Operational decisions at law firms are crucial to the bottom line. From fee structuring to which practices to develop, people to hire, technology to use and even the right real estate choice are all factors in the equation of competitive strategy. What can your firm do to stay on top? This month, our panel of experts discusses business best practices that affect the profitability of law firms today and into the future.
Nicholas Gaffney (NG) is a veteran public relations practitioner with Zumado Public Relations in San Francisco and is a member of the Law Practice Today Editorial Board.
|Russell S. Ascher (RSA), executive director of Scarinci Hollenbeck, is in charge of all the firm’s operations and has oversight over finance, human resources, information technology, facilities, marketing and business development. A senior level financial executive and CPA with more than 25 years of extensive hands-on accounting and auditing experience, Mr. Ascher has a solid track record of leading and advising executive management.|
|John Fitzgerald (JF) is an audit partner, member of the Executive Committee, and chair of Law Firm Services at Berdon LLP. Mr. Fitzgerald, a certified public accountant in New York since 1994, is one of the firm’s key advisors to law practices and also works with closely held businesses in various industry sectors. He consults on maximizing opportunities in acquisitions due diligence; obtaining financing and refinancing; evaluating operational efficiencies; examining the financial and economic impact of partnership agreements; and on preserving and transferring wealth.|
|Hank Windmoeller (HW), director, Law Firm Services, is a member of Baker Tilly’s professional services practice and is located in the Philadelphia office. He joined the firm in 2016 and has extensive knowledge of the professional services, homebuilding, and oil and gas/mining industries. Mr. Windmoeller has more than 25 years of operational and financial experience in the legal industry, including holding chief financial officer and chief operational officer leadership roles for AmLaw 100 firms.|
NG: What strategies have you seen successful law firms implement to grow revenue and improve profitability to keep them competitive in the marketplace?
RSA: We have focused on growing practice areas that we think have strong growth potential such as intellectual property and tax.
JF: Marketing should not be viewed as an expense, but rather as an investment. It is essential to develop a strategic marketing plan that includes business development. The plan should identify and maximize individual business development skills of its partners and other professionals — one may be an effective rainmaker, and another may be a good spokesperson. This is especially important for up-and-coming millennials who are go-getters and want to reap the benefits of good performance instantaneously. They look for strong training and development programs in their employer.
Additionally, practice/industry groups have become a driving element for strategy development and implementation. Developing such groups is a very effective way to organize a practice and enhance competitiveness while engaging all of the partners and professionals in the important role of planning and executing to become more valuable to clients and prospects.
A reluctant team is a losing team, and partner buy-in is a must, however you decide to organize your firm. There are various compensation models to consider, each with pros and cons. Among them are equal partnership, lockstep, modified (the Hale & Dorr model), simple unit, and 50/50 subjective-objective, among others. Whichever systems you choose, be consistent or risk creating discord in the firm.
HW: We see successful firms having a clearer understanding of which clients are profitable and what practice areas, specialized services, or industries distinguish their firm from the competition. This knowledge allows successful firms to strategically allocate and target their talent, marketing and business development resources to more profitable geographic and practice areas to grow revenue and improve profitability.
NG: Do you see the growth strategy of hiring lateral partners and firm mergers as a continuing trend into 2018?
RSA: We feel that this will continue since many clients prefer working with firms that they feel have sufficient depth. To remain competitive, firms must add laterals and merge with other firms.
JF: It will continue, but, as with any strategy, the lateral strategy can be costly if not planned and executed properly. To enhance your success rate, include four distinct phases:
- What is your objective in hiring a lateral? What is your lateral message? Why do you need to make a change?
- Understand his/her skill set, develop a business plan, and assimilate the lateral’s clients into the firm’s clients. Individuals and small groups of laterals must fit into the existing firm culture.
- Laterals that fit into your existing core business will be easier to retain while laterals in non-core practice areas will be more difficult, and will require a longer planning effort. Assign a partner to champion this effort.
- Develop a memorandum of understanding, including compensation guaranty, retirement provisions, representations and warranties, roles in the new firm, contractual obligations, pending litigations, tax issues and audits, insurance coverage, and technology.
HW: In 2018 we expect the trend to continue for law firms to take advantage of available laterals to supplement, complement or grow specific practice areas.
Unfortunately for some firms, continued static demand for legal services coupled with recent associate salary increases has placed a downward pressure on firm profitability. This has had an unfavorable impact on partner compensation. In addition, firms seek to enhance their profitability by counseling out less productive partners and acquiring talent in their perceived growth areas. As a result we expect to see a continued “migration” in 2018 of partners seeking the best fit for their practice.
We see law firm mergers as a quicker way to develop critical mass, expand into new markets and absorb any existing excess capacity, however, they require a substantial amount of planning, diligence, and integration to actually result in a positive outcome.
NG: Statistics show there has been an increased trend toward alternative fee arrangements (AFAs). What are some best practices that law firms should implement to manage the resulting cost implications from these AFA engagements?
RSA: It is important that attorneys accurately input their time even on flat fee arrangements, so that the firm can evaluate the amount of work that was performed for a given fee. This will help the firm better estimate the flat fee amount for future engagements.
