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(From left to right):Hugh MacKinnon; Bennett Jones LLP

Lisa Borsook; WeirFoulds LLPBill Tuer; Macleod Dixon LLP

Managing Through the Labyrinth

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With the economy in crisis, firms are cutting back on entertainment, catered lunches and parties. As managing partners keep a watchful eye on the economy and their costs, they discuss their expectations and fears about the futureBy Sandra Rubin

Managing Through Tough TiMes

Party’s over. All that’s left from six years of dou-ble-digit growth is the hangover and sinking feeling something has changed. These can’t be fun times to be a managing partner.

There’s no single right way to manage a law firm but are there a few wrong ways? With some

of the country’s best-known corporate clients wobbling like tenpins, that’s got to be a scary question. The sharp falloff of financial and capital markets work has most managing partners bracing for revenue hits and moving to shore up firm finances. In the United States, almost 1,500 lawyers and staff were shown the door in January alone. In February, roughly 2,000 jobs were eliminated — 800 of them in a single day, including 440 just at Latham & Watkins LLP. By the end of March, the number of lawyers and staff who lost their jobs this year hit 7,000 or more.

“When all of your clients are having difficulties running their operations or closing deals it becomes apparent pretty quickly,” says Les Viner, managing partner at Torys LLP. “So you hunker down for the year and you keep your focus on your clients. We think the situation is real and deep — but temporary.”

How deep? “We’re preparing for a drop in revenue of more than 5 per cent and hoping for flat,” says Viner. “I think people should be prepared for at least 10 per cent.”

At Torys, like almost every other corporate law firm, manage-

ment is looking at discretionary expenses such as entertainment, marketing and conferences. Instead of travel, for example, Viner says people are being asked to use video conferencing where possible.

“We’re also asking people to go to in-town conferences instead of out of town, to be cautious on the entertainment front. Think less and different. Think pubs, not Canoe,” he says, referring to the high-end Bay Street restaurant. As for staff cuts, “it’s too early to say.”

Viner is talking about cost-cutting measures the same day Latham announced its massive layoffs and he seems almost shaken by the scale. He asks about it. “It’s like the size of an entire Canadian law firm,” he says in disbelief.

Could firms here be similarly forced to cut into bone if things don’t turn around quickly? He says no. “The structure in Canada is vastly different because of the leverage. We have an average of one associate per partner and in the US they have five per partner, so you can’t even compare the two models. We’re in a very different place — but we’re not immune.”

Lisa Borsook shares the worry that Canada will not escape unaffected. Every day at 10 a.m. Borsook, the managing partner of WeirFoulds LLP, goes to a special inbox on her computer to scour the day’s “statistics,” a snapshot of work-in-progress, targets, time docketed and time billed. She says law firms generally lag

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(From left to right):Hugh MacKinnon; Bennett Jones LLP

Lisa Borsook; WeirFoulds LLPBill Tuer; Macleod Dixon LLP

Managing Through the Labyrinth

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Reprinted with permission from the May 2009 issue of Lexpert Magazine. © Thomson Reuters

Managing Through Tough TiMes

the larger economy six to nine months, but the warning signs are there.

“The statistics I read about are sobering. We watch the statis-tics all the time, I never take my eyes off them, daily, nor does my CFO or CIO.

“A year ago, you might say the work in progress was off 3 per cent in January but January is an unpredictable month, so you wouldn’t worry too much. You’d wait for the first quarter results. But because of everything you read these days there’s a whole new level of anxiety.”

Firms that are not heavily dependent on transactional or lending work should have an easier time, and those with low bank debt are better positioned to ride out the storm. But those firms that finance their working capital through credit lines and those that have borrowed heavily to build new offices or expand into new markets are hunkering down for a rough ride. Two top corporate firms are widely believed to be dealing with current revenue hits of 20 per cent and 14 per cent, according to half a dozen managing partners (not something they’d want to publicize).

“There’s going to be a lot more competition for less work,” says Norm Bacal, co-managing partner of Heenan Blaikie LLP. “I wouldn’t want to be one of the mega-firms who’ve built them-selves on just getting their fair share of the mega-transactions because who knows if there are going to be many this year.”

As for Heenan Blaikie’s revenue projections, “if we’re within 10 per cent of last year I’ll consider this to be a very successful year. We’re all going to earn a little bit less but we all earn very nice amounts. If you took 10 per cent off that it’s not the end of the world — but I’ve heard some of our competitors talking about 30 per cent drops in expected profits.”

