Tom Clay on Law Firm Merger Combinations

Ep: 15 Tom Clay   Spoke to Law Firm Merger Combinations Insights and Wisdom

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“My thing is if you haven’t done the prep work, just think about what your key issues and opportunities list and rank them. But never, ever, ever start talking until you feel fully prepared. The business case rational is often fuzzy, fuzzy, fuzzy. “

“I detest natural synergies. And to a business person or an MBA person, there is no such thing. Synergies come about through active actions. They don’t just emerge, so there are no natural synergies. There might be potential synergies that you work hard to achieve.”

“Too often I hear what I call the Jack Daniels discussion. One managing partner calls another up. They go have dinner together, they have a few drinks, they like each other, and they come back and say, “Jeez, we ought to think about merging with these people.” Well, that’s ridiculous.”

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Links referred to in this episode:

Tom Clay’s Professional Bio

MergerLine by Altman Weil

In M&A You Only Get One Chance To Make a First Impression By Altman Weil

Law Firms in Transition Survey 2017 by Altman Weil

How Kodak Failed by Forbes

The ABA Commission on Multi-Disciplinary Practices

(The Commission on Multidisciplinary Practice’s mandate was to study and report on the manner and extent to which professional service firms operated by non lawyers were seeking to provide legal services to the public.)

PwC Opens ILC Legal Services in the US by New York Times DealBook

Does the UK Know Something We don’t about Alternative Business Structures? by ABA Journal

The Tipping Point: How Little Things Can Make a Big Difference by Malcolm Gladwell  

Grandma Gatewood’s Walk: The Inspiring Story of the Woman Who Saved the Appalachian Trial by Ben Montgomery

University of North Carolina Tar Heels Basketball Team

Peter Drucker by Wikipedia

The Great Artificial Intelligence War of 2018 by Fast Company

Richard Susskind | Author and Futurist

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Audio Transcription 

To Download the PDF Transcript of this Audio, click here. (Look in the top right corner and click on the three dots to download.)
Hi listeners, this is Chris Batz, your host of the Law Firm Leadership podcast. Today this episode is all about law firm combinations. I interview Tom Clay, head of Altman Weil’s M&A group. He brings valuable insights to the process and what the future holds for law firms. You won’t want to miss it. Here’s some boiler plate reminders.
The transcript of this audio will be available in PDF or you can read it on the website at LionGroupRecruiting.com/podcast. If you haven’t done so, please leave a review on iTunes. iTunes reviews make the podcast more visible.
Finally, in the show notes of your device, I’ve provided links to the subjects we talked about in this episode and a link to the transcribed audio, which is a PDF download.
As many of you know, we interview corporate defense law firm leaders, partners, general counsels and legal consultants. You’re listening to episode number fifteen of the Law Firm Leadership podcast.
Chris: Welcome to the Law Firm Leadership podcast, I’m your host, Chris Batz with The Lion Group. Today I have the pleasure of speaking with Tom Clay, legal consultant and principle of Altman Weil. Tom is a 30 year veteran legal consultant specializing in strategic planning, firm management and law firm mergers and acquisitions. Prior to Altman Weil he was vice president and general manager of a venture capital firm. Tom is a thought leader and has been published in several legal and national news publications, such as, The American Lawyer, National Law Journal, The Wall Street Journal, The New York Times, and many others. He’s a frequent speaker and lecturer on the legal profession. Tom holds a bachelor of science in business administration from the University of North Carolina at Chapel Hill and a master of business administration in finance from Georgia State University. Welcome, Tom to the Law Firm Leadership Podcast. It’s a pleasure to have you on the show.
Tom: Chris, thank you very much. I might add that I know we’re going to talk about a little bit of personal things, but I will tell you why this occasion to be involved in a podcast is extremely interesting to my family, if you’ll permit me.
Chris: Oh, go for it.
Tom: Year ago, for reasons that will be unstated, my family began to call me poor old dad and they shortened that to P-O-D or POD, which is what I’m called by everyone in the family. So when I told them I was doing a podcast today, they fell over and laughed and so.

