Kowalski & Associates

January, 2012

My copy of the Model Code of Professional Responsibility runs to some 500 pages, with sundry commentaries.  The Code plumbs virtually aspect of a practicing law and details that which can be done by lawyers and that which may not. One relatively brief section deals with lawyers handling of client funds held in the law firm’s escrow account, sometimes called “Escrow Accounts,” “Special Accounts,” “Trust Accounts” or “IOLTA (Interest on Lawyers Trust Accounts – but this one is a long and irrelevant boring story).   Cut to the quick, the Model Rules say just three things:  (1) Don’t co-mingle these funds with any other account; (2) deal with these funds exactly as instructed by the client and affected parties, as detailed in an appropriate escrow agreement and (3) if you even think about screwing around with these rules, you’re gonna fry.

In New York City, the Departmental Disciplinary Committee, the judicial authority having authority over lawyers’ compliance with applicable rules, investigates thousands of complaints filed against lawyers for all sorts of alleged violations of the applicable rules.  Yet, perhaps 80% of all suspensions and disbarments result from either defalcations or co-mingling of client funds. Here, justice is swift and certain. The Committee has long had a zero tolerance policy with regard to any impropriety concerning client funds, a view held by all governing bodies. Suspension or disbarment is the only result.

These facts are well known to all practitioners and may even strike some as a hackneyed topic. But recent reports of significant defalcations by a former counsel at a BigLaw firm of what may be as much as $20,000,000 and in another instance of the chair of a global law firm’s Asian gaming group having allegedly slipped out some $2,000,000 from client escrow funds to allegedly cover his own gambling losses suggest that this topic requires  careful review.  Indeed in year-end reviews by several of our law firm clients, prompted by the recent tawdry headlines, controls over client escrow funds were studied and found to be lacking. There have also been a recent spate of unsubstantiated rumors concerning of escrow account improprieties that are, simply put, more than troubling.

Some law firms dispense with the entire issue by simply eschewing, as a general rule, the maintenance of any escrow accounts. Where funds are required to be escrowed, these firms advise the retention of an independent trust company, bank, title company or where permitted, a duly licensed escrow agent.  However, often, local custom and usage requires law firms to maintain escrow accounts, which are fraught with peril, if not subject to stringent controls by the law firm. These controls should be described in writing and the firm’s policies regarding client funds should be in writing and part of its employee  handbook.  These rules should also be part of every new lawyer’s orientation session as he or she arrives at the law firm.

The required controls begin with the commencement of the client relationship. Every engagement letter must contain a disclosure regarding the law firm’s escrow policies. The letter should describe the firm’s policies concerning escrowed funds and, particularly, the requirement that all funds released from escrow require two partner signatures. Funds released by wire transfer require a separate email confirmation from a law firm partner to the escrowee.  The engagement letter should require the client to report any departure from these rules to the firm’s managing partner. The need for the double signature and reporting is best demonstrated by the fact that in one of the recently reported instances of trust fund defalcation, a counsel of a national law firm is reported to have taken a check drawn payable to his law firm, as escrow agent, walked across the street and simply opened an account in the firm’s name, making himself the sole signatory, without the bank requiring any certification from any partner at the law firm.

The law firm should not allow the deposit of any escrow funds without an accompanying escrow agreement. Thus, the firm should have a tightly drafted model form of escrow agreement, with appropriate exculpatory language, from which there should be no material departure, except upon written consent from department head, an office head or an executive committee member.  Each such agreement should also require the signature of such a member of management. When funds are deposited in to the escrow agreement, the requested deposit should only be permitted to be made to the accounting department of the escrow agreement, the underlying agreement, stipulation or other instrument giving rise to the creation of the escrow, as well as a memo (or standard form) from the responsible lawyer describing underlying transaction and the conditions precedent for the ultimate release of the escrow. This initiating memo should also include the client’s contact information. The memo form should be countersigned by a member of management. A member of the accounting department should examine the entire submission for regularity and completeness.  Any departure from the firm’s escrow policies must be reported in writing by the escrow clerk to the responsible lawyer, as well as to a member of management (optimally, if the firm has an in-house general counsel, the mater should be addressed to him or her), even if the departure seems to be only clerical or ministerial.

