Recently, I ran across a Buddhist proverb: “Do not hope for a life without problems. An easy life leads to a lazy mind.”
What might the relevance be to law firms and the Transatlantic Elite in particular? For the eight years prior to 2008, global firms benefited from a benign macro environment with high demand, limited supply of legal talent, tolerance for annual rate increases and rapid globalisation fuelled by easy credit availability.
Law firm leaders at this elite level have come to realise that the period they now nostalgically refer to as the ‘golden age of law firm profitability’ has come to a crashing halt and they will be growing profits far differently in the future.
They have also come to see that, when they enjoyed the ‘easy life’ described above, they failed to apply rigour to the problems that were evident in their business models. In Buddhist terms, they suffered from ‘lazy minds’.
What a difference a year makes. Better put, what a difference a day makes: 15 September, 2008 – the day Lehman died. The old rules died as well.
No longer can law firms expect annual rate increases at historic levels. No longer is 5 per cent growth in demand a certainty. No longer will clients accept inefficient delivery of legal services. And, no longer is the billable hour model the only game in town.
Not only have the rules changed but conventional wisdom has done a 180 degree turn.
According to a study of 140 US firms in 2000-07 and the ‘Flash Report’ on 2008 produced by Citi Private Bank’s Law Firm Group, during 2000-07, global firms outperformed the industry. Firms with leverage in the US grew profits at a fast pace. Firms with broad and deep footprints and infrastructures were seen as the places to be. These characteristics describe the Transatlantic Elite.
But in the 2008 post-golden age world, these trends were reversed. And this will most likely recur in 2009.
My sense is that the UK firms in the Transatlantic Elite have been harder hit than their US counterparts. The former have greater reliance on financial services and lack meaningful litigation practices to cushion the drop in transactional work. And exchange rates have not helped.
But UK firms have acted the quickest. They have right-sized at all levels (associates, staff, partners) and begun thinking of more efficient ways to serve clients. I fear US firms have been frozen by their past successes and fear of being the ‘first mover’.
So what will the post-golden age look like? Firms will build cheaper and more flexible ‘accordion’ leverage through the use of temporary attorneys; they will employ MBAs to price out fixed-fee alternatives, providing greater certainty to their clients; and they will build a cadre of professionals with project management skills to design the most efficient processes for delivery of legal services.
Firms will determine the cheapest locations in which to produce work and pass along part of the savings to their clients.
Associate compensation will be overhauled so that the variable component makes up a higher proportion of total compensation, salary increases will not be a given and bonuses will no longer be lockstep but performance-driven.
These are but a few of the changes the industry must implement to have any chance of returning to double-digit profit per equity partner growth.
UK firms have started down this path. Will the US follow?
Dan DiPietro, Citi Private Bank