5 Major Trends Impacting Canadian Law Firms Today

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1) The Norton Rose Phenomenon

One of today’s key trends affecting law firms of all sizes in Canada is the Norton Rose phenomenon. Norton Rose is a 2,900 lawyer global giant, organized as a Swiss Verein, which has just gobbled up Ogilvy Renault and Macleod Dixon in two quick bites. Within a matter of months, they have singlehandledly changed the face of the Canadian legal industry, creating the third largest legal firm in Canada and they’re just getting started. That’s pretty incredible, and scary for some at the same time. This is the new order in Canada’s legal industry.

This is also a defining moment for the legal industry in Canada, and will potentially drive more mergers and changes in national and regional firms as Norton Rose presses its influence. It could force Canadian national firms to get bigger or they’ll be swallowed up as well. Other global giants such as DLA Piper are waiting in the wings.  At 4,000 plus lawyers it’s the largest law firm in the world.  Discussions are happening amongst multiple potential Canadian merger partners, with other global firms no doubt interested in Canada’s lucrative resources legal work as well.

There are many similarities to what the large accounting firms such as KPMG and Deloitte went through in the ‘80s and ‘90s, as they used Swiss Verein structures to build their global presences as well.  The Swiss Verein structure provides limited liability, world-wide branding and consistent client service standards as some of its features.

Large Canadian law firms are being influenced by the large accounting firms in many ways. In the 90’s, large Canadian law firms went national to protect against the feared onslaught of accounting firms, which fizzled out when Enron happened, but the large national law firms remained. Now there is pressure  again being exerted from the outside, and large firms will have to restructure to fight against this new enemy.  Rumour has it that the large accounting firms are looking to get back into the legal industry again as well.

As an adjunct trend, the rise of the ABS regulations in the UK is putting an even more interesting spin on Norton Rose’s arrival in Canada. ABS allows public ownership of law firms, which is happening right now as UK firms are lining up to go public. If this trend catches on in the UK, even more resources will become available to UK-based firms like Norton Rose, and the US may have to consider the possibility of allowing public ownership for US firms to compete with publicly owned UK firms. This could lead to the ultimate showdown of publicly-owned global law firms, which may lead the legal industry to look something like the big 4 accounting firms when the dust settles, or…? Stay tuned on this one :) .

2) Move to Corporate Model

Another trend happening simultaneously is the move to more corporate models of firm governance amongst large Canadian firms. McCarthy’s moved to a board of directors and a full corporate business model a few years ago, and other large and regional Canadian firms are now going the same way. Practice groups are consolidating on a national basis, similar to what the large accounting firms have done for decades.

3) Alternative Billing

Fee pressures from clients are being experienced by firms of all sizes in Canada. It ranges from the small firms that do commodity work such as residential conveyances for less than what notaries charge in British Columbia, to large firms that are being pressed by large clients to offer alternative billing arrangements such as fixed fees to provide more certainty and less risky billing options.

Alternative billing is not as advanced amongst large firms in Canada as it is in the US and Europe, however, it is coming and firms need to prepare. It is being felt in the banking and intellectual property areas already, for example. It has been prevalent in commodity work in Canada for decades eg. personal services law, residential conveyancing, wills and estates, etc.

Project management is another trend that midsize and large firms are embracing, as a forerunner or as an adjunct to alternative billing. The idea is to get as efficient and effective as you can, then use this efficiency to go out and compete in the fixed fee arena, and hopefully maintain or enhance profitability.

The whole concept of value is being embraced by clients, who are looking at the very high chargeout rates that law firms have brought in over the last decade, and they now want retribution and rollbacks, or at the very least a stop to the increase in their legal budgets. The rise of the ACC Value Challenge is just one indicator of their resolve here.

If the economy worsens in a possible double-dip recession, clients will exert even more pressure on law firms. Firms must prepare for this change in the client’s mindset and must demonstrate more value to satisfy clients.

There is also a movement to reduce the recovery of soft costs such as photocopies and fax charges, which irritates some clients, and law firms are pulling back on this somewhat.

4) National Firms Cleaning House

National firms are cleaning house and cutting partners with practices below minimum $ practice size and clients that don’t meet minimum $ billings levels. This is a great opportunity for small and regional firms, who are picking up these senior national partners who have been pushed out or who have left national firms for better work/life balance.