When funds are mature and are required to be released, the responsible lawyer should prepare a new memo (or standard form), describing the transaction should be prepared by the responsible lawyer and countersigned by two partners with management responsibilities, such as an office head, department chair or member of the executive committee. The submission should again include the underlying escrow agreement and governing instrument. Again, the escrow clerk should examine the entire submission for completeness and be obligated to report in writing any irregularities to each of the lawyers who have already put their fingerprints on the escrow arrangement as well as general counsel or a designated separate member of management. As I mentioned above, all checks drawn on the escrow account should require the signature of two partners, neither one of which is directly involved with the matter.  If a wire transfer is required, the clerk should send a confirmatory email to the client, using the email address originally provided at the time of the original submission.

Where law firms sometimes screw up is in connection with smaller branch offices, at which smaller support staffs and reduced lawyer headcounts often breeds shortcuts, for the sake of expediency. The fact is that far greater scrutiny is essential for smaller branch offices, which often takes on a degree of laxness and informality, primarily because of the greater sense of intimacy such smaller offices promote. In the age of the Internet, emails and paperless offices, there is no excuse for departing from the required controls. There simply must be zero tolerance for any departure from these controls. After all, bar associations and other governing bodies have none.

The law firm’s general counsel, chief financial officer and its chief risk manager should be responsible for regularly monitoring activities in the firm’s escrow accounts and its escrow clerical staff. As much as law firms are allergic to certified financial audits, the law firm’s outside accounting firm should be required to annually audit its escrow funds and provide written certification that all controls are in place and there is full compliance with the firm’s stated policies.

Finally, as too few lawyers realize, defalcations from escrow funds are not covered by a law firm’s malpractice policies. A separate fiduciary policy is required. Insurance carriers tend to be rather chintzy on these policies, often limiting coverage to $5,000,000. That may be far too low, if your firm’s escrow balances or individual escrow accounts exceed that amount.  You should explore increased coverage or excess coverage with your insurance adviser. And, finally, always be prepared for the public relations hailstorm that will assuredly ensue if you are indeed the victim of a nefarious lawyer with your firm.

© Jerome Kowalski, January, 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.

                                                                             Kowalski & Associates

                                                                             January, 2012

Parting is such sweet sorrow.

                As I predicted last November, the early weeks of 2012 have marked a surge in lateral partner movement at every stratum of the profession. Some partners are leaving their firms because they feel that their firms no longer provide them with an adequate platform and there are alternatives. Others are leaving their firms with the same spirit in which they arrived:  Fired with enthusiasm. Other partner will be seeking more hospitable climes because of law firm failures in the coming months.

            Few articles or pundits address the art of departing.  Some law firm partners intuitively depart with grace and dignity. Some departures create unneeded disruption for the new law firm, the prior law firm, the partner or clients; sometimes all three. Accordingly, with due deference to Paul Simon, I shall briefly address the ethos of smoothly creating a fresh start.

            You just slip out the back, Jack.  Bad idea. Some departing partners, particularly those who have left under less than voluntarily, burn bridges and simply leave and do not capitalize on personal relationships that yet may be of some real future value. Law firms that are constrained to ask partners to leave or enforce mandatory retirement policies, similarly do themselves a disservice by further fostering a culture of partner free agency, unhindered by institutional loyalty, when they promote quietly slipping in to the night. We have recently seen what may be perhaps the most poignant and sardonic example of this in a recent departures memo from a Sidley Austin retiring partner.

            We are all painfully aware that law firm partners are no more than employees at will and the notion that partnership results on lifetime tenure and certainly not a sinecure, as was the case, arguably, a half century ago. Be that as it might, slipping out the back, without further cultivating personal relationships established during  partner’s  tenure at a law firm is just plain counter-productive. From the departing partner’s perspective, presumably, he or she has developed important relationships which will likely result in future referrals. From the law firm’s perspective, the departing partner himself or herself can be the source of future referrals because of conflicts or perceived expertise. Thus, a departing partner should make the round and bid proper adieus. A law firm, urging a partner out the door, should not set an arbitrary deadline at which time the partner will be stripped out of the firm’s web site or shoved out the door within an arbitrarily short period. Transitions, although always difficult, require careful planning and mutual planning by all of the stakeholders involved. Law firm management should not suggest, for internal or external consumption, that a partner’s departure was welcome (he or she wasn’t any good, he or she was overpaid and goodbye to bad rubbish and the like).  We have seen the management of one law firm announce during the fall of 2010 that a rash of partner defections was welcome and part of the law firm’s strategic realignment (read: we got them just where we want them:  our nose squarely in the jaw of impending implosion and we’re not letting go) only to see that law firm be 2011’s most spectacular law firm failure.

