Avalanche alert

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Posted in: Big Firms, Finance, Recession, Talent

“[F]irms still have too many lawyers,” says the Chicago Tribune in the course of a rather grim 2009 forecast for American law firms. That might not be a problem for too much longer, because we’re about due for another round of bloodletting. But the next stage of the inexorable rationalization of the private bar won’t involve more of the associate and staff layoffs that marked the latter days of 2008 (though we’ll still see plenty of those). We’re now in Phase Two; partners are on the move, voluntarily and otherwise.

In the latter category, the latest news comes from the UK, where Addleshaw Goddard just told 19 partners they were no longer welcome, while Ashurst decided that 10 of their partners would be a better fit elsewhere. This is a whole different order of impact than associate and staff layoffs. There’s a difference between cutting fat and cutting bone, and in a law firm, partnership is bone marrow. It forms the underlying substructure on which everything else is built. “Partnership” carries a lot of emotional and psychological weight, and a firm can’t revoke that designation without expecting some emotional and psychological backlash.

But that looks like the lesser of the problems on the horizon. With the new year comes the end of the old year’s collections and distributions, so a lot of firms’ balance sheets are coming into focus. That means Lateral Season is upon us, and this year, the harvest looks to be exceptional.

Now that 2008 firm financials are becoming clearer, legal recruiters and consultants say lateral partner moves are bound to heat up, just as they always do at the start of a new fiscal year. But this time around, they say the added pressures of a tanking economy and firm layoffs will flood the market with even more partners looking for new homes, or for quick escape routes off sinking ships.

“This is the month to watch,” legal consultant and recruiter Colin Beebe says. “In January and February, you’re going to see a lot of partners calling and asking, ‘How do I get taken?'”

It’s not hard to sketch out the next few steps. Firms lower down the standard “profitability” (I use that term advisedly with law firms) scale will be vulnerable to raids by higher-ranking firms; in a recession, acutely so. In some firms, a few key partners — well-known in the industry, well-respected by clients and colleagues — will accept the invitation to climb several notches on the PEP ladder. It doesn’t have to be a mass defection; just enough key people in key positions whose withdrawal, like certain critically placed rocks on a hillside, can lead to a few more, and then some more, and then an avalanche.

We’ve seen it happen before, and I think we’re about to see a lot more of it. The first few months of 2009 could well be marked by a series of firm implosions, as the strong get stronger by poaching from the weak. This is inherently neither a good thing nor a bad thing — companies and organizations fall and rise regularly in normal marketplaces — but it will be a surprising and affecting turn of events for lawyers. It will be an uncomfortable reminder, as Prof. William Henderson told the Tribune, that “[y]ou have pretty weak glue holding these bigger enterprises together.”

And that’s what will interest me the most — looking for the firms that, in the natural order of things, might have fallen, but didn’t, because their glue was stronger.

I actually don’t think it will be the less “profitable” firms that are most vulnerable to poaching; it will be those that  failed to strengthen, or actively weakened, the internal bonds of unity, purpose and vision — “vision” here signifying something more meaningful than profit generation. Firms that worked staff sick, rode associates too hard and undervalued partners are in particular  trouble. Those that expelled partners solely for reasons of profitability should be declared off-limits to visitors due to the danger of imminent collapse.

The survivors will be those that have sufficient strength and cohesion to hold together when others shake apart. They’ll be the ones that, months or even years ago, sensed the emerging ethic of the time, that the day of the me-first organization is over. There’s no time left now to build that ethic into a firm; either it’s there or it’s not, and the consequences will flow accordingly.

I listened to a man deliver a pretty good speech yesterday. Here’s what he had to say about character and collegiality in the face of adversity:

[O]ur time of standing pat, of protecting narrow interests and putting off unpleasant decisions — that time has surely passed. … [A]t this moment — a moment that will define a generation — it is precisely [the spirit of service] that must inhabit us all. … It is the kindness to take in a stranger when the levees break, the selflessness of workers who would rather cut their hours than see a friend lose their job, which sees us through our darkest hours.

