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Avoiding Law Firm Implosions by Mandating Firms to Undergo Annual Stress Tests

Posted on May 13, 2012 by kowalskiandassociates

Stock footage taken at Beaumont Hospital. 14:1...

Stock footage taken at Beaumont Hospital. 14:18, 28 October 2006 (UTC) (Photo credit: Wikipedia)

Jerome Kowalski

Kowalski & Associates

May, 2012

The horrific death spiral of Dewey & LeBoeuf, which started within the firm in October of 2011 and debuted its public spectacle in March, 2012, continues to evoke gasps and cries from all observers and participants. The latest horrors, not unexpected, are the loss of hundreds of jobs and the disappearance or dramatic reduction of thousands of pensions.  To be sure, more ugliness lies ahead: Draconian financial penalties to partners and prosecutorial inquiries of potential criminal liability for some key Dewey players.

The question I pose to you today, dear readers, is whether we are simply voyeurs or whether a sense of professional high mindedness should prevail so that urgent steps are taken to prevent the next seemingly inevitable law firm implosion? Did we come to the speedway pretending only to be interested in the competition but hoping for carnage or are we among those who seek to promote safety and prevent future crashes?

Dewey & LeBoeuf’s Current State of Play

The crescendo of public discourse of the Dewey disaster escalates daily. One of the most recent cogent pieces, sets forth a seemingly well informed and apparently factual exposition of the events leading up to the inevitable denouement.  Other well informed pieces analyzes the root causes of the Dewey & Leboeuf debacle.  A brief moment of levity was inserted into the mix as an avuncular former Dewey & LeBoeuf partner and department head stared straight faced into a  television news camera and calmly explained that the reasons for the firm’s implosion was that after Steven Davis, the now ousted chairman of Dewey, sat down with his partners in January and apparently revealed to them for the first time that the firm was functionally insolvent, headhunters had the gall to help partners find new positions, the media had the temerity to report on the facts and the district attorney had the audacity to conduct an investigation of serious allegations of criminal wrongdoing by senior managers at Dewey & LeBoeuf. These bon mots brought to mind the tale of the owners of a bus company who were called to task because they had employed an alcoholic bus driver who in his stupor caused a horrendous crash resulting in awful carnage. The owners calmly explained that they were not to blame.  The reason so many people were taken to the hospital was because of the fleet of ambulances that descended on the scene and the cause of so many reports of broken limbs was attributable to the zeal of the hospital’s ex ray technicians.

The fact is that since the 1988 implosion of Finley Kumble, then the world’s second largest law firm, there have been some 43 major law firm bankruptcies.  Each major law firm bankruptcy brings disgrace to the profession, disrupts lives, erodes confidence in the profession and creates a cascade of unemployment, poverty, death and disease (the rate of stress related diseases and mortality post law firm bankruptcies, reported only anecdotally, is staggering) and divorce (again, reported only anecdotally).

The blight on the profession is not simply the fact of these law firm failures, but the utter failure of the profession to address these failures and take any steps to prevent them. The appalling nature of this Ostrich like  stance is the generally accepted belief that a number of large law firm failures in the coming months seems inevitable.

The problem

The three inch thick annotated American Bar Association’s Model Rules of Professional Conduct that sits in every law firm in America is completely silent on the issue of law firm financial reporting, whether it be to the firm’s partners, its lenders, vendors or the media. The self reporting through The American Lawyer is largely recognized to be unreliable at best, or a large bad commercial joke at worst. Let’s simply look at the soft, puffing (and apparently demonstrably false) report that Mr. Davis gave The American Lawyer in March, 2012 as a prime example. Neither the firm nor Mr. Davis was called to task for gross overstatements of revenues; The American Lawyer, which derives significant revenues from theses annual reports and the hoopla leading up to them did not immediately exercise the requisite journalist imperative of rigorously subjecting Davis to the crucible of informed journalistic inquiry (although it did, to its great credit, after public disclosure of the Dewey deception, take the unprecedented step of unilaterally restating Dewey & LeBoeuf’s financial reports).

The Model  Code is also strangely silent on the issue of law firm governance. Based on what has this far been revealed and now seems indisputable, based on the public record to date,  the demise of Dewey & LeBoeuf is largely attributable to a complete and abject failure of proper governance. The tragic irony is that Dewey still boasts on its web site of its superlative corporate governance practice group. Read it now, while the web site is still up and running. If you missed it, here is a pertinent excerpt:

“Based on decades of experience in corporate law, governance, restructuring and litigation, Dewey & LeBoeuf has assembled a next generation capability to achieve clients’ goals… Our multidisciplinary approach enables us to develop special tools that allow directors and management to avoid ‘not knowing.’”

We can apparently now conclude that Dewey did not capitalize on its “generations of experience” in establishing a system for itself of checks and balances, oversight and accountability required of this generation of commercial enterprises. The firm’s culture seems to have been built on partners proudly “not knowing.” The firm’s mascot may well have been an ostrich; the firm seems to be a paradigm of the cobbler’s children going barefoot.

Of the two score and some firms that failed over the past three decades, all have seen complete failures of appropriate governance, inaccurate financial reporting and excessive leverage and debt.  Some, like Dewey have fallen victim to excessive compensation paid to laterals.  More have flawed partner compensation systems.

The Solution

The need to address these issues could not be more urgent. To rely on the sloth of the ABA to urgently address these issues, then followed by fifty-one local bar rule making deliberative bodies, which collectively makes the ABA seem lightening-like, would require the complete suspension of disbelief. To suggest that large law firms could be brought into line fearing disciplinary action by state disciplinary bodies would require the confidence of a naïf.  Despite the three inch thick annotated tome that comprises the Model Rules, the overwhelming number of disciplinary actions brought by these bodies only relates to escrow account defalcations and disbarments of convicted felons. Witness the fact that the current public record shows an ongoing criminal investigation of Dewey managers, as well as seemingly clear evidence of deception by some of these lawyers, some rather facially convincing prima facie evidence of securities fraud by the firm as an issuer of securities, violations of fiduciary obligations to partners, violations of statutory duties to employees and violations of rights owed to the pension beneficiaries of the firm. Certainly, there may well be complete defenses to each of these matters and I invite my many Dewey readers (or their counsel) to provide them below. But the real point is that while investigations by disciplinary committees are secret, we each can sleep soundly tonight assuming that no such investigation has commenced.