          The point here is obvious: The loss of a valued partner can have a cascading effect and has been seen to be fatal. Law firm management should be honest in assessing when the loss of a partner will cause pain and then shore up its other productive partners in a positive, candid and constructive fashion. If a partner will be missed, because of contributions made by the partner to the law firm at any level, say so. Publicly and privately wish him or her well.

            Grace, dignity and mutual respect, even through clenched teeth and feigned, serve all stakeholders best.

            Make a new plan, Stan.   The essence of smooth transitions is careful planning.

            The departing partner, as part of his or her practice integration plans, should set forth carefully his or he plans with regard to each of the myriad matters requiring attention as he or she extracts himself or herself from his or her prior firm. All steps necessary must be taken in accordance with a partner’s fiduciary obligations to his or her former firm, The Model Code of Professional Responsibility and other legal or ethical constraints. When in doubt, always consult an appropriate professional. Most certainly, a departing partner is best served when guided by an experienced professional, well informed of the various contingencies that lay ahead.

            The steps range from the mundane to the sublime: assuring that all contact lists and related information is stored on someplace other than a law firm’s server, documents, pleadings, agreements, correspondence, templates, forms and other written information, not the property of the law firm, should be downloaded and stored on a safe site, such as Dropbox. Ethically compliant conversations should be had with clients as early on as possible (yes, do let the clients know that you are considering alternatives as soon as possible; be assured that many law firms will seek to retain relationships that you have introduced to the firm). 

            Law firms contemplating the compelled or likely departure of a partner should be assaying matters brought to the firm by the soon to be erstwhile partner and identifying those matters and clients that the firm may be able to hold on to. Similarly, the firm should identify those other lawyers who are part of a prospective partner’s team and determine which, if any of these teammates would be of value to the law firm. Law firm management should reach out to those lawyers, again, early on in the process and incentivize those lawyers to stay and reach out – together with those lawyers – to those clients which the law firm believes it can retain. Both lawyers involved in this process and affected clients should be offered real financial incentives.

            At the same time, departing partners should not be shy about identifying clients of the former firm that might be amenable to a strong marketing pitch as soon as the partner has landed in his or her new home.

             You don’t need to be coy, Roy.  While we’re on the subject of the futility of timidity, the fact is that while otherwise constrained by various ethical and legal obligations, candor (and certainly not rancor) should be the watchword of the day. A departing partner should have his or her backstory lined up and be frank and open to one and all. The same is incumbent of the law firm. In a mature and respectful setting the backstory should be the subject of mutual agreement and be a consistent thread of conversations and disclosures to all affected parties.  Neither a departing partner or a law firm should be in a situation in which a colleague, one day passing a dark and emptied office, ask “what ever happened to Roy?”

            Partners should also insist that all future callers to the law firm will be forwarded to his or her new home. Optimally, the firm and partner should also enter in to a mutual non-disparagement agreement.

            Coyness has its limitations during the search for a new home. As partners seek new homes, they must be realistic and conservative in projecting their likely future production. Giddy, unwarranted optimism will only inevitably result in real pain for all concerned. Similarly, skeletons in the closet must be disclosed early on. They will doubtless surface. Google, Lexis and online court data bases makes all of our live public and transparent.

            Just get yourself free, Lee.   Once the planning and various required mutual understandings are reached, both the departing partner and the law firm should plan on lives apart. It’s time to move on.

            Departing partners are too often wont to eagerly hear about the internal politics and vicissitudes of his or her former firm. Gossiping by former partners who either seek repeated personal assurances that they made the right decisions or who wish ill of their ouster is simply counterproductive and impairing. Recognize that it’s time to move on.  Revenge, while frequently desired, is best had when it is simply achieved by doing well.

            Hop on the bus, Gus.  Once a decision is made, accept it. As twelve steppers do, invoke the serenity prayer (one should always pray for the serenity to accept the things he or she cannot change; the courage to change the things he or she can; and the wisdom to know the difference).

            Just drop off the key, Lee and get yourself free. Transitions are always by definition disruptive in every sense.  

                However, approaching a transition with careful and deliberate forethought, vigilant planning and maturity serves the law firms affected, the partner and his or her client best. Anything less invites less than unfettered success.