How many partners in your firm would willingly — enthusiastically — assent to a drop in profits per partner in order to keep fellow partners in the fold? The answer to that question might just determine how well, if at all, your firm weathers the coming months.

Deconstructing prestige

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Posted in: Big Firms, Marketing

I’m currently taking part in an intriguing conversation at Legal OnRamp about the reasons why GCs hire prestigious, big-name law firms. A recurring theme in the discussion is that in-house lawyers often default to using big, well-known (and often highly inefficient) firms because of the protection these firms’ prestige affords to corporate counsel. Just as no one was ever fired for buying IBM, as the old saying went, no one gets fired for sending important and potentially calamitous work to Famous & Expensive LLP: “I paid top dollar for Top Law Firm, so don’t blame me for what happened.”

My contribution thus far has been to ask (a) whether  that protection actually materializes in practice, (b) how much outside counsel work is so important that it requires the F&E imprimatur, and (c) if any GC has yet been fired for failing to rein in outside counsel costs. The whole conversation might eventually form the basis of a separate post. But it does lead me to a related and I think pretty important subject: what “law firm prestige” itself actually represents.

“Prestige” is one of those words, like “professionalism” and “value,” that we throw around a lot in the law without establishing exactly what we mean by it. Interestingly, trace its etymology back to Middle French and you’ll find it originally referred to an illusion or a conjuror’s trick, a sleight-of-hand; if you’ve ever wondered where the old magician’s standby “Presto!” comes from, you have your answer. That’s something to keep in mind when considering law firms’ “prestige” — that we’re talking more about the appearance or suggestion of merit than we are about the actual presence of merit itself.

Let’s say an in-house counsel purchases a law firm’s services at least in part because he expects that firm’s “prestige” will provide effective cover against adverse outcomes. The clear implication, I would think, is that that prestige reflects a higher quality of service and/or results, as compared with less well-known or less “prestigious” firms — otherwise, why would it be relevant to the question of whether the corporate counsel made the right call? This implies that there’s a rational, measurable connection between a prestigious, well-known name and better, more reliable results.

But is that actually the case? And it it’s not, are clients who rely on “prestige” when making their legal purchasing decisions doing little more than buying smoke and mirrors?

Let’s break this down: what are the elements of “prestige”? Does it involve longevity? Maybe — but Thacher Proffitt & Wood just disappeared in its 160th year. Is it about having a stable of famous clients? Maybe — but Bear Stearns, Merrill Lynch, Northern Rock, Circuit City, Nortel, the Tribune Company and many others, not to mention GM and Chrysler, all retained prestigious firms. Is it about having the “best” lawyers? Maybe — but considering that partner movement is now so frequent among large firms that the AmLaw Daily has a regular section called “The Churn,” I’m not sure how  the fleeting presence of individual lawyers can affect prestige.

It seems to me that, like the old SCOTUS definition of obscenity, many people believe they know prestige when they see it. I’m dubious. As far as I can tell, among the constituent elements of law firm “prestige” today, along with longevity, name clients and name lawyers, are tony corporate addresses, marble-lined reception areas, old masters on the wall and in the corner office, a collection of long-past accomplishments, massive marketing expenditures, and often, just sheer size (a factor ably assisted by a legal media disproportionately interested in the largest of large law firms). Roll all these together and Presto! You have a prestigious law firm.

When a general counsel tells the board of directors that he protected the company’s interests by hiring a prestigious law firm, those directors assume that a law firm’s prestige is rationally and demonstrably connected to a higher quality of service and results. I don’t know that that’s a safe assumption. I don’t know if there’s a direct correlation between a firm’s prestige and its excellence or reliability. And since that assumed connection is actually the fundamental premise upon which is based many general counsels’ hiring rationales, I’d say this is something worth exploring in some more detail.

Because if that premise is flawed — if prestige, however we define it, isn’t rationally connected to quality of service, results or satisfaction — then that’s a pretty major obstacle to the efficient operation of the legal services marketplace.

Renovating or tearing down?

