Make More Rain : blog, economic outlook

Happy Thanksgiving!

MichelleStPierre — Wed, 25 Nov 2009 14:00:00 GMT

I want to take this chance to wish all of our readers a very Happy Thanksgiving! As our CEO Mike Walsh reminded all of us here in LexisNexis US Legal Markets via email yesterday, "Today, Thanksgiving is marked by football, the Macy's Thanksgiving...(read more)

Too Good To Be True

Admin — Tue, 24 Mar 2009 22:04:00 GMT

Shortly after I graduated college I had just been dumped by college sweetheart, was not happy with my original career choice, and my billfold was getting smaller and smaller as the country was in a recession. Safe to say I was in a bit of a quarter-life crisis and my confidence was slightly south of nothing. That said, within my larger circle of friends I had noticed and briefly met a girl whose beauty was so striking that the room stopped every time she walked in. I and my friends...and pretty much everyone else thought there was no way she would ever be interested in a guy like me. I am no Brad Pitt to say the least. Yet to my surprise she started to actually pursue me (That should have been the first sign that there was clearly something wrong with her). On our first date we went to a bar and I remember immediately hearing whispers from other male patrons about how in the world a loser like me could be with a gal like her. Those whispers made me feel pretty good, important even.

Now here is the reality. Within five minutes of that date I realized that this girl had so much baggage that even United couldn't lose it all. In addition every time I talked with her I wanted to claw my eyes out. Even my friends who at first thought she was a knockout quickly changed tune and told me I was a moron for dating her. Every moment was full of drama, I could never make her happy, she messed with everyone's mind, had a temper that would make Chuck Norris cry, and Chuck Norris can't cry. My billfold was not only gone but would not feel the touch of debt free cash for quite some time. I still bang my head against the wall every time I think of those days. Why did I date her??? Why would I have subjected myself to that torture??? Well, reflecting back, it was because I was on the rebound, I didn't have many other prospects at the time, my self esteem was way down, the whispers made me feel like a somebody, and I just didn't have the skill yet to pick the right people to date.

Now that I have bored you with part of my dating past there is a reason why I bring this up in a law blog. Travelling from firm to firm I have heard many stories about risky clients that have been taken on within the recent past. Some of these clients promised big returns on contingency cases, yet even though the likelihood of success was slim the firms took on that work. Why you may ask? Well, in this down economy where attorneys are starved for hours worked the mere chance that maybe just maybe they could win made them take on the matter. How did it turn out? Nine times out of ten, just as you would expect. Resources were poured into the case, the firms played with house money and at the end of the day there was absolutely no return.

In other cases I have seen very risky clients being brought in who not only have poor payment history but are demanding the world when it comes to fee arrangements and terms of payment. Again the primary reason is that work is down and attorneys need hours. Right now in many minds any hour is a good hour. Sadly this is a major problem that needs to be addressed. Just like I was down in the dumps after college, so too now are many firms. Self esteem is low after a downturn in growth, layoffs of peers, and pressure to bring in any originations. Yet the idea that any work is good work is simply false. As my colleague Bo Yancey recently mentioned, understanding the opportunity for the firm with respect to what the client is offering is essential for long term sustainability. A lot of firms would be better off not taking any of this overly risky work and focusing their efforts on identifying prospects, (most likely internal ones) that can help get acceptable work for lagging practice areas until while dust clears.

We know all too well how hard this economic downturn has hit not only the legal industry but the industries that firms serve. It is a depressing time for many of us, but we still have to keep our wits about us and make the right decisions. I made the mistake of taking on a very risky venture in my dating past. Not only that but even after I knew it was a failure I kept it going for months afterward. I challenge firms to not make a similar mistake and analyze your intake process. Try your best to make the right decisions on clients despite the pressure for originations. Finally, if you realize you made a big mistake, correct it as quickly as you can before you drain additional resources. I'd like to think that my billfold would be twice as big now if I hadn't made the choices that I did. Perhaps the same can be said for many firms ten years down the line, long after this recession.

-Russ Haskin

Russ Haskin is Director of Consulting for Redwood Analytics/Lexis Nexis

RFPs: A Necessary Evil

Admin — Mon, 09 Mar 2009 21:58:00 GMT

As we’re all aware, in today’s economic climate there is a big focus on cost reduction. It’s no surprise, then, that RFP’s are being used with even greater frequency by purchasers of legal services. The concept is not new, but the extreme focus on price across a large percentage of those companies probably is. For law firms, this is not a happy consequence. Law firms incur significant expense by simply responding to RFP’s, with no guarantee of work at the end of the process. Of course, a primary reason for companies using RFP’s to begin with is to get the lowest price across all parties—which means that the “winner” of the RFP may not be getting profitable work. In an RFP process, it’s not a guarantee that the lowest price will get the business, but it’s nearly certain that “bidders” with pricing substantially above the lowest prices will be eliminated quickly from consideration.

