Make More Rain : law firm bus model

Should non-lawyers have a stake in law firms?

Loretta Ruppert — Thu, 02 Feb 2012 22:24:00 GMT

The New York State Bar president, Vincent E. Doyles III says non-lawyer ownerships in law firms "is worthy of serious consideration" but was adamant on pointing out that New York State Bar Association is opposed to non-lawyer ownership of law...(read more)

The Impact of Emerging Trends on the Law Firm

Loretta Ruppert — Sun, 22 Jan 2012 22:50:00 GMT

In a recent article in Law Practice Today , the author spoke of how the law firm business model is being impacted by the 7 emerging trends occurring around us. The seven trends are: 1) A wealth of information both in quantity and quality for the law firm...(read more)

The Art and Science of Business Intelligence

MichelleStPierre — Wed, 04 Nov 2009 18:37:00 GMT

It is not unusual today for companies to compete on analytics, as Thomas Davenport famously wrote about in the article "Competing on Analytics" for the Harvard Business Review in 2006. There are companies in the non-legal space who have built...(read more)

The Windy City hosts the 2009 Redwood User Conference

MichelleStPierre — Thu, 10 Sep 2009 14:52:00 GMT

This post is guest authored by Chris Katchuk who is working hard to help organize the 2009 Redwood User Conference in Chicago from September 22-23. There is still time to register to attend, follow the link at the end of the post. Whether you are a first...(read more)

Law Firms Rethink Receivables

BoYancey — Fri, 21 Aug 2009 16:35:00 GMT

One of the biggest surprises to me when I began studying law firms was the lack of importance clients placed on paying for work. I had always assumed that lawyers were the last people on earth you'd want to stiff, and had always paid any legal bills...(read more)

September Call Ups

MichelleStPierre — Thu, 20 Aug 2009 16:28:00 GMT

Just as in baseball when rosters expand in September from 25 to 40 players to allow minor leaguers a shot at big league action, Boston-based 200 attorney firm Brown Rudnick announced today that they are calling up 11 previously deferred new associates...(read more)

Using the Recession to a Law Firm's Advantage

BrianTaaffe — Wed, 29 Jul 2009 16:09:00 GMT

With the economy in its current state, and the legal industry perhaps not as recession proof as previously thought, law firms are looking into ways to cut costs in order to improve profits. Previously I suggested ways to improve margins through cost cutting and other options, but another point that has been getting a lot of press is first years' salaries. Where they currently stand, first years' salaries are probably higher than they should be. Law firms are not getting value out of their new recruits at current salary levels. Their costs are high, and the revenue they bring in is low - largely due to inexperience. First year associates do not have the knowledge or expertise to produce the same quality of work as a senior attorney. To top it off, first year associate rates are often much higher than a client is willing to pay. From what I have seen in working with law firms, in many cases a first year associate's work is being discounted heavily at the time of billing, or is being written off. Clients do not want to pay for second rate work - they come to big law firms to get the best talent and legal services; first years do not have the ability to produce the work that the clients would expect from the rates they are being charged.

So why do firms pay first years such high starting salaries...

...(read more)

Mastering Law Firm Analysis

MichelleStPierre — Tue, 14 Jul 2009 16:00:00 GMT

For those of you who have been wondering if you can be trained to think about the business of law firms the way our bloggers do - the answer is, yes you can! Redwood Analytics is offering Mastering Law Firm Analysis in Washington, DC at the end of July. And if you bring a friend or co-worker, s/he will save 50% on the registration fee!

...(read more)

More Thoughts on Reducing Headcount

MichelleStPierre — Fri, 10 Jul 2009 13:45:00 GMT

The post yesterday by my colleague Brian exposed some interesting ideas about maintaining profitability. Another one of my colleagues, Bo Yancey, previously published an article in the 2009 LexisNexis Business of Law Insight on a related topic, exploring various 2009 scenarios to "right size" firms in the face of reduced demand and downward pressure on pricing. Bo draws a similar conclusion to Brian's assertions - the four scenarios he addressed in the article show that firms cannot maintain profitability by just reducing associate headcount, and he encourages firms to explore structural leverage.

...(read more)

Reducing Headcount May Lead to Less Profit in the Long Run

BrianTaaffe — Thu, 09 Jul 2009 18:00:00 GMT

Very few firms today are 100% utilized. Almost all attorneys within a firm have free capacity, and depending on the firm, this can be a large cost. With profits dropping, layoffs and delayed start dates for first year associates have been seen as a short term solution to increase profits. This may be an effective way to address utilization concerns and bring profits back up to levels that law firms have experienced over the last five years, but it may also have some long term effects related to production.

...(read more)

Part Two of Leverage: Friend or Foe

Admin — Tue, 14 Apr 2009 20:02:00 GMT

In Leverage: Friend or Foe of Maximized Profits per Partner I discussed an approach that a firm could use to address the dropping demand for legal work. In short, this approach suggested that a firm could reduce their supply of legal work to match current demand by cutting heads in its most junior ranks, the ranks that produce the lowest $PP contribution. This is simply de-leveraging. By doing so, the firm would ensure sufficient utilization and would generate the highest possible $PP for existing partners . At the same time I also hinted at a second alternative that would enable a firm to deliver greater PP$ than simply de-leveraging.

