November 2006

1. Lessons from the road
2. Sure we lose money, but we make it up in volume
3. Who's in charge here?
4. If you had to sell, what is your price?

Articles

1. Lessons from the road

   Perhaps you have been following the "Saga of the Airstream" the past several weeks on the LawBiz Blog (www.lawbizblog.com). Successful consulting requires drawing lessons where you find them, and the process by which my wife and I decided to purchase, refurbish, register and take trips in a vintage 1969 Airstream trailer has given me insight into issues of law firm management like few experiences in my life have done. What I've tried to do in my blog posts is invite readers on my journey of discovery, as each major step of the decision-making and communication process regarding the Airstream has illuminated some thorny issues of interpersonal dynamics within law firms. This seemed a good time to summarize and take stock, but I hope you'll go back to the original posts at www.lawbizblog.com and perhaps see other lessons of your own.
   
   

   • When we had to choose between a new or a vintage trailer, it reminded me of the plus/minus calculation that law firms do to decide whether to hire a lateral lawyer or a recent law school graduate who must be trained. There is much to be said for each. The lateral hire is a known quantity (for better or worse), involving less near-term risk but also perhaps needing more effort to maintain. The new graduate requires lots of time and expense to train, but theoretically should be with you for the long haul. Every firm's answer will be different as to which option is better.
   • My wife and I made a lot of decisions about how to refurbish the Airstream as we went along; it was only afterward that we realized how helpful a plan would have been. Like married couples, lawyers are notoriously averse to planning. They are motivated by practicing law, not by thinking about how to practice it effectively, efficiently and profitably. Yet, a firm that does not decide what kind of practice it wants will wind up with one reflecting whatever walks in the door. It is doubtful that serendipity and whim are the best paths to success. Set objectives and stick to them.
   • Whether it was an issue of driving techniques or inspection practices, reflection and teamwork were the answers every time we had a disagreement about the Airstream . . . but not always the first or the obvious answers. Law firm partners, like married partners, can't assume that they are on the same wavelength. Unless there is continuous open and candid communication, and buy-in for the path chosen by the firm, sooner or later there will be a dissolution. If something goes awry, or is a variance from the plan, determine what future action needs to be taken rather than worry about fault or blame. Remember, this is a team effort. You can always change the managing partner. But, unless you support the managing partner, you will find that no one wants to be the managing partner, the firm will flounder and, ultimately, the discontent and bickering will reach a crescendo that requires the break-up of the firm. Perfection is seldom possible, so don't use that as your standard for evaluation.
   
   I'm sure the Airstream will take me to more such lessons. As I said in my posts, stay tuned.
   
   
2. Sure We Lose Money, But We Make It Up in the Volume
   
   We've written many times, and in many contexts, about how clients (especially business clients), and many lawyers themselves, fundamentally dislike hourly rates as a billing gauge for legal services. Hourly rate alternatives are increasingly coming to the fore, and there is nothing magical about them - they all seek to achieve the same thing. Rather than setting price by a standard unit or result, billing alternatives focus on actions taken to benefit the client, beyond the time of how that value is applied. Choosing the right alternative is ultimately a business matter for both the firm and the client. There is no universal best billing alternative.
   
   Consider an increasingly popular alternative: charging a flat fee at a volume discount.
   
   With a fixed or flat fee, the billing rate is determined and stipulated in the engagement letter, before the assignment even begins. It will not vary no matter how much time the lawyer expends, or what the result. Flat fees are especially useful for routine legal services, and encourage the use of technology to streamline the provision of those services.
   
   The challenge with this approach is that lawyers, generally, don't know their costs of operation. Thus, the fee figure chosen often is a "by guess, by golly" fee, not one based on a cost benefit analysis. Your firm cannot aspire to set an accurate flat fee unless you understand the operation of the firm as a business (budget, collections, profit, loss), the firm's billing structure, and how each attorney affects firm profitability. A flat fee is only an acceptable billing alternative if the attorney knows the cost structure behind it, and if the client accepts the value that the fee represents.
   
   I recently advised a contract attorney, doing work for a large firm. When he proposed a new, higher fee schedule that included a volume discount based on a scaled number of hours per month, the client's managing partner asked that the number of hours and the discount to be applied be reviewed retroactively at the end of each three months cycle. I suggested that a volume discount is based on a prospective, rather than a retrospective, guarantee of work. A retrospective review is a disaster, fails to offer any security to the contract attorney and makes both time and financial planning impossible. Without the prospective assurance of volume, there is little or no benefit to the contract lawyer; there is every benefit to the law firm. He who has an option usually is in the driver's seat. Which side of the table do you want to be on in this situation?
   