...(read more)

Closing the Barn Door

Admin — Fri, 06 Mar 2009 01:06:00 GMT

It seems like every article, blog, lecture, or memo now starts out with the words, “In these economic times,” and then goes on to explain what should be done. In fact, I am sure we could find many articles starting out with some slight variation of this premise reading back a few days in this website. While many of the business practices and choices currently being made are a direct result of the poor performance of the economy in general, from a management consulting standpoint, there is nothing like necessity to make people actually take notice of good ideas. I would surmise that if you are using the current market conditions to employ a sound business decision, you are probably well behind the curve. A good idea today was probably a good idea 2 or 3 years ago in the days of double digit growth.

Of course I am being somewhat facetious and coldhearted. Many of the decisions made today are both painful and undesirable to all involved, but necessary due to existing conditions. That does not change the fact that, in the past, there were many ideas that could have been taken advantage of in order to improve the well-being of individual firms while they still had the option.

Suggestions on how to increase profitability and streamline efficiency have always been out there, but in good economic times it hardly seems necessary to make a change to a practice that could create more work and stifle growth in the short term for potential long term gain and stability. Just ask my wife, who has insisted for years I either paint or replace the railing on my front stoop. Why would I when, in my opinion, the railing looked fine? While there were a few cosmetic blemishes, they were barely noticeable unless you were specifically looking for them. However, as if tempting the inevitable, I leaned up against the railing last month and fell into my holly bush. Sure, my parable of reckless abandon with marital bliss and home repair may seem silly but I knew that eventually the unpainted sections of wood were suspect to rot. I also knew what my wife said made sense but it would have taken time and money, both of which I did not want to spend.

I bring this up because I was recently speaking with an individual at a firm I have worked with quite regularly over the years; they thought the idea of me thrashing about in a holly bush quite amusing. This firm has been quite successful in past years and while they understood the concept of cross selling work and that introducing additional partners to certain client relationships would potentially yield more work overall and lead to greater client retention, this firm was satisfied with their current profitability strategy did not think it necessary at the time to encourage this behavior within their firm.

I can’t say I blame them, after all “if it ain’t broke, don’t fix it,” right? Well, we won’t know for sure, but I do know that double digit growth is no longer on the horizon, or even in the rearview mirror. This client, like many others, is struggling to keep certain practice groups viable due to lack of work and significant client attrition. As for myself, I have a new vinyl railing that doesn’t need to be painted, a neatly trimmed holly bush, and am revisiting the list of home repairs given to me by my wife a few years ago.

--Derek Schutz

Derek Schutz is the Director of Programs for the Business of Law team at Redwood/LexisNexis.

Heller in the Cellar

Admin — Wed, 05 Nov 2008 00:38:15 GMT

I read this article on the downfall of Heller Ehrman with great interest. What this doesn’t say is that Heller was a firm who last year had profits per partner in excess of $1,000,000, and in 2004 was ranked 2^nd on the American Lawyer’s A List. The key takeaways are that weak leadership, and the resulting lack of direction and ability to make key decisions, doomed the firm. The dissolution of the firm was brought to bear by lenders who called in loans when the firm’s partnership numbers dwindled below what was allowed in financial covenants. In essence, a “bank run” ensued with partners leaving, which caused the banks to act. (The current financial crisis likely did not help).

There are other firms who are similarly exposed, and while law firms generally don’t have a lot in the way of “retained earnings,” it does not mean that their financial health should not be scrutinized. Fixed costs, equity partner contributions, and debt financing are all things that can bring about the end of a firm in challenging times if managed inappropriately. As a managing partner at the conference I attended last week said, “lawyers often vote with their feet.” That’s what happened here. In my view, this shows the delicate balance firms must face in building consensus while still being able to make tough decisions. Increasing profits year over year certainly helps.

