Insights

Q. What is the most important lesson you have learned about managing law firms?

That consensus is no substitute for leadership. personal counsel law firm profitability

When I became the managing partner of a large San Francisco law firm, the president of one of our firm’s clients sent me a note with this very advice. It has proved invaluable to me ever since.Unlike most business ventures, law firms, particularly partnerships, are created as horizontal structures. Vertical structures are easier to manage because they more clearly define who is in charge and who will make the decisions for the organization. In law firms, lawyers not in management roles feel entitle to voice opinions and expect management to act on those opinions. This horizontal structure unfortunately creates a temptation for firm management to seek compromise and consensus in even the most basic decision-making. This usually impedes true progress because in general, lawyers not in management roles do not fully or clearly understand what is best for the firm as a whole. They merely want to have a say on matters they perceive will affect them most directly.  It is often appropriate for management to seek input before making some decisions, but a consensus-based management approach is not a substitute for true leadership in defining the best course for the firm.

Leaders should be placed by the firm in a position to lead, just as in vertical business structures.  Recognizing these traits and pitfalls is essential to effective management of any organization but is particularly important for law firms and their managers.

 

Q. What is the most critical factor in increasing law firm profitability?

A hard look must be taken at whether the firm is “right sized” for current business realities.  

Many law firms govern by inertia, positive and negative. When things get busy, optimism prevails, new people are hired, and operations expanded.Expansion fuels the ego and creates dreams of wealth. If things slow down, hope often remains that business will rebound, so the firm takes insufficient action to reduce expenses, attorneys and staff. Although it’s tough, management has to recognize this pattern and act promptly and decisively.Failure to manage growth and contraction properly results in unnecessary expenses and under-utilized attorneys and staff. Morale generally suffers and fear of excessive overhead may lead the firm to make unwise decisions, including the pursuit of unfamiliar types of business that may prove unprofitable and compound the problem. Although firms in this situation recognize the need to shrink, they are slow to reduce expenses and lay off people. Hesitating to act quickly and decisively can retard the financial success of an otherwise productive firm for years.Firms often benefit from outside assistance in managing both shrinkage and growth. Downsizing can be personally painful to the leaders of the firm no matter how necessary. They are not as personal to the consultant, who can look at the complete picture objectively without being limited by established cultural practices or firm norms that no longer can be sustained. He may see different ways of doing business that will require less sweeping cuts. The same is true about managing growth. The consultant can help moderate the owners’ enthusiasm for growth with an eye toward avoiding the creation of built-in surplus when needs change.

With experience and professional size management, the profitability of the firm can be maintained or increased regardless of changes in the business climate.

Q. What is the most significant mistake you have seen an attorney make at trial?

When an expert witness is excluded or limited in his testimony because of poor preparation by the trial attorney, the result can be catastrophic.

When the trial attorney fails to provide the expert with sufficient information or define the specific opinion needed, things can go south quickly. Although the expert often can assist the trial attorney in making these decisions, it is the trial attorney who must understand the legal sufficiency of any opinion and how it may be presented to the court and jury. Two cases from my past point out what can happen if the attorney does not keep this in mind: In a 2006, commercial dispute, I observed a Florida attorney representing the interests of my company cross examine the plaintiff’s main financial expert. This meant that the defense counsel, if he lost on liability, had no ability to present a lesser number to the jury. When the jury went to deliberate, it was all or nothing. If they found liability, they had to award $20 million instead of the $2 million that would have been the correct damage amount. They awarded $20 million and my company sued law firm for legal malpractice. In a 1995 broker-malpractice case where I represented a high-net-worth investor, I deposed the defense’s world-renowned financial expert for several hours on the issue of liability. The federal judge ruled that the expert could not testify despite his impressive credentials and admonished the defense counsel by saying that “The case you prepare is not always the case you get to try.” We received a substantial plaintiff verdict based upon the unrebutted testimony of our expert. In both of these cases, disastrous results could have been avoided had the trial attorneys thought through their case process and made sure their experts were sufficiently prepared to offer admissible testimony on all of the important issues.

Q. Where do firms get into trouble in terms of attorney compensation?

Too many firms, while espousing certain values, actually reward very different behaviors. A compensation system works only when the financial incentives are specifically aligned with the stated goals of the firm.

Many law firm management consultants spend hours and hours interviewing the firm’s attorneys to learn about what they perceive as the firm’s values. I have found that the easiest way to determine the firm’s real values is to look at the way the attorneys are compensated and see what behaviors actually are rewarded. For example, many firms will tout business diversification as a goal, yet their compensation plan actually rewards work on existing business and may actually penalize those venture out to develop new business. Diversification can be the catchword of the firm retreat, but in the end the attorneys know that their individual incomes do not depend on their diversification efforts.

Failure to recognize the different roles attorneys play within a firm is another common problem. The firm needs to decide what roles they need their attorneys to play in order to meet the firms goals, recognizing that some attorneys are finders of new business, some are minders of existing business and others are grinders who do the work. Depending on the needs of the firm at a given moment in time, the value of these roles can vary dramatically. Firms suffer when they do not properly identify the roles and adjust compensation accordingly.

Another example is where firms talk about their collegiality and culture of cooperation yet actually reward the lone-wolf “rainmakers.” In this situation, what incentive do any of the other attorneys have to work toward the stated+ goals of the firm?

While admitting that the firms stated goals and culture are out of line with their compensation plan is a bitter pill for many firms to swallow, it’s absolutely essential to long term financial health and success.

Q. How much does the reputation of the plaintiff lawyer affect how an insurance company handles a claim?

It can mean a lot! And I can say from personal experience that underestimating this fact can cost you and your client a lot of money.

Some years ago I was handling the litigation in an insurance bad faith case. Our in-house attorney had been following the developing case and had concluded that it was a low exposure case, in large part because he was unimpressed by the opposing lawyers. The defense counsel was similarly unimpressed and did not take seriously the prospect that the case might go to trial. He did little discovery and few interviews of company personnel.

One day, several months before trial, a well-known bad faith attorney appeared for the depositions of several company representatives. Suddenly it became clear that the case might be worth much more than originally thought. The ultimate seven-figure settlement confirmed that conclusion.

In this and other cases, the identity of the plaintiff attorney was a primary factor in whether the case was considered “high-exposure” and placed in the system for senior management evaluation and settlement.

Many competent attorneys, with good cases, are able to do what is necessary to prepare the case properly for trial. Nevertheless, it is inescapable that reputation plays a large role in the perceived value of the case when viewed by insurance claims personnel and senior management. The lesson to be learned is that even with excellent preparation, an insurance company is much more likely to take the case seriously if they are aware that a well-known lawyer will be involved. The cost of retaining a more experienced attorney to assist in this way often will be justified by the greater concern it creates within the insurance company and higher settlement value given to the case.

An insurance company is much more likely to take the case seriously if they are aware that a well-known plaintiff lawyer will be involved. The cost of retaining such an attorney is almost always justified by the higher settlement value assigned to the case.