The 2017 Law Firm Merger & Acquisition Trends

Chris: That’s excellent. Well, that is definitely a first. I’ve never heard of that, but it sounds very suiting. Well, thank you for sharing. And I think that’s just an excellent story. So, yeah, we will talk about personal things, but let’s jump into why law firms are calling you every day, or I don’t even know if it’s every day at this point, but so you are providing leadership with your partners for firm M&A or combinations across the United States, and I’m assuming abroad as well, but let’s jump into the 2017 kind of merger trends you see. What are you seeing right now because I know things have been continuously increasing year after year?
Tom: Well, you’re right. We are getting a lot of calls and I head up our merger and acquisition team. Before I jump into some of the commentary, I would like your listeners to know there’s what I think is a terrific resource if they want to know what’s going on and not only that, how they might prepare or engage in mergers and acquisitions. And it’s a thing called MergerLine, Altman Weil MergerLine and it’s on our website, AltmanWeil.com. And you can download the entire ten-year look back as well as the resources in there in the back for free. So I would encourage your folks to do that and it may help them as they try to make decisions.
So one of the things going on is volume and the volume of deals, so to speak, over the last four years have continued to climb where it took a significant dip after the recession, so the volume of deals is going up. We report on them every quarter. My guess is by the end of this year we may have had the biggest year since we’ve had MergerLine over the past ten years in terms of deals. The takeaway though that firms should remember, well, all firms, mostly that volume is not the big deals that we read about, that reporters call us about, they’re smaller deals of larger firms acquiring 20-lawyer law firms and fewer and the majority of those are ten-lawyer law firms and fewer.
So mainly what larger firms are doing in this whole arena is looking to buy market share, to acquire clients, access and things of that nature. And the smaller firms are beginning to say there is a reason for us to sort of give up, well, give up who we are and join a larger firm with more resources, more choices for younger people and things of that nature. So all of that’s outlined in the MergerLine and it’s also outlined by state and by who did what. Every deal that’s done, we name who did it, who they did it with, where their geography is. So there’s a lot going on. Our practice, if it’s a good barometer, and I think it is, shows that it will continue this year. And I see no reason based upon the calls we get and things that it won’t continue to be pretty hot next year as well.

Three Objectives for a Successful Firm M&A Deal

Chris: And jumping into a little bit more, I’d love to hear your feedback, what are firms doing to make these deals successful? Like if you were to define success by these mergers, can you give some color to deals that are done well and maybe not so well?
Tom: Yeah, and thank you for that. That’s one of my major issues is that in our opinion there are – probably like in any business, very, very successful combinations, extraordinarily successful, meet all the objectives. There are probably what I call more deals that are ho-hum, “Okay, we did something, so what?” and the objectives may be fuzzy. And then there’s some firms that if you looked at them you would say clearly all they did was get bigger or fatter and they’re no better. So that’s a continuum and all the deals would probably live on there at some point.
The ones that make this work well I think are three fold. Real clarity about the business case upfront and what I mean there is a lot of work to determine why we’re going to do this, why it’s a good strategy, what our objectives would be, and what our measurables would be, how can we tell if this was a good deal. And too many firms don’t spend the amount of time necessary to really work through that hard and not get, well, not get focused on if we’re bigger, we’re better because that’s clearly not true necessarily.
The next would be, how do I put it, preparing yourself to go into the market in a robust, visible, rational way. And in the MergerLine thing I mentioned, there’s an article in there about preparation for going into the market to do deals and putting together a prospectus, a prospectus, excuse me, that really distinguishes you from what we hear now. And I don’t mean to be derogatory here, but sometimes it seems like headhunters just throw things out on the wall and see what sticks. We’re talking about really differentiating yourself from things like that so that the potential partner might really see something they like and appreciate.
And the third is with any of these deals, it’s your integration plan. I have to say most firms aren’t very good at this. They integrate the time and billing system, they integrate some technology, but do they really integrate all the activity, operations at a law practice? Hm, not so well. So if you say those three things need to be done robustly and well and very thoughtfully, you’ve got a greater chance of success in doing any of these deals.

When Should the Reporters Know?

Chris: Tom, thank you for that. And let me ask you this question then kind of continuing, do you have an opinion on whether deals should be made public via the news or do you try and keep them quiet? Is that something that’s ever been of interest?
Tom: Do you mean while people are talking or-?
Chris: Yes.
Tom: -post-deal or what? While people are talking?
Chris: Yeah.
Tom: You know, I think – well, we do have pretty firm opinions. The first is this to the degree you can, you ought to handle talks in private because the truth be told the people who do a lot of this, there are a lot of talks that lead to nothing but one dinner and that’s it. There’s some talks that go a little further. Others that approach almost having the deal made and then it doesn’t work. There’s no reason for any of that to be pubic that I can think of anyway.
But having said that, we know that through various means, reporters, if my experience has anything to do with it, find out about discussions and they want to write about it, which is their job, and then they call me. And obviously we don’t talk about it because there’s no sense in – well, I can’t from a professional standpoint – there’s no benefit to it. But on the flip side of that is there – if you’re in discussion and you’re a long way down the path saying, “We are in discussions. We do not have a deal. We’re just working on it,” I see no problem with that. A lot of firms have shied away from it and sort of gotten caught by fibbing I guess you would say and then they announce it. So it’s really where are you in the life of the deal and then at some point if it is out on the street, like any good consultant would tell you, don’t run from it and don’t say no comment, just make a brief comment, but leave it there.
Chris: Yeah. Brief, but leave it there. I like that.
Tom: Yeah.
Chris: Tom, knowing that probably several if not most, I don’t know what the percentage and I don’t know if you have the ability to disclose, you know, of firms talking, how many actually work out. Is there any kind of market percentage or industry percentage of firms that talk that actually are able to close the deal?
Tom: No, because at any point in time any firm – I mean nobody records any of this. I mean, I could probably go back and look at all the work we’ve done over the years and – but see even some of those I never find out until the client’s got one they think is hot, so I do know that managing partners today are mainly, not all of them, but mainly will tell you, we’re open to opportunities and basically what they mean, we’ll listen to somebody, but most of those don’t turn into anything other than we might listen for a while. So there’s much more that than there used to be. They’re always thinking well there might be something – there might be something there that we should know about.