© Jerome Kowalski, January, 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.

                                                                                      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.

• Careful consideration by general counsel whether to build or buy. Corporate legal departments will be major competitors of law firms.

• Increased direct competition for the legal spend from LPO’s and other alternate providers of legal services.

• Increased globalization, with US firms continuing to open new markets, particularly in Asia and South America and foreign firms opening US branch offices.

• Consistent with last year’s trend, expenses will rise at a faster rate than the rate of revenue growth.

• 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.

• High end litigation funding will become increasingly popular.

• De-equitization of partners and reductions in head count will continue.

• Deleveraging of work with partners and other senior lawyers billing increased hours and the trend towards the inverted pyramid model continuing.

• Increased lateral partner movement.

• Heightened due diligence by law firms in assessing lateral partners.

• 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.

• The urge to merge will continue.  Last year, there were more than 43 law firm mergers. In 2012, there will be more. Regional firms will combine to become super regional firms and consolidate some back office operations,

• The Euro Zone will continue to roil, unemployment will decline only marginally, Congress will continue to dither about the national debt, housing prices will, at best remain flat or, more likely, decline slightly, due to the huge REO inventory, municipalities will continue to be in a financial vise, as tax bases decline, real growth in GDP will be marginal and there will certainly be additional bankruptcy filings by cities and counties.  I know looking at all of this may provoke nausea.  But, the wise lawyer and law firm will follow Rahm Emanuel’s counsel that no crisis should go to waste and the wise man looks for opportunity in every crisis. There will be abundant opportunities for lawyers to provide counsel to various institutions affected by each of these economic frailties.

• 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.

• There will be strong tension at law firms between the competing needs to reduce support staff and the need to enhance marketing, IT, client relations, project management and other support functions.

• 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.

• More intelligent use of office space. This will include moving support functions to less expensive offices (for example, West Virginia (Orrick), Ohio (WilmerHale), Belfast (Alan & Overy and Herbert Smith), Texas (Pangea3), North Dakota (Integreon) and Kansas (UnitedLex)).  We will also see firms follow the lead of Pillsbury which announced that it will move its entire back office operations to Nashville, Tennessee.  In addition, law firms will seriously be looking at “hotel” office arrangements, such has been the case for decades at accounting firms. An office, like your home, is just a place to keep your stuff. Today, most of your stuff is stored in the cloud or on your server.

• Increased reliance on project management.

• Increased proliferation of RFP’s, including online auctions by clients for legal services.

• Continued rise in use of alternative fee arrangements.

• Continued rise in clients using social media, particularly blogging, to identify competent counsel, with a concomitant rise in law firms regularly posting substantive blogs and circulating client alerts and bulletins.

• 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.

• Sadly, we will also see additional law firm failures.

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 .

                                                                             Kowalski & Associates

                                                                             December, 2011

They’re coming.

The coming months and the coming years will mark an increased invasion of foreign based law firms and other providers of legal services into the United States.  They will likely be coming from all corners of the world. And, they will be looking to snatch your business.

First, we have the acknowledged intention of UK based behemoth Herbert Smith (1,500 or so lawyers) to re-open a United States office, after an absence of two decades. The new office, expected to open within the year will be populated by both United States and foreign qualified lawyers. Jonathan Scott, a senior Herbert Smith lawyer announced that the new New York City office focused on dispute resolution, including international arbitration and investigations.  Following the Watergate era admonition to “follow the money,”   the premium fee yielding dispute resolution and internal investigation practices seem extremely likely areas for firms like Herbert Smith (and AmLaw 100 firms) to continue to exploit.  The issue, of course, is that as the supply of high end law firms having the capacity to deliver quality dispute resolution work and internal investigations on a global scale and the competition for this work  continues to grow, price competition will ineluctably come in to play.

The British invasion is not new, nor will it end soon. British Magic Circle firms have invaded and have taken an increasingly dominant role in the US market for almost two decades.  London, which seems hell bent on being the Imperial home for the lawyers to the world, has already sent formidable firms here, including Clifford Chance, Linklaters, Allen & Overy, Freshfield, and Lovell Hogan. The last British invasion on these shores began with the Beatles in 1963 and last I heard, Mick Jagger and Paul McCartney are still playing to sell out audiences. The point is that, based on my count, fewer than 20 of the UK’s 100 largest law firms have taken to the US stage at this writing.