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Posted in: Big Firms, Billing, Innovation

I grew up in a small city of about 80,000 and went to law school in a similarly sized town, so my first experience of a major metropolitan center was when I began working in downtown Toronto. I remember being a little overwhelmed by the massive bank towers in the financial district — not a patch on New York, obviously, but still impressive to someone who’d not seen many buildings above eight floors high. But I also remember thinking — and this might give you some insight into the sometimes skewed and contrary way my mind works — “How are they ever going to get those buildings down?”

It seemed to me at the time (and still does now) that putting up a very tall building, while an arduous and lengthy task, is also a pretty straightforward and orderly one. While traffic might be rerouted and the noise pollution might be substantial, still it’s a planned, supervised, rational process with a fixed start and reasonably fixed end date. But if you ever need to take that building down, what do you do? I’ve never seen anyone erect a scaffolding superstructure around a skyscraper and deconstruct it floor by floor. Generally speaking, buildings aren’t dismantled gradually, their component parts carefully carried off to be reused and rearranged for new or better buildings; they come down all at once in a destructive collapse. Sometimes they videotape the implosion, to be replayed at the end of a half-hour news cycle.

This brings me, in a roundabout sort of way, to the billable hour — specifically, a recent wave of articles that suggests a serious challenge to its lengthy rule is underway. Famously, Cravath Swaine & Moore managing partner Evan Chesler published an article in the Jan. 12, 2009 issue of Forbes titled “Kill the billable hour,” in which he sets out clients’ (and lawyers’) unhappiness with and alternatives to the billable hour. As you might imagine, that got a lot of people’s immediate attention. The AmLaw Daily noted a number of resonant examples in the U.S. profession, while lawyers in London piped up that they’re already ahead of that particular curve, thanks.

Around the same time, The American Lawyer named as its Litigation Boutique of the Year the Chicago firm of Bartlit Beck Herman Palenchar & Scott LLP, a crack litigation team remarkable in no small part for not billing by the hour and keeping few associates on hand. Based on all this and more, Legal OnRamp‘s Paul Lippe suggests we’re witnessing an actual, real-time change in the legal profession’s billing mindset. And Michael Grodhaus wonders if those who switch away from the billable hour during the recession will ever go back.

Me, I keep thinking back to those towers. Just as they took a long time to go up and won’t come down without a lot of noise and debris, so too the law firms inside them took many years to build, and if they ever need to be, um, re-purposed, it won’t be easy or painless. Buildings are demolished when their structural underpinnings become unstable or their basic design is rendered obsolete by new advances; occasionally you’ll see a retrofit, but most often you’ll see the wrecking ball, because something that big and rigid just can’t be reduced, reused or recycled. Continue Reading

India: Beyond legal process outsourcing

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Posted in: Globalization, Outsourcing

The symmetry was remarkable. Magic Circle icon Clifford Chance caused major waves in the mainstream legal media this week by announcing plans to cut up to 80 lawyers from its flagship London office, about 10% of the legal professionals there. The move, following layoff notices issued to 20 litigation associates in CC’s New York office in October, was generally taken as further evidence of the deepening recession and perhaps of Clifford Chance’s particular vulnerability thereto. So was its subsequent decision to ask its partners to contribute an average of £150,000 each to the firm’s partnership funds, similar to a move made by rival Eversheds late last year.

But Clifford Chance was also making smaller headlines a long way from both London and New York. From New Delhi came word that the firm was in talks with Indian law firm AZB & Partners about an alliance that would involve client referrals, joint training, consultation and joint marketing. Since foreign law firms are prohibited from practising law in India (more on that shortly), these firms instead have been forming strategic partnerships with Indian firms that could, were the legislative environment to change, rapidly segue into full-bore mergers. Other Magic Circle operations and some US firms have made similar  advances, but Clifford Chance is also the only firm to set up its own wholly-owned back-office and document management company in India.

Clifford Chance also cropped up in the news in late December when the Mumbai High Court ruled in its favour in a taxation dispute, reducing by more than $2 million the amount it owes to the Commissioner of Income Tax on fees earned on four energy infrastructure projects undertaken in India in the late 1990s.  Add to that CC’s controversial September hire of a top capital markets partner away from a leading Indian firm to its Singapore office, and its near-miss merger with Australian giant Malleson Stephen Jacques late last year, and this is a firm that’s making some serious investments in the southeast corner of the world map.