   
3. Who's In Charge Here?
   
   Jack Welch, in a recent Business Week column, contended that governance experts are wrong when they recommend splitting the positions of CEO and Chairman of the Board. Welch believes that there can be only one leader to be successful, not two, in a company, and that all organizations (including law firms) operate best when there is no doubt as to who is the company leader (CEO). The Board's functions are to use its collective wisdom to select the best CEO possible and to monitor the progress of the CEO to ensure that the goals of the company are being met; if not, then the Board must replace the CEO. But, aside from this, the Board must support the CEO. Failure to do so creates schisms in the company that lead to poor performance.
   
   In larger law firms today, management efforts are being split. There may be a COO (usually a non-lawyer), a CEO-Managing Partner (and Chair of the Management Committee), and then sometimes a Chairman of the Board (usually a former CEO-Managing Partner). If the Chairman of the Board is an "emeritus" position or a position with specifically designated responsibilities, this division can work well. However, if there is the expectation that the CEO is the primary leader while there is another ego-bound lawyer acting in a leadership role as Chairman who conflicts with the CEO, the firm can only have chaos and difficulty.
   
   Today's larger law firm is a corporate entity that must have clearly defined roles of leadership. This is particularly so when management responsibility is magnified by the requirements of the rules of professional conduct. In my home state of California, for example, State Bar Rule 5.1 provides that partners and other lawyers with managerial authority in a law firm must take reasonable measures to ensure that all lawyers in the firm conform to the Rules of Professional Conduct. The rule further provides that lawyers who have managerial responsibility within a firm are personally responsible when other lawyers in the firm violate the Rules.
   
   This is a heavy burden. It opens up a whole range of potential governance questions over how the firm allocates new work, who makes the assignments and why, and whether the firm properly ensures that lawyers, especially younger ones, are adequately trained for the work they receive. The answers can determine whether the firm is able to survive a malpractice allegation. And it all comes down to making sure of who's in charge.
   
   
4. If You Had to Sell, What Is Your Price?
   
   For the small firm, and especially the sole practitioner, selling a law practice to another qualified lawyer can alleviate a host of succession planning issues. However, without adequate planning for a sale, a sole practitioner can make a hasty, disastrous decision.
   
   Consider a lawyer with younger children and an older spouse. The spouse suddenly has a serious illness, and the lawyer wants to devote more time to care for the spouse than the practice allows. Without having planned for a sale, what are your alternatives?
   • Ignore the illness, hope for the best - and always live in fear of family and financial loss.
   • Groom an associate to temporarily take over the practice - and, upon returning to practice, face the loss of clients to the new lawyer with whom they have bonded.
   • Merge with or hire another partner level lawyer who has an option to buy the practice - and risk having the other lawyer leave or otherwise reject the deal before you are ready to return.
   • Buy another practice to add more lawyers to your own while adopting a more detached, managerial role - and incur the major expense and risk of an unplanned expansion.
   
   In this scenario, and many similar ones, the most beneficial choice for all those involved is to sell the law practice to another qualified lawyer (or lawyers). Not only do the buying and selling lawyers benefit, but the clients also benefit when they are smoothly transitioned to receive competent representation from a qualified buyer-lawyer.
   
   However, a sale is impossible unless you know what your practice is worth, and the price you want to receive for it. A business is worth only what someone is willing to pay for it, and valuation and price may not be the same thing. In valuing a law practice, one should look to the expected future earnings of the practice. Many people believe that the price to be paid must be based only on this figure generated by the existing practice. But, the price the buyer is willing to pay may be increased if he/she also includes future earnings that may be based on the buyer's talents brought to bear on the purchased practice. In other words, the buying lawyer wants the new practice merely as a base, with its existing personnel and other resources, to use as the infrastructure to expand his/her own talents and opportunities.
   
   A good negotiator may be able to discern such flexibility by the buyer. There can be bonuses and payment terms that lets the selling attorney reap just rewards, while allowing an upside for the buying lawyer.
   
   I speak from vivid personal experience. When my father died of a heart attack, I literally had just verbally closed a deal to sell our business. Between the date of death and the date of the formal close, about a month, I mourned and hoped that the buyer of the business would not use my emotional wound as a tactical advantage to renegotiate the terms. Fortunately, the deal closed with no major modification. The business was properly valued, the price was set, and the hard work of a lifetime was not jeopardized. It was the best outcome to a painful situation, with the buyer getting a solid base for his expansion, while we received that for which we bargained.