How Managing Partners Can Be Better Prepared for Merger Solicitations

Chris: You know, so that’s a great segue. What if a managing partner was solicited and they may have a posture of willing to listen, what do they do? How do they position themselves? What’s the best use of their time if something like that were to happen?
Tom: Well, if you had done some of the things and actually in the materials that I’ve mentioned, MergerLine, there’s some articles and there’s others on our website, but it tells you how to be prepared for these things. But generally if you really haven’t prepared, but you hear, you know, Tom Smith saying, “We’re interested. What do you think?” You know the firm maybe. You might think they’re a good firm. And I get a lot of calls like this, “Hey, Tom, what do you think about Smith and Jones?”
My thing is if you haven’t done the prep work, in other words, just think about what your key issues and opportunities list are and rank them. And I tell them, “Look, just tell the folks you think you might be interested, but you want to drop back a little bit and do some of your own thinking,” and this always resonates well with the other side. Believe me, they appreciate it. And then I’ll tell them,”Here’s what you need to do. Here’s some things we need to talk about. Here’s some things we need to analyze and then you’ll be in a far better position to move forward.” But never, ever, ever start talking until you feel fully prepared. The business case rational is often fuzzy, fuzzy, fuzzy.

Deal Killers in Merger Discussions

Chris: Yeah, that just sounds like it’s full of wisdom. But let me ask you another question, Tom, then, knowing that there’s always been rumors of deals. There’s lots of people talking. They don’t seem to work out and the reporters find out. You and I know both know that there are deal killers that end up causing a deal to fall apart. And I wouldn’t mind talking about some of those hypothetical deal killers, but I also want to distinguish the deal killers from just honestly preventable things that basically could kill the deal, that basically could have been prevented. Could we talk about those two groups?
Tom: Absolutely. Interesting you couch it in those terms. I had a fellow I had known for a long time and he called and he said, “We’ve got a deal that I think might be a good deal but there’s one quirk in it and I really need your objective opinion on it.” And realizing I’ve known this firm, their culture, and their operations for a long time. So he explained all this other firm, it’s sounding good. He said, “They’re something like a 45-lawyer law firm but they have three and a half million dollars of debt that has nothing to do with furniture and fixtures and all this.” And I said, “Well, what was it for?” He said, “Well, they had opened up some new offices and that’s where it came for.” And the kicker for me was he said they had not amortized the debt at all in the last five years, so I said – which means they had been taking income and paying themselves, but just paying the interest on the debt, so that’s a deal killer. It’s not going to go forward because my client has a clean, clean, clean balance sheet.
So that would lead you into one of the other biggest deal killers today, which is unfunded retirement obligations. And unfortunately, not all, but many of the smaller firms, these 20 lawyers and under, put together retirement obligations that the firm might have to a senior partner retiring. And these are Ponzi schemes and fortunately we’ve gotten rid of many of them but not all of them. And so the acquiring firm basically says, “We’re not going to be obligated for that,” so I’ve seen lots and lots of deals not going further once that has occurred obviously.
It used to be but not so much anymore, the name that was a deal killer. I think most people realize now that, particularly if you’re a small firm, you’re not going to have your name in the White & Case name, so I think that has mainly gone away fortunately.
And then big mismatches in productivity and I’m not talking about partner or per partner profitability. I’m talking about the things that can’t be screwed around with, which is overall average per lawyer revenue or productivity. So big mismatches in productivity is probably pretty apparent, but that’s a main reason that firms can’t go further, so I think those are the biggest. There are others. They’re really the biggest conflicts, excuse me, I should mentioned, it’s not been a few times that conflicts with clients have just, you just can’t do it.

Additional Keys to Successful Merger Discussions

Chris: So those are firm like merger deal killers. Tell me about the stuff that basically happened during the process that could have been preventable. I don’t know if it’s more of the soft issues. The bad debt you described makes a lot of sense, but has there been anything else through a process that you’ve observed or have heard that could have been prevented that was outside of these kind of deal killer situations?
Tom: Well, without a doubt, I mean, we have a – we’ve sort of told firms, you ought to shorten this process to be honest with you. Too many firms I will hear from, “We’ve been talking with this firm for six months, now we want you to come look,” and boy does that take a lot of time, a lot of money and basically it means that they haven’t done what they should have done in the beginning. So process is important in this particularly if you ever have to go before a bunch of partners and recommend it. They want to know what you did, how you did it, how good you did it, etcetera. And they should.
So some of the things as I said to be so extraordinary and clear on your objectives, your strategic objectives and not just say we think there might be – the word I hear a lot and I – to be honest with you, all I can think of is I detest, which is natural synergies. And to a business person or an MBA person, there is no such thing. Synergies come about through active actions. They don’t just emerge, so there are no natural synergies. There might be potential synergies that you work hard to achieve, but – so having extreme clarity upfront allows you to have quicker discussions and say hm, it doesn’t look like a fit.
And then the second is too we have a list of the things that any firm ought to talk about before they get into due diligence because they will almost emerge the things that are show stoppers or major problems, so get those over with first and then if you’re still good then you can go to the due diligence and see if you can put a deal together. But I’ll share with you and maybe I shouldn’t say this, but too often I hear what I call the Jack Daniels discussion. One managing partner calls another up. They go have dinner together, they have a few drinks, they like each other, and they come back and say, “Jeez, we ought to think about merging with these people.” Well, that’s ridiculous.
Chris: I’ve heard of those stories as well.
Tom: Yeah. It’s amazing what the smart, even brilliant, people who they will think that that’s a proper path forward. It’s not.

