You keep using that word. I don't think it means what you think it means.
by Jordan Furlong
The legal industry's newest buzzword is "overcapacity." It's constantly invoked in reports of flat revenue and declining profits in law firms, usually as the reason for and precursor to cuts of all kinds, from secretarial firings to partner de-equitizations. I'd like to drill down a little deeper on that word.
"Overcapacity" comes to us from the industrial and manufacturing sectors. Overcapacity, in that context, compels companies to shut down plants and lay off workers because low demand is generating insufficient cash to pay the workers and keep the assembly lines running. It infers a dramatic misalignment between labor and inventory, one that must be re-balanced if the business is to remain viable.
When we talk about "overcapacity" in the law firm context, we similarly mean that a law firm has more lawyers than it needs to handle its available work, that supply has outstripped demand. But does that equally imply that the viability of the business is imperiled? That the firm's lawyers aren't generating enough revenue to even cover their own salaries and expenses? That dramatic cuts are needed to keep the firm afloat? In almost all cases, I contend, the answer is "No."
Take a simple example: the #100 firm on the 2012 AmLaw 10 list reported an average profit per equity partner of $890,000 and a roster of 179 equity partners. That works out to a total ownership profit, in 2012, of $159,310,000. No industry that includes businesses with profits like that - not to mention 99 profits even higher - should be using the word "overcapacity" with a straight face.
You might argue that falling average profits do threaten a firm's viability, even if that fall is from "stratospheric" to "very comfortably well-off," because top rainmakers may bolt the firm if PPEP drops too far. But a firm with a solid identity, a defined strategy, and competent leadership shouldn't fear such departures: if anything, the self-interested partners who bolt for higher ground may well be performing addition by subtraction for their former firm.
I suggest we draw a clear distinction between "doing enough work to generate our desired level of profits" and "doing enough work to meet payroll and keep the lights on," and that only in the latter context should we be talking seriously about "overcapacity" and taking draconian measures to address it. Let's not use euphemisms about demand when what we're really talking about is profit.
|Don't Be a Numerophobe|
Why commercial lawyers need to be "business literate"
"My lawyer's great, but he understands precious little about business." "Could you believe that both lawyers in the settlement conference didn't know what the acronym ROI meant, and once defined, still didn't understand the concept?" "Why can't my deal lawyer understand or use a spreadsheet?"
We've all heard client refrains along these lines. Translated they mean: "Why can't I expect my lawyers to understand basic business and managerial concepts?" Commercial clients have resigned themselves to the reality that very few commercial lawyers really understand business priorities, business challenges, and business processes.
So, what do we mean by this sort of "business literacy," what consequences are visited upon law firms for falling down here, and what can law firms do to arm their lawyers with a working knowledge of business concepts? First of all, below described are some basic concepts lawyers would benefit from understanding:
- Basic financial literacy - Can you read a balance sheet and income statement, and do you know what they mean and how managers use them?
- Understand the organizational chart and structure, and you understand the business defined in its own language - Businesses spend a lot of time allocating resources across many departmental and functional units, and each unit plays a role in the collective success of the business. You can ascertain much about a company's priorities based upon how it expresses itself in this way.
- Lawyers have faith in people, but clients have faith in process - Alternatively stated, lawyers view law to be an art, managers view business to be a science. If it can't be broken down into and defined as a "process," it probably isn't important. Much of the reason why business people focus so zealously on execution, while lawyers assume all good ideas are almost self-executing and implementing, is because of business management's passion for process.
- The Planning Process - All functional pieces of a business participate in the planning process. Among other things, this results in various priorities being identified which in turn are closely linked to departmental incentives. Lawyers should become experts on the planning process and its output so they can understand what issues are truly important to people inside that business.
- Metrics, metrics, and more metrics - If it can't be measured, it can't be managed. Most all important efforts in business should be managed and therefore measured. Law firms can improve their positions with clients and prospects by allowing their efforts to be measured. Additionally, underlying motivators, priorities, and "pain points" are learned through an understanding of the incentive structure supporting various metrics.
- Lawyers deal with symptoms - Legal issues derive from the activities of discrete functional pieces of the business; they are symptoms. The strategy and rationale for a merger are exciting and fundamental, but the structuring and documenting of a deal can be ministerial. Business managers care very much about the business drivers that generate these "legal symptoms," but tend to care much less about the symptoms in isolation unless they pose significant risk-management issues. Legal issues tend not to be part of the departmental business planning process; rather, they either serve as evidence that something went wrong, or as a perfunctory implementation step incidental to a far more consequential business effort.