As the market in the Euro Zone continues to stagnate, law firms in that market will likely look to the American market as new sources for revenue. One recent example is Ireland’s A&L Goodbody, which long had a single lawyer outpost in New York, announced just yesterday ambitious plans to open a Silicon valley branch and reinvigorate its New York operations.   The Germans may not be far behind.

From the other side of the globe, the real game changer may well be the announced merger of   China’s King & Wood and Australia’s Mallesons Stephen Jaques. As announced in The Asian Lawyer , “[t]he combined firm will number some 1,800 lawyers, and is positioning itself clearly as an alternative in the region to the large U.S. and U.K. firms that have traditionally dominated major cross-border deals.”  It matters little if the combined entity will soon open a US office (although my raw guess is that they eventually will), the combined firm will be competing directly with both AmLaw 100 and Golden Circle firms for core cross border work.

As I previously observed,  “the profession must be mindful of the Chinese business model, which seems to be the Chinese asking foreigners 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 on our own.’”

The West has not only taught Chinese law firms how to practice law in the Western style, but, the West has also taught the Chinese to operate globally and on the global expanse. Indeed, the two largest law firms in China, Dacheng and Yingke, are preparing to open bases in London. The United States will not be far behind.   Broad & Bright, one of China’s leading law firms with 60 lawyers,  is set on moving to the West.  It is now in merger talks with 2,900 lawyer Clifford Chance.    Since you have by now read the Broad & Bright web site through the link above, you know that Broad & Bright has acted as counsel in China for some of the world’s largest corporations and on its surface, does not need Clifford Chance to funnel more work to its offices. Broad & Bright is one of those rare firms that can easily be a net exporter of legal services. Thus, should the Clifford Chance talks fail, it would not come as much of a surprise that Broad & Bright (or a similar sized and placed Chinese law firm will simply say “okay, we now know how to do this on our own and we don’t need a Western law firm to open our own international law firm.”

LPO’s, sometimes called “non-traditional law firms”  have watched their gross revenues increase almost ten-fold over the last five years, to an estimated $2,500,000,000 in 2012 with some estimating a doubling of that number by 2015.  As I have said in the past, it is a major mistake to simply think of LPO’s as limited resource providers of ancillary services to law firms and corporate legal departments. Rather, they are alternate providers of legal services, which can provide a full range of legal services to United States consumers of legal services at an enormous price advantage. The only areas in which these entities are precluded from competing directly with United States law firms are appearing in judicial proceedings, signing legal opinion letters or otherwise directly providing advice to a corporation on American law.  A number of LPO’s, particularly on the Indian sub-continent, have affiliations of one form or another with Indian law firms.

The thin barrier preventing LPO’s from grabbing even more slices of the legal spend pie will easily evaporate.   There are a variety of different means for those affiliates to establish or acquire a United States law firm.  Thus, an LPO could easily establish a very real law firm branch office in the United States, populated by US duly qualified lawyers which in term could make eviscerate the thin boundary which would give these offshore entities the ability to offer the full array of legal services – including appearing in judicial proceedings,  signing legal opinions and direct counseling,

LPO’s, owned by offshore entities and owned by either US investors or by US law firms are sprouting United States branch offices like weeds. Those US branch offices already have the infrastructure in place to function as full service law firms, often with technology already in place that is complete state of the art. And there are many a small or medium sized law firm that would presumably welcome the capital and assured revenue stream from a successful well capitalized offshore LPO to buttress its own sagging fortunes.

In 2011, United States law firms met the challenges of reduced legal spends and new competition through reducing headcounts,  merging to create more critical mass and consolidating back office and support funtions, or by shutting their doors. Professor Steve Harper avers that in 2011 there were a total of 43 law firm mergers. Those shutting their doors, often with disastrous consequence to the firm’s individual partners, include the splashy Howrey implosion, Florida based Yoss, LLP as well as Ruden McCloskey (which didn’t quite go down without a fight) , New York’s Snow Becker and Krause, Atlanta based Shapiro Fussell Wedge & Martin, Los Angeles based Silver & Freedman, Denver based Isaacson Rosenbaum,  foreclosure mills Steven Baum and David Stern and150 lawyer Austin based Clark Thomas & Winters.  And there are more than a few commentators who suggest that  Arnold & Porter’s acquisition of the remnants of Los Angeles based Howard Rice and Bryan Cave’s acquisition of Denver based rapidly shrinking Robert Holme & Owen largely staved off the closures of the acquired firms.  A similar suggestion arguably applies to McKenna long’s “acquisition” of Luce Forward, with the former plainly planning on doing a material house cleaning of the latter.