Is It Called a Law Firm Merger or Combination?

Chris: Yeah, that’s interesting. Let’s jump in to just something that tends to be hitting the newswire and we hear that firms merge or we hear firms that combine. Can you dispel some of the myths to the verbiage of this?
Tom: Yes, I can tell you from our firm’s situation, we like to use the word combinations, even though the title of the resource I mentioned is MergerLine, but it became very apparent years ago that a lot of law firms, small law firms, don’t like the word acquisition, so we don’t use merger and acquisition as much as we used, but to us a combination is just putting two organizations together regardless of size without distinction of who acquired whom. So there is no definitional difference basically. It’s kind of a semantics and a public view difference.

Why Should Law Firms Consider a Merger?

Chris: Tom, let me go back to something that just continues to come to me. You guys have tremendous resources and you guys obviously deal with this every day, and you talked about the pre-due diligence before deep due diligence, but even before then, why would managing partners ever consider an overture from another firm? What are the benefits I guess, to these firms considering marrying up or joining something that’s bigger than them? Can you just list some of the reasons why people are making the jump?
Tom: Yeah, I mean I could pull out my whole PowerPoint slide deck and share them with you. I’ll just give you some of it. Well, there are a couple of reasons that they come to talk to us. So the rationale if it is within a written, clear strategic plan that combinations, and I’m not talking about size, the combinations would fit your strategy. That’s the very best reasons to do something in our opinion so that presupposes that you have a clear, written strategic plan so that everybody can understand it and it would be the touchstone against which you would measure the hoped for synergies and things of that nature so that would be one reason.
Another reason is, and this happens from time to time, but not a lot, is a client would like you to be in another geographic venue because they give you more work. Most law firms know that that rarely is as much work as the client has said, but sometimes it is, so you go out and acquire a firm in another area. So that’s one reasonable reason.
Right now, and this would be part of your strategic plan, is we all know that baby boomers are moving through the bulge rapidly right now and over the next ten years it’s going to be a lot of, this is a fear of mine from my clients actually, a tremendous amount of know-how, expertise, client contacts and all those things that firms crave, is going to be gone. And if through acquisitions you can refurbish, refinish, whatever word you want to use, your breadth and your depth in those areas that you have to have skills and competencies, then yeah, acquisitions or mergers or combinations make enormous amounts of sense.
And then the last of the main ones that I would mention and there are others in my slide deck obviously, one is if you can differentiate through either bolting on or acquiring or whatever you want to call it, in areas that – and I’m talking about in vertical markets like health care or financial services, if you can all of the sudden increase your skills, competencies, capabilities, breadth, reach, etcetera, in the market that you’re trying to really solidify, then this is a terrific way to do it. That’s mainly probably more acquisition, but it could be some mergers of equals and things of that nature. So there’s to me if you have that clearly in your mind of what you want to do, those are great reasons to have some of the talks that you might get or to say that doesn’t fit our strategy. Thank you.
Chris: Yeah, it would be fun at some point to hear your larger slide deck, but I know we have limited time.
Tom: Yeah. I just feel compelled though to mention one thing you didn’t ask me but-
Chris: Please.
Tom: Size is not a differentiator in most markets to clients. Growth size. The truism, and this is a truism because I can prove it with the data, the National Law Journal 250 firms in the aggregate now, in the aggregate number of lawyers have shrunk since the recession and we track it every year. So size is another one we’re asked. “Tom, should we be 100 lawyers? Should we be 200 lawyers? Should we be 500 lawyer?” It’s a really bad question to ask. So acquisition to achieve bulk, growth bulk, is a bad strategy.

