On February 9, 2010, David Cruickshank spoke at UWO Law on “The Business of Law: Hot Topics and Emerging Trends in the Legal Profession.” Cruickshank is a partner at Kerma Partners in New York City, and provides professional advice to law firms and other services.
My notes from his talk follow.
Threats and opportunities in Canadian Legal Market
Canada is still identified as a resource economy, but also innovative in terms of technology exports. But if you look at the size of the TSX in comparison to other exchanges, it is still focused on resources and commodities.
On the transactional side, there is large consolidation of major companies, such as aluminum and energy. Many of these transactions are driven from New York, Shanghai, and London. Realistically, Canadian firms do not drive these transactions. Although Torys LLP has a New York office, they are still small compared to other firms there. Those that do set up offices around the world are usually following their clients around the world.
Even though you have purchases and consolidation of Canadian firms, they are being driven by American law firms. Canadian firms just do not compete in world financial centres.
The opportunity for Canadians is in deleveraging. Companies are selling others in Canada. And even though these are being run by New York, Houston, and London firms, they are using some local counsel. There are opportunities to acquire clients in New York, the U.K. and Shanghai.
Another approach is to identify start-up resource and technology companies, and grow with them.
Opportunities in dispute resolution and litigation
The traditional skill set are harder to acquire, because there are fewer trials available. It’s not unheard of for a 7th year associate in New York to be considered for a partnership and have never done a trial except for some pro bono work or junior work on a trial, largely because so many trials settle. It’s difficult to get a reputation in litigation this way.
Historically litigators could excel by knowing where exactly to find information and specific documents. But now a paralegal can pull this up with a simple word search in a matter of seconds. Those memorizing and cataloguing skills are obsolete, and the technology delivers this at a lower cost. Litigators will have to leverage other skills such as knowledge of procedures and judges.
Large consolidated client organizations are all trying to reduce fees, even before the recession. They are rejecting increases, and asking for discounts. Firms have to find ways to do discoveries cheaper. Firms are now outsourcing to Virginia and India to low cost centers.
Litigation law firms are being divided into the haves and have-nots, those willing to invest large amounts of capital into litigation matters. And sometimes the have-nots are large 400 lawyer law firms. The sheer number of documents involved means that some firms cannot deal with large litigation cases.
Law firms are undercapitalized. The investors are partners, who cannot raise enough money. They even pay their own payrolls. This makes law firms somehow weaker than other businesses.
The opportunities to get the skill sets that litigators will need can be found in small organizations, pro bono work, and government settings. Associates in their 5th-6th year of practice in these contexts will have much more skills.
But the most important skill in litigation day in and day out, which is often ignored, is interviewing skills. Negotiation skills are a close second. Cross-examinations are rarely used, even for experienced litigators. Young lawyers rarely recognize the importance of the right skills needed for litigation. Even in mid-trial, most lawyer s will not have major trials.
Litigation turns on reputation, and writing on speaking are good ways to build that reputation.. The best way to get known in litigation is to write about it, in news magazines, speaking at conferences, and blogs. You should have an area of expertise to focus on.
Two Impacts of Technological Changes
Technological changes are impacting law firms in their recruitment. Potential recruits are asking about the technology that the firm is using. Some law firms did not provide their lawyers Blackberries, and these firms are now laughed at. Technology is needed just to keep lawyers happy.
The other area of impact for technology is in litigation, which has become incredibly technological. Most large firms now have litigation support programs that have an IT person and a lawyer that manages all the documents.
In the U.S., demonstrative aids like videos and accident reconstructions, are allowing for sophisticated trial demonstrations in the court rooms. Jury selection and the science of making an impression on a jury are becoming crucial for trials.
Holland & Hart in Denver, Colorado put $1.2 million into a studio to create these aids, giving them a competitive advantage in their region, which has turned into a business of selling these aids to other lawyers. It created a business within a business, paying off their costs. But making the initial investment was probably a tough sell for the firm.
One of the initiatives that Gowlings undertook in the mid-90s was a technology platform that let a client know the status of any litigation at any time. During that period, it was a very sophisticated system. When clients then considered seeking other counsel, they decided to stay with the firm when they realized that they had developed an affinity for the system, and would benefit from it elsewhere.
