Margins: What's Real, What's Hype?
In stating the obvious, the American Lawyer may be reminding us of an important point.
By Ed Wesemann
Yesterday's edition of the AmLaw Daily did an analysis of some of their AmLaw 100 data which they called "Margins: What's Real, What's Hype." In the article they discovered and presented charts showing that:
1. Single tier partnerships had a strong positive correlation with high profit margins;
2. Lateral growth had a negative correlation with high profit margins; and
3. Firms with above average leverage tend to have below-average profit margins.
Duhhh! Next will they tell us that black is a dark color and the sun rises in the East?
In this spirit of stating the obvious we should point out that profit margin is the amount of revenues left over after expenses have been paid, typically expressed as a percentage. So, if a law firm had $10 million in revenues and paid out $6 million in expenses (salaries, rent, magazine subscriptions, etc.), the firm would have a profit margin of 40%. If expenses go up without a corresponding increase in revenues, profit margin goes down. If expenses go down, profit margin goes up.
Accordingly, if our $10 million firm was made up entirely of equity partners, it would have no salary expense for lawyers which would result in low expenses and low leverage but a profit margin that was, compared to most firms, quite high. If the same firm had one equity partner and all the other lawyers were paid a salary as associates or non-equity partners, the expenses and leverage would be high but the profit margin would be low.
So, of course, single tier partnerships, where the compensation of all the non-associate lawyers is not treated as an expense, show a correlation with high profit margins. And, lateral growth, where firms are bringing in lawyers, at least initially, as associates or non-equity partners, means more expense for salaries (plus those headhunter fees and an empty WIP and AR pipeline) meaning lower margins.
Now, if there is anyone in a leadership position with a law firm to whom the conclusions in today's AmLaw Daily come as a surprise, they should immediately go to Amazon.com and buy any of David Maister's books. You need a quick dose of law firm economics 101.
But, seriously, credit where it's due. The obvious conclusions of the AmLaw Daily do remind us that many law firms spend too much time talking about margin. Expense control is an important aspect of managing a business. And, if you're General Motors building Buicks, margin, as a statistic, is vitally important. But if you are a law firm where you can control how much of your labor costs hit the P&L, don't fool yourself into believing that having a high margin, by itself, has anything to do with profitability. Contact the author, Ed Wesemann
Overcoming Fee Resistance
The first step in convincing a client of your value is to have confidence in yourself and the fees you charge.
By Gerry Riskin
Consumers want the very best price for any given product or service. As a lawyer, you suggest a fee. Your client looks at you and says, "Gee, that's a lot of money. It's really a lot more than I had budgeted for, and I'm really concerned about that." Or perhaps, "My CEO is concerned about our legal budget. Is there a possibility that you could do this for less?"
What do we do?
What we do not typically do is give that client an assurance. We do not usually look the client in the eye and assert the merits of our fee. Instead, we become frightened. What if we lose the client? What if they select someone else? With those fears in mind, we either capitulate on the spot, or we say we would like to talk to our management committee - and then we run to our partners and suggest that we ought to lower our fees to keep the client.
I am not suggesting that this is not a competitive world. I know it is. There may be times when you need to exercise personal judgement, reduce the scope of the mandate and lower or moderate your fees. However, rather than responding reflexively with fear, we should learn first to apply the same approach as professional salespeople-and that is to demonstrate to clients that they are getting good value. We need to assure clients that we are uniquely equipped to deal with their situation and deploying the very best people available. We need to assure them that the fee is commensurate with the value that they will receive. We may even want to add, where appropriate, that due to efficiencies and effective systems the fee is lower than some other firms would charge to provide similar value.
At that point, the client may very well do what we do often in a showroom when we are buying a product, and that is to accept the explanation. If this does not happen, then we need to apply personal judgement as to how to proceed from there.
The important point is that all too often, we capitulate too early - we fail to demonstrate that we have confidence in our fees. By capitulating so early we probably reinforce the client behavior of questioning our fees-and make the client think, "I guess the name of the game is that whatever the law firm suggests by way of fees, you complain a little and you say it's painful and then they moderate the amount." It becomes a conditioned response.