Mission Critical Issues for Managing Partners

Chris: I think that’s very helpful and it seems like there’s a real mass move to just kind of acquire for the sake of size. I know we can’t talk about firms, so I want to steer clear of that. Let me jump into another question because I’m just too tempted to start talking about firms. Here’s a question. So we’re fourth quarter and partners are all trying to get their collections in, but we’re really in that planning phase of budget and strategically thinking about the last half of this decade. What should law firm executives from putting your strategic hat on, should they thinking about and finishing out like until 2020?
Tom: With respect to this particular discussion we’re having or other things?
Chris: It’s beyond M&A, but it is in general for law firm leaders.
Tom: I think as you know we do another survey. We’re wedded to doing surveys. And our latest one, which is the largest of the U.S. legal profession, we publish it every year, it’s called Law Firms in Transition and again, I would encourage our listeners to go to our website and get it and it’s free to download. It’s really long, so if you’re trying to do it double sided. But in there it talks about the market forces as we see them and as the respondents see them in leading change, a whole section about what you should be doing as a leader.
But to be more responsive to your question is I think there are a couple of things and firms are beginning to pay attention to these but not as robustly as they probably should, partly because they’re not very sexy and in some degree hard. And the first one is succession planning. We started looking at the demography of the profession probably 12 years ago because I remember we had a retreat and said look at this bulge 10 years from now and are any of our client prepared for it and the answer was no, not really. And we said this is what we should be doing and what leaders in law firms should do to prepare for succession, whether it’s managerial and leadership succession, client succession and then just succession for all the baby boomers that are going to move out.
So I would ask myself do we have a clear set of policies that the partners know, systems and procedures to execute really well succession and if you get that done over the next couple of years, that would be a terrific thing. That would affect potentially merger and acquisitions because some of the conclusions you might have would be “Wow, we can get our succession in place, but what do we need? Can we fill it all internally or do we need to do it with some external resources.” So just doing the planning helps you decide what you might do in terms of M&A.
The other side, and this, we are firmly, firmly convinced and we’re not hyperbolic here I don’t think, but one thing for all of the firms to look at because it’s going to affect head count in the most major way, which is the speed with which artificial intelligence and machine learning is coming into the profession. And again, we just have all the data. Now you probably have your ear to the ground as much as we do, and you can’t underestimate the power of this tool. You can’t underestimate how quickly it’s coming into the profession. It already is here and it’s not just big firms. But the thing we’re telling folks now, if you look at the very end of that Law Firms in Transition survey, there’s a thing called a bonus question where we ask, “Do you know what AI is and are you doing anything about it and do your partners understand it.” And I’ll leave it to your listeners to go look at it. The results are disheartening.
So we’re in it every day. We see that as so large and if that won’t inform you about how much head count you need because it would make you think we’re going to need a lot less head count over the coming decade.

Legal Industry Market Prediction 

Chris: So not to be doom and gloom, I’m a big fan of extrapolating. Hopefully, not to ridiculous edges. So taking these two huge trends you’re talking about, which we haven’t also introduced new competitors into the market, what predictions do you have, Tom, for the legal industry, going forward? Can you share some of those anecdotal kind of insights you’ve seen?
Tom: Yeah. Well I will tell you one that I saw from basically a banker who they do surveys, economic surveys of the profession using their own clients’ data. But the thing I saw was a commentary in the last PowerPoint slide that a client actually sent me and said, “What do you think about this?” and it basically predicted an enormous downturn in the profession simply because they looked back and saw in U.S. history run up markets usually last a little less than five years and we’ve obviously been in a run-up market for since the recession to some degree. And if the stock markets any indicator, who knows. But all I’m saying is that’s a very bad statement in looking at the dynamics in the profession, in my opinion.
So I don’t look for any crash, but here’s what I do look for. I do look for more rapid dislocation of firms who have grown head count-wise. And with all the things that if you tallied up a tally sheet of the things that are affecting demand for billable hours, and I should emphasize billable hours, not matters, demand for billable hours, the only – and things like AI and alternative legal service legal providers and things like Price Waterhouse and the other big four coming into the market more robustly, the math is just compelling to me that the profession in ten years will be 30% smaller than it is now.
Chris: Okay.
Tom: And it’s so hard – and I bring this out in very I think nobody says you’re Darth Vader or you must be smoking something, but it’s just the math right now and the dynamics in the profession. So what I would encourage law firm lawyers to do, and I was talking about it today as a matter of fact, just sit down and look at the dynamics and the math and the data. Clear off everything you’ve ever learned and ask yourself if I were going to start a law firm today, how much of it in terms of my people would be in the new law firm and what tools and methods would I use in the new law firm and ask yourself if you’d still be the same size. You might be surprised.
Chris: That’s an incredibly powerful question. It’s like, starting from scratch again, how would you do this.
Tom: Yeah, it’s a little part of innovation and I think innovation is a part of the thing that’s going to continue to put pressure. But firms typically don’t want to question their business model very critically and all I’m saying is we really have to now. And I’d love – do I have time to share one thing, not about the profession, but I use with the profession all the time?
Chris: Yes, absolutely, Tom. Go for it.
Tom: I became interested because I had a client in Rochester, New York and Kodak.
Chris: Yeah. Yes.
Tom: And we all know that Kodak had in the 19- mid-70s I think the data shows, they had something where 95 percent or more of the camera film and processing market worldwide. Extraordinary what they had. So they were riding the greatest cash cow in that market that anyone could want. Well, as we all know at one point, digital photography came around. So you and I all walk around with a phone or an iPad and we’ve got great cameras, better than the cameras that Kodak, Nikon, etcetera were producing. And the interesting thing I learned and thing is – and very few people know it – Kodak invented digital photography. They invented it specifically upon the request of the federal government, namely the military. And they sent one of their engineers, high level, and I’ve heard him speak, engineer to invent digital photography, which they did. So at one point Kodak was sitting there with the greatest cash cow available in photography. And the next cash cow available in photography. And ultimately they went bankrupt. So to me the lesson I try to show managing partners and other leaders in law firms is you have to sit back and ask relevant questions about the future and your business model and if you don’t, you could end up like Kodak. So I’ll get off my rant there.

