Does your lateral partner have unfinished business?
Large firms, more than we care to know, have made news in the last couple of years by "going under," i.e., defunct! Firms such as Howrey and Heller Erhman became the targets of personnel raids. Very good lawyers from these, and similar, law firms departed and joined other major, national law firms. Today's WSJ comments on the current state of affairs for some of AmLaw 100 law firms.
Some folks are asking whether your new lateral partner have any unwanted baggage? In some instances, the new firm accepted partners from the old firm with the understanding that the lawyer would bring over clients from the old firm as well as his "unfinished business." This provides for immediate billing .. and therefore an opportunity to acquire great talent at a very low or zero cost.
These firms, and others, have gone into bankruptcy to collect funds to pay the firms' creditors. In a law firm, the major assets "walk out the door every evening. Computers, furniture and real estate are of minimum value, if any, in a law firm. Accounts receivable are a major asset, though often difficult to collect from clients when they know there will be little serious effort to collect.
But, when the partners from the old, now defunct, law firm went, they generally took "their" book of business with them ... and the "unfinished business" of the clients that went with them. One argument is that clients have a right to seek their own choice of lawyer. And the other argument is that the partner and new law firm benefited, resulting in a profit to the new firm that truly belongs to the old firm.
This battle will be fought for years, I suspect. But, the reality of our world is that anyone can sue anyone else, even if wrong. In the meantime, the largest pool of cash available to the trustee in bankruptcy for the defunct firms is the new firm and, perhaps, the lawyers, individually, from the old firm. Whether legitimate or not, new firms have been economically compelled to settle many of such claims in order to go on with the new firm business.
The new firms thought they were getting a steal! Maybe. But, I'm reminded of the old say that "...if it looks too good to be true, it probably is too good to be true." There is a cost to everything, even a very attractive, new lateral partner with great talent and a great book of business.
Are you sure you have malpractice coverage?
Fee suit exclusions seem to be the latest insurance ploy to cheat unsuspecting lawyers.
An engagement agreement is designed to be a "two way street." The lawyer promises to do certain things... address the needs (and wants?) of the client; represent the client to address the challenge being faced by the client, whether it be a lawsuit or a transactional issue. And, of course, the lawyer is representing that he/she is competent to do so.
The client, on the other hand, promises to tell the truth to the lawyer, provide information and documents relative to the matter when requested by the lawyer to do so ... and to pay the fee as billed in accordance with their arrangement.
What are the consequences of failure to honor the respective promises? For the lawyer, it is a malpractice suit and/or a disciplinary proceeding. For the client, it's withdrawal by the lawyer (unless on the eve of trial or otherwise would prejudice the client) or a lawsuit for payment of the fee.
BUT, some insurance carriers are lining up with clients, saying that if the lawyer sues for fees, and the client cross complains or counter sues for negligence or files a disciplinary complaint with the state bar, the carrier will not provide defense costs or pay any judgment against the lawyer. The effect of this is to deny the lawyer the ability to collect the fee when the client fails to pay. Why pay insurance premiums for something you will not receive? The $64 question.
Fee suit exclusions are a veiled attempt by insurance companies to raise premiums without notice to the lawyer. And, the lawyer generally isn't even aware of this exclusion.
Both law schools and insurance companies conspire to keep lawyers ignorant of the business nature of their practice. In no other industry do creditors ignore their rights and fail to sue debtors for refusal to pay legitimate debts resulting from their purchases. Why should lawyers be placed in a different position? Why should clients be encouraged not to pay their lawyers' fees?
The reality is, according to people I've spoken with in the industry, that there are few lawsuits filed by lawyers. (Perhaps it's because lawyers have been scared away.) Further, the reality is that there are few counter suits for negligence. The further reality is that lawyers win most of these lawsuits; the figure I've been given is winning 9 out 10.
Seems that the lawyers face a big challenge: Failure of the law schools to teach business practices so lawyers can more effectively represent clients and efficiently deliver legal services; insurance carriers looking out for themselves, not their customers (lawyers); and bar associations believing their sole function is to protect the public, rather than a dual function of protecting the public AND helping their members (lawyers) to become better practitioners (including business skills).
Lawyers who survive in this environment should be commended.
Growing law firms
Despite today's economy, some law firms are growing ... by merger and acquisition.