- Bo Yancey

Law Firm Talent Management Doesn't Stop with Recruiting

Admin — Thu, 30 Oct 2008 21:57:09 GMT

Without question, gaining an understanding of the characteristics of successful lawyers within individual firms can help firms to make wiser recruiting investments. The “Moneyball” project worked on by Kerma Partners and Lexis Nexis’ Redwood Think Tank focused on the characteristics of lawyers before they entered the law firm studied. Valuable information for the firm to have? Certainly, if thoughtfully incorporated into a recruiting strategy.

However, recruiting the best candidates for success within a firm’s culture is only part of the story. What’s the strategy to develop these associates after they are hired? The most qualified new lawyer can be mismanaged (or unmanaged), whittling away at the likelihood of success. The good news is that regardless of the candidate’s development before being hired, his/her development is largely within the control of the firm.

While the recent spotlight on analytics around recruiting efforts is very positive momentum, a firm really should not focus on a recruiting strategy without building a complementary development strategy. Over the past year, the Think Tank has been studying what differentiates successful lawyers once they begin their careers. In the handful of firms we’ve looked at, we have seen a (varying) correlation to success for attributes such as the type of exposure an associate receives, the clients they work with, and the volume of work they perform. Look for an article summarizing these results in the near future. As with the Moneyball conclusions, it will be important for firm managers to view information about the success of their own lawyers in the context of their own firm’s culture.

I welcome feedback and ideas for attributes to test as we continue to apply real analytics to the issues surrounding talent management in law firms.

-Kris Satkunas

Moneyball Indeed!

Admin — Wed, 29 Oct 2008 23:13:18 GMT

Buzz abounds concerning the recent “Moneyball” project completed by the Redwood Think Tank and Kerma Partners. A lot of the reaction seems to focus on trying to apply the results for a specific firm to the industry as whole. This misses the point entirely.

The basic premise of the study is that there is value in breaking away from recruitment as usual. Spending millions of dollars to recruit the same small pool of candidates everyone else is targeting is not efficient. Within the context of a broader set of talented, accomplished law students, traits should emerge from deeper study that allow firms a more focused approach. Firms who develop the sort of self-awareness a study of this type creates have an opportunity to create substantial competitive advantage in their ability to attract the candidate lawyers (entry-level and lateral) best suited to long term success in and for the firm. On the flip side, retention rates (and the cost of associate attrition) should be dramatically reduced.

With regard to the question about the application of these conclusions industry-wide, there are a number of important points to draw. First, a sample size of 1 is far from telling. In fact, I would expect to find a number of firms for whom the conclusions drawn would be exactly opposite of those for this first firm. Of course, this is not to say that interesting trends won’t emerge as the study is expanded; they will. Which ones, however, will only become clear with a greater sampling. Secondly, and I believe most importantly, the point of the exercise is to not really one of knowing which candidates will make the most successful lawyers generally but specifically, in the context of the firm’s culture, business and experience. This point cannot be overstressed. Yes, we may find that some traits can be correlated with expected success in the profession. That said, any particular firm may find this trait to be unimportant in its context or even negatively correlated. The power of the Moneyball study resides its law firm specificity.

-Norm Mullock

Tax Reform Up For Grabs

Admin — Thu, 29 May 2008 07:00:45 GMT

With the tax cuts enabled during the Bush administration coming to an end soon, lobbyists and tax attorneys are lining up to offer their opinions on how the tax code should be reformed.

According to an article in the National Law Journal (Firms Gear Up For Critical Tax Polcy Changes), "[a]bout $4 trillion worth of tax revenue provisions are expiring, the most in the history of the U.S. tax system":

"The next president has some ticking time bombs to address," said Jim Miller, a tax attorney who last month moved to Winston & Strawn's Washington office from Hunton & Williams. "There's now the greatest potential for tax reform certainly since 1986".

How is this important to you? Consider this:

"Tax issues will be the key driver for political and economic activity for the next half-dozen years," Mike T. McNamara (a Sonnenschein Nath & Rosenthal partner) said. "All of our clients are trying to look at how tax policy will drive or hinder their business plans."

It isn't just your clients who need to watch the tax policy. Your firm needs to pay close attention to how tax policy is addressed so that you may draft your own business plan that take the new policies into consideration.

Alan J. Auerbach, Jason Furman, and William G. Gale wrote an essay on possible approaches to tax policy titled Facing the Music: The Fiscal Outlook at the End of the Bush Administration.

The tax foundation has a summary of each of the Presidential Candidates' tax plans that can be accessed by clicking here.

If you want to talk about "perfect storms", consider the effects on your business of expiring tax cuts and a struggling economy. How tax policy is approached in the coming year(s) will be telling on how well our economy rebounds from this (at least so far) minor contraction.