Competition from the Big Four Public Accounting Firms

Chris: No, I love the example. That story of Kodak is incredibly sobering. And you brought up competitors too, so let’s just talk briefly about PwC with ILC Legal announcing that this office opening in September, can you just give us again some thoughts and feedback about U.S. law firms now competing on their own turf with the big public accounting firms.
Tom: Yeah, well a little history is going to be in order here. A lot of people will remember that pre-recession a lot of discussion in the legal profession about multidisciplinary partnerships as they were called and should they be allowed. And in particular in the United States we were pretty resistant to that. In fact, one of my partners who was very involved with the International Bar Association, led a commission by the ABA to study what the ABA should think about and recommend with respect to MDPs (Multi Disciplinary Practices) and I talked to him a lot about this. I mean we spent hours talking about this. And so at the end of the day though, his commission actually wrote a report saying that MDPs could not be forestalled world wide. They benefit clients and that law societies and bars should begin to determine how to incorporate them and do it in a way that benefits the clients and the lawyers.
Well, that was moving along with some pretty decent debate, although, at least in the United States, all of the state bars are vehemently against it, believe me. And they will be a formidable force going forward. And then all of the sudden something happened to put all that on the very, very, very back burner called Enron. And when Arthur Andersen crashed as a result of this, all of the big accounting firms saw no reason to get into the MDP arena right then. Well, now you see PwC’s announcement. But the truth be told, it isn’t as if they’ve sat on there because we’ve tracked them. We know them, as a matter of fact. They haven’t been sitting on their hands. I think the big four have an excess of 9,000 lawyers in their ranks right now, with PWC around 3,500 or something and they’re not all just tax lawyers. They’re M&A lawyers. They’re due diligence people. Everything that a business might need with maybe the exception of giving pure legal advice. We’re talking about the process work, the stuff that’s become commoditized.
So if you ask me, remember I said, somebody ought to just write down and it’s just math. It’s just going to be less billable hours for a law firm. The accounting firms are a big part of that. The thing they do, they invest. So they’ll invest in these technologies. They already have. They’re using AI now for clients. So they invest in this. They have investment dollars. They’re more innovative, so that’s – I mean, there’s no reason for them not to continue to push this at a pace.
Chris: And it seems as though Tom that they already have tons of lawyers. They do lots of legal work outside the United States, so a lot of them are overseas in other parts of the world competing with very large global law firms. Do you see that too, where they’re just now it seems building the courage to get into the U.S. and start rocking the boat here?
Tom: Well, I think there’s no doubt about that. You say legal work, it’s interesting, I mean when you start to think about some of the work that law firms don’t do any more, like e-discovery. That’s the old, we’ve got 50 lawyers sitting in a warehouse somewhere reading documents, that’s gone. And e-discovery took it over. Well, is that no longer legal work? It’s work done on behalf of the client that’s important. Document management, lease management, all those, it’s commoditized really rapidly. Is that no longer legal work or is it something else? So yeah, they’re organized for all these things that are becoming or have become commoditized parts of matters, even huge matters, they’re organized to handle that. And believe me, it’s not with hoards of people; it’s with systems and technology.
Tom: And they’re faster.
Chris: Yeah. Definitely a force to be watched. And I mean, it seems like Axiom has been pretty quiet. They were making waves a couple years ago and they’ve been fairly quiet. And then you have the ABSs you brought up, the alternative business structures out of the UK and yeah, there’s just a real eye on the market cap of the legal industry and other people wanting a piece of that.
Tom: Oh gosh, and the sad thing to me because this has been the profession for most of our life is they are eating law firms’ lunch and law firms are being incredibly slow to respond, some not, but in the aggregate, incredibly slow to respond.

