Check Your Checks and Balances

This post by Jim Rhyner, worldwide lawyers professional liability insurance product manager, Chubb Group of Insurance Companies, is one of a series of guest posts on CounseltoCounsel. Special thanks to Jim for his contributions.

In my last Counsel to Counsel post, I talked about recent financial scandals in the legal profession. In both cases, a senior partner’s deception slipped through the cracks after a period of rapid profit growth. These incidents underscore the value of an effective system of checks and balances which can help ensure that no one person has total control over the inflow and outflow of the law firm’s cash.

In some law firms, financial responsibilities are limited to a small group or an individual, allowing the rest of the firm’s attorneys to focus on the practice of law rather than running the business. This format may work in some contexts, but it is not without risk. If only one person is responsible for keeping the firm’s books and signing the checks, the opportunity for that individual to commit theft or fraud is heightened – and it reduces the likelihood that others in the firm will discover such behavior. Spreading financial responsibilities (such as billing, payroll, and reconciling the firm’s expense account reporting) among several people makes it difficult for one greedy employee to cause trouble for the whole firm.

Attorneys who aren’t directly charged with managing finances can consider the tips below which may help reduce their firm’s exposure to embezzlement and internal theft:

• Ask questions and speak up – individual attorneys are ultimately responsible for safeguarding their clients’ funds; even if it’s the senior partner who’s guilty of raiding the coffers, you could be held personally responsible, so trust your instincts if you think something is amiss
• Get it in writing – make sure that all of the firm’s transactions/payments are recorded
• Check the checks – two signatures on every check a firm issues to ensures that no one person has total control of the finances.

Social Media and Your Overall Marketing Plan in the New Year

This Thursday, January 7, I'll be leading a discussion on how to integrate social media into your overall marketing plan. The session is sponsored by the Massachusetts Law Office Management Assistance Program (LOMAP), a relatively new entity that is already doing great things to improve the quality of legal practice in Massachusetts. It is part of a marketing group that meets periodically by conference call. This first session of 2010 (which meets at noon) is open to anyone.

If you or someone you know has a limited budget for law practice consulting, LOMAP offers many free resources (particularly aimed at smaller firm practitioners who are just starting out; but anyone is welcome to participate.) If you can't make this session, take a look at their website for other resources and upcoming programs.

Keeping Up Appearances Could Cost Your Firm

This guest post by Jim Rhyner, Worldwide Lawyers Professional Liability Insurance Product Manager, Chubb Group of Insurance Companies, is part of an effort to diversify the voices and opinions that appear in Counsel to Counsel.

From pro athletes to Wall Street executives, big paychecks beget big egos – and the same is often true in the legal profession. And while there’s nothing wrong with enjoying the lifestyle that’s been well-earned, some law firms can run into big problems when a lawyer’s desire to live large eclipses his or her better judgment.

Sensational news stories about individuals raiding corporate funds are increasingly featuring attorneys at law firms. Just recently, the founding partner of a South Florida law firm was charged with raiding the law firm’s treasury for his own personal use. He allegedly used the firm’s money (reportedly up to $500 million) to fund a lavish lifestyle including the purchase of beachfront property, Lamborghinis, private jets and other trappings typically associated with extravagant lifestyles.

In the South Florida case, as well as the case of a prominent New York firm that experienced a similar scandal last year, it is noteworthy that both firms enjoyed huge growth just prior to these incidents. While in most instances, a steep increase in profits is a good thing – occasionally, it can unfortunately become a trigger for greed. In firms where only one or two senior people hold the exclusive authorization and access to law firm funds, it can become much easier for fraudulent activity or theft to slip through the cracks, unnoticeable by a firm’s other attorneys until it may be too late.

I’ll share some tips for checks and balances at law firms in my next post – in the meantime, what are your best practices for keeping law firm employees honest?

Posted by Jim Rhyner, Worldwide Lawyers Professional Liability Insurance Product Manager Chubb Group of Insurance Companies

A True Electronic Future for the Practice of Law

I've bought real estate, sold real estate and refinanced many times. Each time I complete a transaction, I think to myself, there has got to be a better way to do this. So much energy is wasted on producing paper documents and going through a huge stack of them and signing them one at a time. But maybe some truly entrepreneurial lawyers are finally getting it right.

