I recently had the pleasure of being interviewed on “The Inevitable Future of Law” by Jacky Wetzels of salesmoves, a legal marketing consulting firm based in Amsterdam. The resulting article covers the gamut of how law firms arrived at where they are today and the inevitable comparisons to global multidisciplinary firms and the Big 4 accounting firms. Dedicated sales departments and sales training are also discussed as becoming more important for law firms to compete in today’s rapidly changing legal industry.
Panel Discussion – Profitable Practice Management
I was honored to be asked to speak at Dye & Durham’s October 6, 2016 “Here and Now of Legal Innovation” event in Vancouver. I participated in the panel discussion on “Profitable Practice Management for Partners and Business Managers”. Here is the text of my presentation at the event:
“I’ll be talking about some of the major trends that impact Canadian law firms today. My focus is on changes in the business model and how law firms must respond to the current challenges to maintain their profitability.
So, what’s changed in the last 10 years?
The first big change is the dramatic arrival of the global law firms in Canada, marked specifically by Norton Rose’s blockbuster move in 2011 when it acquired Macleod Dixon and Ogilvy Renault in one fell swoop and has now completed its sweep across Canada with its recent acquisition of Bull Housser here in BC. The arrival of global law firms like Norton Rose and Dentons has changed the Canadian legal landscape in a big way. This trend is leading to more consolidation of law firms in size and fewer firms, as regional and midsized firms are being gobbled up and shrinking quickly in numbers.
The second big change is the re-awakening of the Big 4 accounting firms in the legal market, with examples such as Ernst & Young moving into commercial law work and Deloitte’s recent acquisition of Conduit Law. The Big 4 accounting firms are ten times the size of the biggest law firms and will be a major force in redefining the legal industry in the coming years.
The third big change is the movement towards forming NewLaw firms such as Cognition and Conduit law. These firms focus on being outsourced general counsel and have reduced their overheads dramatically by working in client offices or virtually as required. They are aggressively using fixed fee billing to cut legal fees and are taking work away from large and small firms. Of course, Conduit is now affiliated with Deloitte, so this partnership will have even more disruptive impact now, and law firms of all sizes should be concerned.
The fourth big change is the rise of alternative fee arrangements (AFAs) and fixed fee billing. This trend has been picking up steam in the US and Europe since the 2008 financial crisis, but not so much in Canada until recently. With the continued proliferation of global law firms and Newlaw firms, fixed fee billing should continue to build in Canada and we’ll catch up fairly quickly.
The trend toward more fixed fee billing also puts much more emphasis on efficiency and has driven the trend towards more legal project management in large and small firms.
How can your firm lead in the next 10 years?
To respond to the above changes, Canadian law firms of all sizes must do the following:
- Centralize your management structure and give more power to your Managing Partner to drive strategic planning and execute the firm plan. Firms must recognize and compensate for firm and practice group management in a much bigger way. Firms must focus their practices to meet specific client needs, be more client-centric and be much more selective in the clients they take on to maintain their profitability.
- Restructure your business model in response to the new competition from global, accounting and NewLaw firms. You need to carefully examine how to reduce your costs and change your staffing mix to optimize use of the technology. The days of levering work down to junior associates at high billing rates and getting clients to train law firms’ junior lawyers are over. Processes must be re-engineered in conjunction with the technology.
- Hire business savvy lawyers, not just brilliant academics. Clients want lawyers who can help them solve their business problems, not just their legal problems.
- Offer value based and fixed fee billing to your commercial and litigation clients. Firms that hesitate will be quickly overtaken by the new competition and will lose their best clients.
- Revamp your compensation system to recognize partners’ firm building tasks such as training, project management and building the systems required to increase efficiency and effectiveness using all this new technology.
And finally, firms must consider client goals and KPI’s and focus on helping clients achieve their business goals, not just the law firm’s profitability goals. Your focus should be on attaining a long term strategic partnership with your clients, which means offering better value and innovative ways of delivering legal services.”
Partner Compensation Trends – Subjective Criteria
One of the most important partner compensation trends I’ve observed is the move to more emphasis on subjective criteria in the compensation process. This topic is covered in the July 4, 2016 issue of Canadian Lawyer article “It’s not all about money” by Michael McKiernan. Michael interviewed me for the article and I provided my comments on this trend in partner compensation:
“According to Colin Cameron, a Vancouver-based law firm management consultant, intangibles are also in vogue in the upper echelons of law firms, despite the enduring popularity of simplistic profit allocation methods such as eat-what-you-kill. EWYK remained the most popular partner compensation method in our survey, used by 35 per cent of responding law firms, but that was down from 40 per cent in 2015.
Cameron predicts the proportion will fall further as partners continue to search out new ways to measure and reward subjective leadership accomplishments that don’t show up in spreadsheets of billable hours and direct revenue generation. “It’s certainly simpler, and in some ways more transparent, to focus on those factors that you can easily put a number to. It’s more difficult to evaluate how good someone’s training is, whether they’re supervising associates properly, and how their project management skills are,” says Cameron. “But I think more and more the trend is for firms to realize they need to recognize these contributions if they’re going to increase their long-term profitability.”
However, the transition often proves tricky, as one respondent at a mid-sized Western law firm complained: “Migrating to a revised compensation model while senior partners oversee the compensation process” has led to problems in “succession planning and rewarding business development efforts” at the firm, they wrote.
“Often there will be different interests between partners, who are perhaps closer to retirement and thinking about cashing out in the short term, versus younger partners just starting out, who are more likely to be thinking longer term,” Cameron says.”
In my experience, an over-emphasis on formulaic or “eat-what-you-kill” compensation systems results in dysfunctional behavior as partners focus on building their own numbers without regard to the firm’s best interests. This often leads to conflict and resentment between partners which can destabilize the firm and erode firm profitability.