Previously I had described the firm structure that delivered the highest possible $PP, which I called the Managerial Maximum. In essence, the Managerial Maximum is the highest amount of leverage that a firm can effectively manage. By having the maximum # of associates working (Sr., Jr., etc.) per partner, they are generating the maximum $PP contribution which results in the maximum $PP, assuming 100% utilization. Any deviation from this maximum leverage ratio will deliver lower $PP. (see example pyramid below)

But what should a firm do if demand for legal work decreases and they can no longer maintain 100% utilization? What most firms are doing in today’s environment is de-leveraging, which is taking them away from the Managerial Maximum. I propose that firms should not be making cuts exclusively to lower level associates as the current de-leveraging strategy espouses, ie. cutting off the bottom of the pyramid. Instead I suggest that firms cut the side of the pyramid off, “thinning”, which entails cutting partners and the appropriate ratio of non-equity associates/staff until they reach a point where their supply of legal work matches the demand for legal work. (See example pyramid below)

By adopting this approach to matching supply and demand a firm is also ensuring that the maximum leverage ratio is maintained, which will result in the maximum $PP possible. For a given amount of legal work, this approach will generate more $PP than will de-leveraging. However, it will require cutting into the partner ranks, which may be culturally and politically challenging.

Below is an example that shows the impact to $PP of the different ways a firm can react to a decline in demand.

In the Base Case, demand is 200,000 hours. This firm is fully leveraged and is delivering $4,350,000 PP$.

Now demand has dropped to 140,000 hours and the firm cannot maintain 100% utilization or the Managerial Maximum leverage. The firm can de-leverage, “thin” or a combination of the two in order to increase utilization and improve leverage.

Below is a table that shows the PP$ result of the various lawyer combinations the firm can choose depending if they decide to de-leverage or “thin”.

If the firm chooses to address the decline in demand solely with de-leveraging the PP$ will drop to $3,600,000, however, if they also adopt a “thinning” approach their PP$ can increase back up to the $4,350,000 they had delivered in the past. In a vacuum, my recommendation to this example firm would be to “thin” down to 6 partners as this would permit the firm to stay fully leveraged while matching hours demanded as close as possible to hours worked (ie. supplied).

Overall, there are two ways a firm can react when demand for legal work declines: 1) they can de-leverage or 2) they can “thin”. De-leveraging will deliver the maximum $PP for existing partners, “thinning” will deliver the maximum $PP possible. Note: I recognize the challenges of eliminating equity partners from a firm. This recommendation is strictly the result of objective considerations.

--Scott Nickerson

Scott is an analyst in the Redwood Think Tank.

The Lost Measure: Cost of Capital - Stress Test Your Firm

Admin — Tue, 10 Mar 2009 19:13:00 GMT

When I started working with law firms in 1999, I used to have heated (and futile) debates about the importance of the time value of money in assessing firm (or practice, billing lawyer, etc.) performance. My argument was simple. Take the law firm business model to any venture capitalist and pitch them: “I have a great business for you. An illiquid minority position in a talent-based, service business with few tangible assets, subject to capital calls. What do you think?” The scenario provoked a lot of chuckles. When I then suggested that the minimum necessary return for that scenario was probably north of 50%, outrage ensued. Cash, after all, was cheap (multiple people suggested Libor as a cost of capital) and easy to get. Collections were predictable.

I think it’s time to revisit the argument. Of course, interest rates today are even lower. Capital, however, is scarce from both internal and external sources. Moreover, the risk component to working capital, the largest component of most firms’ capital base has dramatically changed. For years, Redwood has utilized a model of “discounting” outstanding A/R based on historic collection patterns versus different points of the aging curve. This has allowed firms to more quickly grasp and manage the devastating impact of aging receivables. I think the time has come for more aggressive modeling. At a time when corporate America is scraping cost savings from anywhere they can get it, in a buyer’s market for legal services with utilizations tanking and with rising unemployment (including among lawyers), I think the time has come for law firms to utilize the same sort of “stress tests” being run elsewhere. Can my firm survive 85% or even 80% collection realizations? What if these are combined with 30/60 day extensions? What is the impact on my working capital? Where is my point of “no mas”? In my example below, under a “Perfect Storm” scenario, the firm has tested a deterioration of realizations and an extension of cash collections and has seen a total decrease in available working capital of $20 million plus an incremental $4.5 million of capital costs.

I believe firms that incorporate cost of capital assumptions this way will be better prepared to deal with adversity, and I suspect all who do so will come to the same conclusion that I have. Namely, that the cost of capital for firms is much higher than most realize and that the firm would be very well served by aligning the reward/punishment components of its compensation schemes with much higher costs. These higher costs can provide a measure of protection firms need in today’s climate.

