners, the rainmakers, who are performing solidly above the average. These heavy-weight partners will have a great deal of influence on the strategy of the firm. It is not likely that they are actively participating in the firm’s leadership, as they are way too busy with client work. They are however the ones who are the opinion leaders and who are the informal power within the firm. The formal leadership will have a large degree of freedom as long as it does not upset these heavy-weights. The moment their practice slows down, the heavy-weights, having time at hand, will start to meddle in the leadership. Even more so if they still feel the leadership is weak. (On 21 March we have strongly advised you to implement wartime leadership.) One might be inclined to think that this is a great idea. Wouldn’t it be better if these strong partners take the reins? Well, actually: no. There is a huge difference between being a five-star rainmaker and being an effective wartime law firm leader. The qualities that make a great lawyer become a huge hindrance as it comes to managing the firm. Any managing partner can confirm just how much time it takes to transform from being a full-time lawyer to become an effective managing partner. It easily takes between three and six months. Being absorbed by a demanding practice and expressing your views during partner meetings (and then return to your practice again) is absolutely not the same as having the real-world responsibility for day-to-day management and actually having to execute and implement in the real world. Just as it is different being the CEO of a company or one of the non-executive board members. You definitely do not want multiple captains on the ship (especially during a storm) What you definitively want to avoid is to have multiple captains on the bridge. In times of crisis, the firm needs strong wartime leadership. Where the normal modus operandi will allow for partners expressing their opinion and to have decision taking based on a workable compromise, this will turn disastrous in times of crisis. Wartime leadership must be lean, agile and fast. Under normal circumstances you can push most decisions forward to the next meeting without any harm. Doing this in a crisis will probably mean that you are already too late. Under normal conditions it might be best to water down proposals until the majority of the partners can live with it. In times of crisis this could be lethal for the firm. If the situation gets sour and dread, democracy and common decision making needs to be suspended* *Only for day to day management. For fundamental issues the normal governance structures should stay in place. Firms need leadership, not dictatorship. In times of crisis there can be no decision making based only on consensus. That is why a law firm needs to install a compact wartime leadership, authorized to take all necessary measures without first having to go to the partner meeting. We see that at many law firms, partners are already starting to put pressure on their firm’s leadership. Some partners put pressure that the weak partners will – finally – be kicked-out. Some partners may have delicate personal financial situation (e.g. just bought an expensive home) and, needing to preserve their income at all cost, put pressure to cut costs and dismiss some staff and/or associates. There will be many examples of partners each having their own opinions, their own agenda and priorities. It is the task of the wartime leadership to look after the interest of the firm as a whole and take all required decisions to secure the future of the firm. Wartime leadership should actively invest in the cohesion of the partner group! It will be most important to prevent partners from panicking. Whereas the wartime leadership needs to lead and act, they also need to actively spend a lot of time and energy to keep the partner group together and to keep partners confident that the firm will weather the storm without too much damage. So, at the same time as taking decisions, there must be permanent and open communication. The leadership should aim to be totally transparent. All information must be shared on a structured frequent basis (once a week preferably). Even though the partners do not get to vote on the decisions, the leadership should be in permanent dialogue with the partners and listen to their views, fears and ideas. There will be many great ideas and insights coming from the partners that could be used as input for the leadership, leading to better decisions. Especially in a situation like we are seeing today, where we are all working from home during the crisis. Law firm leaders will need to set up a structure to communicate with the partners. This should also be done in one-to-one conversations and conversations with small groups. The effectiveness of the communication between the leadership and the partners will be crucial in gaining and keeping the confidence of the partners and to prevent panic. If partners are getting nervous and anxious, there is a real risk that the cohesion in the partner group gets lost. Under normal conditions there will be partners who do not like each other, do not trust each other and who see some of their fellow partners as weak and/or useless. In times of heightened tensions this could easily escalate, causing the partner group to fracture. In times of crisis law firms need to double the effort to keep the partners together. It is important to downplay differences, actively increase trust and teamwork. TGO Consulting has developed special tools for this purpose. These tools have already been actively employed at some of our clients and the feedback has been tremendous. These ‘programs’ need to be repeated in order not to lose their effect. Your partners are your most valuable asset, you must keep the partner group strong, confident and united! We are here to help TGO Consulting is there to help you navigate the crisis. We are currently writing a book on this topic that will be finished by end April. This book will be made available for free to all our clients. We will also continue to publish weekly articles on topics that are most relevant to you right now. Our experience with law firms in China gives us a two month head start in knowing what best to do. There will however remain many important unknowns and things can change really fast. This is where our unparalleled creativity has proven to be extremely valuable. We have a proven track-record to find effective solutions faster and better than anyone else. In the meantime, our TGO Consulting Research Team keeps to monitor the state of the economy literally 24/7 to ensure that our approach always remains fact-based. Please do not hesitate to contact us to find out how we could help your firm navigate these challenging times.

