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6.5.20: COVID-19 Crisis Series LAW FIRM

As its first topic of focus, the Council of Luminaries has decided to have regular meetings to discuss the effects of the COVID-19 pandemic on the legal industry as they materialize. The objective is to identify developments in the market, at their firms, and within their teams, and to explore potential solutions and make predictions on where things go from here. Key takeaways from each meeting will be published for the public following each discussion.

The below meeting was conducted primarily with the law firm leaders group.

This Week’s Temperatures

Each week we ask the Luminaries to answer these three questions, on a scale of 1-10 with 5 being what would have been their pre-COVID response.

We started with a simple question: What are we seeing now that we weren’t seeing previously?

We are seeing an uptick in clients and partners looking for help with AFAs, which is different from fee relief or discounts. In some cases these are irrational requests from partners.

At least some firms have started looking to renegotiate the terms of their office space, as one of the positive things that’s come out of this is that firms have become so receptive to remote working.

More interest in alternative legal services

There has also been more interest in the use of alternative staffing strategies and related means of maintaining profitability, which had started before the pandemic, but is now picking up steam. We are starting to see more promoting of lower cost alternatives such as ALSPs and off-track associates. Some partners have been receptive; some are narrow minded, but there are more advocates and more openness to the potential options now. Some of these discussions have become quite broad, moving past pricing and incorporating professional development, HR and others in the conversation to address the realities of how you structure and maintain a workforce with this composition.

Firms that have built out some alternative capabilities are feeling a tension between delivering services using these resources vs. leveraging underutilized associates to get the work done. Partners sometimes understand that using a service center model is a better strategy, and research indicating that quality is often much better from a dedicated alternative staffing option rather that underutilized traditional timekeepers. However, it is much easier to resist engaging someone in a service center that is likely a great distance away than it is to directly reject the sad face of an associate based in your office over a Zoom call. Another issue can be lack of clarity about what alterative attorneys can do as familiarity of their capabilities is often lacking, inaccurate or incomplete.

One contradiction to the business case for alternative resources and processes is that partners see that revenue will decrease, and don’t understand how that could be a positive thing since most have grown up in a revenue-driven evaluation model. Also they want to groom associates, so taking work away from them seems to pose a conflict. Alternative services are shaking the ground of what they understand. Unless the firm is willing to make the hard decision to reduce the number of associates, there are many excuses for why you can’t do it. It’s about changing the cost basis, but the default argument to this approach is that “we can’t fire associates,” which obviates much of the savings. It’s a transformational concept for many practices, which is hard to implement in a partnership regardless of the economic and strategic advantages.

Certain practice areas may be riper than others. For example, real estate practices are struggling and they may be out of other cost-savings options.

It may not be the highest volume work that will be redistributed to lower-cost providers given the current environment as many within firms seek to keep their productivity as close to target as possible by doing whatever they can legitimately bill, and then cut rates when necessary. Underutilized people will be hoarding hours this year at any price because the investment has already been made in salaries, so the traditional, “some money is better than none” argument will be leveraged. There’s likely to be a lot of pushback with so many people on the payroll and a temptation to simply reduce rates to keep them busy. That, however, risks devaluing the brand and can have lasting effects beyond the hard times if provisions are not defined to return to normal price points.

Law firms are a business, too

“Law firms are a business too” is a mantra, but how they are managed doesn’t always mirror that. Unprofitable relationships may not be sustainable, but are often defended due to legacy, client name recognition, and other characteristics perceived to be valuable to firms—or more specifically, partners associated with the relationship. It’s really difficult for a partner to fire a client with a marquee name, but business principles should not be abandoned, and firms need to operate in a way that supports their brand. Productive, profitable, sophisticated work often is the cornerstone of a brand, not just work itself.