Rather.  the solution to this clear and present danger of future large law firm failures must come from BigLaw itself and its stakeholders, including law firm lenders, institutional clients and the academy.

What is required is for law firms to retain independent professionals who would annually conduct a stress test, having full and unfettered access to all of the firm’s data and information,  and then report to the firm and its partners (equity and non-equity) that (a) the firm has adequate procedures in place to provide adequate oversight of its management group; (b) an appropriate system of accountable governance is in place; (c) the firm’s financial reporting (audited or not) fairly states the firm’s financial condition as of the reporting dates; (d) the firm’s general counsel is timely provided with all information necessary to discharge his or her duties and that he or she has full and open access to all relevant information as well as the ability to report any concerns to a full governing body; (e) the firm has an appropriate risk assessment and management officer, adequately performing the require objectives of that office; (f) the firm has an appropriate mechanism in place to avoid conflicts of interest and to otherwise insure full compliance with all applicable ethical rules, laws and regulations, (g) the firm maintains adequate insurance coverage; and, finally, (h) no set of facts was discovered that raises any apprehension that the firm is at risk in continuing as a going enterprise. Any failures or suggested improvements in any of these areas should also be described in detail. Similarly, any deficiencies detected in previous reports and the adequacy of any steps taken to ameliorate those deficiencies should be further described. Should management of the law firm elect to discharge the independent professional because of any disagreements in interpretation, the professional should be contractually bound to disclose those facts to the partnership.

There may well be other items that should be included in these reports and suggestions will doubtless appear in the comments section below. If you have a thought, feel free to pony up.

I would further propose that the independent professionals conducting these tests prepare at least two forms of reports: The first being the detailed report described above and the second a summary form which might be made available to clients and prospective clients, lateral candidates and law schools as part of a NALP disclosure. Every one of these stakeholders has a simple right and need to know that the firm will be there next year.

As I suggested, it is extremely unlikely that any regulatory body will timely and efficiently create a mandate for these reports. Rather, a forward looking well managed law firm will certainly see the universal benefit and advantage of having such reports issued to provide comfort and assurances to its stakeholders and to avoid being tarnished by the reputation of a failed law firm.  The reports would be potent marketing and recruiting tools. These reports would certainly be most beneficial to top down management style law firms and those that operate in a black box.

I could certainly also see institutional lenders and clients routinely requiring their borrowers and counsel, respectively, requiring these stress tests, particularly as they have been seriously burnt by previous law firm failures and certainly as to lenders, they may correctly feel that what’s sauce for the goose is sauce for the gander.  It will, I suspect, take only a very small number of lenders and important clients to make these reports a required norm; indeed, mandatory. Similarly, it will take only a handful of the AmLaw 200 to come forward and proudly offer these reports to make their annual production an industry requirement. The market will require nothing less.  The implosion of a law firm casts a pall on the entire profession and creates a blot on every large commercial law firm. Those blots can be avoided by having  large law firms don the Teflon that these stress tests should provide.

© Jerome Kowalski, May, 2012. All Rights reserved.

Jerry Kowalski is the founder of Kowalski & Associates, a consulting firm serving the legal profession exclusively. Jerry is a regular contributor to a variety of publications and is a frequent (always engaging and often humorous) speaker to a variety of forums. Jerry can be reached at jkowalski@kowalskiassociates.com or at 212 832 9070, Extension 310

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Filed under: Crisis management, Dewey & LeBoeuf, Global law firms, Hiring and training lawyers, Lateral law firm partner, Lateral law firm partner movement, Law Firm Crisis Management, Law Firm Dissolution, Law Firm Dissolutions, Law Firm Escrow Accounts, Law firm financial reporting, Law Firm Governance, Law Firm Implosions, Law firm management, Law firm management strategies, Law firm marketing, Law firm partner layoffs, Law Firm Risk Management, Media Relations, Navigating the Perfect Storm: Recruiting, Retaining and Training Lawyers in the Coming Decade, Strategic law firm planning, The Law Firm of the Twenty-first Century | 10 Comments »

Dewey Need to Take a Pledge?

Posted on April 12, 2012 by kowalskiandassociates

The National Assembly taking the Tennis Court ...

The National Assembly taking the Tennis Court Oath (sketch by Jacques-Louis David). (Photo credit: Wikipedia)

Jerome Kowalski

Kowalski & Associates

April, 2012

 

Again, I am constrained to comment on a rather absurd story appearing in a Reuters dispatch concerning a venerable law firm listing along a perilous course. Leigh Jones, a capable journalist now reporting for Reuters and, I suspect in this instance taken in by the firm’s Hollywood Ninja flack, posits that this firm can hold steady and survive the storm if a “few key players” stay on board (all men) and steer the firm to safety.

The proposition is dubious as a general matter. Given where this law firm finds itself right now, the notion requires a complete suspension of disbelief. Sure, there are a few notable large law firms that achieved remarkable success because of the drive, skill and leadership of a few key players.  Boies, Schiller & Flexner, Kassowitz, Benson, Torres & Friedman and Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor come to mind. However, Dewey & LeBoeuf is not, in its current incarnation, the product of a few driven leaders of the bar.  Dewey is a century old global law firm with 1,000 professionals (maybe fewer by the time you read this) and 24 offices. The notion that a law firm in crisis can survive the loss of 50 partners and a complete crisis in confidence by and among all of its stakeholders by keeping a small cadre signed on to stay the course is simply not credible. Collaboration, the key to law firm survival, is painfully missing here.

Ms. Jones goes on to note that Dewey “… firm leaders say that the vast majority of the departures are due to the firm’s decision to downsize in order to increase profitability.”  Let’s look at the numbers: Six of thirty-five executive committee members have left, four of nine office managing partners are gone and some seven practice group leaders have checked out. And the folks at Dewey want you to believe that this loss of leadership – previously key parts of this firm’s management who have credible client following will enhance profitability.  What we do also know is that one fellow who certainly was tossed out the window (I guess to “increase profitability”); he was the firm’s duly elected chairman who took his defenestration with style and grace.