Partner Cost and Client Profitability (Part V)

Admin — Tue, 27 May 2008 07:00:00 GMT

This is the fifth in a series on partner compensation and client profitability written by Ron Paquette, consultant with Redwood Analytics, now part of LexisNexis. The first article, titled Client Profitability: What Is The Cost Of Partner Time?, was an introduction to the concept of allocating partner cost in calculating client profitability. The second article, titled Partner Cost And Client Profitability, (Part II), is focused on pitfalls of some firms' methodology in allocating costs to partners. The third article, titled Partner Cost And Client Profitability, (Part III), is focused on basing a partner's direct cost on a "minimum margin percentage". The fourth article, titled Partner Cost and Client Profitability (Part IV), is focused on basing a partner's direct cost on a "minimum margin dollar amount". This article is focused on allocating a partner's direct cost using a variation of both the "minimum margin percentage" and "minimum margin dollar amount" based on different partner "ranks" using a sliding scale.

Over the last 4 weeks, we have been discussing in some detail the topic of partner compensation as a direct cost in profit modeling. Specifically we are answering the question: “How much of a partner’s compensation should the firm consider when calculating the cost rate allocated to each billable hour he/she works?” We have evaluated several methodologies that create unfavorable results and 2 that Redwood Analytics recommends. While we will discuss another methodology today (or variations of previous strategies), it is important to remember that there is not one right answer that will work for all firms. Instead, it depends on the current state of affairs of the firm, the long and short term goals of the firm, the relative level of partner compensation, and maybe most importantly, how the firm thinks about client profitability.

Sliding Scale (for minimum margin % or $):

The final methodology we will explore in this series is a variation on the previously recommended approaches. In this variation, firms have the flexibility to use different minimum margins for different partner “ranks”. We do not suggest moving to complete customization (where each partner has a different threshold) but we do recognize that the minimum margin for a senior partner may differ from that of a mid-level partner and a junior partner. In other words, it has been argued by several partners we know that the relative portion of compensation paid to a partner for performing billable work decreases with seniority. Since most firms have some form of partner ‘shares’ , ‘points’ or other credits, we recommend using this as the basis (see fig 1 below), but standard rate or tenure could work as well. In this example, we have split the partnership into 3 buckets to determine the minimum margin %, the firm is free to choose any number of buckets. It should be kept in mind that too many can unnecessarily increase complexity and open the door for disagreement for both start/end points for the ranges and the minimum thresholds

Minimum Shares	Maximum Shares	Minimum Margin %
1	50	40%
51	100	30%
101	150	20%

Figure 1

Alternatively, instead of using a handful, a firm could create a continuum to represent the changing minimum that would eliminate the abrupt change in partner profit that would be experienced as they progressed from one bucket to the next (see fig 2 below). In this example, a partner with 150 shares would have a 20% minimum margin while a partner with 100 shares would have a 30% minimum.

Figure 2

In the examples below, we see the three familiar partners from our previous blog entries with the minimum % applied from the table shown in figure one. Once again, the Jr. Partner is not affected by the minimum because his fully loaded margin exceeds the threshold. Unlike the minimum margin % methodology though, this approach differentiates the Rainmaker and the Dept. Manager (instead of both having 40%). Keep in mind that while we have illustrated this methodology using the minimum margin % approach, we can also apply this to the minimum margin $ approach.

Role	Comp	Std Rate	Shares	Minimum Margin %	Cost Rate*	Actual Margin
Rainmaker	$1MM	$250	125	20%	($200)	20%
Dept. Manager	$500M	$200	75	30%	($140)	30%
Jr. Partner	$150M	$150	25	40%	($83)	44%

* Assumes 1800 standard billable hours expectation

Advantages of the methodology:

It ensures that every partner has a positive margin associated with his/her hours when valued at standard rate. While one may purposely choose to lose money on specific matters through discounting, there should be margin on every hour of time when valued at published rate.
It is based on the partner’s published rate. While total compensation can rise and fall with firm profits, this relative cost will not fluctuate and this method is in line with thinking about compensation for a partner’s work effort.
If executed properly, a leverage model will be supported by forcing the highly compensated partners to a lower margin % than lower compensated partners.
It supports a firm with a closed compensation system since actual compensation will not be revealed through profit model.

We have to address the weaknesses of this approach as well:

Higher complexity. With either bucketing (fig. 1) or the margin curve (fig. 2) the firm will still have more decisions in this methodology than in either minimum margin approach. More decisions open the door to more disagreements and dissenters.