With the Corona pandemic raging through the world, our healthcare systems are stressed beyond their limits. It is heartbreaking to see the reports from the doctors and nurses fighting at the front line. In an attempt to dampen the outbreak, our governments have halted most of public life. We are all ordered to stay at home and many businesses have been forced to close. As of yet, no one knows how long this will last. One day however we will be able to claim victory over the virus. The war against the Corona virus is a war we are guaranteed to win. We just do not know at what cost of human lives. While fighting the pandemic, another MUCH LARGER crisis has been brewing. We are descending into the worst and most severe economic crisis in the history of mankind. Our TGO Consulting Research Team has been monitoring economic indicators from around the world on a 24/7 basis for the past weeks. The outlook is getting darker by the hour. Here are two graphs to help you see what we are seeing: The graph above shows the PMI (Purchase Managers Index) between 2007 and today. It shows the impact of the 2008 credit crisis. The graph clearly shows by comparison what extreme and steep drop we are seeing right now. The graph below shows the effect on global trade. Exports from the US have dropped to the lowest level in history. No need to point out that for China the data are similar. The global economy is grinding to a halt. This has never ever happened before. No amount of rescue packages from governments and central banks will be enough to prevent the damage. The US rescue package is now already worth around 10% of GDP. The blow to output and to tax revenues could also be larger. At least a few economies are likely to find themselves with debt loads well in excess of 150% of GDP. Readers beware, we will be in the most severe economic recession ever. This is going to be really really bad. Fiddle while Rome burns When Rome burned, emperor Nero allegedly played his violin. While this obviously cannot be true, the attitude and mood in the legal industry somewhat reminds me of this image. Our researchers have contacted a number of elite law firms across jurisdictions and almost invariably managing partners claim that their firm is still doing great. Despite the crisis and working from home, they claim to see no substantial dip in billable hours. Observing legal media across multiple jurisdiction seems to support this image. Obviously there is some editorial content around the virus and having to work from home, but for the most part it remains business as usual: great M&A deals and successful lateral hires. On LinkedIn, law firms across Europe still celebrate their rankings in Chambers. While the economy burns, law firms keep playing the violin... It is time for a very loud wake-up call Last week I promised to help you prepare for the economic effects. Over the weekend I have urged you to put in place wartime leadership for your firm. It is high time for law firms to come to grips with reality and to prepare for a MASSIVE economic crisis unlike anything you have seen before. Therefor it is important to move beyond your daily Corona Virus Legal Updates and focus on what is to come. (By the way, do you have any idea how many -almost identical- Corona Updates the average client is receiving just from law firms?) First things first: cash-flow! Like any other business, law firms need cash to pay for their monthly costs. We call this Operating Expenditure (opex). Your opex consists of Direct Costs (the red rectangle), these are the salaries and bonuses of the fee-earners (partners not included) and the Indirect Cost (the yellow rectangle) as illustrated below. Characteristic for law firms is that opex are fixed, it does not vary according to production. Law firms need the roughly same amount of cash every month to meet their financial obligations. In order to meet these obligations, you need at least an equal amount of money coming in from clients paying their invoices. The first thing you need to do right now is to make a cash-flow analysis and projection. In order to do that you need to make an inventory of: a) Invoices that are still outstanding and likely to be paid. b) Billable hours produced, but not yet invoiced to the clients. c) Ongoing matters and the future billable hours still expected (realistically) d) Realistic pipeline of new mandates e) Your firm's financial obligations per month (projected) Based on this inventory you have a pretty clear picture on how much money might still be coming in. Now you have to factor in at what point in time this money realistically will be received, bearing in mind that clients will extend their payment term and some clients might not be able to pay at all. The cash-flow analysis might be your most important indicator to monitor. You need to keep on top of this and do a new analysis based on the most recent data every week. Second: your bottom line Profit is an opinion; cash is a fact. That is why we emphasize cash-flow before profit margin. However, for law firms profit margin equals partner compensation and this is always a super sensitive topic. We know the economic slump will depress demand and slow client payments, but don’t know when it will kick in, how bad it will get, or how long it will last. Once partners will start to realize, just how bad things might be, they will start to feel anxiety about their income. Within a matter of weeks/days from now law firm leaders will be under pressure from partners to take all necessary measures to protect the income of the partners. At the time of the 2008 financial crisis cutting costs was pretty easy and law firms turned to their usual playbook: they made some staff redundant, skipped planned investments, scaled down on marketing, tried to renegotiate occupancy and other costs, reduced recruitment and raised the quality bar for lawyers, firing those who did not meet the new threshold. Reducing the number of equity partners at the same time, most law firms managed to limit the damage to partner income. Some firms even ended up with higher PEP during the crisis than before. The problem now is that it following the same playbook once again will not have the same effect. We did it all a decade ago, today there is far less left to cut. There might be a big elephant in the room The average profit margin for law firms is around 35%, while some elite law firms are around 50%. This means that between 50 and 35% of all revenue is allocated as compensation for the partners. Reducing that number would have more impact on the available cash position than any other measure. Discussing the possibility of temporary reducing partner payments to help the firm through harsh times has until now been considered a taboo as it could open Pandora’s box. We have written an entire book on this topic: Death of a Law Firm (2015). Partner compensation is a complicated multi-faceted topic that goes way beyond what can be covered in this article. So for now it seems wise for law firms to remain on the side of caution and reduce monthly payments to partners. This would be preferable to a capital-call at a later stage. It seems only fair that also partners show that they are prepared to bear part of the burden. Just dismissing some associates and staff and negotiate a lower rent does not look good. When the whole economy is collapsing, we will all be better off if we share the impact. We should all behave like decent people and not put our individual interests before those of others. We are here to help TGO Consulting is there to help you navigate the crisis. We are currently writing a book on this topic that will be finished by end April. This book will be made available for free to all our clients. We will also continue to publish weekly articles on topics that are most relevant to you right now. Our experience with law firms in China gives us a two month head start in knowing what best to do. There will however remain many important unknowns and things can change really fast. This is where our unparalleled creativity has proven to be extremely valuable. We have a proven track-record to find effective solutions faster and better than anyone else. In the meantime, our TGO Consulting Research Team keeps to monitor the state of the economy literally 24/7 to ensure that our approach always remains fact-based. Please do not hesitate to contact us to find out how we could help your firm navigate these challenging times.