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How Not To Get What You Have Always Gotten

From Accounting And Financial Planning For Law Firms December 2011 —

“If you do what you have always done, you’ll get what you’ve always gotten!”

That very famous quote from Anthony Robbins describes in a sentence the results of the 2011 Am Law, Law Firm Profitability Surveys that were released this Summer.

 

For the first time in three years the surveys (Am Law 100 and 200) showed positive results.  Overall revenue rose by 3.5% and PEPP increased by more than 8%.  Revenue per lawyer rose by 4.4% accompanied by a decline in the overall number of attorneys employed in the Am Law 200 firms.  The number of Equity Partners declined by .9%,  while Non-Equity Partners ranks declined by almost double that amount (1.7%).  Associates were the hardest hit as their numbers declined by 2.7% in 2010.  These declines followed similar reductions in each category in the 2009 calendar year.

 

I believe these encouraging results are hiding a far gloomier picture of what happened in the top 200 American law firms and that before we pop those champaign bottles we should look into the results a little more closely.

 

The revenue figures reported for the Am Law Firms is total revenue received and are not adjusted for any bill rate increases.  I have recalculated the 2010 revenue results for the Am Law 200 firms by applying a modest bill rate increase.  The increase was based upon the results of several widely circulated surveys including the Altman & Weil, CitiBank and Wells Fargo studies.

 

The factors I chose were 4% for the top quartile in the Am Law 100 firm list.  I then reduced the anticipated revenue increase by .5% for every subsequent quartile so that the last quartile in the Am Law 200 anticipated revenue increase was a very modest .5%.

 

Overall the results show a .4% revenue increase for the Am Law 200 firms and if I were to exclude DLA Piper and Hogan Lovells from the calculation the overall revenue for the Am Law 200 declined by 1.7% in 2010.

 

The increases in RPL and PEPP that were achieved in 2010 were the result of old fashioned belt tightening on the expense side and the downsizing of the number of attorneys and administrative support staff within each firm.

 

My analysis shows that with the exception of the Am Law 100 first quartile and the Am Law 200 2ed Quartile (on an adjusted basis) the remaining six quartiles of the Am Law 200 all experienced revenue declines.

 

By quartile, the reported and adjusted revenue for 2010 was:

 

Am Law Quartile

2010 Avg Revenue Increase

2010 Adjusted Avg Revenue Increase

Am Law 100  1st   Quartile

8.0 %

4.0%

                   1st Quartile excluding DLA Piper & Hogan Lovells

2.9%

(1.0)%

                  2ed  Quartile

.2%

(3.3)%

                  3rd Quartile

.8%

(2.2)%

                   4th Quartile

1.3%

(1.2)%

Am Law 200  1st Quartile

(2.0)%

(4.0)%

                   2ed Quartile

3.3%

1.9%

                   3rd Quartile

.7%

(.8)%

                    4th Quartile

4.9%

3.4%

 

The Am Law 100 1st quartile firms are (of course) the largest and most successful firms in the United States,  The fact that they could implement and collect bill rate increases is not surprising.  The results in the Am Law 200 2ed quartile firms are a little less obvious and I will leave that analysis for another day.

 

The results for the remaining six quartiles point to 2010 as the third year in a row that revenue in the Am Law firms declined.

 

I also analyzed the results by geographic region and found similar declines in revenue as the following chart shows:

 

Am Law 200 by Location

2010 Avg Revenue Increase

2010 Adjusted Avg Revenue Increase

Atlantic

1.2%

(1.7)%

Chicago

1.8%

(1.7)%

Mid-West

1.9%

(.6)%

New York

2.1%

(1.2)%

North West

3.9%

1.7%

South West

1.3%

(1.5)%

Washington D.C.

13.9%

16.5%

Washington D.C.  excluding DLA Piper & Hogan Lovells

(5.5)%

(2.6)%

West

2.2%

(.9)%

 

Once again, the results, when adjusted for bill rates show a flat to down year in all geographic areas except the North West.  Washington D.C. (when DLA Piper and Hogan Lovells are excluded) also shows a decline instead of the unadjusted significant improvement.

 

What the leadership of most Am Law firms did to weather the storm of the past three years was to slash expenses and cut staff.  Considering the size of the storm overall, leadership did a commendable job.  Earnings in most firms may be flat but the firms are still standing.