While we are far from creating a paperless law office, has the time for true electronic transactions finally arrived?

The marketplace is screaming for more efficiency and lower legal fees. There is a lot of opportunity here for tech savvy lawyers in all practice areas who can find ways to do it better, faster and cheaper.

So what have you done lately to add efficiency to your practice?

Of course this is all tied into how lawyers charge for legal services and until lawyers more fully embrace alternatives to the billable hour, the motivation remains high to continue being inefficient.

Think Like a Lawyer-Bill Like a Consultant

How can lawyers get themselves away from the dreaded billable hour? By adopting billing methods that have long been standard in the consulting industry. See my post on the Middle Office.

Successful Law Firms Are All Alike

They have these 10 qualities.

Leverage Model in Firms Will Change, Not Disappear

Aric Press, Editorial Director of Incisive Media (formerly American Lawyer Media), discusses the changes that are coming to the traditional law firm model (free subscription required). The pressure on law firms to control fees continues to mount and law firms are being forced to rethink leverage.

Press discusses how firms will begin to adopt a multi-tiered staffing model where there will be many more staff attorneys and only some of the lawyers hired out of law school will advance through associate ranks and up to partnership. But he misses the opportunity to mention even more radical change.

It's not that leverage will go away; rather, firms will gain leverage through staffing that goes beyond using associates (or even staff attorneys). Firms must learn that work that can be done by non-attorneys will need to be taken off the attorney's plate.

I imagine that the larger firms will continue to find ways to push work down to paralegals and secretaries. But they will also increasingly resort to the use of contract attorneys domestically and legal process outsourcing(to gain access to a cost effective talent pool in India).

Will the ABA Rule Change Fuel Lateral Movement?

The ABA has adopted a new rule which seems to create more opportunities for partners to move laterally. In lowering the ethics hurdle with respect to conflicts of interest, is the ABA encouraging lateral movement or simply acknowledging what is already happening in the legal profession?

Cost Cutting at Law Firms

The National Law Journal cites some interesting statistics about law firm expenses. Here are a few:

• A firm cuts costs by an average of $250,000 for each attorney let go. For each legal assistant or other staffer laid off, a law firm saves about $100,000
• For most big law firms, about 85% of their budget goes to rent and personnel costs
• Paying severance can be costly. Every $10 million saved in compensation is offset by $7 million paid in severance
• If 30% of a firm's expenses are going to associate salaries, layoffs that trim 5% of associate costs are the equivalent of just 1.5% of revenue
• Clients are demanding price cuts. The chairman of a major U.S. firm said
  "There's less diplomacy in the discussion [with clients] about discounts". "They're not inviting you to a discussion. They're saying 'it's 10 or 15%, and if you can't help us out, maybe we'll go somewhere else.' "

In addition, the article suggests that firms have increased cash availability by "deferring partner profit distributions, reducing partner draws, making cash calls to equity partners or asking nonequity partners to provide capital".

My takeaway is that all signs point to a drop in law firm profitability in the next few years. It is very hard to cut costs in a law firm. In addition, partners and senior associates who lack portable business are in the greatest danger of losing their jobs (since they cost the most to keep in place).

While none of this bodes well for large law firms, small to mid-sized firms will probably be the winners. Large firms that find ways to deliver legal services in a more cost effective manner will also prevail. Some will adopt more creative billing strategies. Others will employ technology to do what they do "faster, better and cheaper" (at LegalTech this year, it seemed clear that e-discovery is a key area ripe for cost savings). One other area where large firms may be able to cut costs is through effective use of outsourcing (using contract lawyers and working with LPO companies).

A Renewed Push for Fixed-Fee Billing Arrangements?

Alternative billing arrangements are hardly a new concept. In many ways, fixed-fee billing is actually a retro concept. Fifty years ago, lawyers were not slaves to the billable hour.

Fixed-fee arrangements have been trying to make a comeback for over a decade. At the same time, there have been many efforts to create new forms of billing that reward firms for success. I remember organizing a CLE program, Beyond the Billable Hour, in the mid 90's. But the current financial crisis seems to be creating a renewed push by corporate counsel to get law firms to move away from open ended hourly billing arrangements.