The implications of this functional illiteracy are pretty obvious in terms of the client's or prospect's perception of lawyers. Clients are much less willing to retain lawyers to do anything other than the most necessary, "burning platform" activities; the somewhat elective or discretionary legal efforts (e.g., compliance programs, risk-mitigation activities, etc.) are stillborn because clients don't view them to be closely linked to core business priorities. Businesses aren't inclined to include lawyers in deeper business discussions, as they assume they won't have any meaning to lawyers. More clients are viewed to be "at risk" and pose retention issues as business literacy and intimacy supply necessary connective tissue in support of the lawyer/client relationship. These are just a few of the consequences that arise from the industry's failure to shore up the profession's business understanding.
Law firm professional development and practice group management ought to take seriously the need to arm lawyers with this vocabulary in the marketplace. The market will take notice of firms that have made an explicit commitment to this level of professional development - that translates into new clients and new $! Moreover, it will free up lawyers to more easily and organically interact with their marketplace to build out their relationship bases. So take up the mantle -- we all can become MBAs!
Contact the author, Mike White
"As is so often the case, fortune favours proactivity."
by Nick Jarrett-Kerr
As economic conditions in the main western economies start slowly to ease we are noticing that the financial performance of some of the major law firms in the USA and Europe are starting to improve. The old adage is that "the rising tide lifts all boats" but all the indications are that the uptick has come too late to aid a significant number of troubled law firms. Over-peopled and under-powered, some firms have their keels so firmly stuck in the mud that the rising tide may simply engulf them.
If and when the recovery increases in pace, I expect to see the better law firms starting to hire and acquire the best available talent, and a further exodus of star players at all levels may prove to be a blow too far for weaker firms. Currently, the more mobile and effective partners are grimly hanging on in their firms through fear of the financial liabilities that might attach to them should their departures increase the probability of a collapse. There will however come a time when such partners will decide to swim rather than sink with their boat.
Firms in trouble face some stark choices particularly when their lines of credit dry up. One solution is to seek a structured rescue from bigger firms; DWF's rescue of Cobbetts and Penningtons acquisition of Manches provide two UK examples of this approach, involving structured arrangements (individual and collective) with creditors and ring-fencing of liabilities.
Another solution, which may benefit firms whose performance and financial position is poor rather than terminal, is for such firms to trade their way out of crisis. This course inevitably requires the cutting of overheads to match expected revenue turnover, and that in turn means letting yet more people go. This is easier said than done. Firing yet more partners sometimes needs a special resolution of partners and those who feel threatened may be reluctant to become "turkeys voting for Christmas". Additionally, the departure of more partners affects the balance sheet structure of the firm which may not be able to afford to repay exiting partners' capital. Faced with this impasse, some firms appear to be choosing the default option of firing associates and expecting partners to take up a heavier 'grinding' workload - effectively working as associates for the firm rather than partners.
Some firms however have simply run out of options. They may have cut and cut again and may well have become lean and efficiently managed; but they still face ruin through their inability to increase or stabilise revenue production in an increasingly competitive environment. Ironically, therefore, it may be some of the historically badly managed firms that have the best chances of escape, as by putting in place basic hygiene measures (particularly better management of receivables and lock-up, and improved performance management generally), tighter management controls may just be sufficient for those firms to suck their keels out of the mud.
As is so often the case, fortune favours proactivity. It is best to ensure your boat is buoyant and ship-shape before the tide comes in and to avoid waiting passively for the ebb and flow of economic conditions to powe r recovery.
Contact the author, Nick Jarrett-Kerr
Legal League Consulting, LLC
Delhi and Mumbai,
|At The Podium: Upcoming Appearances by Edge Partners |
Bithika Anand Dec 06-08
Presentation on Law Firm Strategy and Management
China International Lawyer Marketing & Technology Summit
Jordan Furlong Feb 27
Association of Legal Administrators, Puget Sound Chapter
Jordan Furlong Apr 02
Legal Marketing Association Annual Conference
Jordan Furlong Apr 27
LESA Litigation Refresher
Lake Louise, AB
OCTOBER 2014Gerry Riskin Oct 17
Keynote Presentation, Annual Futures Conference
College of Law Practice Management