Changes and challenges

  • Subtitle: Cover Story: Law Firm Management Roundtable
Written by  Posted Date: September 3, 2012
b_150_0_16777215_00___images_stories_01-CANADIANLawyer_2012_September_sept2012cover.jpgEconomic changes over the last few years have had a dramatic impact on the practice of law in Canada and abroad. Old ways of doing business do not work anymore and the industry is being forced to make substantial structural changes. Canada still lags behind many countries in reassessing the way the legal profession is regulated, continuing, some may argue, to be a self-regulated monopoly that enriches practitioners while acting as a barrier to access to justice. That is perhaps a bit harsh but there’s no doubt that Canada — specifically the provincial regulators — is well behind the United Kingdom and even Australia in adapting to new realities. Alternative business structures are barely on the radar in this country, despite rules that allow multidisciplinary practices in many jurisdictions, but the world is changing and Canada will have to catch up.

The regulation of the profession is the big picture that can be somewhat academic for most lawyers but the running of individual law firms and how they serve clients is something that affects every practitioner every day. There’s no arguing that the way law firms function is evolving and understanding and embracing change is the only way forward for operations of every size. In the last decade, many law firms have embraced more business-like structures by creating executive committees, boards of directors, chief executive officer and chief operating officer positions, and other more corporate elements. The whims and desires of partners are no longer the main drivers of decisions with formal marketing and business development strategies taking over. And Canada is not the island it once was. The globalization of business, primarily for Canada in the strong resource sector, has changed the landscape not only for law firms but for the clients they serve.

In light of the sea change occurring in the profession, Canadian Lawyer gathered together five experts in law firm management — lawyers and non-lawyers at firms of various shapes and sizes — to discuss the management issues facing their firms. We held a lively roundtable in late June to address some of the most pressing matters around running a law firm in Canada today. They included the following main areas: law firm profitability and fee structures; managing the people within a firm; the globalization of law and how Canadian firms fit in; and the future of law firm structures, especially in the aftermath of legal giant Dewey & LeBoeuf’s demise.

The panel joining Canadian Lawyer editor and roundtable moderator Gail J. Cohen were:

Marc-André Blanchard, chairman and chief executive officer of McCarthy Tétrault LLP, which has about 600 lawyers in five offices in Canada and the U.K.

Sandra E. Dawe, managing partner at Shibley Righton LLP, a regional law firm of about 40 lawyers with offices in Toronto and Windsor, Ont.

Karen MacKay, president of Phoenix Legal Inc., who is a globally recognized expert on the challenges, expectations, and motivations of the generations at work in law firms today.

Philip Mendes da Costa, managing partner of Bereskin & Parr LLP, an intellectual property law boutique firm withfour offices and more than 70 lawyers and patent and trademark agents.

Byron Sonberg, managing director at Goodmans LLP, a transactional law firm of 211 lawyers with offices in Toronto and Vancouver.

The following highlight some of the vigorous discussion that took place around those topics. For more from the roundtable, please visit us online at canadianlawyermag.com each week in September for a series of videos covering additional areas of discussion.

Alternative fee arrangements

MARC-ANDRÉ BLANCHARD: At McCarthy Tétrault, what we did two years ago is rolled out a vast initiative of project management. So we trained everyone in project management within our firm from our most senior partners to all members of our staff to all of our lawyers, our students and our articling students as well, and why did we do that? Because we think that the AFAs, the sort of things that we hear more and more about from our clients, it’s all about being able to be more predictable in the pricing of our work and budgeting of our work — about the issue of what’s the scope of work, what are the assumptions, what will be the staffing, what will be the budgeting — and then being able to say so to our clients — and make sure that it gets to the relationship with the clients. So it’s like more transparency. It brings out communication at the centre of the relationship.

The alternative fee arrangements don’t work if there’s no trust in the relationship, so that’s why there must be completely full transparency between the law firm and the client, and there has to be constant communication.

