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A Tale of Two Law Firms part 2

Jim McCann, the former Managing Shareholder of Abel, Bennett & Comings Inc. walked through the double wood doors of his new law firm, Xavier, Young & Zacharias LLP,  one week after “turning the lights out” at his old firm.  It had been a painful process for him; Abel Bennett & Comings had been his home for more than 30 years.  His career at Abel Bennett started in the mid 1990’s as a summer associate while he was in law school and ended with him as the Managing Partner of the firm just last week.  Well that was not exactly right, he thought.  He had been the Managing Partner until 2020 but then the firm was sold to outside investors and he became the Managing Shareholder or president of Abel Bennett & Comings, Inc.

 

The firm’s bankruptcy (some six months before) was a shock to McCann, the legal community and the investment bankers.  After all, Abel Bennett had been the first American law firm to sell itself to outside investors and had done well for the first several years.  It was the economic downturn of 2023 that doomed the firm.  First there was a decline in work.  As the firm’s billable hours dropped revenues declined.  But what was a modest decline in revenue was magnified into a huge drop in profits.  Even then, Abel Bennett might have survived.  The firm had gone through tough times before and the partners had all pulled together to make it through those times.

 

But it was different this last time.  In addition to the partners (transformed into “shareholders”) Abel Bennett had investors.  The investors did not really care about the firm’s rich history, the legendary partner collegiality nor the excellent legal services that the firm provided.  No, the investors were most interested in a return on their sizable investment and after that return was paid there was very little left to distribute to the shareholders.

 

Once the magnitude of the bonus shortfall became apparent to the Abel Bennett shareholders the exodus began.  McCann could not really blame them, everyone had bills to pay (mortgages, tuitions and living expenses) and the base salaries that the partners received was less than 50 percent of their projected annual incomes.  In McCann’s case his base compensation was a mere 25 percent of his annual income with the remainder tied up in performance bonus awards.  There was not much cash available to reward performance when your firm goes bankrupt!

 

After the shareholder defections the banks got nervous and when they seized the firm’s bank accounts to secure their loans Abel Bennett’s proud 75 year history, was history.

 

Bill Muth met McCann in the lobby to welcome him to Xavier Young.  Muth was regarded by many in the legal community as a visionary for the way that he had transformed his firm (a midsized Chicago based general practice firm) into a thriving global giant with offices throughout the United States and around the world.  After the welcoming handshakes, the tour of the office and seeing his new, corner office McCann sat down with Muth to talk about the new firm and how it was organized and why it had remained profitable in the face of consolidations, General Counsels clamoring for either alternative fee arrangements (usually the heads I win, tails you lose verity) or a straight 10 percent discount (sometimes more) off last years bill rates.

 

Muth was quite open about his firm’s financial success.  Indeed, Xavier Young had not always been as successful as it was now.

 

About five years before, in 2020, Xavier Young was faced with significant problems Muth recounted.  The firm, which was itself the result of several mergers over its 50 year existence, was an administrative nightmare.  They had never successfully merged the two legacy accounting systems from the last merger some 10 years ago and so continued to run both.  Clients could be on both accounting systems with different client numbers.  Consolidation at the client, office and firm level was accomplished the old fashioned way, they added together the dollar amounts contained in the two systems and reported the results to management.  Turnover in the administrative staff in Chicago was almost 30 percent a year.  In the Houston office the administrative staff turnover was even greater.  There were no generally accepted accounting procedures and not only did Chicago and Houston have significantly different procedures but each branch office did as well.

 

The IT and H/R/payroll functions were in no better condition.  Equipment was old, software was several versions behind and the Help Desk was commonly referred to by lawyers and staff alike as the “Un-helpful Desk”.  And as if all those problems were not enough one of the two accounting system vendors went out of business and the firm was paying $350 per hour for programming support of the antiquated system.  In 2019, software support costs exceeded $500,000 for the firm’s two accounting systems.

 

The chaotic administrative support systems and staff problems were his, the Management Committee and the Firm’s administrative leadership’s constant concern.   Muth joked that back then, long term objectives revolved around getting bills paid, cash deposited and the results of those activities reliably and punctually reported.  Strategy was something we read about, often joked about but not something that we ever did.