Well then, Ollie, that’s a fine mess we’re in.

Despite admonitions concerning the imprudence of predicting the future by such luminaries as John Kenneth Gailbraith (“the only purpose served in making predictions about the future is to lend credibility to astrology”) and Yogi Berra (“the future is hard to predict because it hasn’t happened yet”), I tremulously suggest that we are certainly likely to see the following over the coming months:

• Continued merging of middle market law firms to create larger regional or super regional law firms.

• Further reducing headcount and support staff.

• Acquisitions by foreign law firms or alternative providers of domestic US based law firms.

• Some US law firms meeting the invasion of foreign law firms and alternative legal service providers by counter-attacks, landing branches on foreign shores, despite the known risks attendant to that approach.

• Law firms establishing subsidiaries to compete with lower priced alternative providers.

• Law firms establishing strong affiliations or joint ventures with alternative legal service providers.

• Continued de-equitization and other reductions in force, in order to keep law firms right sized and maintain PPEP at a level sufficient to adequately compensate all of the firm’s important stakeholders.

• Enhanced collaboration, both vertically between the law firm and its important institutional clients, as well as horizontally with alternative providers of legal services as well as with law firms to which the client may have downsourced work to.

• Increased price competition for premium work as well as increased commoditization of other lines of work.

• Increased reliance on RFP’s.

We are in for some challenging times.  Most well managed law firms will continue to survive and thrive. Some law firms will inevitably appear on lists published next December of law firms that sadly didn’t make it.

© 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 .

                                                                             Jerome Kowalski

                                                                             Kowalski & Associates

                                                                             December, 2011

About thirty years ago, I was assigned to be a second seat on a complex multi-party securities fraud case.  Among the many lawyers working with us on the defense side was a partner (let’s call him Tom here) at an AmLaw 50, who was a widely respected litigator with 25 years of experience. In fact, shortly before the case was scheduled for trial, this lawyer was nominated to serve as a judge on the United States District Court for the Southern District Court.  A month or so before the case was scheduled for trial, the lawyers for the dozen or so defendants met to begin planning for the trial and dividing up the various pretrial and trial tasks.

As the meeting started, Tom looked around the room and said plaintively “fellas you got to help me out here. I’ve never tried a case before. I’ve got lots of deposition and motion experience and some evidentiary trial experience in connection with injunctions, but I’ve never even seen a jury trial”  Yes, we all stared in disbelief. Five or six of the seasoned trial lawyers in the group took Tom aside and gave him a four day crash course on jury trials.

The case was duly called for trial and in the six weeks of trial, Tom, who had a high degree of innate intelligence, acquitted himself well, although I can’t say the same about his client who was found liable for serious damages. A few weeks later Tom’s nomination was confirmed. He attended judge’s school, went on to serve with distinction and ultimately became chief judge of the district.

The story comes to mind in connection with an interesting and provocative article by Mark Herrmann of Above the Law in which he discusses different interviewing techniques for lawyers being considered as lateral candidates at law firms. Herrmann first discusses the two standard techniques, resume based interviewing and second, behavioral based interviewing. The former is straightforward and is one in which the interviewee is asked about items on his resume. The second involves asking candidates about experiences in their lives and how they handled them.

The issue is even more timely, following a recent piece by Professor Steve Harper entitled “Fed to Death” in which Harper recounts, among other things, that injudicious lateral hiring of partners has caused the implosions of many major law firms.

A correspondent to Herrmann, Alessandro Presti suggested to Herrmann an entirely different approach. As recited by Herrmann, Presti

 “… suggested giving an applicant a relatively non-technical contract and asking the applicant to interpret it or identify issues that the contract left open. This might give insights into the applicant’s ability to identify issues and analyze them. Once the applicant identified the issues, you could explain that your client wants to launch a new product and ask whether the contract permits this. This would force the applicant to synthesize information and present it, thus demonstrating communications skills.”

While not utilized often, I have in the past fact seen this approach taken.

