Size shouldn’t matter

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Coudert, Thelan, Dewey Lebeouf. Heller Erhman, Howrey, Olswang…. Former great firms which no longer exist. And yet the partners at these firms are still working and the clients are still writing cheques. What went wrong?

Most law firms aren’t run like modern businesses. It used to be that being a law firm was a way to print money. Clients were everywhere, brand was key and partners did not have to work too hard to win business. The demand in Asia, London and New York for skilled-lawyers was sky high and firms had no issue in raising their rates without clients questioning this. Some firms began turning over $1 billion in revenues and partners were making millions.

Those were the good old days. Fast forward to 2017. Corporations are so focused on cutting costs that firms cannot just rely on brand anymore. It used to be that Firm A was one of a couple go-to firms for a particular type of work (private equity mandates for example). Now these firms are competing with more competition and clients are always focused on who can do the work for the best rate.

So what’s the problem?

Simply put, law firms are too big. In the golden period of law firms, partnerships were smaller and run in a way which benefited all of their partners. The concept of a salaried partner was rare and many firms shared the same vision, ambition and culture. Now it seems law firms are in a race to see who is the biggest – for law firms, size does matter. The issue arises when trying to maintain a core strategy and culture when you have 500 partners to please.

A knock-on effect is that firms need to keep their partners happy and their brand strong and this means they are now almost entirely focused on annual profits. Firms always talk about long term strategy and investment but when it comes to it they only care about one thing – annual profits per partner (PEP). When PEP is high, times are good. When PEP falls, it is a disaster. And everyone looks to management. Why then would a firm look to invest profits for a long term strategy when they need to get PEP high at the end of the financial year?

At least once a month I meet with a firm who pitches me their long-term strategy. When I talk about potential partner hires, the first question asked is what their portable book of business is? Personally I would prefer they ask what their predicted book will be in three years but this would take some investment. This wouldn’t be a huge issue if making one or two partners hires a year but as mentioned before, size matters to law firms and they tend to want to recruit a couple dozen.

Another issue with short-term focus on profits is that partners can simply move whenever they want to earn more money. In my experience, a firm is more likely to hold on to under-performing partners rather than fight tooth and nail to keep their superstars happy (again, size does matter a little bit too much here). Once profits drop in a year, earnings fall. If you are a rainmaker in a firm, then you can cross the road to a competitor and earn more money. Compare this to a listed company – when the stock drops shareholders will moan but in most cases customers and employees don’t run away.

Until firms start to take a long term approach to growth, invest in the best and get rid of the rest then this problem will continue. Ironically, I believe that not only is the next Dewey Lebeouf around the core but more are necessary. As more firms fall at the way side we will then see the next generation of successful firms which allows to promote their own, retaining rainmakers and making bigger profits.

Giovino

What is my book of business?

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Given the current market I am reviewing anywhere between 10 and 30 partner business plans at any one time. Every one of them is unique but they all have one major issue to overcome – what is the book of business?

Portability of practice is not guaranteed but frankly, is the most important thing in a business plan. Firms want to know where the money is coming from.

My advice is simple – put down what you think you will bill assuming everything goes perfectly in the first year and  assuming you also have a little bit of luck.

This is not to say that you lie or even exaggerate. Partners have done this in the past and I refused to work with them. I am just saying think “best case scenario”.

And I know what many of you partners are thinking already – “but Alberto, I want to under-promise and over-deliver”. That one phrase no longer has a place in lateral partner recruitment.

I understand why some partners and recruiters take this approach. Why over promise and fail to deliver meaning you have a target on your back? What happens if your clients don’t move and you don’t reach these numbers? What if the market tanks six months in?

All of these are valid points. But the question is this – would you rather take a lower salary and be rewarded if you beat these conservative numbers? If so, great – take the higher salary after you reach your targets. However, you can imagine what most partners say when I suggest this.

 I recently worked with a private equity partner from a top firm in Los Angeles. Year on year since 2010 his personal billings were $6.5m. He was taking home around $2.3m and expected the same or a small uplift. However, when I saw his business plan he was predicting $4m in his first year. When questioned on this he said to me he would probably do $6m but wanted to be cautious in case clients didn’t come.

I couldn’t help but laugh. When I suggested he take home $1.5m for the first year and then increase this when he hit $6m+ he was astounded.

“Alberto, you’re crazy – why should I take a pay cut?!?!”

“Based on those numbers you aren’t worth $2.3m”

“But I will probably do it, I just want to be careful in case it doesn’t happen”

“Why would you want a firm to invest in you if you don’t have the confidence to back yourself?”

And there it was – that moment of clarity….

The fact is this – law firms will automatically cut your predicted book by 25%. They assume you’re exaggerating! So there is no room for caution. Back yourself, remain positive and visualise your first year going absolutely perfectly. Unless of course you are willing to share the risk and take a massive pay cut until you reach success (I have yet to meet a superstar partner who is willing to do that).

Oh, and that partner I moved. He billed $7m in his first year and is projecting hitting $10m over the next two years….

Giovino

Welcome

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Year on year the challenges facing law firms, its partners and staff generally grow. I have spent a decade working with leading firms across the world to help combat problems and prepare for forthcoming challenges. Whether it is assisting a firm re-branding, assisting with a merger or hiring their future leaders I have been privileged to gain an insight into the key issues facing this industry. This blog focuses on some of these issues.

If you are a partner considering a move, management members debating growth plans or a just someone interesting in the misspelt ramblings of a headhunter I hope you find this content useful.

Alberto Giovino – GSL Partners