October 3, 2018
The Best Way to Grow A Firm
The American Lawyer recently published an article by consultants Mary K. Young and Kent Zimmermann titled, " Law firms need to consider a range of options for achieving their aspirations,” which discusses the best options to achieve law firm growth. The authors examined lateral transfers and small group acquisitions and compared those to other growth strategies. They found that laterals and small group acquisitions neither help nor hinder growth, instead for most firms profit per equity partner growth was “due to management levers including higher leverage, lower costs, and managing the growth of equity partners.”
The authors continue by noting that, “to achieve sustainable competitive advantage, firms are best off if they are open to a wide range of options including improved management, lateral acquisitions, group acquisitions, and combinations.”
So, when should firms consider growth through laterals or combinations? Ms. Young and Mr. Zimmermann argue that laterals and combinations work best when a firm is trying to bolster an area where they already have “credible strength” and they want to achieve leadership status. In this scenario organic growth might take too much time. However, firms should consider laterals carefully due to the expense, time and rate of failure.
The authors suggest, “The success of a lateral, small group, or combination growth strategy (or all of the above) depends on strong execution. Firms need to be proactive, thoughtful, and take a robust approach to identifying and vetting laterals and combination opportunities. They also need to develop a proactive approach to integrating new lawyers and groups or integrating combined firms. To achieve their vision, many firms need to balance building scale and depth with enhancing profitability. Some firms need to focus initially on getting more profitable before assessing growth opportunities. This yields better options to grow, whether through laterals or a combination or both.”
Productivity is King
The “2018 Dynamic Law Firms Study” by Thomson Reuters’ Legal Executive Institute’s showed that “productivity is king.” Among the top performing, dynamic law firms there was an additional 96 billable hours per lawyer in 2017. In fact, this gap has been widening for the past three years the study noted. Bill Josten, one of the study’s authors, pointed out, “Hours don’t necessarily equal revenue; but it is awfully hard to generate revenue without booking the hours.”
Productivity also has knock-on effects for other financial metrics, and when “productivity suffers, investment isn’t far behind.” Indeed, for the weaker, static firms in the study, as average productivity declined it restricted funds available for investment. And, the lack of investment ultimately hurt profit potential. “Dynamic law firms vastly outpaced their Static counterparts in terms of investment in technology improvements and marketing/business development growth. Not only are the Static firms unable to invest in tech that could help them improve their client service delivery and internal operations, they’ve cut way back on the money they spend to reach out to their current and prospective clients. If your firm isn’t improving in these areas, it will undoubtedly impact your ability to find additional profit,” notes Mr. Josten.
The Big Four Take on Big Law
In a recent article for Law.com titled, “Where Else Will the Big Four Pop-up in Legal?,” writer Erin Hichman discusses the Big Four accounting firms push into legal services. Deloitte, EY, KPMG and PwC (The Big Four) have been moving quietly into the legal market for some time, but lately they have become more open and aggressive with their moves. In the article, Ms. Hichman identifies that potential threat the Big Four represent.
Mainly, the Big Four have many more services available to their corporate clients, including consulting on or providing services related to: Sales, Marketing and Customer Service; Information Technology; Human Resources; Logistics Distribution; Management Administration; Operations and Production; Research and Development; Legal Services; as well as Finance and Accounting. This gives them an advantage over most law firms that only offer legal services.
“The Big Four are also very efficient and process-driven. This is a huge differentiator for the Big Four. Their focus on efficiency – and even incentivizing it – is a stark contrast to law firms, who still heavily rely on the billable hour, which rewards inefficiency,” according to Ms. Hichman. Further, the Big Four have a lot technology to bring to their clients to solve problems and improve efficiency.
The article concludes, “These firms are also best positioned to target and capture the lower-priced or more ‘commoditized’ legal work that is usually characterized by high volume and low value (both economically and strategically) because of their dominant technology and process optimization expertise. However, as the needs of the corporate legal department evolve into integrating more with business processes and strategy, the Big Four will be viewed more favorably for mid- and higher-value legal work since these organizations can provide sophisticated and completely integrated areas of expertise that go beyond a purely traditional legal perspective.”
NYC Bar Bars Litigation Funders for Litigators
The New York City Bar Association recently barred lawyers from entering into funding arrangements with non-lawyers, according to the association’s website. The association decided that lawyer-funder relationships that involve fee sharing is unethical under Rule 5.4(a) of the New York Rules of Professional Conduct. The practice of third-party funding of litigation has been controversial and other regulators have been scrutinizing the practice.
The practice typically involves an entity or person that provides financial backing for litigators or their litigation clients to cover most or all litigation costs. The NYC bar notes that, “Client-funder arrangements of this nature do not implicate Rule 5.4, which forbids a lawyer from sharing legal fees with a non-lawyer, because the lawyer is not a party to the arrangement and payments are made by the client out of the client’s recovery and do not affect the amount of the lawyer’s fee.”
On the other hand, arrangements between lawyers and funders that are contingent on the outcome of the case are prohibited. Nevertheless, the association makes clear that, “the fee-sharing rule does not forbid a traditional recourse loan requiring the lawyer to repay the loan at a fixed rate of interest without regard to the outcome of, or the lawyer’s receipt of a fee in, any particular lawsuit or lawsuits.” However, any arrangement that ultimately involves some sort of fee sharing is a violation of the rules of professional conduct.
