Over at Above the Law, Jeff Bennion is a lawyer who understands business. He has succinctly described the formula that accounts for a lawyer’s salary:
Salary = $(my worth to my firm) – [$(the administrative expense of keeping me employed) + $(the amount of profit my firm plans of making off me)].
He then sums up the ways in which an attorney may increase his salary:
If you want to increase your salary, you can either increase your worth to the firm, decrease your administrative expense, or talk your boss into making less money off of you. I recommend increasing your worth.
At Privileged Communications, we believe Jeff Bennion is 100% correct. Individual attorneys can (and should) capture more upside when they increase their worth to the firm, either by delivering better performance or bringing in more revenue.
Likewise, law firms can (and should) be able to increase their revenues when they increase their value to their clients, either by delivering better (and/or cheaper) legal performance or by helping their clients with their non-legal objectives.
A firm that is good at business development provides its clients with quality legal advice which causes the clients to return. A firm that is great at business development provides its clients with quality legal advice and uses the firm’s resources to advance the client’s business goals.
One thing that denotes sophisticated corporations, private equity funds and hedge firms is their willingness to pay for value. A phrase we heard in a meeting with a major private equity firm the other day was “we love to pay fees” [to banks]. Why is that? Because those fees represent a fraction of the value extracted from the banks’ activities. It is the same for legal services. The same clients that pay banks millions of dollars in fees are the ones that will pay $1,000 per hour for a partner but not a dime for a first year associate. The $1,000 investment generates a return – superior insight, better negotiated terms, a novel approach – that can never be obtained from a first year associate, no matter how inexpensive the hourly rate.
Given that serious businessmen and women are willing to pay – and pay very well – for value, the quest for all law firms that service such clients should be to figure out how to increase the number of chances to provide their clients with valuable opportunities. The traditional and obvious path is to obtain highly-regarded talent that can add outsized value in important transactions. This makes unimpeachable sense. A law firm’s primary asset is (through its attorneys) the legal advice it can sell to clients. However, it is not the only asset, and legal advice is not the only item of value a firm can provide.
Law firms, by the nature of their business, are institutions with incredibly powerful networks. The average 500 attorney firm has 18,000 clients. Even better, the contacts that firms have are often at the highest levels of a client’s organization. Working with a client’s senior personnel on a yearly, monthly, weekly and daily basis allows attorneys to have a great deal of insight into their client’s business objectives. This places the attorneys in a unique position. They sit in the center of the deal flow for their own clients while they are simultaneously connected to all of the other clients of the firm through the other attorneys. If Attorney A representing Client X knows that Client X has a problem and also knows that three other clients of the firm could potentially solve Client X’s problem, then Attorney A possesses very valuable information.
This is the great untapped resource of corporate law firms – the ability to connect clients together who have compatible business goals.
The anecdote below is a true story. While the advisor was an investment bank, there was nothing magical or special about what the bank did. Wherever you see the word “bank”, replace it with “law firm.”
Company X, a publicly traded oil exploration and development company, was in financial distress. It had outstanding commitments pursuant to a joint venture contract that it could not meet. The stock price was very low, and the traditional capital markets were closed to the company. To survive, it needed an infusion of capital. The company contacted its bank and asked it to help figure out a solution. Because of the nature of the transaction, the bank was never going to make a significant deal fee from Company X. However, the bank made introductions to several potential partners. One of those partners was Private Equity Firm Y, for whom the bank had done a large amount of work in the past. Private Equity Firm Y told the bank that if it completed the transaction it would pay the bank a $1.5 million fee, merely for bringing it the opportunity.
Think about that. $1.5 million for an introduction. Even better, that is $1.5 million the private equity firm was happy to pay. It recognized that the value it would receive from finding the right deal was far in excess of the fee it was paying the bank. Undoubtedly, being under financial distress, Company X’s law firm was advising it on legal matters related to its problem. However, the law firm never took the initiative to help the client find a business partner. The firm probably collected its hourly fees, but it never took the extra step to bring enhanced value to its role. Had it done so, many benefits would have accrued to it, both from a financial and a relationship perspective.
Clients come to firms because they need help in solving their business issue, whether it is the sale of a division, the creation of a joint venture or the financing of a new power plant. Most of the time, clients come to the firms after they have made the business decision and they are only looking for advice in execution. However, there are many times when clients come to attorneys before the business decision is made, when they are considering whether they should sell a division, or expand into a new market or build a new power plant. They come for advice on how to best proceed in the event the transaction goes forward. In those cases, attorneys can provide value to their clients, not only by advising them on the legal framework, but by actively helping them to find the right business partner.