Kristin Stark | Principal at Fairfax Associates
Law Firm Management Consultant| Hildebrandt & the Golden Years | 3 Reasons for a Merger | Peer-based Leadership | Better Managed Law Firms | Debt & Real Estate | Predicting the Competition | Family
I interviewed Kristin Stark | Principal at Fairfax Associates on Monday, May 11, 2020.
The episode began with Kristin Stark sharing her journey to becoming a legal consultant. She explained her career moves from Deloitte to Hildebrandt to Thomson Reuters to launching Fairfax Associates. We discussed the 2 types of leadership and her insights on law firm mergers. She then spoke about COVID-19 and how law firms who are better managed will fare better with lateral partner growth. We also touched on real estate and debt management. Kristin then spoke of the Big Four accounting firms and how it’s hard to understand what they are doing as they build a competitive position in the legal industry. Kristin shared her client recommended readings on Peer-Based Leadership and how she coaches clients on leadership. We finished the conversation discussing family and the impact of COVID-19 on their everyday life.
Here are some highlights of my interview with Kristin Stark:
When I did my MBA, I did projects for privately-held companies and partnerships and found that I really enjoyed the ability to influence decision-makers at the very senior level.
It was a very exciting time in the legal industry because it was the boom period leading up to the Great Recession, we call it the Golden Years, where law firms experienced revenue per lawyer growth and profits per partner growth of about 5-7% on average per year. Those years of phenomenal growth were my early years in consulting law firms.
Our view is that either a proactive approach or at least a more educated approach is going to be a more successful approach over reactive because then you’re going to understand what you are looking for in a law firm merger.
When partners don’t feel that management is doing everything needed to bind the firm together, to make good business decisions, to communicate effectively during difficult times, they start leaving.
Borrowing money to pay partners or using future profits to pay partners is probably one of the riskiest debt strategies that law firms can take.
One of the opposing forces to the change in real estate space is social distancing, law firms may actually need the space that they have in the short term until the crisis is passed.
Law firms don’t fully understand where the Big Four are investing, how they plan to compete, and how they are going to be positioned three-five years from now.
In terms of law firm leadership, try to think about it as peer-based leadership, your ability to convince people who are seen as your equals to do the things that they need to do which are best for the entity or organization.
In our work, we often are delivering difficult messages. We’re telling people things that they might not want to hear. One of the things that I believe is a skill of mine is that I do it with empathy. I deliver difficult messages but in a way which is hopefully something that most people can digest or hear and it allows them to be able to take action on it as a result.
Links referred to in this episode:
McKenna Long Completed Merger with Luce Forward by Washington Post
Aligning the Stars by Jay Lorsch & Thomas Tierney
The Little Book of Leadership Development by Scott Allen & Mitchell Kusy
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Greetings friends, this is Chris Batz, your host of The Law Firm Leadership Podcast. In today’s episode, I spoke with a law firm consultant and we discussed all things law firm related from a high level including the impact of COVID-19, merger trends and advice, debt, real estate, competition, and much more.
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As many of you know, we interview corporate defense, law firm leaders, partners, general counsel, and legal consultants. You are listening to episode forty-three 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 Kristin Stark, principal at Fairfax Associates.
Kristin is based in California and advises law firms on strategy development and implementation, organizational management, and structure, financial management, and compensation. Prior to establishing Fairfax in the United States, Kristin was a senior director with Hildebrandt Baker & Robbins, advising law firm clients on strategy and management topics. Before joining Hildebrandt, Kristin was a senior consultant with Deloitte as a managing consultant for Fortune 100 companies. Kristin has a bachelor’s degree from the University of Notre Dame and an MBA from London Business School.
Welcome, Kristin, to The Law Firm Leadership Podcast. It’s great to have you on the show.
Kristin: Thanks for having me, Chris. It’s a pleasure to be here.
A Journey to Legal Consultant
Chris: Could you start from the beginning with your two degrees and share what led you to land a consultant job at Deloitte?
Kristin: Notre Dame has a very big alumni recruiting effort and so when I was at Notre Dame, I was recruited by alumni at Deloitte. It was a very engaging process. They pull you in culturally into Deloitte and you develop a lot of camaraderie. I interned there and I just fell in love with the idea of being part of their consulting team. I wanted to go into consulting as a potential opportunity, but once I met the people at Deloitte and the Notre Dame alumni network there, I was really drawn to it.
Chris: What about consulting piqued your interest while at Notre Dame?