JF: To combat client fee issues, a firm must first elect to implement an AFA option that best fits in with its current processes and culture as much as possible, to eliminate too much disruption. This will assist in transitioning to a new model. An AFA should complement a firm’s client expectations, business plan, accounts payable processes and partner obligations. A firm should always test different AFAs before adopting. Keep in mind, a firm can always implement more than one type.
Some things firms might consider in controlling costs associated with AFAs is outsourcing some of the administrative functions of an engagement; hiring contract attorneys who work on a short-term basis rather than hiring full time employees, which would come at a greater cost to the firm; and pushing down work on engagements to lower-level staff and administrative personnel.
Hiring experienced administrative heads for finance, human resources, and marketing will take these functions away from attorneys whose time is better spent on client service, new client development and recruitment.
Locating offices in less-expensive areas and moving back office administration into smaller, suburban offices will also provide savings. Legal libraries are digital now and that space can be used for other purposes or eliminated altogether.
HW: The pressure for real alternatives to hourly pricing continues to be a challenge to most law firms. Client law departments that were asking for cost control from their outside counsel are now demanding further cost reductions with greater predictability, certainty and transparency. Getting to a win-win solution requires a firm to design an effective fee proposal that provides value to the client and still delivers a profit to the firm while maintaining a new level of certainty, simplicity and clarity.
Best practices utilize data mining and breaking down projects, transactional matters and various types of litigation into their component parts. This allows for rational assumptions in pricing a wide variety of legal services, ranging from the simple to the complex.
Introducing project management skills provides the ability to restructure engagements through better staffing choices and the leveraging of technology to further reduce delivery costs and improve margins. Best practice should include the management of resources and establishing a timeline that ensures predictability of the delivery and cost of the client’s project.
Partner compensation plans are also slowly adapting to reward management of the cost of services, profitability of matters and modest process improvement risk taking designed to enhance efficiency and client satisfaction.
NG: How have successful firms dealt with inflating real estate costs as they look to grow but still remain profitable?
RSA: The trend has been towards smaller attorney offices as most attorneys don’t meet with clients in their offices but instead meet with them in the firm’s conference rooms or at the client’s location. There has also been a trend toward more work being done away from the office, making the large office less essential. The trend toward the paperless office has also reduced the amount of real estate needed to house paper files.
JF: Large firms have already downsized their space in New York City, Los Angeles, San Francisco, Chicago and Dallas, to name only a few markets. This trend will continue nationally. Firms locked into long-term leases are looking for sub-tenants, in some instances leasing entire floors that had been used by the firm itself. Firms that merge are combining offices, reducing lease costs and duplicative operating expenses.
Some firms are relocating to smaller, more efficient space in newer buildings. These buildings often contain the technology infrastructure needed in today’s business environment, an expensive upgrade to make in older buildings.
Other firms are leveraging the advantages of teleworking. This is particularly popular with millennial employees who are more adept at the use of technology. It also fits in with their desire for a greater work/life balance.
HW: With the impending retirement of the baby boomers and the unique space preferences of millennials, law firms today require substantially less square footage per lawyer than traditionally was carried in the past. Efficiencies in space design, reduction in office sizes, leveraging technology and the ability to work remotely have resulted in smaller law firm footprints which has minimized the effects of inflating real estate costs.
NG: How are successful firms preparing for their future leadership to maintain growth and profitability?
RSA: Firms need to consider succession as part of their strategy. It is important to mentor associates and allow them to interface with clients so they will become better prepared for leadership roles in the future.
JF: In developing future leaders – who are mostly millennials – firms must first understand how to best identify and harvest their talents. This is mostly accomplished through strong training and development programs. Once identified, opportunities to nurture their talents with new projects and responsibilities should be given.
Future leaders require a mentor-type relationship – someone with whom they can bounce questions on an ad-hoc basis. They don’t want to be left alone to fend for themselves. Flexibility is also important as a means of giving them the opportunity to work remotely and this is likely to result in increased hours as well as better attitudes.
Additionally, management should make a strong effort to engage consistent feedback that includes acknowledgement of successes and weaknesses as well as open dialogue on required areas of improvement. Consistent feedback will help keep younger professionals motivated and engaged, and will help ensure they feel involved and appreciated.
Involvement is essential to raising future leaders. Structure accounts that have senior partners nearing retirement as the “relationship partner”, should include an up-and-coming associate/junior partner. This “passing-the-baton” program will enable the younger professionals to take over accounts with greater confidence and ease.
HW: Nearly half of the partners in the nation’s top 200 law firms are baby boomers and that means there will be a wave of upcoming retirements. The American Lawyer reports that 16 percent of partners will retire in the next five years and 38 percent in the next ten.
Many firms find it difficult to have open and frank discussions with their partners about retirement, but successful firms pro-actively develop an age profile for the firm, their offices and practice areas. Successful firms use this firm profile not only to identify those potentially retiring but to recognize gaps in age and experience which may become critical when transitioning client responsibilities.
Early succession planning is important to the future law firm leadership in order to retain existing legal talent, successfully manage existing client relationships, and to maintain growth and profitability.