Assert your fees and demonstrate your value. Your client is looking for confidence -don't disappoint. Contact the author, Gerry Riskin
Leadership is Baaaack
Welcome back leadership development. The profession has missed you.
By Douglas Richardson
Prior to the great recessionary train wreck, leadership development had become a hot topic in law firm strategic thinking. Firms of all sizes, but particularly those undergoing rapid growth, post-merger integration and/or dramatic multi-office expansion, realized that law firms have become sophisticated economic engines requiring powerful and sophisticated leadership. Succession planning was moving rapidly away from the time-honored "Okay, Bob, it's your turn to run things for a couple of years" model. The need was clear to identify and groom top leadership talent.
Pre-recession leadership development programs took various forms in the quest to identify and support firms' most powerful or promising lawyers: weeklong full-immersion off-site programs; comprehensive leadership assessment; individual leadership assessment and coaching; internally-led group programs on firm governance, operations and economics; and confidential long-term consigliari coaching support. In one cutting-edge example publicized in The American Lawyer, Buchanan, Ingersoll & Rooney took a group of 14 high-potential younger partners and provided each with an individualized program that combined leadership assessment, group programs, creating an individual development plan, and a year of personal coaching with an outside coach.
Leadership development programs, of course, are a discretionary expense, potentially quite a large one. When the recession hit, more pressing financial priorities and tighter firm budgets heavily impacted professional development and back-burnered many leadership development programs. Consultants, coaches and internal professional development staff shrugged, sighed "What can ya' do?" and resolved to wait out the downturn.
Now that the weather forecast is at least partially sunny, leadership development is getting renewed attention, and the purse-strings are loosening in many firms. We see a changed emphasis, however. There is diminished focus on succession planning and developing the strategic vision of top firm leadership, and a far greater emphasis on developing the hands-on skills of practice group leaders, client team leaders, office managing partners, and anyone else responsible for any of the firm's profit centers.
Leadership gurus and consultants have long distinguished between the functions of leadership and management, but we often see that line blurring at the practice group and office management level. Yes, the troops need to see strategic vision, skilled planning, superior interpersonal skills and collaboration-building abilities, but the hard realities of the bottom line place now equal emphasis on here-and-now management skills: organizing, budgeting, staffing, monitoring and directing those troops. Because lawyers by temperament generally are not highly collaborative, any program that fosters effective and consistent communication, collaboration and cohesiveness can have immediate positive bottom-line impact. Welcome back leadership development. The profession has missed you. Contact the author, Douglas Richardson.
The Two-Tiered Associate Myth
The creation of permanent associates is about law firms figuring out that not everything they do is mission-critical, and changing their approach accordingly
By Jordan Furlong
Late last month, a New York Times article described how two law firms (Orrick and WilmerHale) have created so-called "permanent associate" positions that make much less money (around $60,000 annually) and have no chance at partnership, but that require far fewer hours and come with no billing pressure.
The Times article, and much of the discussion around it, focused on the two-tier associate angle, highlighting the potential morale risks, detailing the benefits to the lawyers who take these jobs, and placing the whole affair in the context of an evolving post-recession workforce. But I think this coverage misses the more important point.
Two-tier associate tracks are nothing new. The "non-equity partner" of the 2000s is simply a shinier name for the same less-regarded position; one firm specifically uses the term "permanent associates." Firms expect attrition to claim most associates in the first several years of their careers and ask only a handful of associates to stick around all the way to partnership.
The larger point here is that these "permanent associate" positions are not being offered in New York or Boston or San Francisco. They're in Wheeling, West Virginia (Orrick) and Dayton, Ohio (WilmerHale), offices set up specifically to handle low-value work at much lower costs than the firms previously incurred in major urban centers.
These offices are now booming: Orrick's Wheeling outpost has grown from 75 people to 350 in the last two years alone. Originally set up as purely back-office locations, these outsourcing centers are now adding lawyers. The same thing is happening across the Atlantic: Herbert Smith and Allen & Overy have set up outsourced offices in Belfast, Northern Ireland, with A&O aiming to have 50 fee earners join 250 support staff by 2014.