This can be a great boon for the smaller firm, as they acquire new talent and institutional clients, who will remain with the smaller firm after the partner finally retires. Many national partners have established long relationships with their clients, and are able to transition their clients to their new smaller firms and make them profitable with the lower overheads of a small firm.

5) The Rise of Innovative New Legal Business Models

The rise of innovative new business models such as Delegatus, Clearspire, Axiom, Cognition, etc. The concepts of outsourced in-house counsel, no partners, franchised firms and virtual firms are threats to national and regional firms and an opportunity for small firms.

“Non-law firm” legal service providers such as Thomson Reuters are also looking at getting into the business of providing legal services through their outsourcing arm Pangea3. The ABS regulations offer the potential of “Tesco law”, which opens up possibilities for many more non-legal entities to provide legal services as well. These are threats to traditional law firms of all sizes.

Presented at the Seventh Annual CBA Law Firm Leadership Conference held October 24-25, 2011 in Vancouver, BC

Planning for Success – Key Issues & Goals

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Originally posted on Small Firm Innovation

In the first planning installment, we talked about creating a vision and core values statement. The next step is to identify the firm goals and key issues facing the firm.

One suggestion for getting buy-in from the partners is to have them write down the top 3 goals for their practice and for the firm, as well as the things that are stopping them from achieving their personal and firm goals (the key issues).  Submit these for compilation and discussion at a planning retreat.  This will also start the process of aligning personal and firm goals.

At the planning retreat, list all the goals and issues on flipchart paper and post them for all partners to review as the day proceeds.  Then start discussing the issues one by one until you have exhausted all issues.

I’ve found the process is usually more successful if you start by discussing the issues first and the goals after.  Lawyers are naturally focused on what’s wrong with the firm rather than the positives, so I find this approach simplifies and speeds up the discussion considerably as a result.

Once all of the issues have been discussed, then you can start prioritizing the issues.  Aim to have the top 5 issues decided on by the day’s end.  This part of the process can proceed quite quickly if you’ve already had a thorough discussion of the issues beforehand.

Once you have a prioritized list of the top 5 issues facing the firm, you can now start to turn those issues into quantifiable goals.  For example, if one of the issues is “lack of profitability”, then the goal can be converted to “increase profits by x% over x years”.  This is a quantifiable goal with a deadline, which is essential for follow-through and measuring the success of the firm plan later on.

Review the list of goals submitted prior to the retreat, and add or modify to this list based on the discussion of the key issues.  Decide on the top 5 goals as a group.

Once you have decided on the top 5 goals, then you need to determine if completing these goals will be enough to achieve your vision.  If not, you will have to repeat the process until you come up with an adequate set of goals which will achieve your firm vision.

In the first installment we talked about determining where you’re at today and your vision of where you want to be in 5 years.  The difference between these two points is known as the “planning gap.”  The strategic plan will include all of the steps required to get you from where you’re at today to achieving your vision.  The strategic plan will normally cover a 3 to 5 year time frame.

This completes the goal-setting phase.  Now we can start thinking about the strategies and action plans needed to complete the firm plan.  We’ll discuss this phase in the next planning installment.

Old School Marketing – Sales Is Not A Dirty Word

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Originally Posted on Small Firm Innovation

Back in the old days, lawyers really had to hustle to get work.  Okay, that’s just like today.  But lawyers had to “sell” themselves to get clients to use them.  So what’s so different about that today?  Well, many law firms now use technology and social media to get their marketing done.  But it still requires a human touch to get the “sale” done.

Marketing is the set-up, and sales is where the real money is made.  When you’re trying to win legal work from high powered corporations with their own sales teams, you need to match them in sales skills.  The clients will push every law firm to distinguish themselves with their sales abilities to earn their work.

So once you’ve identified and qualified the buyers, you approach them for the sale and “ask for the order.”  What’s that you say?  Yes, this is “old school” marketing.  It’s been done by salespeople in every industry for decades. Don’t want to have a sleazy “car salesman” image?  You don’t have to.  Some of the greatest salespeople are actually very highly skilled lawyers who use their own special sales techniques all the time while networking with blue chip contacts.  Their clients are also great salespeople, and smart lawyers connect them with other great salespeople they know and generate great referrals.

