Ep: 19 Erik Gustafson Procuring Legal Services & Trends

Erik Gustafson on the Current Trends in Procuring Legal Services

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Links referred to in this episode:

Erick Gustafon Web Bio

Now, Discover Your Strengths by Buckingham and Clifton

C. S. Forester | Horn Blower Series | Amazon author page 

Frank Herbert | Dune Series | Amazon author page 

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Hi listeners, this is Chris Batz, your host of the Law Firm Leadership podcast.
Today’s episode I’m speaking with the CEO of an Am Law 200 law firm and his perspective on client trends, procuring legal services, and how his firm is designing solution portfolios for these clients. We also discussed his advice for aspiring managing partners, why he’s watching the new competition with a close eye, and what he’s seeing in the lateral market place.
Just a remember, the PDF transcript of this audio is available to download. Go to LionGroupRecruiting.com/podcast.
As many of you know, we interview corporate defense, law firm leaders, partners, general counsels and legal consultants. You are listening to episode nineteen 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 Erik Gustafson, CEO of LeClairRyan. Being based in Virginia, Erik oversees about 330 attorneys and 600 employees in 25 offices across the United States. Prior, he was the head of the firm’s litigation department. As a practicing attorney, he counsels the senior leadership at his clients about operations, governance, growth, and risk management. He is also currently a member of the executive committee of U.S. Law Network and has served in several roles in the organization. Erik received his JD from the Georgetown University Law Center. Welcome, Erik, to the Law Firm Leadership Podcast. It’s a pleasure to have you on the show.
Erik: Thanks, Chris.

The Rise of Gen X & Y General Counsel using Data

Chris: I’d love to hear your perspective on what you’re seeing in clients and how they’re procuring legal services today.
Erik: The two overriding themes that you see developing are rather than being a relationship business founded only on having gotten to know one another through a shared experience instead that relationship increasingly is both more dynamic with more people in it. So a change in the set of roles that are determining how should we outsource our legal work, who should be in that mix.
I think one of the other themes is very much looking at data. Rather than just how do you feel about whether we’re getting good legal services, there’s a lot more data involved in the equation. I also think as you look at – and I notice, for example, one of the largest international financial institutions in the U.S. just had a change, announced a change in its general counsel role, where the new general counsel is someone in their mid-forties. You’re beginning to see the rise of both Gen X, Gen Y, and then increasingly Millennial consumers of legal services from the corporate perspective and they bring a very different understanding and feel for both data and technology to the equation.
Finally, you have a rise, particularly in the last five to ten years, of what many commentators are referring to as New Law, that is non-law firms that are providing services. That’s the fastest growing segment of the legal services marketplace. Then you also see the nature of technology and the sophistication of technology affecting the efficiency with which the services can be delivered or the amount of leverage that either an outside lawyer or an in-house lawyer can use to deliver that service that ultimately they want to their client.
Chris: How is LeClairRyan responding to the shifts and changes?
Erik: A couple different ways. One of which is increasingly part of my role as the CEO, is meeting with our clients and developing conversations with clients about what I would refer to as portfolios of legal services, whether that is not just being on an improved panel or a list to be able to do work, but really having a thoughtful discussion about what’s keeping the general counsel or the CEO or the CFO awake at night from a risk-management perspective, but also an expense perspective and looking to repurpose and redesign how that solution is delivered.
That sounds very 100,000 foot speak, but it kind of distills down to a couple of different key things. One – identifying where there are pockets of work that clients would like to do more predictively in terms of their cost at an equal or even better result. This isn’t about simply discounting rates because the fundamental value promise to the client is that you need to do the services at least as well as, but really better than, the service that had been provided before in a more thoughtful and holistic fashion.
Now, not everything lends itself to that, but for clients particularly that have recurrent legal needs in volume or simple recurrent legal needs as a result of the operation of their business, whether it’s regulatory compliance, whether it’s analysis of data privacy or just operational, breaking data down into a predictive way, and really asking them the question, what are the main drivers that you want. I like to describe in the analogy is the box. Here’s the box we’d like to sell you. It really is about here’s the process and here’s the conversation. And it starts with what are the client’s goals and then you design the box that the client wants.
The advantage for the law firm is that this allows you to take a much more comprehensive approach including, designing where a technology solution might create more efficiency or a technology solution might be able to create a better collaborative environment.
I would argue that one of the opportunities in this is that rather than worrying about how many hours you’re going to fill on someone’s plate, the more that you can look at a portfolio approach. You can achieve the more you can operate like almost any other business in the United States, including professional services businesses, which is a better understanding of your talent and where your talent will have the highest and best use, coupled with the predictive nature of what your revenue is likely to be.
Again, if you look at the data on Am Law 100 and Am Law 200 firms that comes out, there’s a little bit of a bifurcation certainly now between Am Law 50 firms and those coming after the Am Law 50. But it’s still a bet and it’s a bet on how busy do we think our client demand is going to be. The vast majority of the work is still generated by individual colleagues maintaining and developing great interpersonal relationships and delivering excellent client service.
However, what I see as part of a transition is in almost every other professional services business or other things like law, software contract development, consulting services, those kind of things, the predictive nature of those contracts, which tend not to be time and materials contracts, really lend themselves to longer term thinking, driving value, predictability for the firm itself in its financial performance and not the fortuity of who happens to be at the firm, whether they have a better year than the year they did before. And when you can bring that institutional relationship and all of the value that all of your team members have into an aggregate with a client, not only is it driving a better relationship and a better understanding of that client’s needs, their business, their goals, but you actually find the teamwork across practices and across offices really increases. It’s trying to bring that sum total of knowledge to bear on providing solutions to our clients. But from an organizational basis, that’s where I think it starts. Form a philosophical basis, it’s all driven by how can we do better work for our clients and deliver better results.