In fact, I had lunch with such a law firm just this last week. They are an 100 lawyers firm that is seeking to grow. They are interested in acquiring my client, a substantial boutique that would add a significant presence for them both in the relevant practice area as well as the geographic area.
We couldn't seem to connect, however. I made it very clear that my client was talking about selling his firm. Their offer suggested that they were interested in "merging." The reason was simple: No capital outlay was needed for a merger. The "offer" was structured in a way that would pay my client several hundred thousand dollars more than he is currently earning. And 100% of the payment to my client would be tax deductible as an ordinary expense, not a capital expenditure. They structured the offer this way also in order to be sure that the "book of business" follows my client for several years. This, was not what we wanted ... we are not looking to become partners in the acquiring firm.
During our conversation, it became clear why we were communicating at different levels...
...I believe our "firm" has goodwill that is transferable. The "buyer" believes that the "book" follows the lawyer. By the time we finished lunch, we understood the perspective of the other. There are ways to assure the buyer gets the essence of the bargain. For example, we are willing to guarantee the revenue stream as long as the buyer is willing to offer a fixed sum, with a substantial down payment and a short payout with collateral to support the payment schedule. And compensation for the added effort of my client during the extended period he remains.
Bottom line, we will meet again and approach the conversation from the same side of the table.
Suggestions for successful acquisitions:
• Eschew 'ego-driven' acquisitions; ensure they are strategy-led.
• Successful acquisitions require senior leadership involvement.
• Integration of both management teams and members of impacted practice areas is essential.
• 1+1=7 or more - you must stretch the business and have clear success targets; this requires a delivery road map with crystal-clear accountabilities.
• Pace is everything in delivering the benefits - don't delay; complete the integration quickly, perhaps in 100-days;
• People issues are critical to ultimate success - telling yours teams that the deal is in the best interests of both firms is essential, and showing how is important.
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Big Firm Salary Model Broken
Is the big firm salary model broken? That's the topic addressed by Michelle Lore in the Minnesota Lawyer. Associate pay is only one of many areas of cuts in expenses that law firms are reviewing. In our Managing Partners Roundtable, just yesterday, large law firm managing partners said that they are now "lean." They have cut all the "fat" or excess expenses they can, some of which have become evident in 2009 and others which will show up first in 2010 results.
What will the law firm model of 2010 look like? Or will law firms ignore the lessons of 2007-2008 and seek to go back to "normal" as the economy turns around? "Head in the sand" approach usually doesn't work for long term success.
Why sell your law practice?
Lawyers, ready to retire, must consider the value of their law practice as an asset that can be sold ... With 401 Ks becoming 101 Ks (or less), the revenue from the sale of one's law practice may provide the revenue stream needed for retirement.
Law firm revenue is decreasing
In this morning's session of large law firm managing partners, a group I've facilitated for more than 10 years, I heard hand-wringing I've never heard before. September 2008 was a watershed benchmark for revenue. Since then, revenues have decreased each month for many of the firms. There are only occasional rays of hope in certain practice areas. There seems to be a significant excess supply of lawyers. This is a significant change. As one lawyer cautioned, though, when the paradigm shifts again (as in the past), there will be an inadequate supply of experienced lawyers available to meet the demand.
How do you see the future both for the profession as well as for your own practice area?
Expense reduction or investment advance
One of my law firm clients has a lawyer who is what I would call a "reluctant marketer." This lawyer is a great lawyer, a "worker-bee," but not a great rainmaker. The managing partner considered engaging a coach to help the lawyer improve his skills within his comfort zone. Why is this important? Because the amount of work for this lawyer that is being internally generated is lessening. In other words, this lawyer has to begin helping himself a bit.
Parenthetically, I saw a recent survey that shows the amount of hours being worked by lawyers, generally, is coming down. But more on that later.
But, the management committee has come back and said that "costs" are frozen. No more spending. Is this a backward way to look at the situation? What about looking at expenditures from the ROI perspective? If you buy a new piece of equipment and it pays for itself in a couple of months, wouldn't you move forward? I think you should. If a coach or marketing director can help the lawyer increase his/her revenue because of improved rainmaking efforts, shouldn't you invest in the process?
And what would this mean to the other lawyers? A reduction in their take home pay? When you're already earning hundreds of thousands of dollars, a collective reduction by only a few dollars in sdthe short run for an ROI building expenditure may be worthwhile.