Your clients respect the art of sales as that’s how they conduct business all the time.  Lawyers who master sales techniques are respected by their clients, make no mistake.  It’s all in the delivery.  If you have a great product, you are proud to sell it and its benefits.  Don’t focus on features, focus on benefits, and distinguish yourself from the competition.  Find out the customer’s needs, then provide them with the customized product and service they require.  Listen a lot, and cater to their desires.  Really care about your clients, and provide added value over and above what they are expecting.  These are all tried-and-true sales techniques, of course.

It’s time that lawyers really understood the language of sales and applied the concepts.  In today’s competitive legal environment, you can’t afford to be “outsold” by your competition.

Some large law firms now even have sales departments.  They’ve got the message, and they train their lawyers in sales techniques using standard sales training courses.  Solos and small firms have the same opportunity.  You can get the necessary sales training from many sources out there.

Immerse yourself in the sales culture and start regularly “asking for the order.”  Some of the most successful lawyers I know are experts at it.  Some may call them rainmakers, but the smart ones know that deep down they are really just good salespeople.   After all, the highest paid person on a car lot is the sales manager.  Now that’s a goal to aspire for!

Planning for Success

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Originally posted on Small Firm Innovation

I’ve talked to a number of solo and small firm lawyers over the years about the topic of strategic planning, and often get asked the same question: “Isn’t strategic planning  just a “big firm” thing?”

The answer is that strategic planning is for firms of all sizes.  In fact, it’s even more important for solos and small firms in today’s competitive legal environment.  Solos and small firms can use strategic planning to focus their efforts and “steal” work from big firms by providing better value through lower rates and more flexible billing arrangements, for example.

“Isn’t strategic planning too time-consuming for our partners?”  It doesn’t have to be.  In fact, I will outline a straightforward question and answer process which will easily guide you through the planning steps and produce a strategic plan once you’ve answered all of the planning questions.

“But I’ve already got plenty of billable work which clients need me to do now!”  Yes, you may have lots of work now, but are you doing the kind of work you want to keep you intellectually satisfied, and is it producing the most amount of profit for the least amount of your time?  The strategic planning process will help you resolve these questions.

Where are you going?

You start by creating a vision for your firm and deciding what your practice or firm is going to look like in the long term.  What type of law will you practice, who will your clients be, how big will your firm be, will you have a “bricks and mortar” or “virtual” office?, etc.  You need to envision all of these things and look out 5, 10 or 15 years out for your vision of the firm.

The visioning process doesn’t have to be complicated.  Some large firms spend weeks or months creating a vision, as they have many partners who must come to a consensus on it.  But as a solo or small firm, you only have yourself or a few other partners to come to a decision on your vision, so the time required is much less.

The planning process usually involves taking some time out at a retreat to have partners think about the future of the firm, and is most likely facilitated by a third party.  This third party option usually works best, since all partners have vested interests, and you want someone independent to guide you through the process to ensure you have “buy in” from all partners.

Where are you at now?

Once you’ve figured out where you want to go, you need to confirm where you’re at now. What is your current profitability by practice area, who are your current people, what is your current management structure, what is your partnership entry criteria, etc.  You will need to do a SWOT analysis, which is a review of your strengths, weaknesses, opportunities and threats to really define what your current position is.

Who are you?

This is the core values step. This involves creating a set of “values” for partner behavior which all partners are required to adhere to.  You need to decide “who’s in the boat” and who isn’t.  You need the right people to help you achieve your firm vision.

What are the steps required to achieve our vision?

Once you know where you’re going, who you are and where you’re at today, you need to figure out the steps needed to achieve your vision. These steps are known as goals, which will help you to determine if you’re making progress towards achieving your vision.  The goals need to be quantified, so you will know when you’ve reached each step along the way.

Next steps

These are the first key steps in the planning process, which will help you kick-start the creation of a new strategic plan for your firm.  In future posts, I will continue this series on strategic planning for solos and small firms.  We’ll fill in the details on how to complete your firm strategic plan and instill an ongoing strategic mindset to maximize your firm’s competitiveness and profitability for the long term.

Trends in Partner Compensation Systems in Law Firms

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An increasingly competitive legal environment is resulting in changes in the way that law firms pay their partners.

In my experience there are three main types of partner compensation systems:

1)      Equality/lockstep – Compensation is determined mainly by seniority. I’ve seen this system used by many small firms and some very large US and UK firms.  The advantage is that it encourages partners to work as a team, while the disadvantage is that partners may not feel it’s fair if other partners don’t pull their weight yet are paid the same as high performers.  This can lead to a lack of incentive for high performers, and creates a risk they may leave.