Kristin: This was in the 90s and the time when Andersen Consulting was growing by leaps and bounds every year and I actually almost took an offer at Andersen Consulting as well. That was one of the other options I considered. Consulting was one of the biggest career opportunities coming out of the undergraduate business program in the business school at Notre Dame. I was a marketing major, interestingly, only because my sister had been a marketing major at Notre Dame and I was impressed by her degree, but once I got into marketing I realized it was not for me, so I started taking more accounting and finance classes. That led me to a desire to be more of a holistic management consultant. I didn’t want to only focus on marketing, finance, or accounting, but I wanted to cover broad management consulting.
Chris: Were you working with tech companies when you were at Deloitte and working with the Fortune 100 companies?
Kristin: I was a part of the project when Hewlett-Packard acquired Compaq way back when. I was on that project for quite some time. This was back in the day. Deloitte would send you out on a Sunday and we’d come home Thursday night, so we’d be gone the whole week or even Friday. So, I was up in Colorado for 6-12 months and then I moved to a Boeing project and did that for some time. Then, I started getting more involved in the finance world. I began working with partnerships and privately-held businesses in the finance industry. That’s actually what led me to look at legal consulting coming out of business school.
When I did my MBA, I did some more projects internationally for privately-held companies and partnerships and found that I really enjoyed the ability to influence decision-makers at the very senior level. It’s something which is much harder to do in a large Fortune 50 or Fortune 100 company, where there are many layers of management and bureaucracy. When you look at privately-held companies and partnerships, you’re able to get to decision-makers and work on critical, strategic issues with the top decision-makers in the organization very readily. You don’t have as many layers.
Hildebrandt & Thomson Reuters
Chris: Why did you pick the legal field or were you also entertaining other fields while at Notre Dame?
Kristin: Choosing the law was more happenstance. I never really considered a career in the legal industry until joining Hildebrandt in the early 2000s. When I was doing my MBA, I was consulting to some privately-held companies in the UK and in Hong Kong. I lived in Hong Kong for some time. With the partnerships in the privately-held companies, you’re dealing with the managing member. It gives you this exposure to be able to have conversations about their most critical business issues that they’re facing. When I was coming out of business school, I interviewed with Hildebrandt. They told me that same story. They told me how they influence very high-performing and mid-performing, small-, large-, and mid-size law firms about their most critical business issues. It was very intriguing. It was Hildebrandt’s unique practice that led me to legal consulting.
Chris: Can you tell us what really got your attention when you were working at Hildebrant?
Kristin: When I joined Hildebrandt, it was still a privately-held business, so it was actually a partnership. Then, Thomson Reuters acquired Hildebrandt after I joined. I believe that was in late 2004. That was a really big change for Hildebrandt because they essentially sold to Thomson Reuters and became part of a large Fortune 1000 business and a consulting division within Thomson Reuters.
When that happened, we did have more resources at our fingertips. It was at the time when Thomson Reuters was also launching Peer Monitor, which is a product that still exists and had significant research capabilities. It was a very exciting time in the legal industry because it was the boom period leading up to the Great Recession, we call it the golden years, where law firms experienced revenue per lawyer growth and profits per partner growth of about 5-7% on average per year. Those years of phenomenal growth were my early years in consulting law firms. We ultimately stayed part of Thomson through the Great Recession and we spun out in 2011.
Chris: Why did Hildebrandt spin-out from Thomson Reuters?
Kristin: I was a Senior Director at the time and it’s my understanding that Thomson felt consulting was really not part of its core competency and I don’t believe that Hildebrandt Consultants had really flourished. There were some people who left the organization to go in-house to law firms and I think they were realizing that they’re much more of a product and legal services-technology based business as opposed to a management consulting practice. I actually recall June 29th they announced that they were going to get out of the consulting practice. It was effective on June 30th. So, we formed Fairfax on July 5th. There were several spin-outs and ours was one. My partner, Lisa Smith, is based in DC and we joined colleagues who had actually left Thomson and left Hildebrandt ahead of us, who were in London, so we had a London, DC, and California presence.
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Mergers & Lots of Strategic Planning
Chris: So, you started Fairfax Associates with Lisa and some colleagues in London. Give us the landscape of 2011 as you started your business.