KAREN MACKAY: It’s interesting because I do hear it from both sides — from general counsel and from managing partners, who are trying to cope with all of this — and in so many firms, because general counsel, the client, has grown up in an hourly rate environment, in many cases, they’ll come back with an alternative fee arrangement, it’s just a lower hourly rate or a lower hourly rate by volume. It’s very frustrating from both the firm and in-house counsel perspective. I see that. I see clients wanting project management and wanting methodology that is recognized, and so I see that in terms of that tension around fees. They want faster, better, cheaper.

BYRON SONBERG: In some respect, alternate fee arrangements have been around always, and clearly clients are focusing on them more now and struggling themselves on it. Often, the alternate fee arrangement that’s suggested by a client is freeze to last year’s rates, which is really no different. The challenge comes in on the nature of the work, the nature of the transaction, and the predictability of the work. It’s no different than if you were going to redo your kitchen. If you know what’s going to happen and you know what’s going to go in, you can get a fixed price on it. If you’re doing an older home that’s going to have unforeseen events, it’s going to be tougher to have a fixed fee, and the same thing goes [for] law firms. Depending on law firm transactions or business transactions, depending on the nature of the transaction, it could become more difficult to fix a fee, and there needs to be mechanisms to deal with it.

PHILIP MENDES DA COSTA: What typically the law firm is looking at doing is setting the bar somewhere in the middle. You’ll win some, you’ll lose some. On some files, it’ll take more to produce the work than the fee, but there will be some where it’s faster, and it’s a law of averages. The difficulty you have is if the client turns around in some of the easier files where [the client says] that didn’t take you as long, why should I pay this fixed fee?

SANDRA DAWE: We’ve always done real estate and real estate is one of those areas where, oftentimes, the client wants the fee set at the beginning. Some deals, it’s easy to do; some deals are a little trickier. And there, it’s just really a matter of assessing the deal up front. More recently, we’ve taken on our first class action file, and, because we’re small and we’re nimble, we were able to fairly quickly assess that and make the decision, and so now we’ve embraced another type of fee arrangement within the firm. What I find with us is that as new things come up or as a client walks in the door and they’ve got a new idea, because we don’t have a lot of structure and we don’t have a ton of people, we can assess it for what it is and decide whether or not it works for that particular client and that particular lawyer.

Price versus value of legal services

MENDES DA COSTA: The hourly rate came in initially because clients were having a problem: How do I put a value on these services? That’s worked for a number of years, but it doesn’t really answer the question anymore for a lot of clients. The issue the client now has is where is the value in the work. I have some clients I work with and every so often they’ll call up on a bill to say, ‘I know you did the work, I trust you did it as efficiently as possible and you did a good job on it but this particular one we killed the project. We’re not building the condominium. We’re not going ahead with this project. We’re not going ahead with the licence. So from a management position, while the bill is right, it doesn’t meet our value proposition for this particular file.’ In that case what I will do is I’ll just agree to write down the bill to the client to say, ‘Yeah, I understand.’ Because on that one, it doesn’t work out, and this is what the client is looking for at the end of the day.

SONBERG: It’s the value proposition to the client that really matters. Clients are less inclined to pay for processing content. They want advocacy. They want counselling. That’s huge value and perhaps clients are more able to differentiate that than they were 20 years ago or 10 years ago or five years ago. Maybe they care more about differentiating it because of the pressures that they have, but there’s a big difference in terms of processing paper and doing an agreement versus counselling your client and that really matters when it comes to rendering the accounts.

BLANCHARD: I think that we have to listen to our client, and we have to actually innovate. We have to be more agile in our answers and the way we do things, and that’s why I think it’s an exceptional time for our industry because I think things will change very fundamentally in the coming years. I think it’s just a requirement that is natural, that we have to demonstrate to our clients that we are efficient in the way we provide our services. So yes, excellence in legal services and the quality of our services is essential, and on top of that, you need to actually be able to show that you’re efficient in the way you do that.