We are in a period of crisis in the legal profession. Deal flow is constricted and litigation has not picked up enough to offset the loss of deal related business. In the coming year, this means that clients will have more leverage. Law firms that are able to adapt to this new reality and offer creative billing arrangements will be the winners.

IMHO, everyone will be happier when firms start to move away from the billable hour. Law firms will be rewarded for efficiency and associates will feel less pressure to record 200 billable hours in a month. Until that happens, though, we are in for a rough ride. Maybe a new wave of financial regulation will help fill in the missing hours at some AmLaw 100/200 firms. Maybe the litigation boom will arrive as companies and individuals scramble to recoup their investment losses. Smart firms will be properly positioned to capture this work. But in order to survive during this recession, firms will need to carefully review their expenses and come up with creative ways to satisfy their cost conscious clients.

How Do Law Firms Succeed?

A consultant offers the Ten Habits of Highly Successful Law Firms. My favorite is #5 (Emphasizing that Clients Belong to the Firm and NOT the Lawyers.) But given the power that large rainmakers yield at large firms, I think many firms are unfortunately headed in the opposite direction.

How NOT to Recruit Laterals

Law firms are not always known for having the most advanced management practices. As a recruiter, I've seen many firms miss the chance of hiring great talent simply because they did not pay enough attention to the candidate. A recruiter in Texas has some good anecdotes about this. I also wrote about this subject not long ago.

Blocking the Exits?

Do law firms need to block the exit doors to stop associate attrition? Should they keep raising associate salaries so that other options become uncompetitive? In the long run, I'm not sure that higher salaries will keep unhappy associates from seeking alternatives to the large firms; though in my experience, these increases certainly make other options look less attractive. I know this first hand because recruiting for smaller firms has become more difficult.

Ironically, there are much less expensive ways to slow associate departures. If firms could communicate better with associates, give them more meaningful context about their assignments and simply pay more attention to their professional development, then attrition would slow. These and other good suggestions from two law school professors (one who has worked in-house and currently with a large firm.)

These authors focus mainly on professional development as the key to retention. But clearly, work/life balance is a major issue that firms also need to address. There are a lot of talented associates who want sophisticated work, but not at all costs. The accounting industry has found ways to make this a reality. The legal community needs to crack this nut as well. One option is to adopt the model proposed by Deborah Epstein Henry of Flextimelawyers.

Why Associates Bail Out

The fact that 80 percent of associates leave their big firm job within 5 years has been well documented by NALP. There are many theories about why most associates leave and even some controversy about whether large firms actually rely on associate attrition to ensure that partner profits are not diluted. To those of us who consult to the legal profession, it seem ludicrous to invest so much time and energy in recruiting (on the front end) and to put little thought into retention (the back end of recruiting.) But as law firm profits continue to soar, it is hard to see how this is all hurting law firms in the short run.

Nonetheless, I still believe that in the long run, sound management practices can only strengthen a law firm. There is a good article in the Legal Times in D.C. in which a career consultant comes up with some of her own theories explaining associate attrition. She suggests that attrition may be due to a number of factors including: law school attracts many bright people who have not really taken the time to think critically about what they want in a career; law students do not have enough information to make informed decisions about how firms differ from each other; and a it is difficult to switch departments even if you conclude that you are better suited to another practice area.

She suggests that firms adopt a number of policies to address these issues including: providing opportunities for associates to change roles, training associates in business development and effective management techniques and cultivating a strong alumni network of associates and partners who do leave.

"Danger, Will Robinson!"--Baby Boomers About To Retire En Masse

I mentioned in an earlier blog the huge opportunities and challenges facing law firms with the impending baby boomer exodus from the leadership ranks. I thought I would expand on that theme here.

That's right, you heard me--the long-standing complaint among senior associates and junior partners that they have no role in leading firms is going to radically change in the next few years. Take a look at the bios of the leaders in firms--that grey should be telling you something. That, coupled with several years of very healthy profits for equity partners (meaning less incentive to hang on and keep billing), and moreover combined with the heightened expectations of us all for long and fulfilling retirements, will all work together to create a single and compelling phenomenon: an impending tsunami of retirements that is going to rock the leadership of firms great and small. Click here if you don't believe me.

