Making a Profit

Posted on June 22, 2011 by Ronda Muir

In connection with the American Lawyer's announcement of the 2010 Am Law 100, Amy Kolz, a reporter there, wrote an article about profit margins of those firms over the last five years, to which I contributed. To summarize the article's main points:

  • Not only for the past 3 recession years but also for the final two years of the boom (and we would argue even before that), associates in highly-leveraged firms were "underutilized assets with high fixed costs."  Thus, the majority of firms with profit margins higher than the average (38%) reported leverage ratios lower than the average (3.45), with firms in the bottom profitability quartile (32% and below) showing leverage 22% higher than the average. 
  • In spite of significant growth in nonequity partners over the last 5 years, single tier firms and those with the fewest nonequities consistently reported higher profit margins--averaging @45%-- than that of firms with a majority of non-equity partners--27%. Part of the answer lies in the fact that since at least 2007 average hours billed by nonequities are lower than those of both equity partners and associates (a distinction which might become less relevant in the fixed fee marketplace).
  • Firms within the highest quartile of profitability hired the fewest laterals--comprising less than 4% of their equity partners, compared with firms in the bottom quartile who hired in an average of 18% of their partners. Part of the explanation continues to be in rich up-front compensation packages for laterals, 60% or more of whom don't work out. 
  • Real estate also took a bite out of profits: firms with more than 20 offices had an average margin of 34% compared to 46% for those firms with less than 7 offices. Nonetheless, truly international firms enjoyed slightly higher profit margins than their more domestic peers.

There were a number of issues we discussed that didn't make this and related articles (see also "Living on the Margins"). For example, an additional and ongoing drag on profitability is the steadily declining rate of realization, in both billing and collecting, over the last ten years or so, which may abate as the economy picks up but has hit some firms hard. Better intake procedures, client relationship management and billing follow-up can help improve realization.

The practices within a firm--whether it's bond work at Weil Gotshal or Cravath-style deals--also impact profitability, so much so that it makes the firm-wide information less valuable than the practice group information, according to Steve Roster, formerly managing partner at Morrison & Foerster.  

On the real estate side, when a firm negotiated its lease, how prime the space is and how much was spent on building-out and furnishing can have a long-term impact on firms profits.

Many firms have tried to improve profitability by radically reducing expenses--renegotiating big-ticket costs, firing staffers and associates and under-performing partners, with a resultant up-tick in profitability.  The problem is that many firms are running out of expense reductions and those they have made have not been focused on long-term benefit.

As to the oft-asked question as to whether profit margins will recover or continue to be erratic/decline, my guess is that there will be a fake toward returned profitability as revenues general pick up, which will be most deleterious to those firms who have not done some serious thinking about retooling their delivery model and internally aligning with that—they will assume all is back to “normal.”  For those firms, that comfort will get them through a few years of bumpy but fairly steady profitability that will eventually decline as more forward-thinking firms with more sophisticated internal processes and management make inroads into the revenue pie.  And it will be hard for them to catch up. 

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Learning Emotional Intelligence

Posted on June 14, 2011 by Ronda Muir

Even the original researchers in the emotional intelligence field--Jack Mayer and Peter Salovey--have taken different sides in the controversy as to whether EI can be learned.  That uncertainty has put law firm professional development managers in a difficult spot, second-guessing the usefulness of providing lawyers with EI training programs.

The most recent research suggests that, instead of EI being an attribute you are either luckily born with or unfortunately stuck with lacking, it’s a skill you can learn. And a skill that can be learned through a program that is not particularly arduous for either trainees to undergo or management to provide.

In two recent studies, people were enrolled in an 18-hour emotional-competence course designed to teach “understanding emotions, identifying one’s own emotions, identifying others’ emotions, regulating one’s own emotions, regulating others’ emotions, and using positive emotions to foster well-being.” 

Results of the first study showed that "the training with e-mail follow-up was sufficient to significantly improve emotion regulation, emotion understanding and overall emotional competencies. These changes led in turn to long-term significant increases in extraversion and agreeableness as well as a decrease in neuroticism." 

Results of the second study showed that "the development of emotional competencies brought about positive changes in psychological well-being, subjective health, quality of social relationships and employability. The effects were sufficiently large for the changes to be considered as meaningful in people's lives." 

So compared to people who didn’t take any course, or who took a course on improvisation, the emotional-competence trained group scored better on various emotional measures, becoming by external measures more extroverted, less neurotic and more agreeable. They also simply felt better--they reported better physical and mental health, and happiness.  And not just right after the course, but for many months later.

Notably, the course also improved "employability," as judged by human resources professionals who watched videotapes of interviews with participants before and after the course.

