The economy is improving, a little bit. Early signs are that AmLaw 200 equity partner profits were up in 2011, a little bit. But the forecasts for demand growth are grim, and there are some worrying signs of generational or other splits among partner ranks. Lateral and merger activity are at historically high levels, as is the chatter about whether some partners are “carrying their weight” or working as hard as they should be.
There will continue to be attempts to bring costs down, such as Dewey’s recent announcement of further reductions among lawyers and administrative staff, or to shrink the denominator in order to make profits per partner go further, as in Linklaters’ latest restructuring. But the question remains how much can firms continue to try to cut their way to profitability? After several years of attempted belt-tightening, just how much room is left – that firms can actually execute on – to keep doing business as usual but with reduced expense? Some of the analysis suggests that junior associate layoffs have actually decreased leverage and increased the per-FTE cost of delivering services, and deferring investments in technology are just that, deferrals, rather than true savings.
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The Citi-Hildebrandt 2012 Client Advisory notes that there is a “widening dispersion of firm financial performance” – more winners and losers in the battles against low demand, decreasing utilization, and growing expenses. From what I have seen, it’s only going to get worse, as firms struggle externally to find the right value propositions in an unstable market and to build client relationship that deliver more of what clients expect, and as they struggle internally to build alignment and to commit to changes that are going to be difficult and disruptive of ingrained habits and ways of working.
I think it does require fighting this battle on two fronts at once: Firms have to manage change internally to make themselves more efficient, and they have to manage their branding, pricing, and client relationships externally to generate work they can deliver profitably. Fixing only one side of the equation just won’t cut it. For example, firms cannot effectively negotiate the alternative fee arrangements (AFAs) the market seems to want without:
- an appreciation across the partnership of the pitfalls inherent in some types of fee arrangements;
- data about what it costs them to perform similar engagements;
- confidence that they can manage matters (and lawyers) well under fixed-fee or similar arrangements; and
- the ability to negotiate with clients as well as they negotiate for them and to engage clients actively in managing scope.
Similarly, firms have a hard time improving their value proposition to clients for anything except the most significant “bet the company” matters (for which cost is much less relevant) unless they:
- have taken steps to improve their efficiency;
- actively manage and reuse knowledge;
- measure and report more carefully progress through a matter and its budget; and
- delegate or outsource work that need not be done by costly, in-office attorneys.
When it all comes together, however, it can be a thing of beauty. A more efficient firm can offer clients more value and more predictable pricing and budgeting, which in turn invites better conversations about the company’s priorities. Better and more constructive dialogue with clients can help law firms make better choices about how to staff a particular assignment and about what avenues to pursue or not during its execution; at the capability level, such dialogue can help law firms think more strategically about what resources they need to have internally and with whom they might partner for others. The ability to unbundle some parts of their practice so that they can match the right resources to the right tasks can help law firms have better conversations with clients about what kinds of work they should do for them, including allowing them to expand the range of services they provide even as they outsource some components of the work they already do. For example, a law firm that might otherwise be priced out of acquisitions below a certain size, or of disputes with less at risk, might well be able to expand its portfolio of work with a client by matching the less sophisticated parts of some matters with less costly resources, and retaining the more complex aspects of even the smaller assignments, which do justify its premium.
Most law firms around the world are struggling with these issues to greater or lesser extents. Some have taken action, visibly, on some pieces of this puzzle – announcing partnerships with LPO providers, building their own shared service centers in lower cost locations, adopting process improvement methodologies to streamline their own delivery of service, or embracing AFAs. Whether there is a great deal of substance behind a given press release or not, these and other announcements are indicative of the need to transform the practice of law. Because the puzzle has many pieces, however, and they all have to fit together for the picture to make sense, simply jumping out there and doing one of these things is not enough. Law firms need to “think big” this time and plan a coherent series of changes to how they manage clients and how they manage their work, and ensure they put sufficient effort behind the management of change, if they expect the effort to pay off.