Kristin: Our practice was pretty busy from the get-go. In that year, I was working heavily on a couple of mergers. One was in the press where a firm called Luce Forward was acquired by McKenna Long and later became Dentons. From there on I’d say it grew exponentially. As law firms started to recover from the Great Recession we got busier and busier. The work has changed, but back then law firms were still in recovery mode. In the 2011 – 2012 time period we were doing a lot of cross-border merger work. We still are.
In the interim period between those early days when we founded Fairfax, we did see quite a spike in strategic planning work over the past five to seven years in particular. A lot of firms started to really look at their competitive position and say, “Gosh, the industry is changing so much.” It might not appear to be a very significant change to those outside of legal, but it’s a rapid change for those inside law firms. Firms have been looking for ways to respond to that change and really trying to step back and say, “Our competitors are changing, our clients are changing, how are we going to respond?” We’ve been very, very busy with strategic planning work over the past five to seven years.
Partner compensation is an ever-growing topic. Law firms are always having conversations around partner compensation. Innovation was a really big topic for many years I would say. We were doing a lot of innovation-related work from 2013 – 2016. That work has gone away as many law firms have already invested heavily in innovation. Others have not invested as much and it will be interesting to see what they do coming out of this new crisis.
3 Reasons for a Merger
Chris: Would you explain to my listeners why law firms are exploring mergers right now?
Kristin: So, I’ll differentiate between pre-COVID and right now. Pre-COVID, the primary rationale for looking at a merger would be a desire to improve the firm’s strategic positioning with regard to its practice focus or expertise focus. That could be areas of specialization, where they are offering something that is better than the competition and clients choose that law firm because they’re differentiated in that expertise area. That could be practice-based or it could also be industry-based, right? Firms were looking to add to that, to cement it, and to build on it. In many cases, they would also be looking at supplementary areas that help them maintain that differentiated position or secure it. I’d say practice and industry expertise tend to be the biggest drivers of merger focus and merger interest.
Another reason would be geographic, as firms try to round out the firm’s geographic platform, reach markets that clients have demand in an area that the firm doesn’t have a presence in. In many cases, firms have also gone ahead and opened offices in very competitive markets. They’ve struggled with maintaining or growing those offices because they are so competitive and then they’re looking for mergers to really support that office and to build it out further because the lateral strategy has been challenging.
In some cases, another reason would be their clients. If you’ve got specific clients that are saying, “We’re looking for much more of a branded firm.” We call it skill-based mergers. It’s not a growth for growth’s sake mentality which has been widely criticized within legal, rightfully so, for many years. Outside of legal it’s also been deemed to be a strategy for failure, but skill is different. Skill is often how clients link to your firm. “We need to start choosing law firms that have more credible brands. We love some of your lawyers at your small firm, but we simply can’t keep using you for our important work and certainly not for our bet-the-company- work. Even for our higher-value work, we can’t use you because we have a board of directors or public company exposure. We’re getting criticism for using firms that might not be safe bets.”
That’s been part of the client-driven conversation around a merger. Another piece of it would be clients looking for broader teams or deeper teams of lawyers. You might have two M&A lawyers, but they need 20. They’re not comfortable with only having two M&A lawyers. That skill conversation covers both brand positioning as well as the breadth and depth of teams and the overall size of the firm.
Opportunistic vs. Reactive Leadership
Chris: What are law firm leaders doing right and what are they not doing right when it comes to the merger & combination process?
Kristin: One of the big challenges that we see in law firms exploring a merger, tends to be when law firms are reactive in exploring a merger – and I would differentiate reactive from opportunistic. Some firms will say, “Oh, we’re opportunistic,” meaning if they get approached by an opportunity, they’ll look at it. That’s certainly one strategy and it works well for some combinations, but in most cases when a firm is opportunistic, they are educated and aware of the range of growth opportunities available to them. That’s why it can work out to be opportunistic.
When a firm is reactive though, oftentimes they aren’t aware or educated of the merger opportunities that are out there. They’ll get approached by one particular opportunity and decide to pursue it without really going through a process to understand if another combination would be a better fit strategically, would benefit their clients more, or would benefit their talent more.
Our view is that either a proactive approach or at least a more educated approach is going to be a more successful approach because then you’re going to understand what you are looking for in a merger. What is the strategic rationale to pursue a merger? How will it benefit your clients and your talent? How will it make you more competitive in the marketplace? Without that conversation, firms are just responding to one specific firm and they haven’t looked at how they fit into the marketplace and how a merger might or might not benefit them generally speaking. They then go down the path without really giving enough of an educated view. It’s critical that firms have a more holistic sense before they jump into a merger conversation.