Firms need to be ahead of passive technology, but also interactive with the client and ahead of embedded technology. Getting embedded with your client means investing in them, keeping the property in the system that ties them into you, and thereby making it very difficult for them to leave you.
Business analytic software such as Redwood help make better business decisions like how to staff work by looking at billing and lawyer utilization hours. By analyzing what parts of work are profitable and why, firms can develop strategic decisions by modelling different ways to plan work. Although it started as a way to make a law firm more profits, but it is not being used more defensive tool to deal with lower RFPs and still be profitable.
Individuals have an enormous advantage, because many senior lawyers are still working on their keyboard skills. They are more than willing to push it on to junior associates, who should seize the opportunity. Few firms are even familiar with tools like Microsoft Project.
Partners are getting over 500 e-mails a day, and they are not reading them. They are inundated by e-mails. You have to catch people in other ways. Lawyers will be more valued if the look for direction in person.
Even e-mails have to be structured when dealing with busy partners. Put the major issue in the first paragraph. Writing skills and analysis still count, and clarity is needed.
Young lawyers can also benefit greatly from planning tools, learning them and offering them to senior management.
Speed of conversion: innovative to commodity work
Lawyers are moving between practices of different sizes, and the practices themselves are becoming commoditized for smaller firms.
In the U.S., the rise of white-collar crime has resulted in small firm criminal lawyers joining big firms.
Hedge funds in the U.S. have become a commodity work. You can gear it up with set forms, and it used to be something only for large firms. For high-end bankruptcy cases, they become public the day they are filed. These lawyers are giving away their knowledge immediately, and have to be more innovative in the way they do their work.
Once a lot of lawyers realize they are competing for the same service, it drives prices down. By making the service more automated, firms can save themselves and their clients money.
A number of small employment law boutiques across the U.S. have linked up to become national law firms. They have very little real affiliation, but can tell a national employer that they can provide regional advice for a third of the price of large firms. Their success has come from their ability to organize themselves differently.
The trick for large law firms to stay lucrative is to get in get in on the front end of innovative work, and ditch the commoditized work that will be picked up by smaller firms. The challenge is how do you reinvent yourself and find your skills in a new way. Nimble lawyers do this all the time, but it is a tough thing to do.
Strategic positioning in the legal market means looking at emerging and growth markets. Jumping into the emerging markets come with some risks. They might not take off, and may have little returns. In preparation for Y2K a number of lawyers branded themselves as Y2K lawyers, but that specific market never really emerged.
If a large firm is on the front edge of a growth curve (usually a year to 18 months), they will usually do very well and can make a lot of money. At this point the purchase of their services will not realize that a choice of people who will do it for less even exist. They assume it is innovative, and assume that you will be charging the highest rates, and will pay it. It’s only after that they realize they can go elsewhere for less.
During the mature stage of the market, the growth has tapered off. Firms have a regular client who comes back to them again and again. But this mature phase is getting increasingly slimmer, before turning into the saturated phase. Other firms come in, and drive the price down based on their ability to commoditize the work.
Clients will say in the saturated phase, we love you for this cutting edge stuff but we’re going to use a boutique firm for forming companies, convert income trusts, and other activities where we’re getting it for a third of the price.
Where large firms want to be dominant is in emerging and growth markets, but it means taking on some risk. They should get out before saturation. Young associates should also be asking law firms what practices they are in, and get close to partners involved in emerging and growth markets.
Some of these markets are cyclical. So although bankruptcy lawyers are a hot commodity right now, in a few years they will be looking for work. Smart bankruptcy lawyers develop litigation skills to move to those areas of practice during downturns. M&A work is similarly cyclical.
Four areas of pricing of legal work
The traditional pricing in law is billable hour. There is some contingency work in Canada, but does not count for any significant percentage of revenue in Canadian law firms. Economics for law firms are driven by the ability to bill.
Associates tend to cost firms for the first two years, and only make them money after that. Firms want to make as much billable hours out of associates after two years of practice because that’s where they make the money. Before that, they’re investing in these individuals.