The firm provocateur then identified the seven amigos on whose shoulders the firm’s survival can be bound: “The seven key Dewey lawyers … are Martin Bienenstock, a bankruptcy attorney; Jeffrey Kessler, a litigator; Morton Pierce, a mergers and acquisitions attorney; Ralph Ferrara, a regulatory and corporate governance lawyer; Michael Fitzgerald, a corporate securities attorney; Bruce Bennett, a partner in the business solutions and governance group; and Berge Setrakian, an international commerce and corporate lawyer.” Well, gosh, that’s neat. Each of the Magnificent Seven were in place as part and parcel of the cadre that charted the disastrous course, and, presumably prime beneficiaries of the healthy succor doled out to the big producers. The message here is that the Magnificent Seven chose poorly when they allowed the now departed executive committee members, office heads and practice group leaders to assume positions of law firm leadership.

But, these seven keys to success do not quite seem to be reading from the same playbook.

Marty Bienenstock advised Reuters that “[t]wo weeks ago, more than 50 business-generators each individually pledged to stay with the firm.”  Mort Pierce, the firm’s vice chairman saw it differently: “There was no formal pledge, no secret handshake,” he said. Asked whether he was part of the “consensus,” Pierce said, “There was a meeting and I was there.” Ralph Ferrara acknowledged that he is busily fielding calls from the firm’s competitors seeking to lure him away. Jeffrey Kessler offered some faint praise: “I am committed to Dewey and believe the firm will prosper.” Bennett, Setrakian and Fitzgerald did not respond to requests for comment.

None of these fabulous lawyers offered up the solid pledge that Bienenstock averred was in place. And these are the believers.  One who didn’t drink the Kool Ade is John Altorelli, an outstanding corporate lawyer and former Dewey executive committee member who is now at DLA Piper. Altorelli, who ironically actually began his career at LeBoeuf, thought well of his former associates and publicly opined that while most of the folks at Dewey were quite good, management (of which he was a member) was “obtuse.” Altorelli also plainly stated that the king has no clothes: “I’m not sure how [Dewey] can weather the departures.”

It’s not just the previously announced departures.  Bienestock probably had it right when he spoke of the “pledges.”  He is an outstanding bankruptcy lawyer, after all, and knows how valuable pledges can be. The key here is for a public announcement, with no wiggle room, in which at least the  Magnificent Seven and hopefully the Key 50 make an unwavering vow to stay with the firm until either they retire or events force a shutdown. This pledge is certainly unenforceable in any judicial proceeding, but it is crucial in the court of public opinion, where the firm is now being badly battered. These outstanding lawyers have much to lose in the event the firm implodes and for that reason should be motivated to provide an oath of loyalty.

© Jerome Kowalski, April, 2012. All Rights Reserved.

Jerry Kowalski is the founder of Kowalski & Associates, a consulting firm serving the legal profession exclusively. Jerry is a regular contributor to a variety of publications and is a frequent (always engaging and often humorous) speaker to a variety of forums. Jerry can be reached at jkowalski@kowalskiassociates.com or at 212 832 9070, Extension 310

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Filed under: Crisis management, Dewey & LeBoeuf, Global law firms, Lateral law firm partner, Lateral Partner, Law Firm Crisis Management, Law Firm Dissolution, Law Firm Dissolutions, Law firm financial reporting, Law Firm Implosions, Law firm management, Law firm management strategies, Law firm marketing, Law firm partner layoffs, Law Firm Risk Management, Retaining and Training Lawyers in the Coming Decade, Strategic law firm planning, The Law Firm of the Twenty-first Century | Tagged: , | 16 Comments »

Dewey Shoot the Lifeboats as Our Partners Seek Safety From Our Law Firm in Stormy Seas?

Posted on April 5, 2012 by kowalskiandassociates

Telegram from SS Amerika via SS Titanic on loc...

Telegram from SS Amerika via SS Titanic on location of two large icebergs 14 April 1912 (Photo credit: Wikipedia)

Jerome Kowalski

Kowalski & Associates

April, 2012

I recently wrote about a major global law firm which now appears to be very publicly flaming out or perilously close to doing so.

The media trouncing this law firm is going through is, quite simply of its own making. But, we need to learn from all of our experiences and observations. Thus, some observations, as this high drama, cum tragedy, unfolds:

  • Do not publicly grossly overstate your financial condition. You will get caught and  it will be embarrassing, let alone impair your credibility. As previously reported, this law firm reported to The American Lawyer that its 2011 gross revenues were a robust $935,000,000 and a nanosecond later advised its partners that gross revenues for 2011 were actually only $780,000,000.  Sure, everybody puffs their AmLaw numbers, but $155,000,000 is well beyond mere puffery.
  • When you lose about 50 partners in a matter of weeks, including practice leaders and office heads, don’t heap excrement on your former partners or the law firms they are joining. Shooting at these partners as they board their life boats does nothing to enhance the firm or its financial vitality. To suggest that losing these lawyers will have no economic impact on the firm and was all for the best of the law firm, sends pretty abysmal messages: The firm has no loyalty of any kind to its partners of many years; management of the firm fell short in discharging its management duties in not realizing that all of these practice leaders and other escapees contributed nothing to the firm’s profitability; and the AmLaw 100 and magic circle law firms these folks are joining are pretty dumb in not conducting adequate due diligence on the lumpen masses leaving the Titanic seeking safety. This sniping at the lifeboats lacks credibility and shows your mean and vindictive side.

When Chico Marx was caught by his wife en fragrante delicto  in Duck Soup he violently protested his innocence and fidelity even as his wife peered down upon him in bed with his paramour. He famously said “Who are you going to believe, me or your eyes?” Phineas T. Barnum said that nobody ever went broke underestimating the intelligence of the average American.  But, nobody ever saved a floundering law firm by denying what is in plain sight and underestimating the intelligence of a firm’s partners, associates, clients, lenders and competitors.

© Jerome Kowalski, April, 2012. All Rights reserved.

Jerry Kowalski is the founder of Kowalski & Associates, a consulting firm serving the legal profession exclusively. Jerry is a regular contributor to a variety of publications and is a frequent (always engaging and often humorous) speaker to a variety of forums. Jerry can be reached at jkowalski@kowalskiassociates.com or at 212 832 9070, Extension 310

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Filed under: Crisis management, Dewey & LeBoeuf, Global law firms, Lateral law firm partner movement, Lateral Partner, Law Firm Crisis Management, Law Firm Dissolution, Law Firm Dissolutions, Law firm financial reporting, Law Firm Implosions, Law firm management, Law firm marketing, Law firm partner layoffs, Law Firm Risk Management, Public Relations, The Law Firm of the Twenty-first Century, Uncategorized | Tagged: | 18 Comments »

Trending for Law Firms in 2012: What to Expect This Year

Posted on January 3, 2012 by kowalskiandassociates

Trending for Law Firms in 2012: What to Expect This Year.