2)     “Eat what you kill” – Compensation is determined mainly by personal production. This system is used by small and midsize firms.  Objective systems like this usually focus on just the numbers, which makes it clear to all partners what the expectations are, and is fairly simple to determine compensation as a result.  The downside is that these objective systems also encourage partners to “game” the numbers to their own advantage.  This can lead to breakdowns in team-building, where partners act as “lone wolves” and talk about “my clients”, not firm clients.

3)     Subjective Merit – Compensation is determined by subjective analysis supported by objective factors. It usually involves a compensation committee of 3 or 4 partners, and is used mainly by midsize and large firms.  This system has the advantage of encouraging partners to operate at a higher level and get compensated accordingly.  In addition, the subjective merit system may have an objective component as a starting point, but subjective analysis reduces the potential for “gaming” the system in a purely objective formula system.

Depending on the culture of the firm, any of the above systems may work effectively.  However, my experience and research indicates that the most effective system for increasing profits is the subjective merit compensation system.

Compensation System Trends

One of the major trends I see is towards more “pay for performance” in law firms, with a particular emphasis on rainmaking results.  Rainmakers are paid big bucks to switch firms, especially commercial lawyers who are able to command and move a large client base.

Compensation compression ratios (the $’s paid to the highest paid partners compared to the lowest paid partners) are increasing, as firms accommodate rainmakers at the top end of the pay scale.

Law firms are requiring an increasing minimum practice size to remain as an equity partner.

Non-equity partnerships are growing in popularity as firms attempt to maximize their leverage and equity partner compensation.

Large firm compensation systems are becoming more “corporate” in nature, as firms grow in size and scope internationally.  The larger the firm, the more corporate the model.  Managing partners and executive committees are wielding more power, and are providing more input to the compensation of individual partners, who are becoming more like employees in large firms.

Managing partners and practice group managers are being compensated more for their management accomplishments.  Some firms are compensating their managing partners using balanced scorecard techniques, for example.  Law firms are trying to run like real businesses, and are delegating more and more of the firm’s business functions to their management partners.

Many firms are requiring pre-retirement phase-downs in compensation and have established retirement policies at a set age eg. 65.  There is some controversy here, however, given challenges to the legality of forced retirement. Firms are continuing to try to enforce these retirement policies in order to maintain increasing equity partnership leverage and profitability objectives.

There is a trend for senior partners with portable practices to move from firms where they have spent their entire careers, after being forced out by the imposition of set retirement age policies.

Most firms have fairly “open” compensation systems, where partners know what other partners are being paid.  The trend is towards less compensation transparency in larger firms, however, with power and information centralized within a few management partners.  Compensation discussions can be too much of a time distraction for large firms.

More non-equity compensation arrangements are being used for hiring lateral partners and retaining good “up and comers” with long-term potential for building a practice.

Buy-in requirements are growing as firms grow and partner leverage increases.

More flexibility for balanced lifestyles and part-time partner arrangements are being demanded and received by the new generation of partners.

Compensation Criteria Trends

There is more emphasis on teamwork, and less emphasis on personal billable hours. This also ties in with growing recognition for the need to lever work, and the growth of alternative billing practices.

More firms are doing strategic plans in response to increasing competition, and this is leading to a need to recognize partners’ non-billable efforts in implementing strategic plans at the firm, practice group and individual partner levels. This also means more recognition of training, supervision, quality control, and various other non-billable tasks performed by partners.

More firms are recognizing client origination results, and firms are tracking client and matter origination more diligently.  Sales skills are being taught to partners and associates.

More peer evaluation is happening, especially in larger firms. There is also more emphasis on client feedback, realization and profitability of partners’ practices. More emphasis on cash in, and less on billings.

Compatibility with firm culture is becoming more important. Non-conformists with firm culture are punished, leaders are rewarded.

Summary

The key trend is toward more “corporate” compensation models, driven by competition and the corporate style of growth of large national and international firms.  Compensation is driven more by the strategic goals of the firm, and partners who contribute to firm goals are compensated at higher levels as a result.  There is more and more emphasis on pay for performance as well.

Compensation compression ratios are widening, as firms attempt to accommodate and retain the rainmakers in their firms.  This has resulted in major dollars being spent to lure new rainmakers to the large firms.  Business development is more and more highly prized, and rainmakers’ compensation is increasing significantly.

