I was recently interviewed by Bloomberg Law for its Behind the Headlines series. In the interview (click here to view), host Lee Pacchia and I discuss the evolution of rainmaking — otherwise known as business development or sales — in law firms. In the heady days of yesteryear, rainmaking involved networking, establishing and nurturing relationships, ensuring that when clients and prospective clients encountered a legal issue, the rainmaker was top of mind and received a call. Of course it’s slightly more complex than that, as good rainmakers will say that you also have to be credible and competent in your field. Others will say that working the cocktail circuit isn’t enough, particularly with sophisticated buyers, so coming to the table with industry knowledge and solutions in mind is important. All of this is true. It’s also true that, for the most part, successful rainmakers are a relatively small segment of the Biglaw population. Most successful partners have had some success in bringing in work, and while many can cover their own compensation and overhead, quite a few don’t generate enough business to make a dent in the typical large firm’s overhead. A disproportionately high percentage of revenues are concentrated in a relatively small number of business generators. And these rainmakers know it, hence the heavy courting of laterals with portable books of business.
The essence of the interview is describing how rainmaking has become more challenging in the tougher economy. Clients are severing long-standing relationships to seek lower-cost providers. Others are putting immense price pressure on traditionally premium practices. Still others are demanding budgets and certainty and project management expertise in order to minimize surprise and manage change. The stereotypical gregarious rainmaker with a winning smile and a firm handshake who can work a room like nobody’s business is giving some ground to a more sophisticated, data-driven approach. This is good news, because as rainmaking evolves more partners have a greater chance to succeed. Here are five additional thoughts to the points I made in the interview:
Don’t chase every dollar. Revenue is not the same as profit. In the traditional law firm financial model, the way to generate profit is to bill hours. The more hours billed, the more profits generated. This works… to a point. Most firms track their top clients by revenue. This is a nice starting point but as a data point to guide future business decisions it’s incomplete. Without understanding the corresponding profit for the matters, we might be celebrating dollars that are dilutive rather than additive to the firm’s PPP. So many firms have some version of the top rainmaker handsomely rewarded for bringing in a $5 million client… that costs the firm $5.5 million to service. When we look at lifetime value of a client, which incorporates repeat business, cost to acquire new engagements, depth of practices engaged by the client, and more, we find that some business is not worth pursuing. It’s critical to analyze which work is profitable, which clients are profitable, and devote greater resources to winning and keeping work that is lucrative.
Relationships always matter. But not all relationships are equal. When I work with practice groups to understand what process they have in place to identify and pursue new business opportunities, the first discovery is that few have any process whatsoever. However, those firms that reward, and fund, business development activities (not results) will generate an exhaustive list of client lunches, event sponsorships, association dues and game tickets. By putting in place a simple opportunity pipeline populated with a few key data points, it becomes much easier to distinguish between the lunch with Mary, the chief legal officer of a Fortune 100 company on the outskirts of town, whose company has entrenched legal providers handling most of her premium work, and very rarely encounters “bet the company” issues, and who has dined on the firm’s dime 23 times in the last five years without sending a single piece of business, and lunch with Ted, the deputy GC of a small subsidiary of a mid-size manufacturer of aircraft components, who has hired the firm 4 times in the last 3 years for increasingly complex matters and whose company has been named a co-defendant in a high-profile products liability case filed after an airplane crash in Singapore… which just so happens to be where we’ve recently opened an office. We may also discover that game tickets have generated, or at least been a factor in, $125,000 in new business in the last year, but our monthly breakfast briefings that cost, in total, $23,000 to produce have generated $432,000 in new engagements, 50% of which are with new clients.
Relationships can’t overcome bad economics. Every partner reading these words has had a longtime client sever ties in recent years. These are golf partners, law school pals, people we’ve joined on vacations, even people whose kids’ weddings we’ve attended. And yet, when push comes to shove and their CFO is breathing down their neck, they change law firms in order to maintain their budget and keep their jobs. Wouldn’t it be helpful to know which clients are changing outside counsel more frequently now than they have in the past? Wouldn’t it be helpful to know if the economics of certain industries are creating budgetary pressure on legal budgets across all competitors in the space, giving us time to prepare for the tough call? Wouldn’t it be helpful to know which practices, or even which tasks within given practices, our clients feel are declining in value and for which they will refuse to pay premium rates in the future? This information is out there for anyone looking for it.
Don’t confuse strategic pricing with suicide pricing. It’s important to understand the recent remarks made by my friend and colleague, Bruce MacEwen, who is one of the brightest minds I know. In an earlier Bloomberg Law interview he described the suicide pricing taking place as firms offer substantial discounts to win business. This is absolutely happening, and in time these firms will become known because they simply can’t sustain their infrastructure for very long with non-profitable revenue streams. But I am also aware of some savvy practice group chairs in other firms who are offering favorable pricing that, to an casual observer, looks like suicide pricing but in fact may be strategic pricing. Simply put, if I can lower my cost of legal service delivery by eliminating wasteful steps through process improvement, then I can maintain profitability even at a lower price point. Every firm has wasteful steps, as defined by the client, and this is reflected in the firm’s realization rates. Whether through undisciplined write-downs that partners take before invoicing, or negotiated write-downs after invoicing, the firm’s realization rates reflect the difference between price and value from the client’s perspective. And here’s a scary thought – as more clients embrace billing analysis and benchmarking, it’s going to get even tougher. We’re still at the nascent stages of downward price pressure in this market.
Stop smirking, mid-size law firms. You’re next. I have a number of mid-size law firm clients and they are experiencing, in general and in aggregate, one of the busiest stretches ever. As one partner said to me, “Recession? What recession? I’ve never been busier and I’m getting very little pushback on rates.” True. One thing the recession proved is that there are fantastic lawyers in mid-size firms whose expertise rivals that of Biglaw. And because these mid-size firms in mid-size cities offer mid-size rates, clients are calling. The trouble is, if there is no differential value offered by these mid-size firms other than slightly lower rates — no project management, no alternative fees, no predictable budgets — then the clients will eventually press forward with fee arbitrage and select firms in the next lower tranche, offering similar quality at slightly lower rates. And the mid-size firm partners, particularly those who staffed up quickly to meet rising demand, will be left with high overhead and rapidly declining revenues. Rinse and repeat. And when the bigger firms start embracing process improvement to lower their cost of delivery and can thrive at lower rates, then the pressure on the mid-size firms will come from above and below.
If you aren’t having these discussions in your board rooms and practice group retreats, then you had better get started. Despite what you may have heard or assumed from the prognosticators of doom, the crisis facing the modern law firm is eminently solvable and law firms can and will thrive. The question is, will you be on board the bus or under it?
Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change. To inquire about his services, click here or contact him at +1.609.557.7311 or at firstname.lastname@example.org.