Law firms are under increasing pressure to run their businesses more effectively. Throughout 2018, Canadian Lawyer, with research partners RSM Canada and CIBC, invited members of the legal community to provide input on six critical topics facing the legal community, including diversity, succession planning, talent, growth/capitalization, expense control and technology.
Managing Editor Tim Wilbur then sat down with Hasan Khorasanee, Director of Commercial Banking at CIBC, and Michael Nicoló, a partner at RSM Canada LLP, to discuss these topics. The goal was to offer insights to our readers that both Khorasanee and Nicoló bring to their law firm clients about these key issues. Our aim was to help lawyers and law firm administrators tackle these issues to ensure that their law firms are successful, profitable and well positioned for future growth.
Khorasanee: Measuring diversity is one thing; working to ensure that all stakeholders in your firm are conscious of the benefits diversity brings to your organization and the benefits achieved through greater diversity is another. They’re conscious about the diversity gap within their partner ranks, and their associate populations today tend to be more reflective of the diverse world in which they operate. Now, the actual measurement of it in addition to action plans to address any gaps tends to be relative to their size and resources.
Nicoló: At RSM, our experience with law firms has found that a key reason many firms struggle with diversity is structural. In most law firms, few initiatives happen, particularly major cultural changes, without the support of the managing partner and/or the executive committee. There are many competing initiatives, and if diversity is not high on leadership’s priority list, nothing happens. Diversity is not an easy agenda item, but it is critical that firms address it. Research shows that diverse groups outperform homogenous ones. At RSM, we have noted that diversity is good for business. Firms that invest in diversity report seeing many advantages, such as an increased ability to attract talent, greater innovation and improved financial performance.
Wilbur: If firms want to invest in improving diversity, how can they best do that?
Khorasanee: Being conscious of your firm’s diversity gaps and ensuring partners and employees understand why diversity is important in narrowing the gap. The reality is that a diverse workforce produces better results — results that are more thoughtful, relevant, relatable to the world we live in and, most importantly for firms, the client base being served. Law firms need to recognize that clients who are deciding on where to spend their legal dollars are getting more diverse. Beyond the technical expertise that they are expected to offer, law firms are in the relationship business. At CIBC, our view is that relationships matter. We are acutely aware that providing thoughtful, relevant and relatable solutions are key to maintaining and growing our client relationships. For law firms, it’s no different and, connecting with their diverse client base will be key to sustainability and growth. What can they do? Well, they can ensure that their workforce feels that their diversity matters, that their diversity is a benefit to the organization and is valued by the organization. When you’re investing dollars, what does that mean? It’s largely driven off some of the initiatives and constraints that firms will have at the leadership level. But I think that what that looks like is in programs that ensure that your workforce — your talent pool, which is your key asset base — feels that that diversity is valued.
Nicoló: I think it’s important that your people reflect the community and clients that you serve. As Hasan mentioned, law firms are in the business of serving clients. And if you have people who come from different perspectives at the table, the solutions that you bring to your clients, the way that you interact and the relationships you build with your clients are really going to distinguish you from your competitors. For many smaller firms, it may not be realistic for them to do formal measurements of diversity for a few reasons. What can they do to improve their diversity? I think they need to ensure that they have the right top-down attitude. Leadership needs to be an advocate for diversity. They also need to evaluate their hiring process. Do your people reflect your community and clients? And, lastly, everyone can promote diversity, and this can take many forms. You should collaborate with human resources and your staff to see what makes sense for your firm. But at a minimum, you should have a diversity policy and annual diversity training.
Wilbur: Some of our readers indicated they felt doing formal surveys, especially where they may not have enough people, was an invasion of privacy. How do you address that concern?
Khorasanee: I think you need to understand the culture of your organization. There are going to be cultural norms or nuances to those cultural norms within any organization. I think you need to be able to read that. If you can get the message across about what you’re doing, that the intentions are for the good and they’re not there for any other hidden agenda, I think people will be quite accepting of what you’re trying to achieve. If you do want to launch an initiative, solicit ideas. So, if a survey feels invasive, ask for feedback on what people think you can do. Get the message across that it is important for you, it is important for us, it is important for our clients. You want to engage your talent pool to have a say at the table so that they feel they’re part of the solution. It may not be a survey, but it could be something else like a committee. But I think if you get the ideas from your team, it’ll be much easier to roll it out.