Non-Law Firm Competition and Succession Planning

Chris: What’s keeping you up at night as the CEO of a firm with nearly 1,000 mouths to feed in the mid-term ?
Erik: The biggest challenge I see in the next three to five years is the increased amount of competition from non-law firms. that look at the aggregated legal market place in the U.S., sometimes estimated to be over 500 billion dollars in terms of the value driven to provide legal services and that’s an aggregate of in-house non-law or new law and law firms. And if you think about it our challenges in a world, increasingly dominated and influenced by technology, where people are looking for ease of use and efficiency, there’s no less legal work out there. But how we solve those problems are increasingly influenced by things that require capital investment, changes in processes, changes in thinking, and a lot of those are being driven by clients in particular now. But lawyers – I think the great part about being a lawyer and having a background in thinking about client problems, and, more importantly, delivering solutions, is it’s a real opportunity for us to be creative in doing that.. But one of the challenges is a lot of the tools that are required to do that involve capital expenditures, whether it’s new systems, software, non-lawyer personnel, whether they’re around pricing or legal process management or optimization. It’s a real change in the culture.
Chris: Erik, please talk about the challenge of succession planning, with the changes in clients and changes in the right staffing of your firm.
Erik: Overall if you look at it, lawyers are practicing longer and longer and a majority of partners in practice in some states and a majority of partners in law firms are increasingly in an overall average age that’s older than ever before. And, generally speaking, our clients are retiring either because of mandatory issues or just the evolution of business, sooner than lawyers are.
So going back to a comment I made about this being a relationship business, if you’ve had a great relationship for 20 years with a general counsel of a particular client, and you’re relatively speaking of the same age bracket, increasingly one of the things you see in the market place is that the clients are retiring. And in the same way that transition internally from a retiring or a partner stepping back to a younger partner is fraught with difficulty and complication because it’s a very interpersonal relationship. The same thing’s going on at the clients. Work and roles are changing and evolving to different people and it makes that dynamic even more complicated.
There are many firms, particularly those that are in the Am Law 200 and really good local firms, 20 to 40 lawyers, that are all hitting about the same vintage, usually 20 to 40 years old, usually founded as a result of a group spinning off of what was then a much larger firm for really good reasons related to more efficiency, better focus, all of those things. Many of them adopted the same sort of compensation models around originations and certain levels of productivity. As a result of that many of them have sort of the missing generation of partner because there was either not enough work to support that next follow on group to become an equity partner or not enough leadership opportunity in transition for the managing partner to shift responsibilities every couple years.
If it seems to be working, why change it. It lends itself perhaps to a little bit of complacency. Then one day you wake up and what I see in my role, we get an alarming number of – and alarming may be an unfair word – but legal recruiters reaching out to us with really good firms that their lease is up for renewal. Most law firm office leases are about seven to ten years or the managing partner or the biggest rainmaker is thinking about retiring two to three years from now and looking around, they’re not sure that they’re going to be able to hold on to the business or they’re not sure that they’ve got the right person to step into the leadership role. That’s really saying something I think about the marketplace. For all of the risk management and forward-looking advice that we give as professionals, how we operate and run our businesses tends to be a little more idiosyncratic than probably the advice we would give if our businesses were the client.