The fight to stay financially strong can’t be waged solely in the trenches of cost cutting, says Bacal. There also has to be a new focus on receivables.

“That means following up with clients and being very cognizant of who you’re representing. If your client’s in an at-risk industry you’re being a little more careful about how often you’re billing and what your collection process is.

“The one thing I think all the law firms will tell you is the re-ceivables cycle, the day the bill goes out to the day it gets collected, is up probably between 10 per cent and 15 per cent — it’s getting slower. So we’re a lot more vigilant as to when we get paid.”

He says he hasn’t yet heard of any Canadian law firms making capital calls yet (asking partners to put more money into the business), “but I wouldn’t be completely surprised if that were to change by the fourth quarter of this year.”

Iain Scott, chair and chief executive officer of McCarthy

Tétrault LLP, has a piece of advice for everyone: It’s a new day.Scott says the withering of world credit markets is unlike the

slowdowns of 1999 and 2001, which were driven by the collapse of the tech bubble and 9/11 respectively. This time, he doesn’t expect quite as easy a bounce back. “This is systemic and struc-tural,” he says. “Everyone needs to reset their expectations and strategies.”

Great expectations, in short, need to be downsized to good expectations. That’s where things start to get interesting.

Borsook, who’s been managing partner of Toronto-based WeirFoulds for three years, is asked about her greatest fear in steering the firm through this recession. She thinks for a good half minute.

“I guess my biggest fear is that it will turn out I haven’t managed my partners’ expectations, that they’re disappointed. Part of the art of managing a law firm is managing the expec-tations of everyone who works here. If people are disappointed and can’t do things they thought they could, it’s demoralizing. It’s not good.”

She believes the key to managing expectations is to make sure everyone is kept current. Members of the WeirFoulds manage-ment committee each have responsibility for regularly commu-nicating the “statistics” to assigned firm members, making sure no one is left out of the loop.

A formal approvals process for expenses has also been introduced.

Les Viner; Torys LLP

Reprinted with permission from the May 2009 issue of Lexpert Magazine. © Thomson Reuters

Managing Through Tough TiMes

“We’re asking our partners to be prudent and to be cognizant of what people are feeling out there. I’m not even sure any of my clients would want me to take them out and entertain them lavishly,” says Borsook. “That would look like the equivalent of a private jet — people don’t want to say they have them any more because it’s embarrassing. We’ve directed all of our partners to think about that when they do their client entertainment and client business development.

“We’re also trying to use our technology more efficiently and to look at salary review and bonuses in a more merit-based context as opposed to something that’s more formulaic.”

WeirFoulds raised its rates for 2009, she says, although she calls hourly rates “a bit of a red herring” because they are always subject to conversation.

McLeod Dixon LLP, in contrast, is freezing rates, says managing partner Bill Tuer, who budgeted for 2009 revenues “somewhere between flat and down about 5 per cent — and if it’s more than 5 per cent, it wouldn’t be much more.”

Tuer says while that’s not the end of the world as the firm knows it, it clearly warrants restraint. “You look for savings where you can find them in areas like inter-office travel and pro-fessional development and some marketing.

“Marketing and business development is always tricky, of course, because you never want to impair the relationship with your client. But there are some things that can be perceived as extravagant or as extras in challenging times, things that you can defer. It’s a very sensitive area because we never want to be perceived within the firm as not being prepared to make the in-vestment in maintaining clients and growing our business. But if there’s a legal education seminar that’s local or regional instead of international, then this would be the year to go.”

Tuer says the various belt-tightening measures are being com-municated to clients. “We told our clients that we’re going to manage our business carefully so that we can maintain those re-lationships and hold the line on rates. When you’re not able to raise rates, that puts pressure on the firm and our own economics but we thought it was the better thing to do.”

Unlike WeirFoulds, Macleod Dixon hasn’t introduced an approvals policy for expenses (“our firm overall isn’t big on rules and edicts,” explains Tuer, “so you’d never see much of that coming from us”). What it is asking lawyers to do is get a second opinion from either the practice group leader or the local managing partner on expenses like travel.

Management of the two firms may have made some different decisions but Tuer and Borsook have this in common: If you ask Tuer the biggest challenge in steering a firm through these times, he too talks about people’s expectations.

“Over the last few years it’s been easy to be liberal in support-ing your partners. When times are good and you’re in a growth mode, you’re always looking for ways to provide additional resources to the partners to help them grow their practice. Over time, this has given rise to a whole set of expectations about how the world works and now it’s a big challenge when you have to say no for the greater good of the firm.