Filed under: Alternaive Business Structures, Alternative Business Structires for Law Firms, Alternative fee Arrangements, Crisis management, Downsourcing legal services, Electronic Document Discovery, Global law firms, Hiring and training lawyers, Internet based marketing, Lateral law firm partner, Lateral law firm partner movement, Lateral Partner, Law firm blogging, Law Firm Crisis Management, Law Firm Dissolution, Law Firm Dissolutions, Law Firm Implosions, Law Firm Internet Based Marketing, Law firm management, Law firm management strategies, Law firm marketing, Law firm partner layoffs, law firm project management, Law Firm Risk Management, Legal Project management, Legal Project Outsourcing, Legaltech, Marketing the Law Firm on the Internet, Navigating the Perfect Storm: Recruiting, Outsourcing legal services, Project management for law firms, Strategic law firm planning, The Law Firm of the Twenty-first Century, Value Billing | Leave a Comment »

Trending for Law Firms in 2012: What to Expect This Year

Posted on January 3, 2012 by kowalskiandassociates

United (States) Parcel Service.

Image by matt.hintsa via Flickr

                                                                                      Jerome Kowalski

                                                                                      Kowalski & Associates

                                                                                      January, 2012

 

Thirty items affecting the legal profession that are guaranteed to dominate the headlines in 2012

It is that time of year when you are entitled to know what to expect for this new year.  Accordingly, here is what the hot trends for 2012 will be:

  •  Continuing decline in legal spend on outside counsel.
  • As law firms continue to more efficiently and timely bill for matters and, the trend of law firms whittling away at their inventories (WIP), while not being able to replace that inventory because of the lethal combination of  reduced headcounts and  reduction in the legal spend, lenders to law firms will require more stringent reporting and will in some instances, reduce available credit lines.
  • Deleveraging of work with partners and other senior lawyers billing increased hours and the trend towards the inverted pyramid model continuing.
  • Law firms establishing subsidiaries to engage in services complementary to their services, including e-discovery, document review, legal staffing services, investment advisory services for high net worth clients and the like.
  • Congress, the courts and the judicial conference will make serious progress about modifying e-discovery rules, bringing down their current gravity defying costs as well as dampening down the torrent of spoliation claims and the attendant Herculean tasks companies need to take to avoid these claims.
  • Given weakening retail sales and decreased demand for most commercial real estate, buyers will emerge to take advantage of attractive pricing on some properties, perceiving real value opportunities.  Private equity funds will move in to this arena in a big way.
  • Increased  focus on collaboration, within the law firm, vertically with clients and horizontally with vendors of support services and co-counsel. Extranets will be enhanced and new technologies will emerge to provide greater transparency and real time feedback and collaboration.
  • More paperless offices.  With the bulk of communications now being electronic and the expected decline in timely services from the United States Postal Service likely to increase the trend of communicating electronically, law firms will be incentivized to go completely paperless. Incoming snail mail will be scanned and digitized. The huge cost of storing paper documents will evaporate.
  • Increased use of outside facilities management companies for mail, fax, reproduction, IT, bookkeeping and legal records departments.
  • Law firms will make more investments in technology than in people. The IT hotspots are knowledge management, software to farm information for the purpose of responding to RFP’s, making an AFA proposal, based on prior similar work handled by the firm and for project management purposes.
  • Every lawyer will tuck an IPad under his or her arm and no lawyer will attend a meeting without opening one. Continued development of apps for lawyers will simply make this tool not only essential, but a lawyer not having an IPad at the ready, risks a serious loss of credibility.
  • Tough times often brings out the worst in some folks.  Last year’s small spike in BigLaw partners and even other law firm personnel who engaged in defalcations of client funds will sadly probably continue.  Look for more headlines of such tales.  Law firms will be well served to now tighten controls and checks and balances regarding client finds.
  • There will be periodic announcements by a partner at a BigLaw firm stating “after 25 rewarding and wonderful years with my former firm, I have decided to open a solo practice so that I can work more closely with my clients.”  Sometimes these announcements will be sincere and genuine.  Sometimes these announcements really mean “I’ve been on the job market for almost a year since I was asked to leave my former firm.  I haven’t been able to find a new slot and my firm wants me out right now, so I may as well give this a try.”
  • Virtual law firms, such as Clearspire and Rimon will continue to grow and gain real traction and increased market credibility.

I am quite sure that we have been fairly thorough and inclusive. If you think we left anything off the list, please let us know by commenting below. Similarly, if you think we are wrong about any of the above, post a comment.

It’s going to be a challenging year.  Please fasten your seatbelts, hold on to the handrail and make sure that your arms and legs do not extend outside your car. We are in for an interesting year.

© Jerome Kowalski, January, 2012.  All Rights Reserved.

 Jerry Kowalski, who provides consulting services to law firms, is also a dynamic (and often humorous) speaker on topics of interest to the profession and can be reached at jkowalski@kowalskiassociates.com .

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The Coming Invasion of the Body Snatchers: Are Offshore Law Firms Going to Invade the United States?

Posted on December 27, 2011 by kowalskiandassociates

The Coming Invasion of the Body Snatchers: Are Offshore Law Firms Going to Invade the United States?.

Filed under: Alternaive Business Structures, Alternative Business Structires for Law Firms, Downsourcing legal services, Electronic Document Discovery, Global law firms, Hiring and training lawyers, Lateral law firm partner, Lateral law firm partner movement, Lateral Partner, Law Firm Dissolution, Law Firm Dissolutions, Law Firm Implosions, Law firm management, Law firm management strategies, Law firm marketing, Law Firm Risk Management, Legal Project Outsourcing, Legaltech, Navigating the Perfect Storm: Recruiting, Outsourcing legal services, Retaining and Training Lawyers in the Coming Decade, Strategic law firm planning, Tesco Models for Lw Firms, The Law Firm of the Twenty-first Century | Leave a Comment »

Law Firms Going Global: A Baedeker Guide

Posted on December 12, 2011 by kowalskiandassociates

Law Firms Going Global: A Baedeker Guide.