Nicoló: Hasan is right on point. I would emphasize that communication and education are paramount to overcoming this concern. The firm needs to clearly articulate why the firm is engaging in this process and the benefits. Diversity is good for business, and firms that invest in diversity report seeing many advantages, such as an increased ability to attract talent, greater innovation and improved financial performance. It’s critical that this process not just be relegated to HR to champion. The managing partner and the executive committee have a key role to play. Leadership engagement makes the difference.
Wilbur: Succession planning is a big challenge for law firms, especially the smaller firms. What initiatives should law firms consider when they’re mentoring younger lawyers for succession planning?
Khorasanee: Talent is a critical factor in business sustainability, and good succession planning is a key part of that. When we talk to our clients at CIBC, we hear the same message. There’s a lot of competition for the right talent, and law firms need to tap into a diverse talent base to ensure that they can thrive and grow in the future. There are several actions that we believe firms can take now to prepare for that future. The first would be to develop a strategy so that the organization can attract talented people with a wide array of interests and backgrounds. Leaders can be incented to ensure the success of future leaders by sharing work and developing broader client relationships. Well before they retire, partnership agreements can be set up to ensure that senior partners are thinking about the future sustainability of the firm and operating in ways that allow for transfer of practice and business development experience. Another key aspect to succession planning is to ensure that people in the firm are properly compensated throughout their career and that they have good retirement plans in place. Most firms will tell you, “We don’t want to get involved in our partners’ personal financial affairs,” but the reality is that partners who have well-planned retirements are more likely to retire. And that’s a big part of transitioning talent pools from one generation to the next.
Nicoló: Based on our own experience at RSM and years of working with law firms, we have found that it’s important to create a culture and process around succession planning that develops the next generation of partners. Set out standards on how partners are expected to involve junior professionals in meetings with clients, in the management of files and responsibility for seeking new business from existing clients. Creating an environment that is focused on developing leadership skills of the firms’ top talent is key. Formal training and coaching work well. Shadowing is also a great way for people to see how others do it in action. Review the partnership agreement and your compensation models to ensure that they don’t include clauses that act as a disincentive for senior partners to engage in succession planning. Partner compensation in the years immediately prior to retirement as well as the pension payout, if one exists, should also be tied to the successful transition of client relationships. If succession has not been addressed, put together a plan. At a minimum, the plan should focus on partners’ exit strategy, client transition and the development of future partners. Sole practitioners and smaller firms should actively develop existing employees to take over. They should also be in communication with larger firms about transferring clients. Sole practitioners should implement a practice continuation agreement as this will ensure your practice is transferred to another firm or individual in the event of your disability or death.
Wilbur: One of the things our readers indicated that they are considering for succession planning is training their young lawyers in marketing and business development. How can law firms do that effectively?
Nicoló: RSM research has found that there are three effective strategies. First, formal coaching and training. Partners should provide guidance to associates on effective ways to engage in marketing. For example, partners should encourage associates to maintain their contacts from undergraduate school and from law school, and nurture and sustain these relationships over time. These contacts might be tomorrow’s Fortune 500 General Counsel or potential referral sources. Second, shadowing. As helpful as coaching and training are, watching someone who is good at something is an even better way to learn. For example, a partner could take an associate to a client meeting, lunch or social event. And lastly, involve them in activities. Another valuable way to impart marketing and business development skills is for partners to give associates opportunities to collaborate on activities. For example, partners should invite associates to participate in formal pitch meetings with prospects. Firstly, this will show the prospect that the firm values its associates and considers them vital participants on the team. And secondly, by playing a role in the meeting, an associate will gain first-hand experience on how to pitch business.
Khorasanee: People are going to do what they’re incented to do. So, you really need to ensure that you don’t have any disincentives built into your organization preventing people from doing the right thing. That’s step one. Step two I believe is that you need to consciously build into the system incentives for senior partners to do the right thing. So, that means allowing them to have time to mentor junior partners and connecting these more junior partners with their network. Many senior partners don’t need to pound the pavement anymore to meet their business targets; the calls are coming to them, whereas junior partners are pounding the pavement. You bridge that by ensuring that the compensation models build in a factor of mentorship and future firm sustainability.
Wilbur: What other changes should law firms consider for succession planning?