As the referenced article advises, most law firms are blissfully unaware of the potentially crippling effect of management ranks being felled through retirement. Those that can begin to plan ahead and really take stock of their intellectual capital (meaning of course their junior and mid-level partnership ranks) and begin to groom them for real leadership, will weather the storm. Those that won't will be scrambling to import high-ranking talent from other firms to bridge the gap.

The looming crisis could even be bad enough to force many more firms to adopt corporate-style leadership with true CEOs and all the rest (possibly even, gasp, non-attorney management!). It will be something to watch, believe me. It will also be a feeding frenzy in the recruiting world.

Mark my words, firms stuck in old-style, top-down management styles that don't account for the development and grooming of their talent are going to be in for a shock. Further, all these factors combined with the tendency even of current leadership to think only of their own careers with no regard for the future of firms, is going to mean huge opportunities for some--and yet further rounds of mergers. Also, even those firms that have been doing a good job at bringing up good talent are going to find even greater pressures in terms of retention--good leaders are GOING to be even more aggressively recruited.

The smart money is going to be on firms that combine solid retention strategies with agressive recruiting practices and close collaberation with professional headhunters.

Bright young partners be on notice: You may be far closer in line for the 'throne' than you think!

You heard it here first, folks!

Pete Smith, Esq.

BCG Attorney Search

Lawyers On Call?

Deborah Epstein Henry, president and founder of Flextime Lawyers, proposes a model for making job sharing work in the legal field. If doctors can be "on call", she argues, then why can't lawyers? With job sharing, one lawyer might work Monday to Wednesday and the second from Wednesday to Friday. Work that needed to be done on weekends would be negotiated between the two job sharers. Clients would be told that they can call either attorney. Clients would not pay for any time that the attorneys spend updating each other before "signing out"; but team briefings that occur in the ordinary course of a litigation, for example, could be billed to the client.

The demand for these types of working arrangements is clearly already there on the associate side of the table. Law firms just need to catch up to other fields (and corporate law departments.)

Training a Pidgeon

David Maister has done it again, this time with a great videocast. His subject matter is learning how to effectively motivate an employee, colleague, child, etc. to perform at a higher level. Associates who are learning how to work with support staff should watch this. Partners who want to get better work product from their associates should watch too. Anyone who is a parent will benefit from this brief presentation.

One of the most interesting points that Maister makes is that effective management requires one on one communication. Any effort to manage groups in group settings is likely to be ineffective.

For lawyers, the real challenge is that in most law firms, lawyers are not rewarded for spending time managing; most associates are measured by their productivity (i.e. billable hours.) But taking the time to manage your support staff or associates who report to you has the long term benefit of increasing your own productivity. It just requires a law term view.

The Obligations of Law Firm Parnters

Altman Weil has republished an article entitled "What Are the Obligations of Partners". The author suggests that the longterm health of any firm requires that partners continue to demonstrate that they are "adding value" to the firm. He writes that in order to maintain one's equity partner status, that each partner should make contributions in the following areas:

Does this partner consistently provide the requisite quality client service? Does this partner engage in practice development efforts for himself and others? Does this partner participate in management as needed? Does this partner do his/her duty regarding mentoring, training, etc.? Does this partner consistently act in a firm-minded manner?

He suggests that a partner who is billing 2300 hours and doing nothing but collecting on his time is not "adding value" to the firm.

But can't each partner make different contributions to the firm? After all, not everyone has good management skills. Isn't a partnership really just a way to bring together different strengths under one roof?

What if the partner who is billing 2300 hours is doing a great job of cementing the relationship with a number of key firm clients.

There has been a number of articles written as of late about deequitization of partners. Senior management of firms where this has happened would have you believe that this is necessary in order to maintain the financial health of a firm in the longterm. But maybe part of it is just pure greed. Whatever the case, it seems like a trend that is here to stay.

Is Less Equity Such a Bad Thing?

Law.com reports on a recent study released by Citigroup Private Bank. The study suggests that rising law firm expenses (higher associate salaries and rents) will create upward pressure on billable hours and downward movement on the number of partners who are invited into the equity ranks. One law firm consultant quoted in the article seems to think this is all bad news.

"I think that making it harder to become an equity partner than it has been in the past may actually work to the detriment of some firms, because associates coming into these firms looking ahead to the prospect of becoming an equity partner may throw up their hands and say 'I'll never make equity partner, why should I even try?'"