And rightly so. According to the Times, there were nearly 600 cross-border mergers and acquisitions in 2007 that involved an Indian element; on top of that, India’s government has launched an infrastructure program that reportedly will require $500 billion in foreign investment. The word “salivating” appears frequently  in media reports to describe global law firms’ anticipation of entering India and claiming a piece of what most people agree — recession or no recession — is an economic powder keg. But legislation prevents foreign law firms from operating in India and caps the number of equity partners in an Indian law firm at 20.

For the moment, anyway. Last month also brought word that the Limited Liability Partnership Act 2008 has now passed both houses of the Indian Parliament, such that the first Indian LLPs could be set up as early as April 1. The introduction of LLPs to India had causes and will have effects far beyond the legal profession, of course; but one of the expected results of the new LLP law is to constitute the first irrevocable steps towards the entry of foreign law firms and the general liberalization of the Indian legal marketplace. Add to that the anticipated resolution of a long-running court challenge to India’s legal marketplace laws by foreign firms White & Case and Chadbourne Parke, and you can understand why firms like Clifford Chance, despite financial challenges to their Atlantic operations, are intensely focused on India.

Now, this will still take time: very little happens overnight in India, and powerful political interests in Indian law firms oppose change. On top of that, a general election will be held this spring, and frankly, the Indian government has a lot more important and serious things on its mind to deal with these days. But this flurry of activity does illustrate why legal process outsourcing, the subject most often associated with India’s legal profession, is not the long-term future there.

Don’t get me wrong: LPO is still going strong and likely will accelerate, given mounting cost pressures on in-house departments in the US and UK. This month’s edition of Corporate Counsel magazine explores the Indian LPO market in depth, with this telling quote from Microsoft’s worldwide IP operations chief about patent outsourcing to Indian lawyers: “We went there to save money,” he acknowledges. “We stayed and expanded because we liked the quality of the work.” It wasn’t just okay, it was better. And India’s legal community continues to ramp up LPO capacity. The latest evidence is a post-graduate diploma in legal process outsourcing now being offered by the the Indira Gandhi National Open University — the world’s largest university, by the way — and leading Indian legal talent management house Rainmaker T&R. Indian LPO isn’t going away anytime soon.

But LPO is the starting point for India’s legal community, not its final destination. Indian lawyers give nothing away to their western counterparts on acumen, and they seem to be considerably ahead of them on efficiency and work ethic. When clients keep looking at the hourly rates charged by most Indian lawyers — between $20 and $40, according to the Corporate Counsel article — eventually, they stop asking, “Why are they so cheap?” And they start asking, “Why are our western lawyers so expensive?” That paradigmatic perspective shift is coming faster than many law firms think.

It would be unwise to suppose that Indian lawyers will forever be content to take on low-level legal work from western clients. I suspect that India’s lawyers regard a lot of current LPO work as useful training exercises to learn about western legal work habits, preferences and processes — stepping stones on the way to bigger and better things. I’m not about to bet against them, and events of the past several weeks indicate that even in the teeth of a recession, some pretty smart global law firms feel the same way.

Law21 honoured with CLawBies

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Posted in: Law21

I don’t have any other words for it — I’m honoured and humbled that Law21 received the Best Canadian Law Blog Award, and tied (with David Bilinsky’s marvellous Thoughtful Legal Management) for the Practice Management Award, in the 2008 edition of Steve Matthews‘ CLawBie Awards for Canadian legal blogging. It’s just a huge compliment when measured against the remarkable breadth and quality of the other winners and the Canadian legal blawgosphere as a whole, which I’ve been saying for awhile is one of legal blogging’s best-kept secrets.

As part of my congratulations to the other winners, I urge you to go through the list and visit each of the winning sites — your time will be more than amply rewarded. My sincere thanks and appreciation to Steve and to those bloggers who suggested Law21 for an award — I’m touched, and I’m all the more determined to keep giving Law21 my best in 2009 on your behalf.

Just a quick note for regular readers — family and other matters will be taking me away from the keyboard for about a week or so. I hope to be back blogging towards the end of next week.