Law Partners Departures are Coming
Chris: Since you’ve been a consultant and since I’ve been recruiting, we’ve seen a lot happen in the industry. What’s your prediction because of COVID-19 for the remainder of 2020 – 2022?
Kristin: Unfortunately, I do believe we will have some firms which struggle as a result of the crisis. Typically, we’ll tend to see departures. Those departures will potentially be driven by the fact that firm management has not responded effectively to the crisis or, in some cases, their response hasn’t been sufficient. Part of this is the business decisions that they’re making, of course. But another piece of the response has to be about how they communicate with their stakeholders, with their partners, with all of their firm members, and with their clients about the crisis, about how the firm’s weathering the crisis, and that they create a sense of buy-in and teamwork that would hold people together. It creates this organizational glue that can weather the crisis.
When partners, in particular, but talent, in general, don’t feel that management is doing all that it needs to do to bind the firm together, to make good business decisions, to communicate effectively during difficult times, people self-select. They start leaving and looking for opportunities where they perceive another firm, a competitor, is going to be better managed, is going to have better communication, and is going to come out of the crisis better positioned. Those departures are what will trigger instability for some firms.
The other likely pressure that we’re going to see is on law firm economics over the next year as clients delay payments or they tell law firms, “Pencils down, we’re going to do less work.” So, as firms experience departures, revenue declines, and profitability pressure, it’s going to squeeze them. If they’re proactive, they will start looking for a Hail Mary pass merger. They won’t move towards dissolution mode. If they don’t see what’s coming, then they’ll end up in a very difficult position and it will be a very late stage merger or even other firms picking apart groups that are left as the firm goes into dissolution. Unfortunately, I do think we’re going to see some of those out of this crisis.
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Chris: What are the trends that you have seen with law firms utilizing debt?
Kristin: It’s another really good question and one that I would hope our law firm leaders are really thinking about right now. Coming into the crisis, a lot of firms were worried about cash shortages. Many firms, and most of our clients that we were working with, accessed their line of credit and pulled it in, even if they were out of their line of credit. Typically, many of our clients are out of their line of credit by the end of the first quarter in order to have cash reserves in the event that there was a liquidity crisis. We do see some firms going ahead and repaying that line now because production has been holding at about 90 – 95% through April. Collections have been slowing down, but not as badly as some had feared.
In terms of long-term debt, firms aren’t making significant moves on that right now. Hopefully, those are our longer-term notes, five-year notes, maybe even longer in some cases. But generally, I would say firms are trying to manage their debt carefully. We need to be very careful about not assuming a lot of debt while preserving liquidity. That line of credit is an important cash flow mechanism because it’s going to enable firms to get through any kind of cash flow pressure that they might experience if clients start using them like a bank, which happened during the Great Recession. At the same time, we don’t want our firms to use that line of credit or other sources of debt to pay partners.
The best advice we can give to law firms right now is do not borrow to pay partners. Most law firms of any size understand that principle and tend to be fairly debt adverse. Borrowing money to pay partners or using future profits to pay partners is probably one of the riskiest debt strategies that law firms can take.
Social Distancing, Remote Working & Real Estate
Chris: What trends do you think will change with real estate in the legal industry?
Kristin: When all of this started, we had law firms quickly moving to remote working arrangements, something most law firms had not embraced heavily. Obviously, you have virtual firms, but most traditional firms were pretty heavily in-person operations up until the start of this crisis. The move to remote working in those initial weeks triggered a lot of rethinking of space. Unfortunately, for a lot of our law firm clients, they are in long-term lease arrangements. It’s going to take a few years for firms to adjust their space requirements and to adjust their leases, but I do believe this has opened up lawyer’s eyes, especially those with a more traditional, in-person viewpoint. There are recent articles of law firm leaders saying, “Look, we’ve now proven that we can work remotely successfully and we don’t need space.”
Now, one of the opposing forces to the change in real estate space is that with social distancing, law firms may actually need the space that they have in the short term until the crisis is passed because they’re going to have to potentially spread people out more. We do have a lot of legal assistants working in cubicles outside of lawyers’ offices. Law firms are going to need to think about how to space people out.. That might require them to use their space over the short-term period.
But one – three years from now as law firms start renegotiating their leases, they really need to be thinking about how to shed some of that very, very high-cost overhead. This is a way for firms to get rid of expenses and work more efficiently for their clients without compromising the teamwork. During this crisis, law firms have learned to work remotely while preserving teamwork and preserving some of the critical aspects of that in-person environment.
