ALA San Francisco Chapter Lessons Learned from Law Firm Failures Kristin Stark Principal, Fairfax Associates July 2016 Page 0 About Fairfax Fairfax Associates provides strategy and management consulting to law firms Strategy & Performance & Governance & Merger Direction Compensation Management Strategy Development and Partner Performance and Governance and Merger Strategy Implementation Compensation Management Firm Performance and Operational Structures & Practice Strategy Merger Search Profitability Improvement Reviews Market and Sector Merger Negotiation and Pricing Partnership Structure Research Structure Client Research and Key Process Improvement Alternative Business Models Client Development Merger Integration Page 1 1 Topics for Discussion • Disruptive Change • Dissolution Trends • Symptoms of Struggle: What Causes Law Firms to Fail? • What Keeps Firms From Changing? • Managing for Stability Page 2 Market Disruption Over Time…. Clients Technology in Client Advances “Build” Frustration mode LD mining Great Rise of of Big Recession Substitutes Data Clients demanding Disaggreg change in Oversupply ation service delivery model Page 3 2 How Rapidly is the Legal Industry Changing? Today 10 Years 2004 Ago Number of US firms at $1 billion or 2327 4 more in revenue: Average gross revenue for Am Law $482$510 million $271 million 200: Median gross revenue for Am Law $310$328 million $193 million 200: NLJ 250 firms with single office 4 11 operations: Number of Am Law 200 lawyers 25,000 10,000 based outside US: Page 4 How Rapidly is the Legal Industry Changing? Changes to the Law Firm Business Model Underway • Convergence • Dramatic reduction • Disaggregation in costs • Increasing • Process Client commoditization Overhead improvement • New pricing Model efforts models • Outsourcing • Client teams • Pricing experts Business Model • New leverage models • Partial equity partnerships • Service delivery • Non-partner track lawyers • Outsourcing • Different compensation • Improvements through Work Process Talent incentives process change, • Different models for innovations, project different practice groups management • Non-lawyer staffing Page 5 3 Lessons from BlackBerry Balsillie on the iPhone in February 2007: "It’s kind of one more entrant into an already very busy space with lots of choice for consumers ... But in terms of a sort of a sea-change for BlackBerry, I would think that’s overstating it." Page 6 Recent Law Firm Failures Firm Size Year Dissolved BinghamMcCutcheon 795 2014 HeenanBlaikie 540 2014 Dewey & LeBoeuf 900 2012 Yoss 180 2011 Howrey 324 2011 WolfBlock 287 2009 Dreier 155 2008 ThacherProffit 170 2008 Thelen 400 2008 Heller Ehrman 550 2008 Page 7 4 Dissolution Trends 25 1000 900 20 800 700 15 600 Dissolutions 500 Largest Dissolutions 10 400 300 5 200 100 0 0 Dissolutions Largest *Includes US firms that had >10 lawyers at time of dissolution. Page 8 What Causes Law Firms to Fail? Symptoms of Struggle Lack of Declining Lack of Leadership Strategy/ Economics Integration Vacuum Strategic Missteps These are key indicators or “red flags” that the firm is heading towards failure Page 9 5 Symptoms of Struggle: Lack of Strategy/Strategic Missteps Catalysts Impacts • Competing internal priorities • Ill-defined strategy • Loss of market position relative to competitors/industry • Poor strategy (e.g. size based) • Greater vulnerability to • Not recognizing changed market unexpected industry or client fundamentals disruption • Over-dependence on one client • Lost credibility and lost resources or industry • Getting blindsided when small • Inconsistency in strategic choices erosions in business turn into a landslide Page 10 Bingham McCutcheon’s Turning Point Profits per Equity Partner ($ 000s) 12.7% 2,000 1,715 1,625 1,690 1,600 1,420 1,443 1,475 1,335 1,200 800 400 - 2007 2008 2009 2010 2011 2012 2013 Net income down 24.4% Page 11 6 Symptoms of Struggle: Declining Economics Catalysts Impacts • Declining financial performance • Decline in partner compensation and failure to manage and perception/reality that productivity / deal with excess partners could make more capacity elsewhere • Ill advised expansion • Less flexibility to deal with short- term economic challenges • Excessive debt load – Unfunded obligations • Underlying tensions surface – High fixed costs between performing and – Lateral guarantees underperforming partners • Poor billing/collection practices Page 12 Symptoms of Struggle: Lack of Integration Catalysts Impacts • “Me first” attitude causes • Groups of important partners with partners to look out for conflicting or incompatible goals themselves instead of the firm • Collection of solo practitioners • Partners’ practices not self- reinforcing • Failing to integrate across offices and practice groups • Vulnerability to spin-outs • Limited depth and expansive • Vulnerability to loss of clients breadth when partners leave Page 13 7 Symptoms of Struggle: Leadership Vacuum Catalysts Impacts • Inability to confront tough issues • Loss of confidence – Poor performing partners – Changes in client • Lack of clear direction preferences • Myopic views of firm challenges • Poorly planned succession and opportunities • Lack of multiple voices at the top Page 14 What Keeps Firms From Changing Direction? • Lack of trust • Current or past success clouds perspective • Desire for 100% consensus • Culture where no one is allowed to make tough decisions – The “kindler, gentler firm” • Independent practices (mini firms, lack of teamwork, cooperation) – “I like it here because they just leave me alone” • Compensation systems • Legal training/risk aversion Page 15 8 Building Resiliency to Weather Temporary Setbacks Transparency • Financial commitments • Clear communication about financial conditions • Minimize “closed door” negotiations Leadership Decision Making • Respected and in touch, • Enforce performance hearing multiple voices standards • Visible and engaged • Lack of political influence • Consistent words and in compensation and action decision-making Trust Page 16 Challenge of Maintaining Partner Confidence: Typical Lawyer Personality Traits 90 89 71 50 50 50 50 Population 30 Average in Percentile Average Skepticism Urgency Resilience Autonomy Source: Dr. Larry Richard Page 17 9 Managing for Stability • Understand political landscape and which partners are Manage Politics supportive and which are resistant to change • Build coalitions with influential partners • External information on client trends and competitors Leverage Data • Internal data on performance trends • Enforce performance standards where appropriate Show Action • Ensure key influencers are leading by example • Support and reward cross-selling and collaboration Encourage Integration • Facilitate sharing of internal resources • Does compensation support strategic goals? Review Policies • Does your firm have clear succession plans for leaders and clients? Page 18 Managing for Stability During a Period of Instability But managing for stability is not about maintaining course in the face of major industry change: “If you’re in business today and you’re trying to maintain the status quo, you’ll be toast.” – Starbucks CEO Page 19 10 Questions & Discussion Kristin Stark [email protected] www.FairfaxAssociates.com Fairfax Associates London Washington DC California © Fairfax Associates 2016. This material formed part of an oral presentation and is not a complete record of the discussion. Page 20 11.