Perspectives on the Lateral Market

Chris: What are you seeing currently in the lateral partner marketplace right now?
Erik: One, there’s a lot of movement in consolidation and really good law firms that might have a local or regional reach. They are firms that fall into the 10 to 40 lawyers. Those firms, what we see pretty consistently are those themes that I talked about. Client consolidation, so where clients are looking for a single firm to provide services beyond local or sometimes even beyond regional and they’re consolidating their client lists.
The candidates who are coming from Am Law 150, but particularly those in the Am Law 100, accelerated rate increases, particularly for those who service practices in the U.S. and predominantly either a subject matter that is higher in volume or regions that may be non-major metropolitan areas. There your challenges are you have a lot of depth and you have a lot of competition from firms like ours, and middle market firms where the rates may be 20 or 30% lower than what the competition is currently charging for what is really good legal work, sophisticated, complex, interesting, but none the less, it’s really more of that regulated business compliance, things that are necessary, like commercial litigation, but not Bet the Company work. And so there is both a pain point and just a reality checkpoint. There is only going to be so much legal work in the world that you can charge 1500 dollars an hour.
Then you have the rise of the digital world, so you also have folks who are really good local firms or regional firms who really are now able to project on to a national reach if they have the right platform.
Then there’s a negative trend which is law firms are increasingly focused on metrics. They’ve always been focused on metrics, but the amount of grace in telling people how to adjust to whatever those circumstances are, whether they’re achieving particular goals or whether they’ve happened to lose a client and now they’re working on a plan to find a new client or it’s getting a shorter and shorter cycle. You also see the tolerance factor, particularly the Am Law 100 firms, getting ever shorter. What you really see is with the rise in rates, particularly at the world’s largest law firms, the revenue is consistent, the working attorney revenue is consistent, the originations are consistent, but you can see a dramatic decline in hours.
Chris: There’s something about the lower rate work that somehow gives you marketing face time I think that you’re alluding to.
Erik: Yeah, that’s right, but it’s not lower rate necessarily. Every firm tends to focus on similar metrics and that’s not surprising because most firms are still vast majority of revenue is driven by the billable hour, so the rate matters, the billing percentage matters, the number of hours matter and the collection percentage matters. Some of the overarching numbers that people tend to look at: profits per partner, revenue per lawyer – it’s kind of funny because with laterals and others, that’s what people tend to focus on. It’s really interesting to me though because most people – those are all numbers juxtaposed with okay, but what’s your overhead per lawyer, what’s your profitability. If I have segments of people who are entirely devoted to alternative fees, which we do at our firm, the hours are interesting. It gives you a guide, so how people are doing relative to something. But the reality is, if I have an alternative fee with the client where I know we’re going to get at least a million five for the year, and I know we’re staffing in a certain way, then I’m less concerned about the hours because I know what the revenue is going to be.
The only limitation on that right now is alternative fees will probably be somewhere between about 15 – 20% of our revenue this year. When I talk about alternative fees, I don’t mean discounted rates, which is sometimes how people view that. I think that could be really liberating for the profession because when you shift to that model, the hours matter because you want to make sure everyone is equally balanced in their work and the work’s going to the right people and you need to understand how many resources you need, the less agony over it.
Chris: Erik would you talk about the new groups you added in September.
Erik:Two different groups joined us in the third quarter this year. One group, very traditional from an excellent international firm. It’s focus is the aviation industry. They handle regulatory litigation, corporate, so really good talent. That is a traditional law firm group which does some alternative fee work, but by and large its billable hour work, very deeply engaged. Where part of the driver for that is we had a platform that would serve their needs.
That’s juxtaposed by another group that joined us which is the worker’s compensation group, very high volume, relatively speaking low rates compared to the Am Law 100 or 200 marketplace. But what really interested us in this is sort of two different things. One of which is it was created as an offshoot of an insurance company and a TPA, third party administrator, being dissatisfied with the solution they were getting which was sending work to law firms in all 50 states and multiple places within some of those states and it was very inefficient.
The head of the practice was in-house and was charged with the task of coming up with a better solution. The better solution wasn’t to actually drive down the rate that was being charged, but to modestly increase the rate to allow the team to hire the best folks to do the work. Rather than being focused on how many hours are they going to record to something to generate revenue, really the impetus is how efficient can you be. There’s more than enough work to do, so you can actually hire, afford to pay more. You could also drive down the total amount of work each person was doing by making a fairly modest change in the rate being charged for it. You could then look at commoditization and alternative fees, including how quickly an invoice gets processed, and then finally, you embed people with the client. You take out a layer of both expense and a layer of communication gap and so you place the folks who are the decision makers on the legal side with the decision makers who are on the risk management side and you turn that into a more efficient relationship.