Filed under: Crisis management, Downsourcing legal services, Global law firms, Hiring and training lawyers, Lateral law firm partner, Lateral law firm partner movement, Lateral Partner, Law Firm Crisis Management, Law Firm Dissolution, Law Firm Dissolutions, Law firm financial reporting, Law Firm Implosions, Law firm management, Law firm management strategies, Law firm marketing, Law firm partner layoffs, Law Firm Risk Management, Legal Project Outsourcing, Navigating the Perfect Storm: Recruiting, Outsourcing legal services, Retaining and Training Lawyers in the Coming Decade, Strategic law firm planning, The Law Firm of the Twenty-first Century | 3 Comments »

Law Firms Going Global: A Baedeker Guide

Posted on December 12, 2011 by kowalskiandassociates

English: Blank globe, focus on Africa. Deutsch...

Image via Wikipedia

 

                                                                             Jerome Kowalski

                                                                             Kowalski & Associates

                                                                             December, 2011

 

 

Packing your bags and jetting off to new offices abroad

 

Thomas Friedman told us a couple of years ago that “The World is Flat.”  The annual AmLaw reports on law firm profitability strongly suggests that as law firms go global, taking advantage of the new flat world,  profits seem to soar.  But perhaps globalization is not all that it’s cut out to be. And, even if it’s for your firm, going global requires heightened diligence and vigilance.

A recent article in The Economist, subtitled “Globalisation slows profit growth for many law firms” concludes that going global dampens and slows profitability. The Economist suggests that global expansion can be an expensive mistake.

Foreign Offices as Revenue Enhancers?

I recently reported on the The National Law Journal’s Managing Partners’ Breakfast Meeting.  As I noted, the panel leading the discussion consisted of Tom Mills of Winston & Strawn, Alice Fisher of Latham and Elizabeth Stern of Baker & Mackenzie, each of which served as their respective law firms’ Washington offices managing partners.  Each firm represented on the panel was global and certainly eminently profitable.  Winston & Strawn has 15 offices, of which seven are outside the United States.  It reported gross revenues of $717,000,000,  868 lawyers and profits per partner for 2010 of $1,385,000.  Latham boasts 31 offices, of which 19 are abroad. Latham’s gross revenues for the same period of $1,929,000,000, earned off of the backs of 1,939 lawyers.  PPP at Latham for the period was $1,995,000.  Baker, which has a June 30 Fiscal year, reported revenues of $2,104,000.000 produced at 68 offices, of which 58 are outside the United States, where 3,768 lawyers work. Baker reported PPP of $1,125,000.

Baker & Mackenzie stands apart. For more than 30 years, Baker’s business model was unique in that it consisted of a web of dozens of offices throughout the world. It has consistently been at the top of the heap of AmLaw 100 firms in terms of headcount and at or near the top of the heap in terms of gross revenues. It has never ben at the top of the AmLaw listings in terms of either profits per partner or profits per equity partner.  The Baker model has been, for decades, to be the “go to” firm for matters international.  While PPP of $1,125,000 is nothing to sneeze at, it is substantially lower than the firms that make up the AmLaw top ten. Coudert Brothers, a firm founded in 1853, pursued a similar strategy of pan globalism. By 2006, it had 650 lawyers spread around the globe in 28 offices.  In that year, after years of declining revenues and profitability, Coudert dissolved and filed for bankruptcy. A significant number of Coudert partners joined Baker, following aborted discussions between the two firms aimed at a merger.

All of the panelist attributed a great deal of their respective firms’ growth to their firm’s global platforms. Earlier, The Economist reported on the growing trend of law firm globalization and some of the technical difficulties for law firms which seek to leave their native shores and set up beachheads abroad (certainly a worthwhile read for those firms seeking to go global).

Going global is not the unique province of AmLaw 200 firms. Two hundred lawyer Atlanta based Smith, Gambrell & Russell maintains an office in Frankfurt.  One hundred and seventy Cleveland based Benesch, Friedlander, Coplan & Aronoff  maintains an office in Shanghai.  And there are many others.

The single most important metric of the success of a law firm’s offshore branch office is whether it is a net importer or exporter of legal services.  Most law firm foreign offices are net importers of services.  Despite this disappointing result and reality, law firms continue to plant foreign offices in a fashion most akin to the Nineteenth  Century urge by industrialized nations to engage in blatant and boisterous colonialism. The analogy is most apt, as you will see below.

But going global is rife with additional landmines, some of which are described below. .

Can Global Collaboration be Accomplished?

First, as I recently wrote, the key to future success for law firms is collaboration. Cultural and language differences, as well as an army of 1,000 or more lawyers in a dozen or more nations poses some serious obstacles to advancing a culture of collaboration. In addition, the nature of the attorney – client relationship varies widely from nation to nation. In some cultures, lawyers are trusted business advisers and confidants. In other cultures, lawyers are mere scriveners.  In some areas of the world clients treat lawyers as an obstacle to getting business done and dissembling when dealing with one’s own lawyers is commonplace.

Impacts of Local Upheavals on the Firm as a Whole

Second, in discussing strategic planning with attendees of the recent conference as well as with managing partners I regularly meet with, I was rather shocked to learn that virtually no global law firm has a disaster recovery program in the event of a disaster in a major foreign branch.  The greater a law firm’s footprint, the more likely one of those footprints may well land on a landmine. Disasters may be of a natural kind, such as an earthquake on Japan (from which Japanese branches of foreign law firms are still reeling).  Local disasters may be politically inspired, such as in the instance of a regime change or as is now taking place in Russia.  Or, most critically, a disaster may well be the consequence of local financial upheaval.  Of course, the most foreboding crisis is the continued upheavals in the Euro zone; should the Euro collapse, the consequences will be devastating at every level.  But, oddly, while lawyers are trained to always contemplate sundry adverse contingencies as they counsel their clients, I have yet to meet a law firm that has a plan in place should the Euro collapse.

The ability to exercise management and fiscal control over a global expanse is also problematic, as recently shown in the instance of a practice leader in an Asian branch of a US law firm who allegedly improperly pocketed million of dollars of client escrow funds resulting in a loss to the law firm of a claimed $32,000,000.  I do not, of course, suggest that purely domestic law firms are immune from partner defalcations, as recent press reports demonstrate.

In addition, going global necessarily results in substantial additional overhead costs, tax issues and subjects the law firm to compliance with foreign rules, which are often extremely xenophobic.