Thinking Ahead & Competition
Chris: What’s your take on the Big Four and what advice would you give law firm leaders?
Kristin: One of the biggest challenges for a law firm leader is that the Big Four represent a very significant competitive force in the industry. Unfortunately, it’s not fully understood by law firms about the magnitude of the competition that’s coming from the Big Four. In part, it’s because I would say that law firms get to know their competition by knowing some of their peers. They know managing partners at other regional firms, national firms, or even other global firms. There tends to be some networking that’s done among law firm leaders, where they’re able to learn about what their competitors are doing. This networking which doesn’t harm the competitive position in other either firm, but helps the leaders understand what they’re up against.
Unfortunately, a lot of law firms don’t have relationships in the Big Four to understand what they are doing. They’re very strategic. They have a lot of resources to invest. They have a lot of technology capabilities. Law firms don’t fully understand where the Big Four are investing, how they plan to compete, and how they are going to be positioned three-five years from now. One of the biggest opportunities and challenges for law firms is to really start to gauge what the accounting firms are doing, where are they going to be, and how that will impact an individual firm’s position in the marketplace.
Chris: How do you define leadership and what books would you recommend?
Kristin: We talk to our clients about leadership and are involved in projects where we’re helping law firms who have had long-running leadership work on leadership succession and changeover. We talk about leadership as the ability to influence. In a law firm environment, it’s the ability to influence your peers and the ability to influence others to do things that they might not otherwise do if left to their own devices.
In terms of law firm leadership, we really try to think about it as peer-based leadership, your ability to convince people who are seen as your equals to do the things that they need to do which are best for the entity or organization. If we’re talking about it in that context, one of the best books that we would recommend is called Aligning the Stars. It’s a bit of a leadership book but also focuses on how to develop professionals and talent. Leadership Development, that book is famous and it’s been around forever, but it’s certainly one of the ones that I would recommend the most. It talks a bit about pulling together professional service organizations’ true stars and the leadership challenges that are inherent in bringing together people who are all free thinkers. Oftentimes they’re very skeptical, so the book talks about how to align their behavior in a way that benefits the organization.
Family Life & Summer Plans
Chris: You’re married and have kids, correct?
Kristin: Yes, I got married in 2004 and I have two little girls who are six and ten. We also have a Golden Retriever, Bess, who is a big part of our family.
Chris: That’s awesome. So you have three kids or four kids?
Kristin: Yeah, my husband is a very young, playful spirit, so he qualifies.
Chris: Talk to me about COVID-19. How has that affected you as a family?
Kristin: With the kids being at home, it’s been a challenge. My husband is in semi-conductor, so his work is actually essential and he’s been going into the office every day. I guess we need to keep developing some chips so that we can sell cell phones to people and communicate. But my kids have been here of course and they’ve been great.
Fortunately, I’ve just been really blessed with very well-behaved children. They’ve been very cooperative as I’m on Zoom meetings. I haven’t had them run behind me yet on video conferencing. The dog, yes, that has happened, but the kids have been great. One of the challenges we’re going to face for our law firm clients is as we all try to head back to some sense of normalcy, we’ve got dual-working parents. It’s going to be a struggle with having kids at home and how to deal with that child-care need.
Chris: Do you guys typically have summer plans to enjoy and getaway?
Kristin: We were supposed to be heading to Costa Rica on June 4th for a week away but that’s been rescheduled, unfortunately. Yeah, I don’t know what we’re going to do, to be honest with you. We’ll just try to create a fun environment for our kids. I’m a big believer in letting my kids be kids. We live in southern California, where, fortunately, the weather tends to be pretty great. We’ll just try and get them outside. We’re going to probably have to put off travel, but maybe we can have some creative weekends, do some fun things around here and get out to the beach.
Empathy & Hard Conversations
Chris: Kristin, last question for you, what is your superpower?
Kristin: In our work, we often are delivering difficult messages. We’re telling people things that they might not want to hear. One of the things that I believe is a skill of mine is that I do it with empathy. I deliver difficult messages but in a way which is hopefully something that most people can digest or hear and it allows them to be able to take action on it as a result.
Chris: Kristin, it’s been an honor and a pleasure. Thank you for your time today.
Kristin: Thank you, Chris. It’s been a pleasure.
Thank you to everyone who listened to this episode of The Law Firm Leadership Podcast.