The danger of a very high compensation compression ratio is that you could end up like Finley Kumble a few years ago.  They hired many rainmakers and paid them exorbitant dollars for their client originations without a sunset clause, and the whole firm came crashing down as a result. Several different factors were involved, but the extremely high compensation compression ratio was pointed to as a major factor in their demise.

Firms are also trying to encourage partners to lever more to others, and in the process institutionalize clients so that it is more difficult to move clients when partners are offered more money by other firms to lure them away.  Buy-in requirements are rising as firms lever more and reduce the % of equity partners relative to non-equity partners and associates.

Large firms tend to favor subjective merit systems, while smaller firms tend to favor more objective systems. Large firms are increasingly profitable, and the gap is widening, so there may be some correlation/cause/effect in the use of subjective merit systems which leads to increased profitability.

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Strategic Planning for Law Firms – Key Steps in the Process

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So what’s all the mystery about strategic planning for law firms?  Why do so many firms fail to do strategic planning, and if they do try it, why do they fail to implement?

First I’ll address the mystery part.  Most law firms are run as democracies, which allow partners to do what they want with no real accountability.  Strategic planning assumes that you are thinking about your future as a firm, not as a group of solo practitioners.  This is the key to making a strategic plan work.

Here’s some key questions to address in getting the planning process going.

Where Are We Going?

Ideally, you should follow a standard strategic planning process, which involves creating a mission statement and long-term vision for the firm.  The strategic planning process will address the next 3 to 5 years, and should be revisited every 3 to 5 years as the environment changes.

Who Are We?

A core values statement is also essential, to guide all partners and staff on the firm’s expectations of its people.  This will decide who’s in the boat, and who isn’t.  The core values statement is normally created separately from the mission statement, but must support it.

What’s Stopping Us From Achieving Our Vision?

First you need to identify the key issues facing your firm at the moment.  This gives you a place to start turning issues into goals and strategies.  Every issue is a potential hurdle which is preventing you from achieving your firm’s goals.  The firm’s  key issues should be summarized and prioritized.  The top 5 issues should be discussed and ideas exchanged on how the issues are stopping the firm from achieving its mission statement and vision.

What Are The Steps Along the Way To Achieving Our Vision?

Once the mission statement and vision are determined, usually during a strategic planning session with all partners, then you can start eliciting goals from the mission statement. The firm’s goals are normally contained within the mission statement.  Focus on the top 5 goals.

Quantify Objectives

With the top 5 firm goals decided on, you can then quantify objectives which must be met in order to achieve the goals.

How Do We Get There?

Conduct a brainstorming process to consider various strategies to help achieve the goals.  Prioritize the strategies needed to achieve the goals.

Who Will Do What And By When?

This is the action planning stage.  Here we identify who will carry out the strategies and assign deadlines to complete the action plans.  This provides accountability and helps with follow-through.

How Do We Ensure It All Gets Done?

This is where most firms fall down and don’t implement their plans.  You need a management structure with accountability to make it happen.  The Managing Partner will be in charge of executing the firm plan and will ensure every partner does their part in implementing the plan.  The Managing Partner must also be able to impact partner compensation to make partners accountable for their role in the process.

Alternative Billing Trends – “AFA Lite”

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Another trend to watch is law firms of various sizes getting on the legal project management bandwagon as an adjunct, alternative or transition to true AFA’s (Alternative Fee Agreements).

Many clients are asking for 20% lower overall legal costs, so forward-thinking firms are proactively trying to apply LPM (Legal Project Management) techniques to reduce the hours required on a file by 20% by eliminating waste and unnecessary legal steps, while still allowing them to retain the realization (profitability) on these hours.

An estimate of the legal fees is provided to the client up front, but a true AFA is not put in place.  There is, however, an agreement that any adjustments to estimated legal fees will be made with good reasons explained to the client as the file proceeds.  Clear, well-timed communication is key here.

If successful, the upshot of the above approach is that the client gets what they want by reducing overall legal costs by 20%, and the law firm gets to maintain its profitability.  Combine this with the client agreeing to provide a greater share of its work to the law firm, and you seal the deal.  The approach is simple, yet effective.   Neither side loses in this scenario, which I believe is a key for success. I call this approach “AFA Lite”.

Law firms can also use the above approach as a transition to a true AFA arrangement with the client in the future. This will happen when both parties are fully up to speed on the issues involved, and can then feel comfortable entering a trust-based, long-term AFA arrangement (strategic partnership).

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