Nicoló: Law firm leaders should really quantify the risk to see what is at stake. Many firms don’t have a clear idea of the risks and exposure to potential loss from the looming retirement wave. Determine the amount of the firm’s revenue that is tied to each partner and estimate how much of this revenue would be lost with the partner’s departure. Create incentives for partners to support succession planning. Once a clear succession planning process is established, there should be financial rewards for partners who meet recognized milestones. It is important that junior partners buy into the plan and that senior partners help junior partners grow the practice. The managing partner must champion succession planning. We have found that, in most law firms, few initiatives happen, particularly major cultural and structural change, without the active support of the managing partner.
Khorasanee: Succession planning is critical to the firm’s future sustainability, especially as it relates to knowledge and relationship transfer to incoming leaders. Most law firms agree that it’s an issue and they talk about it on the surface. But it’s rare that firms are going through a step-by-step process to evaluate what they can do better. What happens if a partner leaves? What’s going to be picked up? Who’s going to do it? Those formal steps of thinking that through, we’ve found at CIBC when we engage them that it’s not that common for firms to have gone through that exercise, even though it’s critically important.
Wilbur: What about attracting the talent? What should law firms think about as they’re planning their recruitment strategies?
Khorasanee: Generally, law firms do try their best at creating a welcoming environment for clients and employees, because they realize that having a diverse open culture makes them more relatable and helps drive success. I think the devil’s in the details though. What specifically are you doing? Is it just on the surface? Once people come in, does it all stop? You need to offer employees the opportunity to do meaningful and interesting work and have a strong commitment to learning as well as flexibility. Diversity is the key thing that we’ve been talking about here as well. Gone are the days where you hired the same type of person to do the same type of work and you had the same type of client. You are now hiring people with different skillsets, different abilities, different strengths in terms of the way they work. Although the technical expertise is a given, clients are looking for different things to be able to connect with their lawyer. To put technical expertise and relevant/relatable solutions together, you need to figure out how is it that we can keep people working, being creative and giving their best to this organization and their clients? From what we hear from our clients at CIBC, the way to do that is to create a comfortable environment in which they feel valued.
Nicoló: Talent continues to be an ongoing discussion at all organizations, not just law firms. As more and more lawyers are entering the marketplace, their qualifications become table stakes. Therefore, the real differentiator for young talent is their ability to fit within your firm’s culture, regardless of firm size. RSM research has shown that when it comes to attracting top talent, it’s all about becoming an employer of choice, differentiating your firm from the competition and showing top talent how joining your firm can help them reach their career goals. Harvesting the power of your people and clients is very powerful. They are great brand ambassadors for your firm and their experiences significantly affect your ability to attract top talent. Culture is a talent magnet; therefore, attract talent by your firm culture. In our fast-paced interconnected world, diverse teams are becoming crucial; therefore, invest in diversity. Make professional development a top priority for firm management. Lastly, getting beyond money, tomorrow’s talent prioritizes flexibility, purpose and ethics.
Wilbur: Law firms talk about culture so much. It’s something that can have a negative connotation if it excludes people, but it can also have a positive connotation. How can law firms ensure that it’s the positive side that is front and centre when they’re attracting talent?
Nicoló: Harness the power of your people and clients. They are a great brand ambassador for your firm and their experiences significantly affect your ability to attract top talent. Your people, your clients, they talk, so if they are having positive experiences, they are telling their friends, their family, so that really helps with that.
Khorasanee: The legal community is tightly knit with lawyers being well connected to peers through their law schools. This pool is small enough that they have eyes and ears everywhere. Lawyers can also often see across different industries. So, using your people to disseminate your culture is the most effective way you can do it; it’s the fastest, most effective and the most efficient. And, so, we talk about this concept of net promoter scores and employee net promoter scores. If you’ve got an organization full of net promoters internally, that’s going to disseminate quite naturally, because they are just so well connected across the industry. And that just builds on itself.
Wilbur: What should law firms consider if access to capital is limiting their growth?
Khorasanee: At CIBC, we have a lot of conversations around this with our clients. And the benefit we have in CIBC’s Professional Services Group is that we’ve got such a large volume of law firms that we deal with, we have this ability to assess the different sensitivities at law firms. Law firms capitalize themselves in three ways. There’s capital contributions made by partners, there’s retained earnings or undistributed income that’s held back in the firm and there’s debt. The reality is there’s no single answer on what the right balance is among these three sources of capital. Firm culture typically guides that balance. For example, some firms just traditionally don’t like the concept of borrowing. The key is the firm should understand what its options are. It should be having these conversations with both its commercial bankers and their accountants, because there are different ramifications and different ways to balance this equation. At CIBC, we provide guidance around the options that firms have and the tradeoffs of each option. But a lot of firms are not as aware as they should be. When we talk about partners contributing capital, what are our options there? Is this a burden on the partner? Can we make it not a burden on the partner? And if it’s not a burden, is that a better answer than borrowing through a credit line? The reality is that they have a lot of options. That’s the key to it.
