News & Resources

Hildebrandt Baker Robbins and Citi Private Bank are pleased to present this 2010 Client Advisory highlighting the trends that we perceived in the legal market in 2009, as well as the trends that we believe will impact the market in 2010.

For most law firm leaders, 2009 will be etched in their memories as the year they would most like to forget. In many ways, it was the worst year for the legal market in at least the past half century, particularly as it followed a difficult 2008. Challenged by the sharp downturn in the overall economy, most firms struggled to maintain profitability and many implemented broad staff reductions and deep spending cuts that would have been unimaginable even three years ago. While the year ended with some hopeful signs, we enter 2010 with little prospect of a robust recovery and with mounting evidence that the profession is entering an era in which the fundamental economics of legal practice are likely to be significantly different.

In the sections that follow, we describe the economic and related impacts of the past year on law firms across the US market and offer some projections for 2010. We also focus on the deeper issues that we believe are emerging from the current downturn, including some of the ways in which we think the market will be substantially different going forward. Finally, we suggest that – given the changes likely to occur over the next several years – the time has come to think seriously about different metrics for measuring the performance of law firms.

The Hildebrandt Baker Robbins Peer Monitor Economic Index (PMI) rose nine points to 55 for the fourth quarter of 2009. This is the third consecutive quarterly increase for the index, even though demand is light compared to historical levels, and pricing remains weak. For the full year, revenues for Peer Monitor participants fell slightly, down one percent. And profits per partner were flat for the year, due to aggressive cost controls and improved productivity.

The Hildebrandt Peer Monitor Economic Index (PMI) rose for the second consecutive quarter, up two points in the third quarter to a reading of 46. A PMI of 65 or greater indicates strong law firm market performance. Although demand and worked rate growth remain weak, there are increasing signs of demand stabilizing in key practice areas, such as litigation.

PMI is a composite index of law firm market performance using real-time data drawn from major law firms in the United States and key international markets.

SOMERSET, N.J., August 20, 2009 – Aggressive cost controls and headcount reductions are helping law firms deal with weak demand and rate growth. Despite continuing economic headwinds, firms are aggressively reducing their expenses, helping to maintain profitability. As a result, the Hildebrandt Peer Monitor Economic Index (PMI) rose four points in the second quarter to a reading of 44. A PMI of 65 or greater indicates strong law firm market performance. PMI is a composite index of law firm market performance using real-time data drawn from major law firms in the United States and key international markets.

Demand, as measured by billable hours, was down 7.3 percent in the second quarter compared with a year earlier. However, there are some signs that demand may be beginning to stabilize. Bankruptcy work continued to be strong. Litigation work was down from a year ago, but may be stabilizing. Transactional practice areas, including corporate, mergers and acquisitions, capital markets, and real estate were substantially lower but should show signs of recovery in the second half of the year if the general economy continues to improve.

Sharp Drop in Demand in Q4 - Results in Falling Revenues

Overall demand for legal services dropped sharply in the fourth quarter of 2008, causing a further decline in law firm productivity. Firms participating in Peer Monitor®reported Q4 negative demand growth of -6.6 percent, compared to Q4 2007, and negative productivity growth of -10.4 percent compared to Q4 2007. As a result, the Peer Monitor Economic Index (PMI) fell to 42, the lowest point in the three-year history of the index.

Defining Risk Management

Despite the growing awareness, complexity, and consequence of risk, risk management is still challenging to define in the legal environment. Like the blind men describing an elephant, each person involved has a different perspective of the “It” – the situation, probability, severity, and the consequent priorities and scope of responsibilities.

Recent events highlight a variety of issues. A number of law firms, for example, have been in the news for private information leaking to the public. This type of event, as well as multiple search engine rollbacks (after private information was uncovered through internal searches) and HIPAA compliance initiatives, have caused firms to focus on data security, confidentiality, and control across systems. Ongoing management of ethical walls, legal holds, data transfer agreements, and data from lateral lawyers add to the spotlight.

Change Is Not a Four-Letter Word

 

By Mark Sirkin

 

The renowned economist Joseph Schumpeter said that the essence of capitalism was “creative destruction,” and so one can’t be in business – even the business of law – without the constant companion of change.