DAWE: From a law firm management perspective, there’s another side to that and that’s within a law firm. Lawyers are used to being judged on, compensated on the billable hour. So part of our job is if we’re taking on these alternative fee arrangements, when they’re being staffed, you have to have some thought put into it at the beginning as to how people are going to be credited, people being the lawyers that are working on the files for the product at the end of the day, because if it’s billable hours and they’re flowing through and you’re getting paid for them, then that’s simple enough, but if you’ve got a fixed fee arrangement, and there’s half a dozen people working on the file, and at the end of the day you find that the two senior partners have taken all the fee credits and the associates have gotten nothing from it, come compensation time at the end of the year, that’s going to be our problem, and it’s going to be hard to start peeling it back and reallocating fee credits.

Client feedback

MACKAY: I’m shocked at the number of firms that won’t do [client feedback], don’t do it, or do it at varying degrees. I’m just shocked. I cannot tell you how much clients love it. One of my first engagements was to sit on a patio in Scottsdale, Ariz., and interview clients at a big client event for a U.S. firm, and they said to me — and it really struck me as a young consultant having not done that before — it struck me when they all said this is what makes a difference between this firm and everybody else. They actually care what I have to say and they’ve hired you to ask me, and the clients love it.

DAWE: I think as lawyers we’re all hard wired to be perfect all the time, and one of the reasons that lawyers are sometimes reticent to bring something like this into the firm is they think that the flaw that they see in themselves is now going to be out on the table and discussed. And I think the underlying thing as managing partners that we need to do in our firms, if we can, is make it more of a safe haven for lawyers to recognize that sometimes things don’t go perfectly, sometimes a file could have been handled better. Within the firm itself, I think it would it be great if lawyers could see it as a place where we could dissect the things that don’t go as well as we would like and not think then there’s going to be a separate conversation with the partners talking about how that person is really not up to snuff.

BLANCHARD: At McCarthys, we’ve been doing client surveys for four or five years now, and it’s now in the culture of the firm. We have a very well-structured key client program. So we have 37 key clients in our firm, and we have 200 other important relationships that we maintain, and we try for all the key clients and most of the significant clients to perform a client survey every 18 to 24 months, and it’s actually part of the communication that you must have with the clients.

MENDES DA COSTA: You have to have a relationship with the client and maybe in a large corporate environment, there is not a defined relationship, per se. With a lot of my clients, I’ve got everything from small clients to some large corporations, but because of the number of transactions we’re dealing with, there’s frequent communication back and forward by e-mail. I’ve got one client where about every four to six weeks, we have a conference call. So we’re on top of things and if anything is going [off] the rails or if there’s any problems, they come up there.

I can see you can have a problem if you’ve got three, four, [or] five different partners in a firm servicing one particular client in different areas. Then you’ve got some interesting problems because you’ve got to make sure, in that particular case, that you really are seeing, talking, and listening to the clients and, for some of our larger clients, we actually would go visit them or you’ll meet up with them at a conference, and so instead of hiring somebody to do that, there is an annual meeting with the client.

Fitting into the global marketplace

MACKAY: There’s the mega-firm strategy, similar to the accounting firm, but then there are a lot of other spin-offs and practice areas, boutiques that are popping up. I think Canada’s attractive now because of our banking system and because of our natural resources, oil and gas, [and] mining, and that’s what firms are looking for.

SONBERG: The accounting firms have really figured this thing out great. They all have international structures. The work they do is a little bit different on audits and they can feed the work. The question is do law firms work the same way? Do clients hire law firms because they’re a national or international law firm, or do they hire lawyers? To the extent that they’re hiring lawyers for a transaction, being part of an international name could cause conflicts, could cause detriments to attracting certain work. We have taken the approach that we have relationships and that if we need [or] if our client has a need in another country, we will find the best law firm.

BLANCHARD: We’ve decided that where Canada is a champion in the world economy, we’re going to be able to compete on a global basis, and we play at the highest level of expertise. So it’s financial services, it’s mining, it’s oil and gas, it’s IT infrastructure, and, in those areas and some others, we make sure that we can compete with any global law firm. In a lot of cases, we go to the world with some of our clients and we go quite far and away and quite deeply in the way we accompany some of our clients.