Nicoló: I would say, at RSM, we are amazed at how many firms large and small pay little to no attention to optimizing their firm capital. Each firm is different and there isn’t a “one-size-fits-all” approach. There are many options, and Hasan did a great job explaining the various capital mixes: undistributed earnings, capital contributions and bank loans. And I’d add that the mix depends on such factors as the collective risk profile of the partners. It’s not one or the other or all or nothing, each firm’s mix is unique to its situation. Perhaps you adjust distributions and hold back more to finance the growth or you have partners put more “skin in the game” and have a capital call. I think firms should have a solid capitalization strategy so that they can deal effectively with growth opportunities and challenges as they arise. Developing a capital plan is not a one-time exercise; it should include an ongoing assessment of the strategic and financial needs of your law firm.
Khorasanee: The capitalization of the firm, that balance of those three buckets, plays heavily into one other piece that falls outside of the equation. What culture do you create by changing the mix? And part of that is ensuring that partners feel like they are invested in the law firm as a business. And they’re invested in ensuring the growth and sustainability of that law firm. And, of course, with issues such as non-competes, you want to ensure partners have skin in the game to ensure that they’re doing the right thing and moving in the right direction — or the same direction — as the other partners. I think that is where this concept of capitalization ties in to the concept of growth for the law firm in general. By having the right mix, you incent partners to do the right things to contribute to the growth of the firm and sustainability of the organization.
Wilbur: For expense control, what do you think the most important factors are for law firms to consider if they want to grow and improve profitability?
Nicoló: Control of expenses is key to the continued profitability of a law firm. Law firm managers should review each firm expense category periodically to determine if more rigid controls are necessary. A good place to start is by using the firm’s budget as a management tool to determine where expenses can be reduced. If a firm does not currently budget for expenses, this is a critical starting point. To gain a better understanding of expense trends, management should analyze budgets in comparison to actual results for the last two or three years, on a line-by-line basis. Then, the firm should re-examine every line item to look for ways to reduce operating expenses. Perhaps consolidate vendors to get group discounts or do an office space study to support minimizing leasing and operating expenses. The largest single expense for a law firm of any size relates to salary and benefits followed by occupancy costs. Remember, if you are reducing headcount, it has a dramatic effect on your firm. Although a firm commitment to expense reduction may initially improve profitability, most categories of expenses are not susceptible to dramatic reduction without affecting practice efficiency or quality of service delivery. One of the best ways to revitalize the firm and grow it is to focus on growing revenue. Generally, increases in revenue will not be offset by a corresponding increase in expenses. Improving billing and collections also has a profound positive impact on your bottom line.
Khorasanee: On the people side, one way we’ve seen our clients manage costs is promoting lawyers to partners earlier, because it allows them to convert what would have been a fixed salary cost to a variable salary cost. The reality is that they’re not really paying anybody any less, but they’re ensuring that if results don’t turn out to be what they expect in any given year, they’ve got a lever there to adjust that cost (at least to some degree). Another lever is the timing of partner payouts. If you can delay that payment or have a hold-back period at the end of the year and then roll forward, that has a huge impact on your costs. That’s not technically an expense, but it is a significant factor to control your cash flow if you have that flexibility. For premises, amortizing large investments over the life of those investments is going to be key to ensuring that your cash flow matches your net income. You want to make sure that your financial institution is offering you the right options on things such as leaseholds. Where law firms tend to get into trouble is less so on the expenses; it’s more so on not keeping an eye on collections. Proactively manage what’s owed to the firm, collect in a timely way and engage partners and encourage them to ensure that they don’t only bill but they also collect.
Wilbur: If law firms want to shed less profitable practice areas, how can they go about determining what to shed?