Two Legal Industry Tipping Points to be Watching

Chris: Let’s shift to something that is, we could call it slightly playful, but do you have a stock market prediction? What’s your advice for firms who will face another recession?
Tom: Oh, if we go into another recession?
Chris: Yes.
Tom: Well, first of all, you know, one of those I wish I could have called the last bubble that burst, what was it October of that year, anyway, I can’t. So it’s like Malcolm Gladwell’s tipping point. There does come a point at which something in the market and something in structures don’t align and when that happens you get the tipping point or whatever that might be. So I’m asking people, I even have a little PowerPoint on this as well, I’m just asking, “I want you to look at potential tipping points and be really thoughtful about this.” And there’s one great bias in the last book that Susskind and Son wrote, they talk about biases and everyone in the profession will recognize this which is, if I haven’t seen it before, it doesn’t exist.
Chris: Right.
Tom: And that’s huge with lawyers. So you’ve obviously got to get people who are a little more forward thinking in that, willing to look into the future, extrapolate into the future. There’s a thing called, it’s not strategic planning per se, it’s called scenario planning. And in scenario planning you choose four or five different futures and then you try to figure out what you would need to do to be successful in that future. It’s really a lot of fun, but you’ve got to get people who are willing to think that way.
But you asked me for my predictions in this. I think there will be a tipping point and it’s going to be around two things that are integrated in terms of thinking. One is AI and what will it do. How robust will it be and how much of the work that lawyers do now will it, can it be a substitute for? And obviously a corollary to that is will the law firms take advantage of that or will the alternative legal service providers do that.
The second one is this, and lawyers have known this for a few decades now. What we’re really talking about to drive down costs, which means being more efficient, which means driving up client value propositions is how can we take, where is the most cost in the system, in other words, cost of services sold, and it’s people. It always is in the professional services industry. If our listeners go look at our survey, Law Firms in Transition, there’s some compelling data in there about underproductive partners, but mainly non-equity partners. So what we’re talking about is the profession that is in many respects under employed and there is nothing, no amount of marketing, business development itself is going to rectify that.
So at some point this is the model changer. Can you see the model change for the professional personnel staff changed dramatically to compete in one of those three, four, five new scenarios. And if you do, you’ll start planning for that now and then when the recession comes, you won’t be stuck with even more underproductive resources, which I think could lead to failures. I mean if it gets to the point where the top earners in a law firm aren’t earning what they think they should because of their production and there’s too much drag, as people call it, what are they going to do? They’re going to leave.
Chris: Yeah, and they will. Absolutely.
Tom: They’re already doing it to some degree, but we generally don’t see mass exodus, but all it would take would be a ten percent downturn in annual earnings and that could happen if your resources are too expensive and you keep people on you shouldn’t. Interesting, I heard somebody explain this the other day and I hadn’t heard it before. He said, we rank our partners in non-equities as golfers and caddies. The caddies are necessary, but a lot of people can caddy. The high-level golfers are few and far between, so I thought that was a pretty good way to look at it. We can’t afford to have too many caddies as the future comes upon us quicker and quicker.
Chris: Yeah, it’s a great analogy. And you’re absolutely right. I was actually just talking to a whole group at a firm that are just kind of in a state of shock as the leadership of the firm is complicit with 1,200 hours on average per attorney billing or less. It’s like 1,000 to 1,200 and they’ve already presented a business plan to the executive committee. They believe they can’t even honor it because of the economics right now and they’re looking for a new home. And I have to agree with you. If the water recedes, what are we going to find and there’s going to be even more – you’re going to be even more busy as partners are jumping and firms are wanting to merge because they don’t have the wherewithal to keep going.
Tom: Yeah, it could be, well, depending upon how fast and I don’t like to predict a speed that is a crushing change all of the sudden like the tipping point, but nobody can deny that things are moving faster than they used to. So that group you were talking about, well that will show in spades in our transition survey, but how fast will there be more and more and more of those groups.

Personal Passions

Chris: Yeah, time will tell. It will be interesting to see. Let’s shift to personal. I’ve just got a couple questions. One that we discussed ahead of times which was what have you been passionate about lately, Tom?
Tom: I’m passionate about my golf game, but if I were ranked in the PGA, I’d clearly be a caddy. So I don’t have any passionate hopes that I’m going to become some great golfer.
I do say, and I think I had mentioned this to you, I’m a big outdoors person and one of things is hiking particularly in mountains. We have a place up in Maine and we love to go there and do that, but I sort of rekindled a, I wouldn’t call it a passion because I think one part of my brain says it’s passionate and the other part of my brain says you’re nuts, but having said that, I’d like to hike the Appalachian trail from end to end. I’ve read every book there is about hiking it. If any of your listeners are hikers, they ought to read a book called Grandma Gatewood’s Walk about this extraordinary woman in her late 60s who for the first time hiked the Appalachian Trail without all the fancy stuff that you and I might have to hike in and did it two more times, so it’s just a compelling wonderful story about perseverance and something like that. So that would be a passion.
And then the last thing I enjoyed over the years until I had too many children to indulge in much is woodworking. I love to work with my hands, so I’d love to get back into that at some point and maybe potential slowing down toward retirement might help in that way. And then the last thing I have to mention because my wife would think I was nuts if I didn’t is I went to the University of North Carolina as you said, and I’m passionate about the University of North Carolina basketball team to the degree that none of my family will watch the games with me in the room.
Chris: And that’s the Tar Heels, correct? Am I-
Tom: That’s the Tar Heels.

Personal Heroes

Chris: Okay. Yeah, well, I wanted to touch on another question for you just on a personal level. Do you have any personal heroes that have mattered to you personally or professionally?
Tom: Well, that’s easy to me it’s not somebody I know or did know when they were alive, but Peter Drucker. Got exposed to Peter Drucker in undergraduate school, more so in business school, and then as I got smarter, I read everything I could. And I believe that you can fashion much of what you do in leadership and business around his teachings. So I have to say just from a management leadership perspective, it’s easy for me to say Peter Drucker. And the others, lots and lots of books written and I read lots of books, but there really had never been any book that I think is as compelling to me as the things that Drucker said way back when and says that are relevant even now. I mean it’s just-
Chris: It’s timeless.
Tom: He’s the man in my opinion.
Chris: Yeah. When you say Peter Drucker I think of you cannot manage what you do not measure. Is that correct?
Tom: Right, that’s among other things.
Chris: Yeah.
Tom: It’s interesting we’re talking about the future. One of his great comments that I read and I’ve never forgotten obviously is the only thing we know about the future is that it’s different. And so if we’re sitting here doing strategic planning and remember those scenario things I mentioned?
Chris: Yeah.
Tom: You can’t paint those scenarios without wondering what’s different, otherwise you’ve just extended the current line and that doesn’t help.