Like the other Redwood recommendations, the weaknesses are overshadowed by the strengths in the model. And, if the firm can build agreement around the (semi-arbitrary) decisions necessary for this methodology, Redwood believes this creates the most robust model of all those explored, allowing the firm to assess relative client profitability without having to exclude a client due to high/low partner costs. In the last entry of this series, we will detail the list of criteria we have developed to better understand the strengths and weaknesses of a new methodology that we may encounter.

While this series documents every methodology (some with slight variations) that we have come across in our years of working with firms, we do realize that it is not necessarily exhaustive. Have you used, seen, or thought about a methodology that we have missed? Do you have any other feedback? I’d love to hear from you: rpaquette@redwoodanalytics.com

Law Firm PEPP "Bubble" To Burst?

Admin — Fri, 09 May 2008 07:00:24 GMT

Since 2000, law firm PEPP (profits per equity partner) have increased on average 11% for Amlaw 100 firms and 8% for Amlaw 200 firms. Some observers fear that, like other markets that have sustained growth periods at or near double digits in the past 10 years, the law firm partner profit "bubble" may soon burst as well.

Looking at Amlaw 200 data, PEPP increased by 2% in 2001. In 2002, the increase was 7%. 2003 saw an increase of 11%, 8% in 2004 and 2005, and 10% in 2006.

This increase doesn't only apply to Amlaw 200 firms. Looking at the differences from 2005 and 2006 for the top respondent firms in the Law Firm Economic Survey by Juris Inc. and LexisNexis, respectively (the only two years available), firm PEPP increased 11%. It is likely that most firms in the mid-market and small market increased incomes by respectable if not similar percentages over the same period.

What can you do to prepare for a stunt in the growth (or decline) of PEPP? Bruce MacEwen posted an article May 5th on his blog Adam Smith Esq., titled A "Bubble" in PPP? that looks at some short term ideas to help "mitigate the downward trend" and predicts a change in the las firm business model over the long term:

Short term ideas:

Redeploy lawyers in troubled practice areas to healthier ones;
Use the opportunity of "shared pain" with your key clients to get closer to them;
Adroitly stand by while the normal waves of attrition take their toll;
Build or at least safeguard capacity in selected practice areas that you anticipate will emerge strongly from the downturn;
And always, always, keep a sharp eye on costs--although, truth be told, you don't have much material flexibility here. You're not moving your offices to Brooklyn and you're not paying less than market for partners and associates.

Long term predictions:

the billable hour, lamented by many but eliminated by few, will eventually replaced with a more "value-based" model, though MacEwen stresses that he is not "holding [his] breath" on this;
the traditional associate/partner model changes to include more non-equity partners and more contract attorneys;
at least fundamentally, "the core processes by which law firms manage cases and deals must and will change" (ie, more project management, more team philosophy centered around practice groups to become more efficient).

Ultimately, MacEwen believes that due to increased demand (at least for Amlaw 100 firms), finding work won't be the problem. However, he sees the traditional model as being unsustainable based on the limits placed on things such as productivity (>2,400 hours?), rates (>$1,000 per hour?)and realization (>100%?). Because of this, if PEPP does suffer a downturn for an extended period of time, the long predicted changes to law firm dynamics may happen.

If this occurs in large law firms, it is incumbent on smaller firms to adapt quickly. The predictions above are all point towards efficiency that allow firm profits to increase through efficiency rather than increased rates and worked hours. Much has bee written about the "unmanageability of law firms". Despite this, firms have continued to make exceptional profits - due in no small part to their enviable margins. With good management, law firms can see profits that far exceed anything that firms receive currently. And if partner profits start decreasing, your firm will be in crisis - just as it is not a good idea to go to the grocery store on an empty stomach, it isn't a good time to contemplate an overhaul in processes during a crisis.

Much of the allure of smaller firms is quality service at a lower price. Some large firm partners charge rates in excess of $1,000 per hour. If large firms realize they can offer similar services at lower prices and still increase profits, smaller firms can be squeezed out of the marketplace.

Think Walmart. As Walmart entered the scene, small businesses were unable to compete based on their lack of purchase power. Walmart could offer more product selection at a lower price. Home Depot and Lowes did the same to small hardware stores. The small shops that survived did so by using their secret weapon - customer service and personal engagement. Still, you won't find many of these shops who don't struggle on a monthly basis and have to watch as their clients often come to them for advice, then go to Home Depot to buy the big-ticket items.