Outsourcing, at its essence, is about assigning a given task within a system such that its value is aligned with the skill of the task's performer and the cost of the task's location. Traditionally, law firms have assumed that everyone who performs its tasks should be highly qualified, located centrally, and compensated accordingly. This assumption no longer holds, and these four firms are among the first to realize this fact and act on it.
Take a close look at what's happening here, but don't be misled: this isn't primarily about "two-tiered associates." This is about law firms figuring out that not everything they do is mission-critical, and changing their approach accordingly. Contact the author, Jordan Furlong
Building Capital Fabric™
Now you too can build your firm's capital fabric - get your partners to tell you how.
By Sean Larkan
Capital Fabric is not all about money. It is, however, the fundamental essence of a firm. It is the firm's foundational, inherent strength, and it contributes in a subtle yet powerful way to the firm's long-term resilience and might. A firm's Capital Fabric is built by partners who undertake activities in such a way that they significantly reinforce the fundamental, foundational strength of the firm over the long term. It can determine if a firm will succeed in the long run, or stumble and fall.
Any "everyday" activity can, potentially, qualify; however, it must contribute to the long term, fundamental strength of the firm. For instance, something as basic as running a team in an exceptionally good way - recruiting well, developing members in an exceptional way, consistently transferring legal and management skills, bringing people through to partnership, clearly enhances capital fabric.
Short-term activities, regardless of how beneficial they might be to near-term profits, invariably will not enhance the Capital Fabric. Solid performance around day to day activities you are entitled to expect from any partner are "ticket to play"contributions and don't qualify.
Some partners naturally build Capital Fabric. Invariably, they are in a small minority. To build capital fabric, at least take these steps:
1. Explain it.
2. Get partners involved in the creative process.
3. Get partners focused on only one or two capital fabric building exercises.
4. Include Capital Fabric building as one of your partner performance KPIs.
5. Provide feedback.
6. Recognize it.
7. Identify successful role models and describe to others what they have done to build Capital Fabric - it provides a concrete example they can identify with.
8. Get new or potential partners involved.
9. Invite young lawyer participation.
Even after these steps I still find partners who don't "get it." Due to things like fixed mindset or fear of failure, lack of confidence or simply lack of creativity, they can still find it a daunting challenge.
There is another simple but powerful way to engender the building of Capital Fabric in a firm. Get the partners to tell one another how to do it. Go through the above steps but then at your next conference or a suitable get together, break your partners into suitably sized groups (depending on overall firm size) and have them come up with at least two ways in which they believe each of their colleagues can build capital fabric. It is a very rewarding exercise and it works for a number of reasons:
o Partners are hearing constructive, positive advice and suggestions directly from their colleagues, who know them better than anyone - I can assure you, beneficiary partners listen very carefully and think very carefully about what they hear from fellow partners.
o By hearing all the examples in one session everyone begins to understand what capital fabric is and what it isn't. That in turn engenders further ideas - the discussion becomes an "innovation café" (You will still need to adjudicate this to ensure that ticket to play activities don't slip through).
Of course this is not in itself enough - it also requires the usual firm leadership follow-through and support. But this too becomes a lot easier as you will have the whole partnership group understanding and on side with the project. It will contribute to building the long term strength and well-being of your firm. (for a more detailed explanation of capital fabric™ see The Edge International Review Spring 2011). Contact the author, Sean Larkan
|At The Podium: Upcoming Appearances by Edge Partners |
Furlong speaks at Le Barreau du Quebec Annual Conference in Gatineau, QC
June 11, 2011: Jordan Furlong speaks at Nova Scotia Barristers' Society Annual Meeting in Halifax, NS
August 5, 2011: Jordan Furlong speaks at the ABA Annual Meeting in Toronto, ON
August 23, 2011: Jordan Furlong speaks at the International Legal Technology Association Conference in Nashville, TN
October 5, 2011: Gerry Riskin speaks at the LawAustrralasia Conference in Freyeinet, Tasmania