March 2008

   In August, Gerry Riskin wrote his prediction that Doom and Gloom was in our future.  I asked Gerry if he would share the factors that informed his prediction.  He listed these:

    Currency fluctuations
    Price of oil
    Price of precious metals
    Increase and decrease in “real” jobs
    Geographic location of those jobs
    Political stability of job locations
    Foreign relations as they affect business
    Balance of Trade between countries and regions
    Housing markets (not just prices – but demand)
    Auto market (demand)
    Credit levels (or should I say “debt levels”)
    Interest rates (they are not falling, in fact, get ready…)
    The advent of the largely unregulated Hedge Fund industry
    The establishment pensions that invest in Hedge Funds
    The Domino effect – how one indicator impacts many others

In January, Gerry wrote on this topic again, Recession-Proof your Law Firm.  In that post, he drew on the comment of George Soros that we were facing "recession or worse," many would even acknowledge that we are in a recession.  The scary thing, however, was Soros" concern about the possibility of "or worse." 

The third in the Riskin trilogy is Gerry’s March 17 post, asking the question "What do Bear Stearns and Enron have in common?"  The punchline in Gerry’s post?   His conclusion that "this trumps my wildest speculation about how erratic the economy may become."

Even those who disagreed with Gerry in August cannot ignore the dramatic downturn in the economy that we have witnessed in the months that followed.  But here’s the problem from my vantage point.  I don’t see a trigger for a recovery.  The past few recessions have benefited from consumer-driven recoveries.  In December 2001, Business Week wrote:

BUT THEREIN LIES A PROBLEM for the recovery. The NBER’s four key indicators highlight an important atypical pattern of this recession. The bureau noted that "continuing fast growth in productivity and sharp declines in the prices of imports, especially oil, raised purchasing power while employment was falling." This rise in household buying power–even as the three other NBER indicators fall–will continue to sustain spending in coming months.

But that won’t happen this time.  Consumers are losing wealth (and their primary source of borrowing power) because of the precipitous decline in housing prices.  The high price of oil, and hence gasoline, is consuming a larger share of household income, directly and indirectly as others feel the burden of higher energy costs.  Oil prices will not decline thanks in large measure the growing demand from China and India.  Debt rates are higher than ever before, meaning less ability to borrow.  Add the weakness to the dollar to the mix (meaning we pay more for imported products). And with the Fed flooding the market with easy credit to sustain the financial system, the dollar will not soon strengthen. 

This bad news has profound ramifications for our profession, especially on the pricing front.  Our clients are the industries that are suffering through this recession.  Legal departments (especially, since they are cost centers) will face enormous pressures to cut back on expenditures.  That pressure promises to grow more, not less.  And because much of the low-hanging cost-control fruit already has been picked, more and more drastic approaches to fee control will be the order of the day. 

As always, thanks to my friend Gerry Riskin for inspiring me to think more and more deeply than I would ever do on my own.

I am happy to welcome Leo Bottary back to the blogosphere.  Leo wrote, then retired from writing–and is now back writing!–the terrific Client Service Insights.  His innaugural post for his "second season" explains what he’s been up to–lots of changes.  Congratulations to Leo on completing his masters program at Seton Hall University and his  new position at Mullen.  The client service fraternity is lucky to have Leo back.

Michael Maslanka, a lawyer from Texas, authored an article in Texas Lawyer that popped up on law.com today.  The article advises GCs to treat legal fees the same way executives treat business issues.  Beginning with the premise that increased associate salaries are akin to a rise in the company’s raw materials, Maslanka writes:

Don’t belabor the rise — the cost of a company’s raw materials goes up just like a firm’s. Instead, GCs should treat legal fees just like the C-level execs down the hall treat business issues that cross their desks.

He then provides five helpful rules.  Its certainly not an exhaustive list and it ignores the inherent conflict between a client’s economic objectives and those of lawyers who bill hourly.  But my point here is simply to offer one thought expanding on the article–those lawyers who fall behind their clients’ thinking on pricing issues are destined to play catch-up for a long time.  Perhaps to the point of trying to get a client back in the door once he or she has found joy elsewhere.