 

Indeed, the very purpose of strategy is to recognize and prepare for these inevitable changes — to sense the coming storm in time to batten down the hatches, so to speak. This, however, is not as easy as it seems. It is a fact of human nature that, even in the centre of the most revolutionary changes, those of us in the middle are often the last to know.

 

Consider the 1859 end-of-year summary of the Linnean So­ciety of London, the foremost scientific forum of its day for bi­ologists, which stated that no remarkable findings had been made that year — the year that Charles Darwin had unveiled his theory of evolution to the very same group.

The year 2010 is shaping up to be a “best of times . . . worst of times” year for general counsel. On the one hand, general counsel - and the senior lawyers and professionals who help them lead their law departments - are under extraordinary pressure to reduce costs. Of course, there is nothing new in the expectation that in-house lawyers should “do more with less.” It has been expressed – especially in times of economic distress – repeatedly over the past two decades. What is new is the extent to which law departments have been forced to reduce total legal costs and to find new ways to operate more efficiently.

Not Just Smart, Competent

 

In last month’s column, I introduced the notion that strategy is a function of what the firm wants to achieve, where it wants to realize its achievements (geographically, for instance, or in specific practice areas) and the time frame for doing so. These elements define the firm’s goals. Achieving these goals, however, is primarily a function of the talent available — think of it as the “who” in the equation.

 

In the old days, talent was hard to define, but most people were sure they knew it when they saw it. This could hardly be called a recruiting strategy, but up until the ’60s, most businesses were actually run this way. Find good people from good schools with good grades, and voilà — the formula for successful hiring.

 

Well, not really. Corporations learned over time that this approach was hit-or-miss, so they started to come up with new ways of identifying traits that led to success — experimenting with tests, psychological evaluations and assessment centres.

The Hildebrandt Handbook of Law Firm Management draws on the extensive collective experience of the consultants of Hildebrandt International to address the key management issues and leadership challenges confronting law firms in today’s rapidly changing market environment. The Handbook provides the best current thinking on the day-to-day issues central to leading and managing modern law firms as well as identifying the emerging trends.

This book presents interviews of nearly 30 administrators of leading law departments. They explain projects they have conducted, their roles in them, and the lessons they learned. With more than 50 different projects described, the book gives useful guidance to all administrators. Six articles about law department administrators are also included.

The purpose of this book, intended for partners and others in senior management positions in mid-size to large law firms, is four-fold: (i) to assist such firms decide whether they should consider merger; (ii) to guide firms that decide to merge through the process of identifying a suitable partner; (iii) to provide guidelines to undertaking successful merger negotiations; (iv) to help ensure that firms do realize the anticipated benefits of merger through effective post-merger integration.

Whether you supervise hundreds of associates and paralegals or only one, Maximizing Law Firm Profitability will help you become a more effective, more productive manager and lawyer. The book shows how to manage your own practice and how to develop the potential of the people who report to you.

The revised and updated Third edition of Anatomy of a Law Firm Merger by Hildebrandt International provides you and your firm – no matter what size or type of practice – with the expert advice on what you need to consider when contemplating a merger, and how to successfully make it happen. The Third edition now features a completely updated financial perspective for today’s changing financial picture, plus a revised discussion of the economic balance sheet — to help quantify the value each firm brings to the merger.

“Unless we’re in touch with our customers, our model of the world can diverge from reality”
–Steve Ballmer, Microsoft CEO

Any review of the legal press or conversation with the leader of a major law firm reveals there is growing interest in alternatives to the traditional lockstep compensation and promotion system used for associates. It is clear that law firms are moving in the same direction as most other professional service firms, and switching from a system of promotion and compensation based on time-in-grade, to a system of individualized performance assessment and more variable progression, often referred to today as a “lockstep-to-levels” or performance-based system.

In fact, a number of large international firms have recently put such systems in place, and an even larger number have committed to introducing such systems in 2010. While these performance-based systems are relatively new to large firms, their use is well proven among midsize and smaller firms for more than a decade. The experiences and challenges these firms have encountered in their movement to merit compensation offer lessons that can help others in implementing performance-based systems. In this article, we will cover some of the common problems, and innovative solutions, that can help guide any firm thinking about making this same transition.