“For those who’ve been practising for a long while, this is no surprise, but there’s a generation or two of partners out there who haven’t been through this.”

They had better strap in for the ride.

Few law firms are immune to the economic wind shear.

Cassels Brock & Blackwell LLP is projecting 2009 revenue “down between 5 per cent and 10 per cent,”

says managing partner Mark Young and so, like Tuer and Viner and Borsook, he’s been revisiting the perks the firm offered in good times. “We’re asking whether they have to be as extrava-gant,” he says. “For example, there’s a partners’ lounge and a lawyers’ lounge and everyone can pick up a fully catered lunch every day. We’re going to continue that but you can cut costs by 10 per cent and still offer the service.

“There would normally be two hot items to choose from, beef and chicken or fish, and three or four different sides and dessert if you want it. Maybe we don’t have to offer everybody so much variety. Maybe you don’t need two varieties of meal every day; maybe you can have one hot and one cold option. So there are a number of things you can do.”

Cassels feeds an average of 110 lawyers on any given day. Do the math (or better yet, have Young do it for you) and the program comes out to between $360,000 and $400,000 a year. Shave off 10 per cent and you realize pretty quickly it’s a drop in the bucket.

For those of you who don’t manage law firms, you have just brushed up against the hard reality. Between 75 per cent and 85 per cent of a law firm’s expenses go towards fixed costs: rent and personnel. You can scrimp and save all you want on discretion-ary expenses but the money saved will never amount to more than a fraction of total costs.

Young realized he was going to need to trim the numbers, so 38 staff members were cut, about 7 per cent of the Cassels workforce. It wasn’t the first Canadian firm to do so – in November, Fraser Milner Casgrain LLP laid off about 40 people including 10 lawyers, about 3 per cent of its workforce – and it probably won’t be the last.

According to US industry consultants, letting a lawyer go can

Reprinted with permission from the May 2009 issue of Lexpert Magazine. © Thomson Reuters Reprinted with permission from the May 2009 issue of Lexpert Magazine. © Thomson Reuters

Managing Through Tough TiMes

save about $250,000 in annual costs, while the figure for legal assistants and other staff members is about $100,000. But many Canadian firms are leery of cuts – especially associates – for fear they’ll give the firm the cold shoulder later in their career and try to persuade their friends to do the same. So the interesting thing is not so much that Cassels made some cuts, it’s that the firm put out a press release announcing it.

“There was certainly a lot of thought and discussion about that,” Young acknowledges. “I guess the starting point is we thought we’d attract attention whether we announced it or didn’t announce it so if you’re going to be the subject of some attention perhaps it’s best to put the facts out there yourself, rather than having them come out in dribs and drabs and in rumours that would circulate.

“We waited for quite some time, looked at what some other firms had done – particularly in the US – compared reactions to those who made announcements and those who didn’t make an-nouncements, and ultimately landed on the approach we took.”

As the conversation with Young is winding down, having gone through most of the areas where the firm is trimming, he suddenly volunteers that there is one area Cassels is not going to touch: Marketing and business development.

“Those are areas where if you don’t keep investing, your firm will suffer in the long term,” he says. “I think the reality is the firm should probably spend more money on marketing and business development this year than we’ve spent in prior years.

That’s what the mindset has to be.” Remember that statement about there being no single right

way to manage a law firm through these tough times? Here we go.

scott Jolliffe, chair and chief executive of Gowling Lafleur Henderson LLP, says there are no sacred cows. Gowlings has already put a major marketing initiative on hold.

“We had a branding launch planned for early this year and our feeling was we should postpone that for a couple of reasons,” he says. “One is cost and the other is we thought this isn’t the time to be trying to get the attention of the marketplace on something like brand identity.”

Gowlings is taking many of the by now familiar measures, looking at “business development, firm travel, internal admin-istration, professional development, conference attendance and sponsorships.”

But the firm is also asking staff to take time off instead of putting in for overtime, and has instituted a hiring freeze. “Where in other times we might replace support staff who left, we’re making do with what we have and asking people to work in teams and pods and engage in a lot more sharing.”

Gowlings doesn’t expect to have to let go of any support staff or associates, says Jolliffe.

“I don’t say we’re immune from that type of thing but my phi-losophy is when you’ve got good people, you hold on to them for as long as you can afford to. Because as sure as things are down now, they’ll turn around and you’ll need those people. Plus it creates a significant morale problem. So my inclination would be to reduce work hours and compensation rather than lay people off, which is a much more team-oriented approach.”