 

McCann was amazed; Xavier Young’s reputation now was that of a very well run and highly profitable firm.  How, he asked had the firm accomplished so much in such a short time?  Muth responded that it all started with a consulting assignment.  Their consultants analyzed the firm’s administrative operations, organizational structure and technology platform.  Muth said he still remembers the hot, humid August day that the consultants presented there final report.  The picture that they presented was of a firm that was in serious financial trouble and needed a “game changing” approach to survive.  It was a difficult meeting to sit through as the consultants presented (in often painful detail) their findings.  So painful in fact that when Muth heard they spent the night at O’Hare airport (sleeping on the floor) because it was closed by a severe thunderstorm he allowed himself a small chuckle.

 

As a result of the study Xavier Young overhauled just about every administrative support function and procedure.  The watchword of the study was “best and highest use” of the firm’s resources.  The consultants challenged why Xavier Young employees performed tasks that long ago other law firms and most of corporate America had ceded to outside vendors.   Muth explained that he learned the difference between outsourcing functions (which often entailed moving jobs of-shore to distant locations with different cultures) and right sourcing them to local, highly qualified vendors who understood the unique requirements of law firms.  Now, most of Xavier Young’s administrative functions were right sourced to those specialized vendors.

 

We identified the low hanging fruit first, Muth said.  The mail and messenger function were right sourced within months of the study’s completion.  Next we right sourced the file rooms.  Not only did we save thousands of square feet of file room space in our offices the vendor also introduced digital capture of all our documents.  Only on a go forward basis of course but now, five years into the program and with the vendor administering a meaningful document retention policy our storage space is about half of what we had five years ago.  We achieved that reduction despite a 50 percent growth in our record storage volume.  We also feel that the firm is less at risk in that the files are maintained in a uniform manner with logical retention periods for all documents.

 

We continued our administrative revolution by contacting with a Managed Print Services (“MPS”) vendor.  Not only did the MPS vendor upgrade and standardize our equipment (but because of their purchasing power and better controlling our inventory) we cut out print costs by more than 20 percent.   About the same time as we introduced managed print services we also right sourced the receptionist, telephone and conference room support staff to our existing mail and messenger vendor.  By the end of 2020 we had shed almost a third of our administrative staff and reduced our overall costs by more than 15 percent.

 

But Muth said, the real revolution came in 2021.  That was the year that we right sourced our accounting, IT and HR/payroll functions.  Actually, what we did was “Co-Source” them according to the firm that took over the functions.  Part of the analysis they did was to identify those individuals with “mission critical” information to the firm and those that did not have such information or skills.  The employees with critical information and/or skills remained on our payroll and within our offices.  So while the CFO, and the IT and HR Directors remained on our payroll most of the supporting clerical support staff did not.  We also kept several financial analysts and of course the billers.  But, the accounting and payables clerks, the server and software maintenance staff, the Help Desk personnel and the H/R support staff were co-sourced and moved to the Midwest.  Not only did we save money, but we improved the quality of the services we provided to our clients and attorneys and provided an extra layer of security by moving critical data out of our headquarters offices.

 

Muth allowed as how he was skeptical about outsourcing the “Higher Value Add” functions as the consultants referred to them but he was reminded and ultimately swayed by the argument that if you were an attorney at Xavier Young and worked in a non-headquarters office, the functions were already outsourced.  The only difference was that the functions were outsourced to a high cost area rather than a low cost area.

 

McCann was impressed by the actions that Xavier Young had taken, even more so when Muth added one final advantage.  Because the firm no longer owned the accounting software, they paid a monthly per attorney users’ fee and did not have to spend the millions of dollars it would have cost to replace their aging accounting systems.  All in all, Muth estimated that the administrative reorganization saved the firm more than 25 percent of there total administrative costs.  Or expressed another way, about 15 percent of the annual PPEP were a direct result of right sourcing.

 

Now Muth said, the firm’s Management Committee and administrative management devote their time to what is important, managing the firm and not responding to chaos.  I could not imagine going back Muth said; in fact I wonder why we ever did it any other way.

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