For small and mid-size firms to compete in this changed environment, they will have to embrace workflow efficiencies that meet or exceed that of the larger firms - and use their "secret weapons" of personal engagement with clients and responsiveness. However, without the fundamentals of an efficient business in place, your firm will suffer under the weight of your processes.

There will always be individual clients available, but more dependable sources of income often come from business clients and their leaders. These clients are already demanding more cost certainty. If larger firms are able to provide this value to business clients first at a price that isn't so different than yours, your firm may be in trouble.

The time to act is now.

Partner Cost and Client Profitability (Part II)

Admin — Tue, 06 May 2008 07:00:21 GMT

This is the second in a series on partner compensation and client profitability written by Ron Paquette, consultant with Redwood Analytics, now part of LexisNexis. The first article, titled Client Profitability: What Is The Cost Of Partner Time?, was an introduction to the concept of allocating partner cost in calculating client profitability. This article is focused on pitfalls of some firms' methodology in allocating costs to partners.

Some firms have chosen to exclude costs all together from billable hours worked by partners. Generally it has been requested for one of two reasons: the firm would like to keep actual partner compensation out of the profitability model (a closed compensation system), or the firm is thinking about a P&L model where partner compensation is simply a distribution of firm profits. While this methodology does accomplish those goals, from a client profitability perspective, it introduces its own set of issues.

What results is a model where client profitability is maximized by only using partners to perform the billable time. In the example below, there is a timekeeper with a 66% profit margin and two partners, both with 100% margins. Any hour that the Associate performs for a client will in essence drag down that client’s profitability and a matter manager might be tempted to use a Partner where an Associate would suffice in an effort to ‘game’ his clients profitability. This is contrary to the proper use of leverage and economic theory which would have the partners working on tasks for which lower level timekeepers are not qualified such as originations and the management of matters and attorneys. For this reason alone, there needs to be some cost associated with each billable hour of a Partner’s time, if not for any other purpose than to represent the opportunity cost of them not performing these other tasks. Besides, every firm that we have encountered expects their partners to perform a certain quantity of billable hours for their clients which would imply that some of their compensation should in fact be allocated to the client.

Role	Compensation	Std Rate	Cost Rate	Profit Margin
Rainmaker	$1MM	$250	$0	100%
Dept. Manager	$500M	$200	$0	100%
Associate	$80M	$100	($44)	66%

Another methodology that has been requested in an effort to support a closed compensation is what we call a fixed (or capped) partner cost. In this scenario, every partner is given the same direct costs. Aside from the privacy of actual compensation, firms make their case by stating that above a certain point, all partner compensation is for contributions besides the billable hour. However, since billable rates vary significantly even in the upper echelons of partners, it is hard to justify those hours having the same cost rate. Regardless, like the methodologies we have already examined, this too creates some unfortunate outcomes.

The biggest concern with this methodology is the reversed leverage that it creates (similar to having no costs at all). In the example illustrated below, we see a firm that has chosen $270,000 as the partner direct costs. Any partner whose compensation exceeds this threshold has their compensation limited and as a result, all have a $150 cost rate for their time. The result is that the highest rate timekeepers have the highest profit margin, 40% in the case of the Rainmaker, while those with lower compensation, like the Jr. Partner, have minimal (or zero) profit margin for their work. Certainly, the cost to the firm for these 3 timekeepers is not the same.

The alternate version (and preferable to the former) is to use the dollar amount as a limit to partner compensation and not a flat amount for every partner. In the example below, we see the Jr. Partner whose actual compensation is below the $270,000 mark. In the fixed methodology his profit margin is 0% but if it were capped, his direct costs would be his actual compensation and therefore would have a more favorable profit margin of 44%. This still does not relieve the cost similarity between the Dept. Manager and the Rainmaker but it is a slight improvement over having all partners at one cost rate. Of course this methodology does not meet the requirements of a closed compensation system (unless the firm is primarily interested in the privacy of Sr. Partner compensation).

Role	Compensation	Std Rate	Fixed Cost	Cost Rate	Profit Margin
Rainmaker	$1MM	$250	$270M	($150)	40%
Dept. Manager	$500M	$200	$270M	($150)	25%
Jr. Partner (Fixed)	$150M	$150	$270M	($150)	0%
Jr. Partner (Capped)	$150M	$150	$270M	($83)	44%

The next installment will focus on better ways to calculate partner cost in measuring client profitability.