Jolliffe says his firm has already started to see a slide in col-lection rates, and it’s important to stay on top of that side of the equation.

“Our realization rates dropped slightly in 2008 and it was probably mostly because of the fourth quarter, so we’re anticipat-ing a higher bad-debt expense this year. One thing we did experi-ence in the fourth quarter of 2008 was the need to write off more of our time, it proved just not to be billable. So in terms of this year I think that’s something lawyers need to be very conscious of, and ensure that before undertaking work that it’s going to be paid.”

McCarthy Tétrault is also putting emphasis on timely collec-tion. “We started a real push in September to get time billed on a timely basis, which is what clients want,” says managing partner Iain Scott. “We have a target that we set every month that’s based on our unbilled work-in-progress and our outstanding accounts

Mark Young; Cassels Brock & Blackwell LLP

Reprinted with permission from the May 2009 issue of Lexpert Magazine. © Thomson Reuters

receivable. Our draw policy for partners is tied to our exposure target — so if we do better on billing and collecting, then we distribute more to our partners.”

Unlike Gowlings, McCarthy Tétrault has not instituted a hiring freeze, he says, “in fact, we’re still in growth mode in Calgary. You can’t stop hiring and you can’t stop admitting new partners, otherwise you get legitimately accused of pulling up the drawbridge.

“Will firms be a little more aggressive, a little more focused on numbers and quality? For sure. But attrition’s still an issue in our business and getting good young talent is still an issue and we still have a big focus on our gender diversity to improve those metrics. So we have to keep hiring at the bottom end because people are going to continue to leave.”

McCarthy Tétrault is looking closely at things like non-client-related sponsorships, for example, amidst a variety of other costs. “Will we take some things in-house where we otherwise would have gone offsite to a restaurant or hotel? Sure. So rather than spend $25,000 for a practice group meeting in a restaurant, you can do it in-house for $1,200. So that for sure will happen.”

Like Tuer, Scott has been talking to senior clients about the firm’s belt-tightening measures. He says it’s a message they want to hear.

“It resonates with clients because if we’re not trying to manage our costs, then they have no comfort that our billing rates are actually sensible. If they think we’re just passing on unreasonable cost increases then they are going to object to our rates. You can’t have a sensible conversation with a client if they don’t actually think you’re on top of this issue because that’s all they’re dealing with.”

Sounds sensible. So why is one of McCarthy Tétrault’s cross-town rivals so reluctant to talk? It turns out the issue of whether to go public can be a surprisingly touchy one.

There’s sensible, and then there’s sensibility.

The managing partner of a major Canadian firm (one that would be a household name to anyone reading this article), says he has much to say – much he wants to say – but will do so only if it’s guaranteed his

name will not be used. He can’t be talked out of it, or even into using what seems like the blandest portion of what he says for attribution.

“I am categorical that we don’t want anything under our name and I’ll tell you why,” he says. “We’ve told our staff and lawyers 95 per cent of what I’m going to tell you, but we haven’t necessar-ily told our clients. We’re not trying to hide anything from our clients, but we’re exceptionally concerned about perceptions of our staff and our lawyers. We’re just paranoid.”

What he has to say is interesting enough to use his comments anyway. For starters, he doesn’t believe clients care a whit about how law firms are managing their costs. “I think clients want to hear we’re cutting rates or freezing them and what discounts we’re going to give them. The fact that they know we’re reducing expenses is fine but clients who know our business know that cutting expenses does very, very little for us.”

He says the only cuts that have a meaningful impact on the bottom line involve people and, “even then, if we cut 50 people the impact on revenue would be minimal. This is a top-line driven business and there’s very little you can do to impact the situation. So if we decide to cut retreats, it’s going to have no impact. If you cut the Christmas party and the summer party, very little impact. And cutting 50 people would send shivers throughout the organization and only earn each of us maybe $25,000 more.

“So those kinds of move can have very little financial impact on your partners and great impact on morale. You have to be very, very careful.”

His firm has decided to keep retreats because management feels they’re important to maintaining cohesion among lawyers. “People are nervous, so this is not the time to send a memo saying we will not go to any retreats.”

He says the one area where things are likely to change signifi-cantly is lateral recruitment. “The marching orders are no lateral hires unless the person is exceptional and this is a once-in-a-lifetime opportunity. One of the very important concerns is if you start cutting your expenses and your people, this has major impact on morale and recruitment. It takes many years before it’s forgotten in the market, so we want to avoid going there. And not hiring laterals has virtually no impact on your people.”