The reality, however, is that most associates at major firms already do not expect to make equity partner and many have no ambition of doing so. While upward pressure on billable hours is a scary thought, I'm not sure that less equity is such a bad thing. The accounting firms have already figured out that professionals need ongoing opportunities to advance their careers. So a system which provides lawyers with only one or two chances for advancement (non-equity partner and then equity partner) no longer makes sense.

I speak with so many young associates who would happily trade salary for a chance to advance more slowly. If firms would insert several layers of promotion into their ranks, then lawyers would have more opportunity to decide whether to go for maximum income (through a series of promotions) or to stick with a balance between good work, good compensation, and livable hours. Under such a system, an individual lawyer could decide to go through the hurdles necessary to achieve counsel and senior counsel status but not do what it takes to get to non-equity I, non-equity II or equity partner status (and still hold a good job!) Too unrealistic? Only if you rely too much on precedent to make management decisions.

Learning From Partner Mistakes

Working for a difficult partner can make your life hell. I spent many years working for a boss who routinely yelled at employees in front of their colleagues, blamed subordinates for his mistakes and placed a high premium on "face time". While I would never want to repeat an experience like that, I did learn a lot by watching a bully in action. In a strange way, taking mental notes on how he treated the people he worked with taught me a tremendous amount about managing people effectively (or in his case, ineffectively.)

Hard driving partners can teach you a lot of substance in your practice area; but they can also teach you how to be more successful in the future when you are running the show. Here's a piece in today's Career Journal on the subject.

A Truly Cynical Analysis of Why Up or Out Policies Persist

Here is a truly cynical analysis of why firms maintain up or out policies. A professor at Case Western makes the argument that "up or out" is the best way to protect the firm's only real assets (i.e. the client relationships.) The argument goes that if you keep around bright people but don't make them partners, that they will walk away with the clients.

This is faulted logic on so many levels. For starters, many law firms have already adopted (and continue to adopt) multi-tier partnership systems (i.e. the professor seems to be overlooking the reality at many law firms today.) In addition, as the professor himself notes, lawyers cannot be bound by non-compete agreements. In other words, there is nothing stopping a senior associate who leaves from soliciting business from a client (whether or not the attorney has stuck around for a while after getting passed over for partner.)

The analysis also overlooks the negative impact on the client relationship when senior partners must continue to introduce new associates to service key clients (while removing senior associates who have built up trust with the client.)

A much healthier way to preserve client relationships is to institutionalize clients and make the client feel that everyone in the firm is available to help the client with his or her needs. When partners hoard client relationships and control client access, clients are poorly served and junior attorneys miss valuable opportunities to learn more about a client's business. This leads to bad morale. I could go on and on (but I won't.)

Open vs. Closed Pay Systems

Is there a trend towards closed pay systems (i.e. where partners do not know what other partners earn?) Seems like a good idea to me. This is particularly true in larger firms where you may not know a lot of your partners. Of course, then you have to trust that your compensation committee operates fairly and according to clear guidelines.

Billings and Originations are Leading Factors

Altman Weil has released the results of its 2006 survey of compensation systems. Billings and originations remain the top two most important factors in determining compensation, particularly at large firms. Also worth noting is that almost 85% of firms with 100 or more lawyers now have 2 tiers of partnership (up from about 65% in 2003). At most firms, good citizenship gets relatively little weight. Strange way to run a business!

Free Podcasts on Management

David Maister now has 5 free podcasts on how to be an effective manager in a law firm.

Mismanaged Law Firms

David Maister concludes that law firms are different than other professional services firms. Lack of trust between partners, skeptical reactions to new initiatives and professional detachment all combine to make managing a law firm very difficult.

Merging is Not For Everyone

Pundits of the legal industry continue to talk about the demise of mid-sized firms. While law firm mergers are continuing at a steady pace, there are still firms who remain committed to limiting growth. The Boston Business Journal reports on a number of Boston firms who are content to stay independent.

Teamwork Actually Matters

It seems obvious that good teamwork can affect the quality of professional services. New research by Harvard Business School shows that surgeons who work in more than one hospital have better outcomes in facilities that demonstrate a higher level of teamwork. Could the same be true for lawyers and law firms? Career lesson: choose a work environment that fosters good teamwork.