Advice for Aspiring Law Firm Leaders

Chris: What advice or wisdom would you provide to an inspiring managing partner?
Erik: What works for me may not work for you, but having said that let me offer up a couple things. One of which is if you’ve never been in law firm leadership before, I didn’t realize is how isolated you can become really quickly. By that I mean, I still have the same great relationships that I’ve had with my partners. Nonetheless, even though I’m the same person I have always been, once you assume a title and either responsibility or authority over other folks, your relationships suddenly and silently begin to change. First of all you have to know who your network is, so who are you going to rely on as an informal sounding board, who are your formal sounding boards, who are the people who are getting accurate information from folks so that you can make better decisions than you would.
The second thing is really get to know the profession and the economics, your firm’s economics, the practice economics, what’s going on in the market place because you may understand your firm really well, but if you don’t understand the overall ocean we’re navigating in, then you may not see the tsunami until it’s too late, or alternatively you may not see the wind coming where you want to change direction now rather than when you’re in the middle of something more turbulent.
The third thing is you have to have sounding boards. I’ve got a mix of people that I routinely talk to. I have a network of managing partners of other law firms, both a formal one and a less formal one. Some folks who are managing firms that are larger than us, some that are smaller than ours, and then some right about the same size. The reasons that I have that are because they can also see the winds coming in different ways sooner than I can and so it helps me in my decision making.
Then two last pieces of advice and they’re really brief. The first one is you have to have a personal philosophy. I think one of the hard parts when you step into law firm leadership is you’re following in other people’s shoes, and you should take the best of what you can learn from those folks, but you also have to be your own person. You have to be comfortable in your own skin, and bring yourself to the table. I think one of the best books I’ve read Know your Strengths.It highlights that the people who are among the most successful in the world, know what they’re good at and energized by it. They also know either what they’re less interested in or less passionate about and they surround themselves with a team that covers those things.
Then the final thing is all too often we get very hung up on numbers. The most important thing about that is understanding those numbers are the result of a story and if you don’t actually understand the story of how those numbers have come to be, you’re going to make really bad decisions if you simply react to things merely in a formulaic fashion.

What Does Erik Read?