The implications for lawyers is obvious--we are on the low side of emotional intelligence no matter which assessment is used, as much as a standard deviation (15%) lower than the average American, according to some assessments. An 18-hour training program is a manageable one for both lawyers and firms with an important upside--better client service, better morale and a better culture.

Let us help you develop an emotional competence course that can bring substantive improvements to the practice of law in your department or firm and to the pleasure that you and your colleagues take in practicing law.
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The Lawsuit Whose Name We Dare Not Speak Part 1

Posted on June 2, 2011 by Ronda Muir

One can’t review the data showing the magnitude of mental illness, substance abuse and other indices of distress in lawyers without thinking of the lawsuit that, with apologies to Lord Alfred Douglas, no one dares speak about but is certain to come. 

There are all sorts of scenarios that could prompt it.  An associate will commit suicide or a partner will kill his domestic partner or a staffer will be attacked.  An in-house counsel will shoot one of her colleagues or friends or abuse a child or her boss will stalk a judge or threaten an outside lawyer.

There may be a criminal proceeding, but certainly a civil one will follow. It will point out that, according to expert opinion, management's policies and practices conspired to create a toxic environment that ignored particularly vulnerable lawyers, both as a group and individually, and that those policies and practices either neglected (possibly criminally) to stop the lawyer in question from committing his/her heinous acts or even pushed him/her into it.

Or, for a milder version, a malpractice suit will be mounted with an additional allegation that the lawyer primarily working on or overseeing a matter that was mishandled was and should have been known by firm or department management to be compromised by substance abuse, mental illness, etc. 

We have regularly seen fact patterns that resemble these scenarios in the various media reports of lawyers acting badly, and any senior partner has stories s/he could tell.  There's the drunken arson of a 9/11 memorial by a biglaw associate, or the lawyer facing criminal charges after shooting a hunter  So far, the publicized cases rarely have involved firms of note or suits against the firms themselves.

Perhaps the most notorious case over the last few years was that of Robert Wone, who left Covington & Burling to be General Counsel at Radio Free Asia only a month before he was gruesomely sexually assaulted and killed in the townhome owned by his college friend Joseph Price, an attorney at Arent Fox, and his gay partner. The lengthy investigation that followed is not something any firm would want to be involved in, let alone as an accused or defendant.  Price's law office was searched. The case dragged on for years.  All three defendants living in the townhouse were eventually dismissed, if not completely cleared.  Wone's widow proceeded to file a $20 million civil suit against attorney Price and his roommates.

It would be a fairly short distance to a similar suit against a firm if one of its lawyers had been identified as the killer.

The legal professionals in your firm have thoughts of suicide at a rate 4-20 times greater than the general public, depending on the source of data, and also have highly elevated levels of substance abuse and mental illness and other indices of distress. They are under extreme pressure to perform in a brutal market. and they have well-documented deficiencies in adaptability and stress management.  Levels of anger and frustration are off the charts. 

 

Most law firms would fail miserably the recognized assessment which determines workplace environments that literally make employees crazy.  

What can your firm do to avoid being one of the headliners when these lawsuits do occur? 

A number of precautions can be taken. Interviewing protocols can be toughened up so that you have a higher assurance that incoming lawyers are entering with relatively stable coping skills and mental health.  Reporting protocols can be set up within the firm to make sure that struggling attorneys are identified and supported.  Firms can offer coaching and psychological services (confidentially) to help their lawyers cope with both the professional and personal stresses that make them vulnerable to debilitation. Guidelines can be established as to what behaviors constitute grounds sufficient for requiring lawyers to take a break or leave the firm.  And you might check your insurance policy.

This is admittedly moving into the touchy area of ADA concerns about discrimination, but starting to explore these issues before the lawsuit arrives will put your firm on the best footing.

Remember, in these lawsuits, plaintiffs will not try to convince a jury there was a workplace environment like in those movies with Tom Cruise, where evil, even satanic partners work their maleficent intent on their own lawyers. What they will show is the indifference of management to clear and convincing data on the vulnerabilities of its lawyer population, the thoughtless promulgation of requirements like unreasonable performance measures likely to destabilize such a vulnerable population and the failure of management to attend to clear signs that the lawyer in question is in distress—absences, family problems, mistreatment of staff or subordinates, irrationality, emotional imbalance, substance abuse. Just the sort of things most firms and law departments would rather not know about their lawyers--and studiously ignore when they happen to find out.

We offer expert assistance in selecting attorneys, improving their coping skills, providing individual and on-site coaching and psychological assistance, identifying and intervening in problematic situations and developing protocols to sustain a productive workforce and reduce potential liability.

  

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