Tag Archive: Finance
Our economy is in the doldrums … or better said, we’re experiencing a depression. Signs abound. From unemployment exceeding 10% and more in some areas, to now thousands of lawyers and staff terminated from the large firms. Who knows how many more there are in small firms …
One large firm managing partner cited an even more frightening fact: Many lawyers have been given generous severance packages in order to obtain liability waivers/releases and to keep the goodwill of those departing. In other words, they won’t feel the impact for 6 to 12 months after leaving. We will see a ripple effect. As bad as it is now, it will get worse …. Unless the federal government is able to pull the rabbit out of the hat.
Our country was built with credit. One of the major thrusts for the Obama administration is to get banks to start lending again. Banks didn’t do this with the first half of the major funding passed in the Bush administration. They horded the money to protect their own balance sheet. Will they do it with the second half, and with other bailout handouts?
Today, I had a conversation with a banker. He said that the federal regulators are requiring a higher capital input from the buyer than ever before. "In the old days" (not that long ago), one could buy a building for very little down payment (10%, e.g.), Today, loan to value ratio has to be 30% and in many cases 40 and 50% This is not the way to growth.
With this type of stagnation of credit, one can be assured that the prices for real estate will continue to slide downward with ever greater consequences. And with continued worsening of our finances, law firms and lawyers will be further impact. If we have too many lawyers today for the work available (as discussed in an earlier post), demand will continue to shrink, and additional law firm layoffs will result.
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See the ABA Journal that predicts a 20% drop in legal revenues and a 50% drop in associate billings, spurred primarily by technology and client resistance.
There are opportunities in the market. Thinking optimistically may open you to them. Thinking pessimistically certainly will cause you to miss them. How much of today’s firm layoffs is because of pessimism, not because of critical analysis of the firm’s position and client (and prospective clients) needs? Like much else in the law firm environment, I suspect that this is much of a knee-jerk reaction rather than serious review and strategic planning.
I’m reminded of a statement from one of the recent TED speakers who said pessimism will certainly cause you to retract while optimism will at least allow you to see the opportunities, no matter how few, that are there. Seeing the opportunities is the first step to taking advantage of them.
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The California Guide to Opening and Managing a Law Office has just arrived! It’s a 600 page power packed treatise that evey sole practitioner should review. It, along with the ABA’s Flying Solo, is uniquely designed to raise issues that need answers for success.
Disclaimer: I’m responsible for two of the volume’s chapters. There are many contributors and editors who have made this an outstanding reference work.
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Has your firm asked you to pony up money? Have you faced a capital call recently? Are your partner distributions being reduced?
A recent (January 29th) Wall Street Journal article discusses the new phenomenon. Several top law firms are asking their partners to increase their capital accounts and/or are reducing the partner distributions, all in an effort to raise more cash for the law firm. Why? Because the new focus is on reducing law firm debt and increasing liquidity in an era where banks are restricting their loan portfolios, even for "favored customers." With revenues and profits constricting, law firms are wise to review their debt structure.
When the law firm cannot open the bank’s loan window, or doesn’t want to abide by the many restrictions and covenants that are attached to any bank loan, the firm will look to partners. And, for those partners who are themselves financially thin, they may have to be the one asking the bank for help in order to satisfy the capital call. To get the personal loan needed to fulfill the capital call, the lawyer may have to mortgage his/her home, pledge other assets as additional collateral or even get guarantors.
Solo and small firm lawyers experience the peaks and valleys of compensation as a normal course of business. To survive tough times such as we currently are experiencing, reduced debt and a reservoir of savings is essential to survival.
Perhaps it is not unreasonable to ask yourself the question, "Do I really want to be a law firm partner?" Do the benefits outweigh the risks?
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Friday’s New York Times has brought light to a steamy debate in the legal community: Is billing clients by the hour the most effective and profitable way for a lawyer to collect his or her fees? In these recessionary times, this norm has become more unpopular. Clients are asking more questions and wondering if law firms are prolonging their problems instead of resolving them.
According to the American Bar Association’s Model Rule of Professional Conduct 1.5, “a lawyer shall not make an agreement for, charge, or collect an unreasonable fee.” Reasonableness is further defined by several criteria. Ultimately, though, what lawyers charge must be commensurate with the value their clients receive.
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“A carriage builder in an automobile world.”
That’s how one staff person described his boss, an attorney not willing to become an effective marketer, but yet believes he’s entitled to receive the same level of business that he has for years. He doesn’t understand that the world is changing, that practice areas once popular are no more and that he has to adapt or be swept out of the practice.
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Association of Corporate Counsel is workingon a "Value Challenge Index." Susan Hacktt, Senior Vice President and General Counsel for ACC, talked about the Index before the Los Angeles chapter of Legal Marketing Association today.
Susan made several significant points. One concerned the traditional allocation of revenue: 1/3 for overhead, 1/3 for associate compensation and 1/3 for partner income. The net result is that 2/3 of the revenue received by law firms is funneled toward attorney compensation.
Susan suggested that General Counsel, as lawyers, understand this formula and are therefore more resistant to outside counsel increasing billing rates. Lawyers wanting to earn more to move up in the AmLaw PPP (profit per partner) ranking isn’t sufficient reason for the corporate client to pay more. And the rationale that expenses have increased is also not well received … 1/3 of the firm’s expenses may have increased somewhat, but the more sophisticated clients believe that the primary factor for increased expenses is increased associates’ compensation. Since associates’ contribution to the law firms’ delivered value is suspect, clients are reluctant to pay increased rates. In fact, some clients refuse to pay for any first year associates’ work on their matters.
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I had the pleasure of talking with Paul Williams of Major, Lindsey & Africa. Paul focuses his energies on placing lawyers as General Counsel of major corporations. From his perspective, he suggests that General Counsel today receive more respect. Of course, GCs today have a much larger budget for legal fees than ever before. And many GCs come from the ranks of major law firms. Coming from the elite law firms and handling such large sums of money, one would expect private lawyers to give the corporate lawyers more respect. Also, in many cases, GCs are increasing the size of their legal departments as one way to control legal costs … they can “purchase” the legal talent at wholesale (as an employee of the legal department) rather than retail (law firm associate or partner).
Following are some of my thoughts and conclusions drawn from my conversation with Paul. Not wanting to attribute words or ideas to Paul that he may not have intended, I will accept responsibility for the following conclusions that I reached from our conversation:
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In response to my last post, the following comment was forwarded to me:
Q: Isn’t gaming what they teach in law school, essentially? Probing for weaknesses and exploiting them ruthlessly when found? It seems that with the adversarial legal system, gaming is built right into the DNA of the experience. I agree they are being poor ethical exemplars by gaming the rankings but I’m not sure it’s entirely inconsistent with the legal system.
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Many lawyers are finding easy ways to communicate with clients … by sending status reports. If anyone wants a copy of one, send me an email to edpoll@lawbiz.com and ask. These are simple forms, originally developed by Michigan attorney, Wes Hackett, a good friend.
Many lawyers, unfortunately, never figure out that their client is unhappy. They just think that the client has no additional legal work. They don’t realize that the client was so unhappy that, though they didn’t complain, they just didn’t return! What a shame not to have the sensibility to even know this.
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