Alan Greenspan Versus The World - The Debate Matters To Law Firms

Admin — Fri, 11 Apr 2008 07:00:57 GMT

There are differences in opinion on regulation of financial markets. On the one hand, Alan Greenspan takes a mostly hands-off approach to financial markets, except when risks to the economy appear. Martin Wolf, among others, have criticised Mr. Greenspan for his policies that they believe contributed, even caused, the current credit crisis.

They both seem to enjoy sparring via the Financial Times. For a little background, read what Mr. Wolf wrote of Mr. Greenspan after he retired as Federal Reserve Chairman (requires registration to read). It was written about in the New Economist blog with a summary.

In March, Mr. Greenspan opined in the Financial Times that regulation won't create a "perfect model of risk". He concludes:

"Thus it is important, indeed crucial, that any reforms in, and adjustments to, the structure of markets and regulation not inhibit our most reliable and effective safeguards against cumulative economic failure: market flexibility and open competition."

Mr. Wolf responded in his forum with nine points in opposition to Mr. Greenspan (read through the comments to see Mr. Wolf's response). He and others criticised the former Chairman for keeping interest rates too low for too long after the brief recession of 2001. This, they maintain, led to the massive asset bubble fueled by great liquidity. Mr. Wolf also aludes in one of his points that far too little attention is still being given the "excessive savings outside of the United States". Some fear global inflation in excess of 5% will be the result.

Mr. Greenspan answered in the Economist's Form section of the Financial Times that was published in print April 7th in an Op/Ed piece. Again, Mr. Greenspan set the rules of the game as black and white:

"My view of the range of dispersion of outcomes has been shaken, but not my judgment that free competitive markets are by far the unrivaled way to organize economies. We have tried regulation ranging from heavy to central planning. None meaningfully worked. Do we wish to retest the evidence?"

Mr. Wolf responded on April 8th in an editorial titled, "Why Greenspan does not bear most of the blame". He grants many of Mr. Greenspan's arguments, but finishes:

"Regulation cannot be perfect. But the worse the outcomes now become, the more difficult it will be to defend free financial markets at all. Without a credible design for regulatory improvement, it will prove impossible."

The arguments on both sides are well worth the time spent reading and provide a better understanding of the likely debates to be held later this year contemplating additional regulation of the financial markets. The breadth of reach that resulting legislation will have affects just about every area of the legal market in some shape or form. The thought leaders are debating it right now. Take some time and read the opposing views. On whose side do you favor?

We have begun taking submissions for the 2008 Law Firm Economic Survey. If your firm is interested in participating, please contact Brian by clicking here.

Business Development Opportunities For Law Firms In 2008

Admin — Mon, 07 Apr 2008 07:00:08 GMT

An article in the Tampa Tribune (hat tip: Estrin Report) reports that foreclosures are so high in some areas that firms are hiring as many as 200 additional staff to handle the workload. Foreclosures in Hillsborough County, Florida in February more than doubled the amount from February 2007 and is more than 5 times the foreclosures from February 2006. This reportedly is putting a strain on the "assembly line" approach firms here use to push these cases through the system.

This is an extremely worrying sign. Granted, the investment houses purchased in Florida may not be the primary residences of the owners. However, their investments were lost and many lost their savings in the process.

This is more evidence that the 2008 Client Advisory published by Hildebrandt and CitiBank is off the mark. There does appear to be offsetting legal work to be found. This is reassuring news to law firms, especially those who have expanded practice areas, that they may not suffer what the Client Advisory termed "the perfect storm" where all areas of practice trend downward with no offsetting surge of work.

However, it is likely that Congress will act to slow foreclosure activity on primary homes sometime this year. Though good news on the surface, Congress isn't very effective in softening the effect of a market correction.

Our economy is volatile. Opportunities for work will be everywhere but not necessarily in areas traditionally served by your firm. Firms need to prepare to be innovative in their business development approaches this year to take advantage of the continued fall out from the several market corrections that have happened and will happen in the coming months.

We have begun taking submissions for the 2008 Law Firm Economic Survey. If your firm is interested in participating, please contact Brian by clicking here.

Law Firms Pass On Arbitration In Employment Disputes

Admin — Fri, 04 Apr 2008 07:00:36 GMT

In an article for the upcoming issue of the National Law Journal (NLJ) posted yesterday on their site, law firms are not taking their own advice when it comes to arbitration clauses in employment disputes.

Is this a case of what's good for the goose isn't good for the gander? Why would arbitration be a good idea for other businesses but not good for law firms? The answer brings into question the utility of arbitration.

