Law Firms in the Great Recession: Are They Missing the Point?

Edwin Reeser

Edwin B. Reeser wrote this piece for the ABA Journal.  He’s a business lawyer in Pasadena and has served on the executive committees and as an office managing partner of firms ranging from 25 to more than 800 lawyers in size.

Edwin Reeser Lawfuel.comThe last decade, particularly the last five years during the Great Recession, have generated tremendous change within law firms. Many long-term partners in large law firms poignantly observe that the firm they joined bears little resemblance to the firm it has become.

Most of this change was focused upon internal governance and structure driven by compensation pressures, not upon operating efficiency or delivering change responsive to client demands for a better value proposition for their legal spend. Inside, it is a whole new firm. Outside, clients don’t see much change that benefits them.

Answers are not bold stroke mergers, absorption of chic specialty practices, or expansion to new markets in new locations. Those are all strategies that send the following message to the entire firm: “The future success, indeed survival, of this firm depends on people who are not here now, and are yet to be found.”

Is that the message of a successful organization that motivates its membership to move forward with energy, enthusiasm, passion and resolve? Such moves by those occupying leadership roles exhaust the spirit of everyone in the firm and waste financial resources desperately needed to work real change, increasing the difficulty of recovery. For five years, this has been the approach of too many firms.

Legendary business consultant Peter Drucker once observed: “Management is doing things right; leadership is doing the right things.” It is clear that lawyers in positions of management and leadership, and many who advise them, fail to grasp this critical distinction.

Cost cutting remains a major focus. It is not the answer. Only about one third of expenses are typically non-personnel in a law firm. Of those, only about half are eligible for short-to-medium-term adjustment. Take a chainsaw to the one-sixth of costs that are eligible for cuts, and hack 20 percent on average. It only saves, in the best case, a little more than 3 percent from the budget. That isn’t going to move the needle on profits very much, and it cannot be replicated every year.

That means people have to be cut, and that gets into the “rightsizing” discussion. Done masterfully (and judging from industry reports, law firms don’t even do it well), that still only allows a firm to have enough, but not too much, professional capacity for declining market demand.

The key is not whether law firms have been doing the above well or doing it badly. The two primary focus points above are reactive, short-term and marginally beneficial. And buying revenue through laterals and mergers is expensive and problematic, not proactive and visionary. The stark reality is that firms have been doing the wrong things.

The focus on wrong things is evidenced on at least two fundamental levels.

The first level is that there has been abandonment of the “people business” essence of law. This impacts upon the investment made internally, and externally on the oft-discussed price/value proposition for clients. The most precious and essential element of professional practice is identifying, recruiting, hiring, training, mentoring, promoting and retaining those professionals, and the properly skilled staff to support them. Systems, procedures and technologies are all important, but they mean little without having the best professionals, (unless you aspire to a practice where the quality of the professionals is not important).

The cost of each professional is very high compared with most other businesses. Every time a firm loses one, it costs a small fortune. This is an incredibly wasteful yet almost institutionalized feature of the industry. Let’s say it costs a firm an unrecovered investment of more than $350,000 each time an associate with less than four full years of service leaves the firm.

What does that do to all those cost reductions elsewhere? Capital is important, but compared with manufacturing and other businesses, it is a smaller contributor to the creation of revenue. In law firms, it is people who create revenue. Operating models that treat legal professionals as fungible and interchangeable widgets are inefficient and unpleasant to work at.

Read more at the ABA Journal

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