The Tech Giants and Artificial Intelligence

Chris: That’s excellent. Here’s a fun one. We all see the technology companies really kind of shaking up markets. I’d love to get your opinion or prediction on Amazon or other technology companies. Do you have any magic ball predictions you can give us, future of what Amazon’s doing?
Tom: Well, if I knew that closely I’d probably have invested in that, which I didn’t. I’m intrigued by, obviously I was intrigued by AI and Amazon, Google, Microsoft, IBM, they’re all big into the AI facets now and I don’t think the public really understands how far into AI they already are and how it’s affecting our lives if you’re in social media at all, things of that nature. So I think – this is my – you’re talking about passion, I think some of the things they are doing are beneficially, in terms of transformation, humankind transformation, whatever you want to call it, I worry about the things they might be doing that might not be, that we don’t know about. You know, for instance the things that are going on with the potential problem into the Russian meddling, but I think we can never stop progress.
So unlike some of my clients, you’re just going to have to deal with what it is and I kind of like new things and particularly technology. And now people brighter than either of us: Elon Musk, Stephen Hawking, etcetera, fear this AI stuff and are preaching go slow, go slow, go slow, but capitalism doesn’t allow you to go slow. So I think they’re going to come up with some, potentially some things that could benefit mankind even more that it does beyond, you know, Twitter and social media, all the way into things I know they’re doing in the medical field to enhance medical treatment and access to medicine worldwide. It’s just phenomenal I think. And those companies, we don’t really know all they’re doing, obviously Apple is the most secret company in the world I think, but some of them I think will really benefit us, at least I hope they will.

A Book That Should Be Written

Chris: Yeah, I have to agree with you. I have to agree also that there’s definitely going to be some benefit. So I’ve got two more questions. The second to last question is what books should be written on the legal industry that are not written yet, Tom?
Tom: Well, as I mentioned the future of the profession that Susskind wrote. He postulates a lot of things and some of it’s just speculation obviously. But I think and this really doesn’t have as much to do with what I do, which is management consulting and strategy and such the profession, but really somebody to think broadly, and maybe they have and I just haven’t read it, think broadly about the beginnings of the profession. Professionals have always traded on specialized knowledge, every profession. And clearly the specialized knowledge of the profession is not so specialized anymore, like anybody can do due diligence let’s say or a machine can do due diligence.
So now we may be going back to, and I’ve thought about this, I really haven’t articulated it to many people, we may be going back to what lawyers used to be, which was more of a consultant, guider, etcetera, rather than a billing unit. And I, for old-timers, so to speak, lament the fact that the billable hour and the what’s your profits per partner has changed the profession so much that they don’t even see it anymore. And I think that’s all where the jokes about lawyers have come to fore, which is well, you know, they just hucksters and I hate that. So I wish somebody could think, more so than me, broadly, on what might the profession emerge as, as we see these changes. Will it be a big difference? Will it be going back to where we were, which might be more professionally satisfying? We hear all the time about the dissatisfaction in the profession. I’d love for somebody to write an uplifting book about what could be and why it would be a good thing. I haven’t heard of anybody talking about it.
Chris: Okay, last question. Tom, what is the kindest thing anyone has ever done for you?

Mentors and Kindness

Tom: Oh, wow. The kindest thing anyone has ever done? You mean other than my wife agreeing to marry me?
Chris: Well, if-
Tom: Something outside of that. That’s the best thing that’s ever happened to me.
Chris: That’s excellent.
Tom: Without a doubt. You know I’ve always been an optimist. I’ve always looked on the brighter side, not to be pollyannaish. I try to do that all the time. And so so many people have been so instrumental in doing good things for me. I really struggle with that one to tell you the truth.
I guess I’d have to say anybody that’s lucky enough to have a mentor and not many do, that really has a broad effect on my life. The first fellow who was a mentor when I came out of undergraduate school and thought I knew everything, got an exciting job and all that and he for whatever reason, God bless him, latched on to me and became a true, honest to goodness mentor. And I didn’t realize at the time what a commitment that was of his, not just we’d go to lunch periodically, but really teaching me things that I probably would never have learned in school. And so he just gave an enormous amount of his time. I benefited from it enormously throughout my career and he never asked for anything, never. So I’d guess maybe I’d have to say he – that’s the kindest thing anybody’s ever done beside my wife.
Chris: And rightfully so. I think it’s a rare thing to find true mentors.
Tom: Oh, it just – he passed away. I loved him dearly. I miss him now, so, yeah.
Chris: Yeah.
Tom: I’m glad you asked that question because I don’t think about that enough, but I’m glad you did ask that question.
Chris: Yeah, good Tom. Well, Tom, it’s been an honor and a pleasure. Thank you for your time today.
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