There is no bigger issue today than pricing.  Every business is feeling the pinch in the worsening economy.  You’re either part of the problem or part of the solution.  There is no middle ground.

In the post just below this one, I wrote about the associate turnover problem confronting BigLaw.  As I was writing, I thought about the wonderful opportunity that problem creates for firms like Valorem.  If you were thinking of purchasing a lamp, and were given a choice, would you rather pay $300 for the lamp or $150?  It’s not a trick question.  And, of course, the answer is obvious.

It is precisely the rapid turnover of associates at large law firms that allow firms like Valorem to offer those very same associates–not ones "just like those at big firms, but the ones who just left big firms" –at about half their original price.  And because firms like Valorem are forced to find cost-effective technology or other solutions to the problems Big Firms address by throwing hundreds of high-priced and dissatisfied associates at them, these immensely talented lawyers have a change to do the things that turn them, rapidly in most cases, into outstanding lawyers who are realizing the potential that led the big firms to hire them in the first place.

As a result, what’s emerging is this paradox:  the best and the brightest leave the high priced big law firms in search of an alternative that provides better alternatives.  They find it, receive better training and better opportunities to develop, and actually do develop.  They develop so much they are actually better and more experienced than their former colleagues, many of whom are still reviewing documents manually, slowly and at great expense to the client.  The departed, meanwhile, have learned how to solve problems for their clients in a more creative, efficient way.

Which one of these provides the greater return on client fees?

By some measurements, 50% of new associates leave their high-paid jobs at AmLaw 200 firms within 4 years.  Two-thirds of these departures of the associate’s choice, not the firm’s.  And the reason for such departures, in the main, is that associates are given drudge work with no real responsibility.  Training is not provided.  Associates are not incorporated into a team, have no understanding of case strategy and aren’t wanted by clients.  

So writes former GE General Counsel Ben Heineman, Jr. and David Wilkins, the Kirkland & Ellis Professor of Law and director of the Program on the Legal Profession and Center on Lawyers and the Professional Services Industry at Harvard Law School.  Heineman now is distinguished senior fellow in the Harvard program.  Heineman is widely credited with transforming the GC position into the powerhouse position it is today and certainly transformed GE’s law department into one of the very best in corporate America.  His insights command attention.

The article’s title sums up the dilemma facing corporate America: Big Firm associates are a "Lost Generation."  The article, "The Lost Generation?",  appears in the March 2008 issue of Corporate Counsel magazine.  Heineman and Wilkins put the real onus for change on the firms, conclude that firms must radically change the way they develop associates, while still acknowledging that corporate clients must be part of the change.  Here is part of their conclusion:

But the primary responsibility for professional development rests ultimately with big firms, which need explicit cooperation from their corporate clients.  They must address the paradox of ever-higher associate compensation and ever-shorter tenure.  The answer is not late-night dinners from The Palm on silver servers.  It is a stimulating, mind-expanding experience at the beginning of their professional careers that treats associates as adults, gives them responsibility, and, most of all, communicates the intellectual and practical excitement of confronting the significant issues that the best partners enjoy.  This challenging culture of professional service, more than pure dollars, can help firms become employers of choice. 

From my vantage point, this answer is wishful thinking.  The turnover problem has existed for decades.  And firms have simply chosen to throw more money at the problem, as they do confronting man problems.  The legal field has never been a particularly innovative one, so why expect that to change?  One former partner once compared the notion of changing a firm’s ingrained way of thinking to the difficulty of "turning an aircraft carrier around in parking lot."

When discussing hourly rate issues, I have frequently said that clients must demand before firms will respond.  I think the same will be true with respect to this problem.

Jim Hassett,  the author of the outstanding Legal Business Development blog, has a new product out (new to me at least)  that really is worth your time.  Appropriately named the Legal Business Development Success Kit, Jim has put together in audio course that combines anecdotes and data from a number of different sources in an easy-to-listen-to manner, a book containing leading business development practices and much more.  Everyone interested in developing new business and strengthening relationships with existing clients should take advantage of this tremendous resource.  Congratulations to Jim on putting together such a compelling offering.