--Norm Mullock

Norm is the Redwood Product Champion for LexisNexis. Since 1999 Norm has helped firms of all sizes deploy solutions that reduce the effort needed to produce existing analyses and enhance firm performance.

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.

Strategic Leverage: Just as Important as Ever

Admin — Wed, 25 Feb 2009 20:54:00 GMT

It is part of my job to make sure I am up to speed on all the economic movements of firms here and abroad as this economic downturn has not trickled down but headed full- fledged into the legal industry. Each day I read article after article about associate and staff layoffs at firms of various sizes and peer status. In addition I attend conferences and listen to Managing Partners, CFOs, and other C-level staff address how to combat this downturn through various actions used to cut costs. At most conferences there has been an inevitable line of presentations on reducing overhead along with addressing the headcounts of staff and salaried timekeepers. If I have to hear about controlling space planning and technology expenditures anymore I think my head might spin.

I speak with CFOs all the time and the prevailing theme is that budgets have been cut so much recently that the line is very thin on providing appropriate support to the primary operations of the firm. I am not saying that these measures of analyzing overhead aren’t important. In fact I agree they are and should be done on a consistent basis, not just when there is an economic downturn.

Most consultants I have spoken with all agree, if you had no strategic plan in place before the recession you are probably too late. Since many firms fall into that category they have fallen into an immediate cost cutting tactical strategy that almost completely focuses on the easiest things to cut (staff, associates, technology, etc.) In some cases the staff and associate cuts are valid in that the recession has produced a prime opportunity to do what was probably overdue in eliminating poor performers. For other cases it is the perceived method of addressing what aims to be a possible rough year or two. Unfortunately I feel that this method of reducing costs is shortsighted and evasive of one of the key detriments to firm performance within an economic downturn, underperforming partners.

Let’s address the shortsighted nature first. In the early 90s the legal industry felt the effects of a recession that lead to mass layoffs of associates and staff. As time passed and the economy improved those firms found difficulty in re-staffing properly for the growing legal work they were receiving. Gone were the associates who were already trained and ready to be the next leaders of the firm leaving a re-tooling effort that could have been avoided. By purging large numbers of associates it mortgages the future of the law firm, leaving a void to fill when the economy turns. This, despite the fact that when it comes to strategic leverage, a well levered firm can be much more profitable.

Strategic Leverage

Below is an extremely simplified view of the effects of leverage. Assuming 100% utilization and 1800 budgeted hours the impact of a shift in the non-partner to partner ratio of 1:1 to 3:1 clearly would reduce revenue, a point that is often used to counter the initiative of leverage, but the key statistic for the legal industry, Profits per Partner, increases. This is generally due to the higher percentage return that associates bring in. Another component that is not even captured in the model is a likely reduction in overhead. This sort of analysis should be done by firms on a consistent basis regardless of economy to find the right mix. You obviously need partners for reasons that anyone reading this blog should be aware of but leveraging is a true way to improve firm profitability. That fact reinforces the shortsighted nature of the removal of staff and associates for cost cutting purposes. You just cannot cut and cut all the way down into profitability.

Addressing the Economic Slowdown through Underperforming Partners

This leads into the other concerning trend I have seen. The legal industry is not focusing enough effort on underperforming partners. As mentioned by my colleague Bo in his forward looking view of leverage last week, smart firms are the ones who will take this opportunity to deal with underperforming partners as well as associates. But we’re just not seeing it here in the US.

I have often wondered why that is the case, but from many discussions with managing partners, the prevailing theme seems to be a feeling that by disturbing the “glue” it would show weakness and perhaps cause unrest among the other Partners. At face value I can understand, but the examples are before us where turning a blind eye to underperforming partners have contributed to successful partners actually leaving firms and causing those firms to fall into decline. I think the point is that subjectively most partnerships have a general idea on who is performing and who is not within the ranks. Technology and consulting can bring data to back those beliefs, but if nothing is done about the underperformers, the over performers may develop resentment as their pocketbooks get hit.

Within recent weeks we have seen several firms release partners in the UK. Linklaters just announced a reduction in their partnership as has Addleshaw Goddard. The Times Online recently spoke with Nigel Boardman one of the UK law firm Slaughter and May’s top partners. He had several great quotes that illustrate this need to address underperforming partners, “I don’t think it follows that a downturn in work means that you cut your associates…If you have to cut, cut your partner profits and even your partners…good lawyers are hard to find.” Mr. Boardman is addressing that thinning the junior ranks will leave firms without qualified talent as the years go by and that is not a good long term strategy.

Profitability of law firm is driven by several factors, but the seemingly elephant in the room (cutting underperforming partners) seems to be a factor that firms have difficulty addressing. It could date to years gone by when partners were considered untouchable. Yet the recessions of the past have changed that as has the changing model of the law firm. This recession is weighing on the legal industry and those firms that finally address partners and practice areas that have not been performing to firm standards and make the move to strategically shift their firm for the long term are going to come out ahead when the economy turns the corner.

--Russ Haskin

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