For any firm that is assessing the international positioning or strategy, conflicts are a consideration, and so yes, in Canada, we have specific and quite strict rules about conflicts, so we have to be very careful, and that’s why it has to be one of the components of thinking about [international work].

DAWE: What we are, at 40 lawyers, is what I’ll call a nice chewable morsel, and I’m not saying that because I’m looking to market us as a nice chewable morsel, but because we get approached. We’re a wonderful beachhead for some U.S. or international law firm that wants to dip its toe into Toronto because we’re just big enough to give them a presence and just small enough that we’re not going to cause them indigestion. And we’ve thought about it, thought about it seriously. But for us, it would be the end of us. It might be something wonderful and new for some people in our firm and it might be disastrous for others.

MENDES DA COSTA: We have the advantage of being a boutique IP firm. When we talk about referral networks, we’ve had referral networks since the practice started. The nature of the practice requires that we work with people in different countries. So if my client needs a patent in Japan, they need a trademark in Korea, whatever it is, we do have to outsource that. We don’t do it ourselves. We have to know where to send the work, and over the years, we’ve built what you can call a referral system.

Lessons learned from the Dewey & LeBoeuf implosion

SONBERG: In the case of Dewey & LeBoeuf that blew up, it’s now easy to point at a lot of things that they did wrong. One of the things that I think was key — and this has been said before them and will be said forever — paying a partner to come across the street to join your firm more than a partner that you’re going to pay that’s been with your firm for five or 10 or 15 or 20 years has to be a mistake, unless there’s some circumstance that I can’t think of. There’s nothing that I’ve seen that makes it make sense, and aside from the economics of it, it’s the feeling that partners get of suddenly there’s a greater value for someone coming across and contributing in the same manner that I have without any history with this organization just astounds me.

BLANCHARD: The issue of Dewey & LeBoeuf — it was an exceptional firm in many ways and leading many league tables, not later than last year. I think the lessons that we have to learn from that — from what I could see is a governance issue, a lack of transparency in the way the firm was managed, and I think that’s a lesson for all of us. I mean we’re advising our clients on good governance and what is good governance, and in a law firm, it’s important to have checks and balances. It’s important, we believe, in an open and transparent system for our partnership.
MENDES DA COSTA: I think we have to step back a bit because the first thing that’s important for the partners is the partnership. The partnership as a whole has to actually realize that we are in changing economic times. You can’t respond until you accept that, and if your partnership is anything like mine, you’ve got partners at various degrees of knowledge of what really is happening. Some people are happy in their own corner,  they’re doing their own thing and they don’t really know what’s going on or it doesn’t affect them that much. The starting point goes back [to] the old model, which is growth for the sake of growth is good. That model is gone. That doesn’t exist anymore. Growth has to be strategic. I hire this person. What is it doing for me? Why am I bringing this person on board? Why am I bringing this expertise in-house? These are really the questions that we have to ask ourselves.

DAWE: Well, in my first year of partnership, our firm went through a complete rebirth. We split pretty much down the middle and re-formed the new firm out of the ashes of the previous firm, and I think that there’s an awful lot of people that don’t know that happened because I think it turned out that it was managed quite well, but I’ve seen what you can do taking a law firm apart and putting it back together again, and I think putting it back together again better than it was before. So yes, I’ve seen some very dramatic changes, and in order to do them, you have to have the right people at the table, because I think if different people had stayed than the ones that did, I wouldn’t be sitting here today having this conversation with you.

On different partnership models

MACKAY: I think that we’re seeing an awful lot more of . . . not just two-tier, but multi-tier partnerships. We’re seeing that, not so much in Canada, but in the U.S. But when a firm embraces the two-tier or a multi-tier partnership, if they use that to avoid decisions — not a good idea. If they use it as a pathway to equity partnership, so that it is a step along the way, in that the mindset of you have to be a partner to make partner because you have to have that credibility on the street, that’s a way to use it on the way up. And it’s also a way to use it at the other end or the other arch of the career, where you can become a non-equity partner as part of the path to retirement. I’ve definitely seen that. But where you’re seeing income partnership as a way to avoid a decision or to create, perhaps, a bottleneck so that an income partner never has those business development skills, but does great work, [that] can become a bottleneck to that next layer of talent coming up. There’s a lot of tension in there.