Nicoló: It depends. The numbers only tell you part of the story; you really need to assess qualitative and quantitative aspects. You also need to review the firm’s mission and strategic vision. Maybe that practice area is temporally losing money, but it really ties into the overall mission of the firm or is a critical component that supports another hugely profitable practice area. I think you need to take the practice’s financial temperature. When you first start out, it’s natural for losses to outpace revenue, but once it’s established, is it profitable? Are there positive cash flows from the practice? Check that you’re not in a race to the bottom, where a practice is becoming so commoditized that you’re simply in a race to have the lowest fee. That may be an indicator that you should shed the practice. But, again, that’s not an absolute truth. If securing the lowest fee means winning the market, then maybe it is a strategy worth considering.
Khorasanee: It is critical that you understand the profitability of your practice areas. Equally critical is to understand how the practice areas are interconnected, as well as understanding what it is that you want to be as a firm. You should assess whether a practice area, even though it may not be all that profitable, allows you to keep a lot of associates busy when they otherwise wouldn’t be, which is great. Or it may allow you to win business in another practice that’s hugely profitable, because these two areas fit together and clients expect that if we offer them this piece of the service that we’re going to offer them that piece of the service.
Wilbur: What should law firms consider when evaluating technology?
Khorasanee: The topic of technology continues to dominate the minds of leadership in the legal community. Whether it’s artificial intelligence, whether it’s how you manage the overall data research client information, I think technology is overwhelming for a lot of firms. If firms are very small, they may not have the resources to move forward on all those fronts. They need to decide what’s important to them, what to do well today and where they can use the help of technology to just be that much more efficient or better at serving their clients. There are many options available to law firms and several options on how you finance those. So, the key is to do all your homework and to fully explore all the costs against your needs and to work with your external partners, whether it be your accounting firm or your bank or other vendors who are facing similar challenges around technology and the deployment of technology and balancing that against the cost. At CIBC, we have many smaller law firms that just don’t have the resources to do these sorts of evaluations. But what we’re able to do is we can bring in our in-house experts, and this has nothing to do with banking, and say, “Look, we have folks who are experts in artificial intelligence and who are trying to figure this out for our institution. Let them come in and talk to your people.”
Nicoló: Law firms need to first consider aligning technology with their business direction, as well as either the technology’s suitability to solve any urgent risks or investing in specific technology that can provide a competitive edge. From a risk perspective, a key concern of law firms is if the technology being deployed could potentially compromise data confidentiality and how safeguards can be instated to prevent such a risk from materializing. From a competitive edge perspective, law firms are always on the lookout to find that magical tool or tools that could help them deliver faster and improve quality, ultimately streamlining their processes. Our research shows firms that have successfully evaluated and deployed technology have a good understanding of their internal capabilities to successfully deploy the technology, a process to embed the technology within existing processes with minimal change, effective and strong change management capabilities, a defined budget and good project management. In such a people-driven industry, strong organizational change management processes can lead to the difference between a successful or a failed project.
Wilbur: What other challenges are you seeing that law firms are facing in being successful?
Nicoló: For the last 20 years, the legal profession has been very static; it really hasn’t seen much change. And law firms, in general, have been trailing corporate Canada when it comes to innovating, among other matters. The federal budget tax changes have had profound changes on partners in terms of their personal tax situation. For partners, for example, work in progress will now be included in taxable income, so they are paying tax on that. There’s competition from non-traditional service providers. There are a lot of small boutique firms; even the “big four” accounting firms are getting into law. These are just a few examples of some external changes that are having a big impact on law firms. So, the landscape has really changed, it’s unprecedented, because for the longest time, it’s really been very static. My final thoughts are that many firms are conservative and slow to react or implement change, so it’s critical to be nimble. Use technology to your advantage and digitize your practice. Rethink the client experience and differentiate yourself in how you deal with clients. While there is nothing wrong with hourly billing, rethink the billing model. For some services, alternative fee arrangements or other billing models may make sense. And, lastly, outsource what you can and free up time and skills for more valuable work.
Khorasanee: The world around law firms is changing. It’s changing so quickly that, if you don’t know what you want to be, then you have no idea what to focus on to grow or make changes or improve. That is so critical. Do you want to be a regional, diversified firm practice? Or do you want to be a national boutique? Or do you want to be a regional boutique? Are you going to compete with immigration services that one of the accounting firms are starting to provide? You need to know; otherwise, you’re going to spin your wheels and a lot of resources — time and financial resources — and you may not get too far ahead. This concept of really understanding what it is you want to be as a firm, it permeates into a lot of the areas we talked about, including culture. That starts with having the conversation and building the road map to who you want to be to remain successful in this changing landscape.