How bad does the firm expect things to get? His firm, like many others, is projecting revenues “about 5 per cent lower but profit per point – what we distribute to our partners – is projected to be 12 per cent lower.”

That puts them right on target with most firms. The annual double-digit growth in profits per equity partner that law firms experienced, and some younger partners came to expect, are a distant memory, according to leading industry consultants. Profits per partner in 2008 ranged from flat to down 10 per cent compared with 2007, according to Hildebrandt International, Inc. and Citi Private Bank, and they warned the outlook for this year is no better. They are predicting 2009 profits per partner will fall a further 5 to 15 per cent or more.

Take home 12 per cent less? Try telling that to partners who have only ever seen their draws rise.

Reprinted with permission from the May 2009 issue of Lexpert Magazine. © Thomson Reuters Reprinted with permission from the May 2009 issue of Lexpert Magazine. © Thomson Reuters

Managing Through Tough TiMes

The picture is not universally gloomy. According to an Altman Weil, Inc. survey of large US firms, 66 per cent are expecting lower revenues in 2009. That means a third of firms see their world remaining

stable, or getting better.Count Daniel Gallivan, QC, in that group. Gallivan, chief

executive officer at Cox & Palmer in Halifax, is among those projecting flat revenue this year — although for the first time, the firm is going to be reviewing its budget on a quarterly basis.

“To the extent we’re wrong, we’ll deal with it that way. And we’re doing it that way because it’s become impossible to project what’s going to happen. We’re in the great unknown.”

You can put Hugh MacKinnon, chairman and chief executive officer of Bennett Jones LLP, in there as well.

“We’re not as busy as we were but it’s not bad enough to start making any fundamental changes — it could be, we’re not arrogant either. We’re watching very carefully. Our world hasn’t changed yet. We had a very good year in 2008. But we’re under no illusions that if the economy falls apart we’re not going to be immune, these things can turn on a dime.”

Bennett Jones distributes cash to partners monthly, he says, so it’s not likely to be ambushed by any changes.

“We don’t distribute against the budget, we distribute what we actually have. So if we don’t have it, we don’t distribute it. Firms that get stuck with bank debt are the ones that distribute a fixed amount every month and if you’re distributing a fixed amount every month and receivables don’t come in, you have to borrow. If you’re distributing cash, you don’t.

“If cash isn’t coming in you get a smaller cheque but you don’t find yourself behind the eight ball. It also means if things start to go sour, we’re all going to know about it pretty quickly. So it’s eyes wide open but no changes yet.”

In Vancouver, John Smith, managing partner of Lawson Lundell LLP, held information meetings for partners, another for associates and a third for staff to talk to each group about the economics of 2009.

“We told them we’re not in a position where we’re going to have to make wholesale cuts as long as things develop in line with our current expectations, which is a reduction of 5 per cent to 6 per cent relative to last year.

“We’re going into this with a relatively lean cost structure — I don’t think we could cut our legal assistant roster unless we were cutting lawyers. And if we were cutting lawyers, we’re not highly leveraged so, as I pointed out, if we had to let 10 lawyers go, some of them would have to be partners. And as soon as you say that to lawyers, the conversation about ‘Couldn’t we lose a couple of people?’ tends to turn around, as I believe it should.”

Smith says while it’s important to rein in costs, it’s just as

important not to strangle the firm’s future prospects in doing so. “When we come out of this, we’ll need to have the right resources, we’ll need to have our client base and we’ll need to have systems,” he says. “So, for example, we’re proceeding with some reasonably significant IT projects that are laying the base for the next rollout we’ll need to do, we think in a year or two.

“I think we should all be focused on making sure we position ourselves for when things turn up again. If there is a wrong way to manage a law firm, I think it would be to take your eye off the ball and think you’re never going to come out of it, to think ‘we’ll worry about that when it happens. We just have to manage through this situation here and if that means cutting into the flesh or even the bone, well too bad.’

“That would be a big mistake. Firms that are simply maximiz-ing their income off a declining revenue pool could be putting themselves in trouble. Yes, we all want to be as busy as we can be through these times, but let’s make sure we position ourselves for when things turn up again.”

Sandra Rubin is a freelance legal affairs writer.

John Smith; Lawson Lundell LLP

Reprinted with permission from the May 2009 issue of Lexpert Magazine. © Thomson Reuters

Reprinted with permission from the May 2009 issue of Lexpert Magazine. © Thomson Reuters416.365.1110

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