BLANCHARD: At McCarthys, we actually share a lot of information, not only with the equity partners, but also the income partners, the associates. I meet with the students every year when they get into the firm to explain the strategy, what we do, the clients we want to serve, the expertise we are developing and why, and the same thing with all of the members of the staff, and so I think it’s part of the culture and at McCarthys we have a two-tier partnership. We have 20 per cent of our partners who are income partners and the rest are equity partners. It works very well for us.

SONBERG: If you look at McCarthys and Goodmans, we are two very, very different firms in a lot of ways. We are a single-tier partnership. We’re very Toronto-centric, and so there’s some very, very fundamental differences, but what I absolutely agree with you on is it’s important that you explain to people, the incoming articling students, the associates, the partners have the same understanding of who you are and what you are.

Succession planning

BLANCHARD: It’s a very challenging issue for all of the players in the legal industry. I think it goes to the culture of each firm, and this is why, at McCarthys, we push the teamwork approach, and we have large teams of people around our main client relationships, and there’s not one person that is the only person responsible for that client. That’s how we have actually prepared. We have dealt with a lot of the cultural issues of succession planning, and it’s not an easy topic obviously for the individuals that are approaching retirement and that see themselves at 56, 58, 60, [or] 65 years old, that they have to hand over a client relationship. If it’s not part of the culture, it will be a shock when you get to that age.

MACKAY: What I’m seeing on the outside is the tension between how we compensate partners and succession, there’s just a tension there, and that’s the big frustration. Doing the right thing for the client may be the wrong thing for my pocketbook, and we have to get over that, and I think succession has to start as part of career development, as part of client development, start way earlier in a career so that some portion, some work, some clients get automatically, as part of career development and professional development and client development, moved to somebody else in the firm.

SONBERG: We, perhaps, are fortunate at Goodmans that when a lawyer or a partner typically brings in a client, they don’t have to worry about holding onto that client because if they let someone else work on that client, build a relationship with the client, they will lose money. There’s no financial penalty for sharing. There’s no financial penalty for working as a team and that works fabulously. There’s one partner in the firm who often comments to me that he loves the fact that he can bring in a client, build a relationship, maintain the relationship, but the day-to-day legal work and the transactions that the client has are managed by other people in the firm. They do an excellent job. He’s happy. The client’s happy. The lawyer who’s doing the work is happy, or the lawyers doing the work are happy, and he doesn’t have to say, gee, I’m going to be financially penalized for that. We think that’s a really important part of our system and we think it matters a great deal.

MENDES DA COSTA: Our situation is a little bit more unique in some ways because on the patent side of the practice, we have people with a lot of different types of degrees. So when you start looking at transition planning and I look at my clients and just say, right, who will succeed me in my clients, on top of all the issues you have, I have to sit there and say, now I need someone at the right level with the right technological background. We don’t have a mandatory retirement policy, and I think we’d probably run into trouble if we did have one because making sure you have the right people at the right level all the time can be very difficult.

Related videos

Video 1: The future of law firms
 
Prepared with the assistance of Siobhan McClelland.


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Gail J. Cohen

One of  Canada’s most experienced and respected legal journalists, Gail J. Cohen is the editor in chief of Canadian Lawyer and Law Times, responsible for the editorial direction of all the publications in the group, which also includes Candian Lawyer InHouse, Canadian Lawyer 4Students, and the daily Legal Feeds blog. Gail has been covering the legal profession in Canada as a reporter and editor since 1997, putting her in a prime position to access and engage thought leaders in the regulatory, legal, and business realms. Canadian Lawyer and its editorial team have been the recipients of many journalism awards and their publications are highly respected throughout the legal profession in Canada and abroad.

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