The arguments for arbitration come from those who have been burned in litigation. Litigation can have you sitting in front of a jury that likely has no experience in the subject matter at hand and may in fact have motives other than the subject matter at hand to deliver a large award to a plaintiff. Arbitrators, on the other hand, are picked from within the industry from which the dispute arises and ostensibly provide a more fair, though equally binding, resolution at less cost than litigation. Where litigation can hinge on perception, arbitration decisions are meant to be grounded in experience-laden fact.

According to the NLJ story, however, only 10% of 200 law firm respondents to a 2003 survey had "mandatory arbitration in place". I assume this means that equity partners were bound by it through the partner agreement and that other employees were bound by it as a condition of employment, though it isn't specified in the article. One reason cited is that arbitration clauses may have a detrimental effect on the workplace. Said a partner with DLA Piper, "Your attorneys can perceive that you are materially changing their position vis-a-vis the firm and attempting to circumscribe the rights they might otherwise have."

I believe that statement holds true to any situation where arbitration exists, not just when applicable to law firms. Any other reason to not have them? The article paraphrased a partner in the New York office of Greenberg Traurig, writing "Arbitration [] no longer offers the benefits of a speedier, cheaper resolution, as proceedings have become bogged down in discovery and quasi-motion work that mirrors litigation."

If that is truly the case, then arbitration has a gloomy future indeed, and not just with law firms. I brought up the article to an attorney I know who defends clients in arbitration and he told me some of his concerns with it:

Arbitration has become very inefficient, with no control over evidence admission (ie, evidence can come in at any time);
The arbitrators do not have the same fear of appeal that judges do and thus are unafraid to ignore precedent;
The quality of arbitrators has declined.

This indicates some serious problems with the arbitation system for dispute resolution. As the attorney I spoke with said, "Our clients used arbitration to get away from runaway juries. Now they are going back to the courts to get away from runaway arbitrators".

We have begun taking submissions for the 2008 Law Firm Economic Survey. If your firm is interested in participating, please contact Brian by clicking here.

Another Word Of Caution Regarding Inflation

Admin — Thu, 13 Mar 2008 07:00:05 GMT

This morning I am off to Chicago to attend the ABA Techshow. I am speaking on benchmarking and the results of the 2007 Law Firm Economic Survey Friday at 2:30pm central. If you are attending the conference I encourage you to drop by. I plan to do some blogging at the event as well, including recording some interviews.

In the meantime, I did a little more research on inflation yesterday and learned some interesting things. I'm no conspiracy buff, but I have to admit that connecting dots is a fun exercise.

First, the Federal Reserve just two years ago decided to stop tracking what is called M3 transactions.

http://www.federalreserve.gov/releases/h6/discm3.htm

According to the fed, it isn’t necessary. According to others, it means the fed is hiding something.

http://www.inflationdata.com/inflation/Inflation_Articles/M3_Money_supply.asp (Interesting analysis related to the Chinese buying back our debt that is being devalued daily just so we can continue to buy their exports.)
http://www.investmentu.com/IUEL/2005/20051208.html
http://www.discursivemonologue.com/2008/02/10/the-federal-reserve-m3-and-inflation/
http://www.moneyweek.com/file/5138/m3-0212.html

A House Bill was introduced shortly thereafter requiring the Fed to reinstate the policy (introduced by ex-Presidential candidate Ron Paul) - http://thomas.loc.gov/cgi-bin/query/z?c109:H.R.4892: - no legs sprouted from it.

Some are therefore calculating M3 themselves:

http://www.nowandfutures.com/key_stats.html
http://www.shadowstats.com/alternate_data

Another troubling sign is what the Fed has been doing lately to help weakened financial institutions increase their liquidity – ie, pumping money into the markets by buying up the possibly worthless mortgage notes so that banks continue to lend.

http://biz.yahoo.com/ap/080311/fed_credit_crisis.html?.v=6

The final worrying sign is the runaway bull market in oil. Oil is near $110 per barrel.

http://www.ft.com/cms/s/0/53123f5c-ef59-11dc-8a17-0000779fd2ac.html?nclick_check=1

How will this affect law firms? Well, as noted yesterday, you need to keep an eye on inflation and your margin. With high margins and low inflation, you are pretty well insulated to inflation's effects. If inflation spikes, though, all bets are off. Based on the above linked articles, however, are we (as Larry Bodine has stated several times) already in a recession? And is inflation already well above 4%?