A couple of years ago, I arrived at the office of a managing partner of an AmLaw 200 firm for a scheduled meeting. He greeted me in the reception area and asked me to excuse him for a moment or two, since he had to conduct an interview of senior real estate associate who was being considered by the firm.

I was initially annoyed, thinking that I would have to cool my heels for 30 or 40 minutes as he conducted the interview.  Instead, he returned and collected me within five minutes. I complemented him on his efficiency in conducting such a quick interview. He explained that he simply started the interview and would conclude it in an hour. He went on to explain that he gave the associate a term sheet for a lease and a draft lease and advised her he would be back in an hour, at which time, she should mark up the lease and he would then discuss her markups when he returned. This was a first for me and I complemented him. He said that he’s been using this technique for a six months. He invited me to join him when he went through the second  substantive part of the interview.

We came in to the conference room and saw a clearly flustered lawyer on the telephone shouting at her headhunter.

She then sat across the table from the MP and slid her markup across the table. The MP began asking her questions about her comments in a mixed style of a partner reviewing an associate’s work and an adversary conducting a negotiation. When he got to the third page, he asked her about an issue that she missed entirely. She was silent for a moment and then tried to
explain that she just wasn’t given enough time to do a thorough review. He said, “you know, here, we are always working under time pressures.” She burst into tears, collected her things
and left. He turned to me and said, “too bad, she’s not going to work out here. Her legal work was pretty good but if she thinks this was pressure, wait until she has to deal with an SOB client or adversary.”

As we approach what will surely be a busy recruiting season, particularly at the partner level, we owe a debt of gratitude to Herrmann for opening up this subject for careful consideration. Much has been written about the essential need for due diligence, not enough has been addressed concerning testing the technical skills of lateral candidates.

Years ago, a fast growing law firm recruited a litigator who had an outsized ego and boasted an enormous book of business.  Once on board, he pitched none other than Donald Trump to handle a significant case.  He neglected to mention to The Donald or his partners that his only jury trial experience was a one day minor Civil Court case. Unlike Tom, he did not have a table full of experienced trial lawyers to guide him along and his hubris precluded him from confessing to his partners that he lacked real trial experience or from asking his experienced partners for a helping hand. He also assuredly did not want to share any “responsible partner credit”  with anyone. The case went to trial and received an inordinate amount of publicity.  The result was embarrassing; The plaintiff prevailed but the jury awarded damages of $1.00, which the court duly trebled.  The tabloids had a field day with this. This lawyer did conduct second jury trial several years later. In that second trial, he appeared pro se, defending himself of defrauding clients of millions of dollars.  This second time, he didn’t fare as well and his subsequent time in prison may have tempered some of his hubris.

So what do you ask a lateral candidate?  I would suggest a combination of resume, behavioral and real life discussion.

Review with a litigator some of the cases he’s worked on.  Pick up the identity of those cases from a Google search, if he or she hasn’t given you a list of cases he or she has worked on. Ask for the details that went on in strategizing the case, why certain motions were made or not and how the case was staffed, including the precise role played by the candidate.

Then pick up a recent case that landed on your desk and ask the candidate about his or her reactions to the claim (of course, being careful not to divulge client confidences).  Challenge him or her on some of some of the theories advanced. Inquire about how he or she envisioned litigating the case.

Ask about some of the adversaries he or she has dealt with.  Telephone one or more that you or your partners may know and mention casually that you ran into the candidate and ask about his or her skills and demeanor, being sure to couch the conversation as being prompted by idyll curiosity.

Ask transactional lawyers the same types of questions.  Inquire about deals worked on in the past.  Describe a pending deal (hypothetical or not) and ask how he or she would structure the deal.

A very similar approach should be taken with regulatory lawyers.

I know all of this sounds a bit gruesome and perhaps overbearing. But, if you are doing things right, your lateral partner questionnaire is overbearing and the ubiquitous use of these questionnaires have made them simply part of the pain a lateral must bear in making the move.

Explain at the outset, either directly or through your headhunter, that part of your firm’s recruiting process entails these procedures, so that there are no surprises.

Steve Harper is right in that lateral hiring may be fatal when not done well. Every managing partner can recite instances in which a lateral was a disappointment. And every managing partner knows full well that taking on a lateral involves substantial risk and investment. That risk must be managed carefully and tempered by a careful and thorough detailed vetting of the candidate. The future well being of your firm rests on working through this process with great care, vigilance and diligence.

© 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 .