Foreign Offices Spinning Off to Compete with the Mother Ship

At the NLJ Managing Partners Breakfast, there seemed to be a general consensus that Asia provides the greatest opportunity for law firms, with most speakers, both on the panel and in the audience, suggesting that China still offered the greatest opportunity. However, another suggested that the profession must be mindful of the Chinese business model, which seems to be the Chinese asking foreigner to come to China and perform a service or build a product, followed by the Chinese saying “let me see how you do that.”  That in turn is followed by “teach us how to do that,” and ultimately “okay, we now know how to do that on our own, so you can leave and we will do so.”  A leading managing partner, suggested, only perhaps slightly in jest, that “in a couple of years, these managing partners meetings will only be attended by Chinese managing partners.”

This is not a uniquely Chinese phenomenon. As firms hire local lawyers, train them in the ways of BigLaw practice and allow these lawyers to bond with the mother ship’s clients, the allure to these lawyers to spin off and form their own firm, taking the clients with them may be irresistible.  These local lawyers have gained the clients’ confidence and demonstrated their ability to deliver high quality legal services. They are fully aware that they can set up shop, unburdened by the groaning weight of BigLaw overhead and offer materially lower rates, while pocketing a vastly higher percentage of the profit for their own benefit.  This has already occurred a number of times and will certainly occur in the future. A BigLaw firm, having invested substantial sums in the branch office then confronts a Hobson’s dilemma:  Cut its losses and get out of Dodge or invest even more money locally and hope to save both face and its prior investment.

More Offices = More Conflicts of Interest

Having lots of lawyers in many countries is neat and certainly does provide some nice bragging rights.  However, it also makes the potential of conflicts of interest far more serious and the ability to thoroughly vet new clients and matters almost impossible.  Global corporations do business all over the world using different business structures and under a variety of names, not always even English.  This point was driven home for me as a partner at a global law firm recently related an incident that caused great embarrassment and some serious erosion of his relationship with one of his largest clients; a global Fortune 100 company..  As he related to me, he was visiting with the client general counsel seeking to further enhance the relationship and hoping to get some more business.  The two dined in the corporate dining room and upon returning to the GC’s office, the client thumbed through the batch of mail that was left for him while they dined.  One particular large envelope, marked “Urgent” caught the GC’s eye and he opened the envelope, examined the contents, and turned to the law firm partner and said, “Jim, I know you would like to leave here with some juicy new business. We just got served with papers in which there is a major claim of patent infringement on one of our major products. From what I see in these papers, the other side is looking for $1,500,000,000 in damages. I want you to handle this case and treat it as a ‘bet the company case’, with no holds barred, especially since you know the lawyer on the other side.  They are your partners in Belgium.”

FCPA and Securities Fraud Risks

Pay to play is an element of trade that does not have its roots in the New World.   Rather, bribery, corruption or other forms of baksheesh is the way of life in most of the world.  Similarly, tax fraud is in the national DNA of many countries. And financial and accounting irregularities are rife in certain parts of the world. There is always a likelihood that local companies or branches of global companies located abroad routinely engage in this type of conduct. Of course, much of this conduct may run afoul of the Foreign Corrupt Practices Act.  Of course, in the event of a law firm’s client being accused of a violation of the FCPA arising out of the conduct in a nation in which a law firm has a branch, there is terrific opportunity for that law firm to conduct the required investigations and defend the follow on domestic prosecutions and litigations in the United States, charging premium rates.  But in my view, sooner rather than later, a global law firm will likely be charged with FCPA violations, either because a client takes an “advice of counsel” defense line or because of a zealous regulator, prosecutor or a qui tam plaintiff.

I wonder how many law firms have written policies in place regarding steps to be taken when member of the firm that the client is engaged in systematic FCPA violations. I certainly haven’t found any.

One of the great varieties of exports that China sends to these shores are securities class actions predicated on an apparent Chinese sense that disclosure rules don’t really apply to them. Again, while some law firms are profitably enjoying defending Chinese companies because of this Chinese penchant, to the extent that law firms have been involved in the representation of the issuer, as with FCPA claims, it is only a matter of time that a global law firm will be named as an aider or abettor.

Structuring an International Law Firm

Most U.S. based global law firms are organized as a single partnership.  Others are organized as Swiss vereins, which are essentially an association of membership organizations formed under an umbrella formed under Swiss Law.  Global accounting firms have long been organized as vereins, largely for tax purposes and to help insulate the firm as a whole from liabilities incurred in discrete jurisdictions. Peter Kalis the eminent leader of global K&L Gates (39 offices, 16 abroad, reported gross revenues of $1,055,500,000, PPP of $930,000 and 1.763 lawyers) has been a vocal harsh critic of law firms that are formed as vereins. Kalis’ singular objection is the vereins “debased the financial results upon which [AmLaw] ranking rests.”  My own view is that too many AmLaw firms debase those rankings by gaming their own reported numbers. The accounting profession, as noted, has long been an adherent of verein systems and it has never been suggested that these firms do not accurately report on their own revenues and profits.

Some jurisdictions do not permit local lawyers to partner with a foreign firm and do not allow any law firm on their soil which have as partners who are not members of that jurisdiction’s bar.  Thus, where permissible, global firms form an affiliation with a local law firm or establish an office which is limited to advising on legal matters in which the global firm has operating offices. The latter option is the format in which Greenberg Traurig plans on opening its 34th office in Israel, a jurisdiction not otherwise hospitable to having foreign law firms operate full service offices on its shores. Nine office Mintz Levin (two overseas) has operated in Israel in this fashion for some time.

Conclusion

Notwithstanding all of these challenges, global law firms are eagerly eying opening offices in new markets such as Korea, Indonesia, Turkey, India and South America, particularly as barriers to entry are crumbling.

No, this is not a screed designed to prevent law firms from venturing abroad. Rather, branching globally requires a heightened degree of risk assessment and once a firm branches offshore, it must impose heightened controls at every level. If you are going offshore, do so with eyes wide open.

© Jerome Kowalski, December, 2011.  All Rights Reserved.