There’s sometimes a presumption that firms have to do work that clients want. But that’s not true. Firms, as sellers, bear the responsibility of setting prices, and should use this as the basis on which to choose to do work or not. There are a lot of clients and firms trapped in unhappy marriages that have likely run their course, but breaking up is hard to do. Many firms will lack the fortitude to deliver the simple, objective message, “If you don’t feel like you’re getting value, there are lower priced providers.” The idea that it’s arrogant for firms to walk away from work is not a fair position, but there is a perception among some clients that they unilaterally control their firms’ destiny—which has partially been supported by the decisions firms have made over the years, which seem to suggest firms conceded this power. But partners often forget that they have a veto on whether to take the work or not, and are serially soft when it comes to defending their worth when a client challenges the price point.

The aversion to declining unprofitable work is often more emotional than analytical – it’s hard for the partners to see that this may not be work/revenue they want. And in some cases, there’s a conflict between keeping people busy and walking away from low prices. Analytics can help partners understand the destructive impact of low-margin work. Reconciling the perceived contradiction of low rates in pressured areas with those in more premium priced practices is a complicated value proposition to explain, which further results in sub-optimal decision making. Sometimes AFAs can help bridge this gap when a firm does a varied collection of work consisting of some complex, and some commoditized work for a client.

In 2008-2010, some firms gave 50% discounts to make sure that there was revenue to cover fixed costs. That may have changed as firms were at that point trying to avoid layoffs at all costs. However, 2009 ended up requiring the mass layoffs everyone had been seeking to avoid by slashing prices to keep the lights on. Since that time, firms have gotten much better at managing their businesses, so there is less fat to cut now and different dynamics. Now it’s more about ideal staffing decisions based on current demand and projected demand for the future, so the approach is more measured today, and includes more voices of professional management executives in the discussion than prior generations of firm leadership had previously. The firms that did not evolve and elevate their management game often did not survive--many of the law firms that were poorly run went out of business following 2008.

In transformational periods when workforce adjustments must be made, there is an emotional element that cannot be underestimated – letting go of people is always hard. But some firms handle it better than others. It can be done humanely, by incorporating factors like severance, benefits and placement assistance. How firms treat people can have a lasting impact because reputations are formed, and those who act without emotional intelligence will drive the most skilled candidates away in the future. At the end of the day, if you can’t manage workforce, costs or customer behavior then you’re not a business.

Demand and other projections

Demand has been impacted in different ways for different sectors and practices. Many believe that demand will actually go up substantially in some practice areas as a result of increased regulatory/compliance work, and perceived corporate wrongdoing or failure to perform during the crisis that will result in “everyone suing everyone.” Industry sector will have a big influence on the trajectory as well--some sectors, e.g. hospitality and energy, will be down across the board. It is unclear what the impact on M&A activity will be, at least after a period of initial mergers and bottom feeding lead by those companies and funds who are sitting on cash and waiting to go bargain hunting as weakened companies struggle to stay afloat. Bankruptcy will be strong, as will insurance defense.

Many firms are tracking how much work has come in directly as a result of COVID (e.g. CARES Act). In some cases, it’s been quite a bit. Pro tip: In many cases specific matters have not been opened with crisis-related names, so word searching time entries for COVID-related terms can help reveal the true breadth and depth of the impact.

It is critical to dig in and understand your business, but many mid-market firms lack the presence of experienced business executives that can lead the way through difficult times. As such, some may suffer in their efforts to weather changing demand cycles due to lack of visibility into the larger market and specialization.

Some feel that navigating this crisis and emerging from it is a more plannable event than the 2008 financial crisis. Pain was universal and somewhat unpredictable in 2008 because of the inability to pinpoint weaknesses in the underlying financial system foundation, whereas now there is more clarity on the scope and scale of issues across sectors. Also, that was a unique experience whereas viruses/pandemics have precedents that can provide some level of guidance for dominant strategies forward.

No matter how you look at it, systemic business model changes are hard. Now is the time to be thinking in terms of what kind of hardships each firms’ most valued clients are encountering, and determining how a solutions-oriented service model can be designed, deployed and institutionalized in a sustainable manner. Success in this endeavor has eluded most law firms historically, but disruption in dynamics of market demand by default causes disruption in the dynamics of supply, so eventually all things will gravitate to a sustainable equilibrium.

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