But the economics different in Canada, since lawyers are a low cost to firms as articling students. Canadians become more profitable about the 2nd year of practice.
Law firms used to be able to increase annual with impunity. The annual rate increased, and the client passively accepted it. Seniority was another basis for charging more, especially in litigation.
Clients are now pushing back. They want results and asking for discounts. Corporate legal departments run by lawyers from inside firms and are seeking value. They are able to pressure firms based on their knowledge of those firms.
From the perspective of the client, the legal department is a cost center. Everyone hates them at business meetings, especially when litigation present. They are under big pressure to cut costs.
One survey demonstrated that 20% of law firm revenue in NYC is under scrutiny. The Association for Corporate Counsel has a target by the end of 2010 of 25% fixed or alternate fees for corporate work.
Law firms will have to wake up. The billable hour won’t die, but how much will get paid is a different issue. How much gets paid affects profitability.
Many years ago, other professional associations like accounting, management consulting, engineers all abandoned hourly rate for budget fees. Law firms will have to learn to do the same.
The implications for individual lawyers are that clients want value, but with value comes certain amount of risk. Clients want lower fees, but higher value. They are saying show us value, don’t show us a million processed documents. Show us the value that you achieved for us. The new paradigm is trying to achieve the client’s goal of value, but in some cases still getting a premium for some services.
What are the options?
- Firms can consider discounts, but that means firms have to do something internally to adjust their economics, such as cut salaries or move to cheaper office space. But there are only so many internal controls that can be changed.
- Another option is what could be called the ostrich approach. Firms can try waiting for return of the good times, and continue raising rates annually, with all senior partners billing over a thousand dollars an hour. But this is a no-go for the short-term and clients are just not accepting it.
- A third option is progressive pricing. Firms negotiate a lower rate, but pay a premium for set successes. If a settlement is found for under a set amount of dollars, they will receive a predetermined bonus. In the current economy it’s still going to be rare.
- The fourth option is protective pricing, where mainstream work is provided at project prices rather than hourly rates, and new revenue sources get in early in the curve with a low hourly rate that is increased over time. Clients recognize that they will face these increases over time.
For lawyers this means that there will be more project fees, but law firms are woefully unequipped to provide estimates based on project management skills. Even when you show them rudimentary project management skills they are resistant due to their billable hour mentality. They cannot bill planning and managing, but can bill for a document, but this is the very skill they need for profitable practice.
These issues also affect women in law firms, and the statistics related to female retention is abysmal. There is some hope from the accounting profession, where Deloitte Touche developed a mass career customization that allowed them to custom careers for women.
Instead of thinking of a career as 60 hours a week times a number of years, firms need to look at it as a set of skills and experience that are developed over time. They can ignore the number of years and allow associates to get to the same place over different times and customize the work that they do.
Instead of basing compensation on time, it should be based on skills.
Skills in managing self and others
Law firms can actually make money on a project basis by properly using technological change, pricing, and proper management. It’s increasingly important to bring a team approach to law firms.
The key skills that are needed include:
- Time management
- Staff utilization; use support staff properly, challenge them
- Delegation and feedback skills
- Supervision skills
- Matter leadership; focus on specific issues
- Project management skills; will have to get from outside, can’t get it in law
Many law firms don’t even know what a Gantt chart is. Project management skills will have to be obtained outside of a law firm, and brought into the profession because they simply don’t exist in firms.
These skills are not appropriately taught in law schools, because you need to understand the complexity of the field to properly apply it. Instead, he focuses on 7-8th year associates. At present, many firms are run by stone age tools like issue lists, group lists, and often a magic markers on a wall calendar.
Young lawyers will also have to take ownership by finding a solution, explaining why it is the best one, and explain how it will affect the client. But these associates have to be diplomatic in how they introduce it, usually by making it useful to one partner.
Law firms can be incredibly resistant to change, the response often quoting the amount of profit made in the past year. But these firms are profitable in spite of themselves, not because of their effectiveness.
In a law firm the first question is always if anyone else in the industry has already done this. But even if it hasn’t, that in itself is an opportunity. In the business world the mentality is exactly the opposite. The recession will invariable force firms to take on more risks and consider new ideas.