 

Jerry Kowalski, who provides consulting services to law firms, is also a dynamic (and often humorous) speaker on topics of interest to the profession and can be reached at jkowalski@kowalskiassociates.com

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Filed under: Crisis management, Downsourcing legal services, Global law firms, Hiring and training lawyers, Lateral law firm partner, Lateral law firm partner movement, Lateral Partner, Law Firm Crisis Management, Law Firm Dissolution, Law Firm Dissolutions, Law firm financial reporting, Law Firm Implosions, Law firm management, Law firm management strategies, Law firm marketing, Law Firm Risk Management, Legal Project Outsourcing, Navigating the Perfect Storm: Recruiting, Outsourcing legal services, Public Relations, Retaining and Training Lawyers in the Coming Decade, The Law Firm of the Twenty-first Century | Tagged: , , , , , , | 5 Comments »

The End of Alternative Fee Arrangements?

Posted on November 30, 2011 by kowalskiandassociates

Cover of "The End of Lawyers?: Rethinking...

Cover via Amazon

                                                                             Jerome Kowalski

                                                                             Kowalski & Associates

                                                                             November, 2011

In doing my nightly reading last evening in order to keep up with the latest trends in the legal profession, I came across a very recent brief video clip from Richard Susskind that made me bolt upright and reach for a very stiff drink.  The clip is a bit nerve rattling; accordingly, as they say, viewer discretion is advised.

The headline on the clip is certainly designed to grab your attention:  It has Sir Richard purportedly suggesting “The End of Alternative Fee Arrangements?” Quite obviously, this headline grabber is a clever play on Sir Richard’s seminal work “The End of Lawyers?”  My first thought was whether all of my work on AFA’s over the past few years was for naught. Or was it like the chimera of the tooth fairy, the Easter bunny or Santa?

In fact, on my second and third view, Sir Richard’s admonition became far more lucid and perhaps obvious:  2012 will be the last year in which the need to meet the demand for a reduction of the legal spend will be met almost exclusively by resorting to AFA’s.

Much more of Sir Richard’s observations are both chilling and enlightening:

  • Contrary to general opinion, the legal spend in the coming year will be reduced by 30 to 40%.
  • General counsel and law firms are going to need to meet these demands by creating yet new efficiencies.
  • Lawyers will need to meet demands for more legal services and receive less remuneration.
  • General counsel and law firms will need to learn work far more collaboratively.

Serendipitously, this morning my friends at Altman Weil, released their Annual Chief Legal Officer Survey.  Altman Weil’s take is consistent with much of Sir Richard’s admonitions in that in spending money for legal services, “Efficiency Trumps Costs.”

However, Altman Weil’s survey numbers are a bit less glum than Sir Richard’s prognostications:

  • “Fifty-six percent of CLOs said they had increased their internal budgets from 2010 to 2011, compared to 51 percent the previous year. The median increase also ticked up from 6 percent to 7. Forty-six percent of respondents increased outside counsel expenditures, up from 43 percent a year earlier.”
  • The median budget for outside counsel increased by 10%.
  • Controlling costs topped CLO’s list of priorities.
  • 13% of CLO’s outsourced work, previously performed by traditional law firms,  to non-traditional vendors of legal services.
  • 60% of CLO’s promoted collaboration rather than competition from their outside law firms.
  • For the third year in a row, top lawyers said they don’t think law firms are serious about changing their service delivery model. They gave firms a median rating of three, on a scale of zero to 10. But the companies aren’t doing much better. Respondents gave themselves a five in terms of how much pressure they were putting on firms to improve the value proposition.
  • 35 percent of respondents said they regularly and formally evaluated outside counsel, and only 17 percent said they communicated evaluation findings to the firm.

On this last and perhaps most significant point, Dan DiLucchio of Altman Weil had a most telling observation: “As long as the company is sending them work,” says DiLucchio, “the firms assume that that is their evaluation.”  Law departments miss out on the opportunity to change the firms’ behavior, says DiLucchio. He’s seen one of two things happen for firms: “Either you die a slow death, where the faucet is slowly turned off. Or you’re just called in one day and told that the company is moving the work elsewhere.”

These slow deaths and sudden terminations are completely preventable. But it is the obligation of outside counsel to be extremely pro-active in doing so. The steps we encourage our law firm clients to take are very straightforward:

  • Build an extranet.  Make all of your work for the client, not merely timekeeping, completely transparent. Clients should be able to click on their files and have full access to the work done and in progress.  Clients should be encouraged to actively engage the extranet and provide their input. Never respond to a client’s compliant about work done or budget overruns by blithely saying “gee, it was all on the extranet, you should have known.”  The extranet does not absolve the lawyer from communicating to the client.
  • Every monthly bill rendered should be accompanied by a letter that describes the objectives the firm had set out for the preceding month for the matter, the steps the firm had taken to meet those objectives, the results and the objectives for the next month. Even where the matter is undertaken on a fixed fee or an AFA, these monthly letters are essential.
  • In mid-month, send the client a time run of time spent on the matter. Let the client know it is for informational purposes only.
  • When an event occurs in a matter that materially affects either the fee or time budget, get on the phone and let the client know at once.  Explain the issue in detail. Let the client know how you propose to deal with this hiccup and solicit the client’s advice on the proposed course of action.
  • Take a page out of the book of Ed Koch,  New York’s long term mayor, who always greeted voters and visitors with “How am I doing?”  annual client surveys, annual visits by a managing or originating partner just don’t do the trick anymore.  You have to be on the telephone with regularity communicating with the client.  You must visit the client with greater regularity.  Your visit should be carefully planned out, as explained in detail here.

Yes, this is a lot of work.  But it is far less painful than seeing your revenues fall by 30%, watching the faucet slow to a drip or being told where to send all of the client’s files.

© Jerome Kowalski, November, 2011.  All Rights Reserved.

 

Jerry Kowalski, who provides consulting services to law firms, is also a dynamic (and often humorous) speaker on topics of interest to the profession and can be reached at jkowalski@kowalskiassociates.com .

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Citibank’s Third Quarter 2011 Report on Law Firm Profitability: The Good News is That Cash Collections Were Up for the Quarter; The Bad News is There is a Lot More Tunnel at the End of the Tunnel

Posted on November 18, 2011 by kowalskiandassociates

North East from 30 Rock (Including CitiGroup)

North East from 30 Rock (Including CitiGroup) (Photo credit: TGIGreeny)

 

                                                                             Jerome Kowalski

                                                                             Kowalski & Associates

                                                                             November, 2011

 

As law firm expenses continue to rise more quickly than revenues, law firms are looking at a real hole in their buckets

Like so many of us, I so admire and respect Citibank and the leader of its law firm lending group, ably headed by Dan DiPietro.  I not only look forward to Citi’s quarterly reports on law firm profitability, but as so many of us do, I carefully parse through Citi’s reports, since even when Citi informs us that storm clouds are about and more are to come, it somehow manages to give the impression that the climate is balmy and sunny days are ahead.

