In the Legal Intelligencer, the reporter Gina Passarella has published Revenue Race, and a companion piece, which basically find the challenge that “a mature US legal market coupled with a dip in demand for legal services” poses to the demand for revenue growth is daunting indeed. Gina’s pieces are worth a read on their own merits, but the bottom line is that in this environment it’s akin to working magic to grow revenue substantially.
Here are the five time-tested tools:
- Raise rates. Yeah, good luck with that.
- More work from existing clients? We’ve heard this song for decades.
- New clients? You’re going to have to pry them out of the embrace of established relationships.
- Stock up on laterals? Clearly the drug of choice these days.
- Mergers? First, 1+1 often equals < 2 once the transaction and transition costs are worked through, and second, there’s no guarantee of success.
A variety of observers weighs in on other options or rings variations on these changes:
- Joseph Altonji says it’s a battle for market share (and yours truly concurs): “some people doing well at the expense of others.”
- Fox Rothschild managing partner Mark Silow has little comfort to offer: “it’s chasing pretty much the same clients a lot of other firms are chasing.”
- Citi Private Bank/Hildebrandt’s 2012 client advisory (which we’ve referred to before) “expects that 2012 may prove to be even more challenging than 2009 in terms of profitability.”
- Ward Bower of Altman Weil warns that “somebody’s bird-dogging your clients all the time in a no-growth market.”
- David Gaulin of PricewaterhouseCoopers’ law firm services practice says firms have to do better at “creating deeper relationships with their clients that go beyond just providing legal services and include business advisory roles” and warns against the trap of clients whose strongest connection is with a relationship partner and not the firm as a whole.
- Pete Kalis of K&L Gates points to his firm’s strength in two key practice areas, cross-border and cross-industry regulatory work, and IP litigation.
- Dechert CEO Dan O’Donnell offers up growing industry sectors as promising (energy, healthcare, and life sciences among them) but admits they don’t always translate into legal revenue.
- and that’s about it for fresh new ideas.
I have a more stringent view of where we are. I believe that, from the perspective of an industry that overall has reached maturity, there’s no way to grow revenue above inflation and true GDP growth. No way.
Now, this is far from a counsel of despair. Consider that essentially the entire consumer products segment of the economy—which is enormous—faces the same {inflation + GDP} growth constraint. Companies such as Procter & Gamble, General Mills, Kellogg, Campbell, Johnson & Johnson, Kraft, Kimberly Clark, Colgate Palmolive, SC Johnson, Unilever, and on and on face this every day.
But for us (meaning, more or less, BigLaw), it’s an enormous challenge. Why?
First, we’ve obviously been spoiled. From ca. 1980 until on or about September 15, 2008, as I’ve written elsewhere, we seemingly could do no wrong, with a top-line growing from 6—8%/year like clockwork. This not only lifts all boats, it forgives a lot of mistakes. As the Wall Street bromide has it, “Never confuse a bull market with brains.”
Second, we don’t know how to manage in the wake of the Great Reset. I challenge you to name a managing partner or chair of an AmLaw 200 firm who has spent any significant part of their career running an organization in a no-growth environment. Lots of middle-aged dogs need to quickly learn new tricks.
Third—and this is perhaps the toughest challenge of all—nary one of our partners saw this coming, many prefer not to believe it’s happening, and I suspect a majority haven’t come to grips with the reality (OK, so say I) that it’s here to stay.
Why is this third part the hardest?
It puts us under tremendous pressure to meet their rising expectations: Don’t profits have to rise every year? Well, don’t they?!
I submit that measures firms are taking to try to meet that expectation are bordering on the frenzied, mergers and frantic lateral acquisition among them. How frantic is the pursuit of laterals? Both hard data and the consensus of opinion converge on the lateral frenzy being stronger than ever. The data is simple, as reported in The American Lawyer‘s annual “lateral report” (emphasis mine):
If 2010 was a year for staying put, 2011 was the year that partners [shouldn’t this read “firms”?–Bruce] jumped back into the lateral market with full force. In the 12 months ending September 30, 2011, 2,454 partners left or joined Am Law 200 firms. That was a 22 percent increase from 2010, when only 2,014 changed jobs—the lowest number of partner moves since 2000. This year’s figure was consistent with the annual average of 2,458 partner moves from 2005 to 2009 and was higher than the number of lateral moves in 2007, when 2,423 partners moved. Even without the 208 partners that the March dissolution of Howrey added to the 2011 total, there was still a 16 percent increase in partner moves over the previous 12-month period.
The consensus of opinion is equally powerful. Every year managing partners are surveyed on what they feel are their most challenging issues, and year after year “recruiting more and better laterals” resoundingly tops the list.
The arms’ race for laterals is, again, from the perspective of the industry overall, a zero-sum game—by definition. Actually, it may be a negative-sum game, coming as it does with a sizable tax paid to headhunters and the friction of transition costs.
So why do we do it? Are we all completely misguided?
Well, not exactly completely misguided; I submit this is a case where the seemingly straightforward and rational course for each atomistic actor (read: firm) creates a completely irrational result for the industry—and every firm in it. How so? I didn’t use the characterization “arms’ race” casually; that’s what we seem to be in.
The more desperately we struggle to gain a leg up, the more we spend in pursuits that essentially leave us all no better off than we were before.
So again, why are intelligent, competitive, exquisitely motivated, and highly-educated people doing this?
Partner expectations: Partners are used to that 6—8%/year clockwork rise in PPP. And if they don’t get it they begin to think something might be wrong with their firm, not that the industry has passed through a sea change.
Managing partners often tell me that one of their greatest challenges is managing expectations. If you haven’t already, it’s time to take this very seriously. Educate your partnership about what the Great Reset/the New Normal looks like. Because if you don’t, the consequences could be extremely dire. Partners getting nervous about the state of the firm can lead to things unravelling with shocking speed and in utterly uncontrollable fashion. Nip it in the bud. Now.
This beanstalk is not going to grow to the sky. Tell them to get used to it. The firm you save could be your own.