 

But, what will happen if/when the economy dips again?  The anemic growth of the US economy in the first nine months of 2011 and the far from robust projections for 2012 mean that the economic troubles are far from over.

 

Increasingly, client demands for alternative fee structures, their refusal to accept first and second year associates on matters, the rise of virtual law firms and the off-shoring of some types of routine legal work will all contribute to a further squeeze on law firm profits.

 

The cuts of the past several years have captured most of the “low hanging fruit” that might have once existed in Am Law firms.  While further expense reductions are possible their identification and capture will be more difficult, time consuming and will require more fundamental changes in the way that law firms manage and provide administrative support for themselves.

 

 

How NOT to get what you have always gotten

 

The second largest expense item for Am Law firms is administrative salaries and benefits and in most firms the third is their occupancy costs.  Indeed, occupancy expense is a function of the number of employees a law firm has.

 

The cost of Am Law firm administrative support is largely determined by geography whereas the cost of the firm’s attorneys is related to how many steps from the “going rate” the firm has decided to compensate it’s legal staff at.

 

Determining attorney compensation and bonuses is a matter of strategy.  Determining how to provide administrative support services is a matter of “best and highest”.  The question law firms should be asking is, “How can I provide the firm’s clients and attorneys with the highest levels of administrative support services at the best cost to the firm”.

 

Increasingly, law firms are determining that many of the administrative support services that they currently provide can be preformed better and cheaper by third party vendors.

 

There are few administrative support services that can not be outsourced at less cost while achieving better levels of service.  There are many reasons for this but the most frequently identified is time and focus.

 

Law firm management (the Managing Partner and Committee plus the Administrative leadership) have more than enough to fill their ten to twelve hour working days.  As a result, many old policies and procedures remain in place long after there useful life.

 

In a recent client engagement we discovered that the firm’s file room reflected it’s old corporate past and not it’s current focus on litigation.  As a result we eliminated a 12,000 sq. ft. file room staffed by eight clerks and a supervisor with a 200 sq. ft. space staffed by two clerks and a supervisor.  The remaining space was returned to the building (saving the firm more than $600,000 a year in rent) and the files and clerical staff was transferred to an outsourcing vendor at a savings of an additional $300,000.

 

Service dramatically improved not only in the delivery and retention of files but in the mail, messenger and copier functions for which the new vendor also assumed responsibility for at a savings of an additional $200,000.  The vendor also introduced newer copiers, standardized uniforms and a messenger training program all of which improved the firm’s level of service and attorney satisfaction with the administrative support services.

 

A recent diagnostic we performed revealed that a large north eastern law firm had secretarial support ratios reminiscent of the 1950’s (1.5 attorneys to 1 secretary) and not reflective of the current generation of attorneys who prepare most of their documents themselves.  By increasing the support ratios to a more modern 4 to 1 and outsourcing the firm’s word processing to a 24/7 provider in the United States the law firm realized multiple millions of dollars in savings as well as improved service levels.

 

But perhaps the greatest potential for savings lies in the trend to outsource the High Value Add (“HVA”) administrative support services of Accounting/Finance, IT and HR/Personnel Records and Payroll.

 

The outsourcing of HVA functions was pioneered in the early years of this decade by Akin Gump Straus Hauer & Feld and Orrick Herrington & Sutcliffe.   Akin Gump moved its HVA services to a third party provider while Orrick built a captive center.  Since that time Baker & McKenzie, White & Case and Wilmer Hale have all built captives.  Last month, Pillbury Winthrop announced that they would do the same and locate in Nashville, Tennessee.   Currently a group of Am Law firms and a respected provider are conducting a proof of concept study for an independently owned center that will service multiple law firms.

 

The push for HVA function outsourcing has many benefits.  In those firms that have adopted the model, significant cost savings and service level improvements have been achieved.  Cost reductions in the 20 to 25 percent range are common.  When coupled with the dramatic improvement in and expansion of administrative support services firms that have adopted the model boast that they would never go back.

 

It is clear the HVA outsourcing is the next big thing.  It offers law firm management a path to better service at a reduced cost.  As more firms adopt the  HVA outsourcing model the competitive advantage to do so will become more and more apparent.  It will be clear that they are not doing what has always been done and that they will not get what they have always gotten.

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