In this regard, Citi’s report for the  third quarter of 2011 does not disappoint. Not that Citi reports much good news nor does it predict coming good times; but, as always, Citi, the master of euphemism, posts some important warnings in terms that seem to provide some comfort. But, the fact remains that, after performing some exegesis of Citi’s most recent report, it is clear that Citi is telling us that current law firm economics are not very rosy and the coming months are foreboding.

Citi, which serves some 600 law firms and 58,000 lawyers in the United States and the United Kingdom, likes to lead with the good news and here it is: Cash collections for the third quarter were strong,  The bad news:  Demand for legal services continues to decline, marking the fourth quarter of consecutive decline in demand for legal services, while during the same period, expenses continued to rise,  consistent with Citi’s last report.

Says Citi:

 Cumulative growth in demand for the first nine months was 1.5 percent, down from 1.8 percent during the first six months. This indicates that growth in demand slowed to only 0.9 percent for the third quarter. This is likely a result of the slowdown in transactional work caused by the market shake-up. The slowdown has hit Am Law 50 firms (the 50 highest-grossing firms on The Am Law 100) particularly hard.

Citi went on to note that rate increases remained steady at 3.7% and realizations were strong.  But a moment later, it also cautioned as follows:

 Expenses, which had already risen by 4.7 percent during the first half of 2011, continued to gain momentum during the third quarter, as they have now increased 5 percent across the industry for the first nine months of this year. This was driven by a continued increase in operating expenses—and in compensation expenses, since we saw a slight uptick in head count during the third quarter, likely due to the entry of first-year associates.

Quite obviously, where your rates are increasing by 3.7% and your expenses increasing by 5%, you are slowly losing ground. Citi acknowledged as much:

This modest increase in associate head count, combined with the slowdown in demand in the third quarter, translated into a decline in productivity gains—from 1.6 percent growth for the first six months of 2011 to 0.9 percent growth for the first nine months.

Tucked away in the middle of a following portion of its report is the most disturbing news of all in the current report, dealing with the very troubling decline in demand for future legal services and continued decline in WIP:  Citi’s report on WIP showed that WIP is currently at

 3.6 percent for the first nine months (versus a cumulative growth rate of 6.3 percent for the first six months). The last time we saw the third-quarter inventory growth rate slowing from the first-half rate was in 2008.  [Emphasis Added].

Citi went on to report on the winnowing down of equity partner ranks at law firms, while increasing activity in lateral hiring. Lateral partner hiring is certainly a positive sign; it signals optimism by law firm leadership and the willingness to fill in valleys of revenue decline by bringing in new partners with loyal client followings. But robust lateral partner recruiting is far from a panacea.  Every lateral partner comes at a real cost, consisting of recruiting fees, where applicable, and the investment in “ramp up.”  For the uninitiated, ramp up consists of that period of time which commences when the lateral partner and his professional and support staff join the firm and are fully compensated until the time that their efforts result in revenue to the law firm, a period typically lasting approximately ninety days.  Thus, while successful laterals do contribute to WIP, they do add materially to the expense side, which some firms have attempted to treat as capital costs. But in simple cash accounting, laterals cost money and mitigate equity partner profitability.

The reader must be mindful that Citibank’s survey is skewed in that it is largely based on AmLaw 100 firms – “44 Am Law 1–50 firms, 36 Am Law 51–100 firms, 49 Second Hundred firms, and 54 additional firms.”  Those firms at the top of this food chain are largely hiring laterals by showering them with gold, not always a great idea..  Firms on the lower end of the food chain are faring much better, in our own experience.  We are seeing many mid-size firms picking up quite a number of attractive top tier law firm partners, who are being squeezed out of AmLaw100 firms simply because their client bases, often quite substantial just won’t swallow the $1,000 hourly rate level required by the top tier to feed its expense levels.  The fourth quarter of every tear is the season of redemption for many, as lateral candidates anxiously scour the market scooping up offers that they will formally accept as soon as the spoils of the previous year are distributed.  Mid-size law firms – the “additional firms” in Citibank’s report – have actually done remarkably well these past two years and they are scooping up many of the soon to be AmLaw 100 refugees at record rates.

The continuing decline in the leverage model and decreased work available for firm lawyers also did not escape Citi’s attention:

 We have recently begun highlighting in our roundtables the rising cost of leverage for law firms. Looking at the 100 most profitable firms from 2001–2010 in our database, we saw a discernable decline in the percentage of associates represented in the leverage composition and a significant growth in the income partner, counsel, and of counsel categories. The result is a much more expensive leverage model, which would be fine if these more expensive lawyers were as productive as equity partners and associates, but they are not. In looking at average annual lawyer productivity from 2001 to 2010, income partners and counsel worked about 150 hours less than equity partners and associates.

“Much more expensive leverage models” is simply a euphemism for the fact that the Cravath system continues to disappear and service partners and counsel as important profit centers are similarly withering.  In other words, the old pyramid model hasn’t really disappeared; it has just been turned completely upside down.

There was also rising concern at Citi concerning the continued growth of Alternative Fee Arrangements and lowered reliance on billable hours, which Citi is concerned might result declining law firm profitability. As I have discussed in the past, AFA’s can actually enhance profitability, if properly managed, and current economic climes, with both declining demand for legal services and increased competition for those legal services require law firms to be more agile and develop new, more efficient and more profitable models for the delivery of legal services.

Citibank, like everyone else, expects an exceptionally hard push for final quarter collections. After all, following a rather difficult year of rising expenses and weakening demand, the need to boast of high PPEP is largely contingent on an extraordinarily strong squeeze in coming weeks.  But as corporate clients have mightily increased their own cash management and stretched out account payable schedules, these efforts may very well be an irresistible force meeting an immovable object.  Something’s got to give.

My own advice is forget about boasting about your PPP; instead, make the far more important investment in enhancing the firm’s long term relationships with its clients.

© Jerome Kowalski, November, 2011.  All Rights Reserved.

 Jerry Kowalski, who provides consulting services to law firms, is also a dynamic (and often humorous) speaker on topics of interest to the profession and can be reached at jkowalski@kowalskiassociates.com

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