Wells Fargo's law firm third quarter financial survey

Keith Mayfield, chairman of an AmLaw 100 firm, is reading the recent press report on the survey by Wells Fargo's private bank of law firm results for the first nine months of 2013:

• Gross revenue increased 2.5%
• Expenses also increased 2.5%
• Total hours billed declined 0.75% and hours per lawyer declined 1.1%
• Effective rates increased 3.6%

Keith reads a press report about the Citibank survey for the same period, which is in line with the Wells report, though showing that revenue gains outpaced expenses by 0.4%. Citibank concludes with, "[T]he underlying challenges facing the legal industry remain: tepid demand and excess capacity."

“That's about where we are,” Keith thinks to himself. “Our expense increases have cancelled out our revenue gains from rate increases, client demand is soft and we have too many partners.”

These results are based on a survey of 125 law firms, including 60 firms in the AmLaw 100 and 45 in the AmLaw Second Hundred.

Lay off partners?

A Wells Fargo private bank senior executive quoted in the report advises that firms need to manage “productivity” and expenses in order to succeed.

“Easier said than done,” thinks Keith. Expenses have been cut about as much as they can. Keith realizes that “productivity” has the meaning assigned in the law firm economic model, which means total hours billed annually per lawyer. One way to increase productivity is to take on more fee-paying work. When more work is not available, another way is to eliminate lawyers. The Wells Fargo report notes that “under-productivity is largely centered in the partner level of all the law firms.”

“So they're telling us to lay off partners,” grumbles Keith, who's been aware for some time that his firm needs to shed partners, and perhaps some associates, to better match the firm's lawyer resources to weaker client demand, which Keith believes is here to stay.

Keith knows he's been stalling in making that move, because it's going to be very unpleasant. Keith remembers the bad press Weil Gotshal suffered in June when it announced it was laying off 7% of its associates and drastically reducing compensation for 10% of its partners because of reduced client demand. (Press reports indicate Weil's partnership agreement permits partner firings only for cause, forcing it to resort to pay cuts to push partners out.) “They did the right thing, but got criticized for it,” thinks Keith.

Keith also reads in the Wells Fargo report that 25% of surveyed firms said they would fall short of their revenue projections for 2013. “At least we don't have that problem,” Keith sighs.

Packaging the news with positive action

Keith decides his firm has to proceed with cutting its partner ranks, but decides he will couple that negative step with a positive initiative to re-engineer the way the firm's remaining lawyers collaborate and deliver their services, in order to improve efficiency and quality. Keith knows lawyers are inherently change-resistant. He figures his partners who remain at the firm may become more receptive to a re‑engineering effort when they see the alternative is to be laid off.

Financial benefits of efficiency

Keith knows that even when billing at hourly rates, efficiency improves profitability. Doing the same work in less time improves realization rates, because write-offs and write-downs will be lower. With better realization, the firm can reduce fee rates somewhat for

the work, while still increasing profitability. Reducing rates can help bring in more work. Improving efficiency also makes clients happier, because they get their work done sooner.

How to proceed

Keith recognizes that re-engineering how the firm's lawyers work is a bold move. He calls in a consultant, who recommends that the approach should first be proven through a pilot in a single practice group, or possibly two.

Possible ideas

The consultant advises Keith that the ideas to be pursued should be driven by the practice group. He lists several, though, to illustrate for Keith the kinds of things that can be done:

• Checklists. Use checklists instead of standard forms, with links to illustrative precedents. Checklists are more nimbly prepared and are useful in reviewing third-party agreements. Use checklists of steps to perform certain tasks, such as due diligence or backing up opinions.
• Practice group meetings. Improve the content, format and frequency of practice group meetings.
• Practice group intranet. Establish new procedures to serve fresh and relevant content on the practice group's intranet site.
• New issues ombudsman. Appoint a partner as the go-to person for questions about new developments in the practice group. Being in the middle will ensure that partner stays current, can answer repeat questions efficiently and will spot trends.
• Document and folder naming convention. Establish a convention for naming documents saved by lawyers in the group. Adopt standardized folders in the document management system. These steps will improve findability of documents. By doing this at the practice group level, disagreements in establishing the required naming conventions can be avoided.
• Matter experience database. Involve the lawyers in collecting a small amount of basic information about every completed matter in the group. The Marketing Dept.'s efforts are too frequently inaccurate or incomplete. Use the data to find comparable matters for purposes of benchmarking fees, finding internal experts, staffing and finding documents.

Action steps for the pilot

The consultant explains that the pilot effort would proceed as follows:

• Select a practice group whose leadership is seeking to improve efficiency, such as due to fee pressures. Don't start with an uphill battle.
• Hold a brainstorming meeting with 10-20 lawyers in the practice group – associates and partners at various levels. Include as many lawyers as possible who previously worked at other firms. Ask the attendees for suggestions about how to improve they way they work.
• These ideas will be wide-ranging, but will almost certainly all revolve around collaboration.
• Invite the consultant to run the meeting and throw out his own ideas. The chances are that many of them will appeal to the practice group.
• The real purpose of the meeting is to get buy-in from the practice group for the changes discussed. The meeting also gives a sense of what ideas are most valuable to the group (and will therefore make the most difference), which aids in setting priorities.
• After the meeting, the practice group leadership and the consultant prioritize the ideas based on difficulty and value, with the least difficult and highest value ideas being pursued first.
• Recruit lawyers from the meeting into small teams to pursue the various ideas, most of which will require substantive lawyer contributions.
• Consider giving billing credit for this work.
• Track weekly progress of each lawyer team, hold periodic meetings of the large group, and require periodic progress reports to the full practice group. Pressure from practice group leadership and peer pressure are needed to prevent lawyers from overly deferring this non-client work.
• Test each completed project with a small group of lawyers before rolling it out to the full practice group. Keep the failures quiet and the successes loud.
• Allow good word of mouth to spread to other practice groups, so they will become interested in making similar changes.
• Consider hiring one or more former practicing lawyers to assist in the re‑engineering effort, in order to keep some of the projects moving forward when lawyers become distracted by client work, especially the slower projects requiring collaboration with the IT Dept. These lawyers cannot substitute, though, for the essential content contributions of the practice group members.

Conclusion

Keith recognizes the enormity of what he is taking on by deciding to shrink the partner ranks, but has conviction it is the right move. He feels better that the effort is also being accompanied by practice re‑engineering, so the firm can hopefully avoid finding itself in the same situation a few years down the road. He walks out of his office to visit each of his management committee members individually, in order to start the process of getting their support.

[Photo credits: © Can Stock Photo Inc. / nan104 & d3images]