Chris: Erik, I know that you had mentioned that you have a double major in history and a minor in philosophy. Share a little bit about what you’ve been reading lately, any books recommend, biographies, that sort of thing.
Erik: Just to clarify, so I went to William and Mary. I double majored in history and government and I had a minor in philosophy. My focus in history was early American History from essentially the mid-1400s to about 1865, so just at the end of the Civil War. And in government was the origins of American political thought, so very much focused on political philosophy around the Constitution, the Declaration of Independence, and sort of the early Colonial thinkers.
I tend to read a lot of kind of three different genres. One of which is historical fiction. I’m sort of a sucker for different kinds of historical fiction, particularly those where there’s not just a novel, but kind of a continuity of novels, where can you see character progression over time, so kind of if you think back to the Hornblower series, if you liked 18^th and 19^th century British naval history. Or what I’m reading right now is actually something that’s six book series about someone serving in the British navy. This one is about a naval officer in the late 1800s as steam is taking over from sail. And it’s an interesting period in the Colonial era because there’s a lot of activity that’s not really between the major powers, but the major powers are involved in places South America and in Asia, and in Turkey, and in Russia, and the wars that were going on at that time, so it’s an interesting sort of political backstory as well.
Second genre I read a lot of science fiction, for example, Dune. There’s an awful lot of books in that series now, including written by co-authors and the son of Frank Herbert and things like that. I spent a summer two years ago rearranging the books so that it goes in chronological order as if it were a history of what was going on. One of the things that I think is a really interesting side note about some of the science fiction books, but the original book Dune, in particular, has to do with mythology and whether or not you can create your own mythology by understanding the narrative and then adapting your life to it.
Chris: Have you always been using a Kindle, I mean, since it’s been out?
Erik: I was a fairly early adaptor to the Kindle and went through the first two iterations of the Kindle device before I finally just turned over to the Kindle app. But with particularly Amazon Prime, it’s a really inexpensive way to add a very large library. I like the feel of having books, but frankly if I’m on vacation or I’m on a plane, the people sitting next to me are probably more appreciative that I’m not lugging a suitcase full of books or that I’m elbowing them as I’m turning the pages.

Populist Movements

Chris: We’d love your perspective on predictions as populist movements have been moving through our country, through maybe France, through what’s happening in Iran right now. What are some brief, quick predictions to what you see happening across world governments right now?
Erik: One, I think we completely underestimate how the digital world is changing how people communicate with one another all over the globe. And that’s a two-way street because while there are increased opportunities for people to communicate, plan, organize, foster ideas, share ideas, there’s also an equal opportunity for governments to monitor that activity. So my short answer is turbulence. It’s going to be turbulent.
We’re in an increasingly regulated world. There are more people every day. There are a finite amount of resources. Water, which is a fundamental thing, fresh, clean drinking water is increasingly in short supply. I don’t think it takes a genius to understand, particularly if you’ve travelled in the world, most people in the world are focused on whether they have a job today, whether they’re going to be able to put food on their table tomorrow, whether their children will have a better opportunity than they did. So turbulence, I think, until we fully appreciate that we’re living in a wider world. That doesn’t mean that there’s no place for nationalism because I think part of the populist move you see is in part driven by an underlying concern or fear around that. Sometimes in scarcity that divisiveness, that turbulence, that fear, comes to the surface.
Now having said that, I’m also optimistic about our future. The opportunities to learn more about the world, to actually experience and see different cultures, to learn from one another, and the benefits that come with that, I think, have never been better. But it is a more complicated regulatory and regulated world that comes with that. That’s the optimistic side. The concern and skeptical side I think, born out of being a historian, is we have to manage those differences between us successfully if we want to have a bright and successful future.
Chris: Really it’s been an honor and a pleasure. I appreciate your time today and just sharing your insights with my audience. Thank you for your time today, Erik.
Erik: Chris, thank you very much and thanks to the listeners who have made it all the way to the end.
Thank you, everyone, who listened to this episode of the Law Firm Leadership podcast.
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