The American Lawyer recently published an article by consultants Mary K. Young and Kent Zimmermann titled, " Law firms need to consider a range of options for achieving their aspirations,” which discusses the best options to achieve law firm growth. The authors examined lateral transfers and small group acquisitions and compared those to other growth strategies. They found that laterals and small group acquisitions neither help nor hinder growth, instead for most firms profit per equity partner growth was “due to management levers including higher leverage, lower costs, and managing the growth of equity partners.”
The authors continue by noting that, “to achieve sustainable competitive advantage, firms are best off if they are open to a wide range of options including improved management, lateral acquisitions, group acquisitions, and combinations.”
So, when should firms consider growth through laterals or combinations? Ms. Young and Mr. Zimmermann argue that laterals and combinations work best when a firm is trying to bolster an area where they already have “credible strength” and they want to achieve leadership status. In this scenario organic growth might take too much time. However, firms should consider laterals carefully due to the expense, time and rate of failure.
The authors suggest, “The success of a lateral, small group, or combination growth strategy (or all of the above) depends on strong execution. Firms need to be proactive, thoughtful, and take a robust approach to identifying and vetting laterals and combination opportunities. They also need to develop a proactive approach to integrating new lawyers and groups or integrating combined firms. To achieve their vision, many firms need to balance building scale and depth with enhancing profitability. Some firms need to focus initially on getting more profitable before assessing growth opportunities. This yields better options to grow, whether through laterals or a combination or both.”
Productivity is King
The “2018 Dynamic Law Firms Study” by Thomson Reuters’ Legal Executive Institute’s showed that “productivity is king.” Among the top performing, dynamic law firms there was an additional 96 billable hours per lawyer in 2017. In fact, this gap has been widening for the past three years the study noted. Bill Josten, one of the study’s authors, pointed out, “Hours don’t necessarily equal revenue; but it is awfully hard to generate revenue without booking the hours.”
Productivity also has knock-on effects for other financial metrics, and when “productivity suffers, investment isn’t far behind.” Indeed, for the weaker, static firms in the study, as average productivity declined it restricted funds available for investment. And, the lack of investment ultimately hurt profit potential. “Dynamic law firms vastly outpaced their Static counterparts in terms of investment in technology improvements and marketing/business development growth. Not only are the Static firms unable to invest in tech that could help them improve their client service delivery and internal operations, they’ve cut way back on the money they spend to reach out to their current and prospective clients. If your firm isn’t improving in these areas, it will undoubtedly impact your ability to find additional profit,” notes Mr. Josten.
The Big Four Take on Big Law
In a recent article for Law.com titled, “Where Else Will the Big Four Pop-up in Legal?,” writer Erin Hichman discusses the Big Four accounting firms push into legal services. Deloitte, EY, KPMG and PwC (The Big Four) have been moving quietly into the legal market for some time, but lately they have become more open and aggressive with their moves. In the article, Ms. Hichman identifies that potential threat the Big Four represent.
Mainly, the Big Four have many more services available to their corporate clients, including consulting on or providing services related to: Sales, Marketing and Customer Service; Information Technology; Human Resources; Logistics Distribution; Management Administration; Operations and Production; Research and Development; Legal Services; as well as Finance and Accounting. This gives them an advantage over most law firms that only offer legal services.
“The Big Four are also very efficient and process-driven. This is a huge differentiator for the Big Four. Their focus on efficiency – and even incentivizing it – is a stark contrast to law firms, who still heavily rely on the billable hour, which rewards inefficiency,” according to Ms. Hichman. Further, the Big Four have a lot technology to bring to their clients to solve problems and improve efficiency.
The article concludes, “These firms are also best positioned to target and capture the lower-priced or more ‘commoditized’ legal work that is usually characterized by high volume and low value (both economically and strategically) because of their dominant technology and process optimization expertise. However, as the needs of the corporate legal department evolve into integrating more with business processes and strategy, the Big Four will be viewed more favorably for mid- and higher-value legal work since these organizations can provide sophisticated and completely integrated areas of expertise that go beyond a purely traditional legal perspective.”
NYC Bar Bars Litigation Funders for Litigators
The New York City Bar Association recently barred lawyers from entering into funding arrangements with non-lawyers, according to the association’s website. The association decided that lawyer-funder relationships that involve fee sharing is unethical under Rule 5.4(a) of the New York Rules of Professional Conduct. The practice of third-party funding of litigation has been controversial and other regulators have been scrutinizing the practice.
The practice typically involves an entity or person that provides financial backing for litigators or their litigation clients to cover most or all litigation costs. The NYC bar notes that, “Client-funder arrangements of this nature do not implicate Rule 5.4, which forbids a lawyer from sharing legal fees with a non-lawyer, because the lawyer is not a party to the arrangement and payments are made by the client out of the client’s recovery and do not affect the amount of the lawyer’s fee.”
On the other hand, arrangements between lawyers and funders that are contingent on the outcome of the case are prohibited. Nevertheless, the association makes clear that, “the fee-sharing rule does not forbid a traditional recourse loan requiring the lawyer to repay the loan at a fixed rate of interest without regard to the outcome of, or the lawyer’s receipt of a fee in, any particular lawsuit or lawsuits.” However, any arrangement that ultimately involves some sort of fee sharing is a violation of the rules of professional conduct.