Legal services pricing is the hottest topic in law firms today. Many companies are experiencing significant cost pressures and legal services, which for years have been excluded from corporate scrutiny, are now expected to find efficiencies and cost savings. Moreover, the conversation has gone beyond simply pricing to actually delivering services on a different, and more cost effective, basis. Some lawyers, remembering the host of articles over the last 25 years calling for “alternative pricing” and predicting the death of the billable hour, question whether law firms will ever bill significant amounts of work on a non-hourly basis. Others see pricing and service delivery as a way to partner with key clients and enhance their market position.

Having long recognized the flaws inherent in lockstep systems, a growing number of law firms are now transitioning to performance-based compensation and advancement systems. The downturn in the economy has certainly accelerated the pace of these transitions, but other factors contributed to the change in the way firms are hiring and managing associates. These developments include changing expectations from clients, who question paying high rates for attorneys that are still developing their skills, as well as different expectations from young associates, who want more work-life balance and are not as concerned about the path to partnership as older generations. Law firms are also starting to design their talent management systems so that they better align compensation with actual performance.

Any review of the legal press or conversation with the leader of a major law firm reveals there is growing interest in alternatives to the traditional lockstep compensation and promotion system used for associates. It is clear that law firms are moving in the same direction as most other professional service firms, and switching from a system of promotion and compensation based on time-in-grade, to a system of individualized performance assessment and more variable progression, often referred to today as a “lockstep-to-levels” or performance-based system.

In fact, a number of large international firms have recently put such systems in place, and an even larger number have committed to introducing such systems in 2010. While these performance-based systems are relatively new to large firms, their use is well proven among midsize and smaller firms for more than a decade. The experiences and challenges these firms have encountered in their movement to merit compensation offer lessons that can help others in implementing performance-based systems. In this article, we will cover some of the common problems, and innovative solutions, that can help guide any firm thinking about making this same transition.

Legal services pricing is the hottest topic in law firms today. Many companies are experiencing significant cost pressures and legal services, which for years have been excluded from corporate scrutiny, are now expected to find efficiencies and cost savings. Moreover, the conversation has gone beyond simply pricing to actually delivering services on a different, and more cost effective, basis. Some lawyers, remembering the host of articles over the last 25 years calling for “alternative pricing” and predicting the death of the billable hour, question whether law firms will ever bill significant amounts of work on a non-hourly basis. Others see pricing and service delivery as a way to partner with key clients and enhance their market position.

Having long recognized the flaws inherent in lockstep systems, a growing number of law firms are now transitioning to performance-based compensation and advancement systems. The downturn in the economy has certainly accelerated the pace of these transitions, but other factors contributed to the change in the way firms are hiring and managing associates. These developments include changing expectations from clients, who question paying high rates for attorneys that are still developing their skills, as well as different expectations from young associates, who want more work-life balance and are not as concerned about the path to partnership as older generations. Law firms are also starting to design their talent management systems so that they better align compensation with actual performance.

The 1990’s and early years of this decade saw a dramatic trend away from the traditional single tier of partnership among large law firms toward a new model where most larger firms today operate with both a traditional tier of equity partners (owners) and a second tier of non-equity partners whose status is somewhat different. These trends were driven by the twin assumptions that a second tier of “partners” would increase profitability by boosting leverage with highly productive and trained lawyers, and improve long-term performance by assuring that the owners/decision makers were those partners who were truly crucial to the firm’s success while giving these rising stars an extended period of time to prove themselves. Based on the evidence of the early 1990’s, these assumptions seemed reasonable. At that time, the dominant version of the two-tier structure, sometimes called the Chicago Model, was focused on using the non-equity tier as a stepping stone to equity. In well managed two-tier firms at that time, an analysis of the profit contributions of the various classes of lawyer generally demonstrated that the most senior associates and the non-equity partners were by far the hardest working lawyers in the firm, and contributed dramatically to firm profitability.

The recent failures of Heller Ehrman and Thelen Reid & Priest – coming, as they did, at a time of serious economic downturn for the country and the legal market – have led a number of our clients to ask us about the root causes of law firm failure and whether it is possible to identify early warning signs of firms in distress. In fact, we believe that it is possible to point to certain commonalities in the law firm dissolutions that we have observed over the past several years.

At the outset, we should note that, while the current economic downturn may have exacerbated the distress of Heller, Thelen, and other troubled firms, it would be inaccurate to conclude that the downturn actually caused their problems. It is important to remember that Heller and Thelen are only the latest in a series of high profile law firm failures that stretches back at least two decades. The list includes (to name but a few):