Bankrupt lawyers
Bankruptcy will be an important practice area for the legal profession, obviously, in 2009 and 2010, as we continue to move through the major upheaval in our economy. And our law firms will benefit.
However, one aspect I did not expect was that lawyers and law firms will likewise face economic hardships … And I'm not addressing the obvious issues coming from the collapse (for other reasons of the large firms such as Heller, et al.).
I'm addressing the more mundane, the traditional, average lawyer, the lawyers that make up the bulk of our profession. When these lawyers are in trouble, the entire profession needs to wake up and pay attention.
I was just contacted by an attorney asking me to value a law firm for purposes of the lawyer’s personal bankruptcy. His law practice is an asset of his personal estate. Times are hard when the helpers need help themselves.
Even Big Solo can fail
Failure can be experienced by small firms as well as large firms. In the case of Dreier, the real shame is not that Dreier failed - he committed fraud and there is nothing new about fraudulent conduct causing failure ... and even jail. The sad part of this tale is what happens to other lawyers working in the Dreier firm.
What is to be learned here involves the impact on other lawyers who worked in the firm. Assume for the moment that every lawyer new to Dreier did his/her due diligence to learn about Dreier's practice, his administrative polices (including malpractice coverage), and other factors of the practice in order to decide whether the lawyer wanted to join Dreier as an associate.
Now, these lawyers focus on the practice, leaving all else to Dreier. There was no follow up. For example, the associates didn't know that Dreier let his malpractice insurance coverage lapse ... which now puts all these other lawyers at risk when clients sue the "firm" and its members who worked on their matters.
Bottom line moral: What are you, the associate, doing to make sure your firm's principal is running the practice properly ... sufficiently well that your professional and personal liability will be protected? The fact that you don't "own" the practice does not mean you have the luxury of ignoring the business principles needed to protect yourself and grow your own career.
Litigation is not the answer - usually
Forty years after the Pueblo was captured by North Korea, the sailors received judgment for damages. This merely gives the sailors a piece of paper. Go collect! Not, that's the rub. And ask the Goldman family how much of their 33 million dollar judgment they've received from the assets of O.J. Simpson.
In the beginning of 2009, we need to hearken back to the words of Rodney King, "Can't we all just get along?" The obvious answer is "no." But, litigation may not be the best answer either; it's certainly not the only answer.
Law firms, even the major law firms (like Heller used to be), whose litigation work makes up more than 50% of their revenue, will need to focus on greater diversity in their offerings if they want to protect their future. More than 10% in any one area always puts a business at risk. Sometimes the risk pays well; sometimes it doesn't. Just ask the lawyers who were at Heller about the high times and then the implosion.
Are lawyers guaranteed a profit?
I like the thinking of Patrick J. Lamb who, in August 2008, said that a lawyer can negotiate a fixed fee even in litigation. In other words, he contests the old rubric that since one doesn’t know what the “other side” will do in litigation, fixing a fee is not possible. He also suggests that creating a budget for litigation doesn’t guarantee a profit, just that the lawyer will not bill more than the budget.
But, the point that Mr. Lamb raises is that no business is guaranteed a profit. Yet, ...
... lawyers tend to view themselves differently. They seem to feel that an hourly fee will guarantee their profit. Of course, they would have to know their cost structure; few do. They would have to collect the fee; more are having difficulty. And few produce a realization rate of 95% or better.
Recently, I received a phone call from a person who wanted to buy a law practice. He visited my web site and saw several law practices I represent or have represented that are for sale. His thinking was that he could buy the practices at a low price, have the seller finance the sale and thereby earn the kind of money to which he would be entitled once he passed the bar exam. I cringed when I heard the word, “entitled!” That is the underpinning economic value of far too many people in our country today ... If the current economic crisis does nothing, it may knock that value out from under us ... and that would be good.
I believe that is what Patrick Lamb was getting at ... that lawyers feel entitled to earn a profit. Yet, he fails to acknowledge the frightening statistic that more than 50% of the lawyers in a California study (and in NY and by extension most other places as well) earn less than $100,000...and more than 25% earn less than $50,000 per year. Many people, even many lawyers, would give a great deal to earn these sums, no doubt. But, after so many years of schooling and foregone opportunity revenue, it doesn’t sound like much. And certainly doesn’t allow one to live lavishly.
Running a practice using the principles of The Business of Law® will guarantee that the lawyer will have the best chance of making a profit ... but the principles must first be implemented to attain and maintain profitability!
