K&L Gates' Full Frontal Financial Disclosure

Parsley Sage Rosemary & Ginsburg LLP

“Always a reasonable result for a reasonable fee, always”

MEMORANDUM

To:	Partners
From:	Mike Marget
Date:	March 4, 2013
Re:	K&L Gates’ Full Frontal Financial Disclosure

        A week ago, a major law firm – K&LGates (1,700+ lawyers) – chose to disclose its key financial information to thepublic via its website.  Since law firms are not required to publish financial statements, this move was surprising on at least two levels:

1.   The firm chose to disclose significantly more financial information than is typically published in connection with The American Lawyer magazine’s annual survey of the top 200 Legal Industrial Complex firms.[i]  K&L Gates provided 2 pages of financial data – the typical revenue, PPP[ii] and RPL[iii] numbers, plus other statistics like cash, debt and capital balances as of year-end, high/low debt balances during the year, and a good deal of narrative akin to the management discussion section found in a corporate annual report.

2.   What could be the firm’s motivation for taking this step at this time?

K&L Gates Motivation

        Chairman Peter Kalis said the firm wasmotivated to improve the public image of the profession in light of the “Dewey debacle” – where management at Dewy & LeBoeuf misled partners, bankers and clients (via the AmLaw rankings)[iv] about the firm’s financial stability before filing for bankruptcy.

        Notwithstanding this noble and altruistic motive, K&L Gates has also positioned themselves very nicely vis-à-vis other firms in the never-ending quest to always pick up the best and brightest laterals to continually improve their franchise.  In one bold step, K&L Gates sent the following message:

• Our internal financial disclosures and external communications (e.g., to The American Lawyer) are the same; we don’t manipulate our revenue figure or our equity partner headcount.  
• Not only do we have no debt at year-end, we didn't borrow as much as a penny against the line of credit during 2012 and 2011.  
• We’re "transparent" with our partners and our clients about the firm's financial stability.
• Can your current firm or other potential lateral firm say the same thing?

Reality Check/Lateral Partners

        Can every firm be trusted to refrain from manipulating the numbers in the press release the same way they did for the AmLaw rankings?  There will undoubtedly be temptations, but the more statistics disclosed the less likely it becomes to alter the important numbers without leaving an obvious audit trail.  Moreover, if other firms do not reconcile their internal and external reporting, they can count on their rank-and-file partners to call them out about it.

        Nevertheless, laterals must always be weary of whatever financial data is provided by prospective new firms.  As a financial person, I would like K&L Gates’ disclosure to be expanded to include, among other things, information like the quality of the firm’s inventory (i.e., accounts receivable and unbilled fees) and the number of highly compensated partners with long-term guaranteed contracts (another problem at Dewey). 

        If you are a major rainmaker contemplating a move, use your clout to examine more financial data before taking the plunge to join a new firm.  For the sake of the capital you will invest in the new firm, for the sake of continuity of service to your clients, and for your own mental health, perform significant due diligence before committing to a new firm.  There are other financial reports you should request and review:

• Citibank and Wells Fargo[v] provide participating law firms with detailed financial analysis – comparing the firm with peer firms – as part of their quarterly industry financial reviews.  Request copies going back 2 years, read them and have a sit-down with the firm’s CFO to discuss.
 
• PricewaterhouseCoopers publishes a similar report which compares firms by geographic area, size and other demographics.

These reports provide significantly more data than that disclosed by K&L Gates last week.  Should any prospective new firm not wish to share this data with you, I would be afraid -- very afraid.

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[i] Don’t get me started about the financial fallacy which is the AmLaw rankings.  Simply put – firms lie.  Not all of them, but enough to call into question the entire process.  Exhibit 1is Dewey & LeBoeuf who overstated their revenue by more than $150 millionfor each of calendar year 2010 and 2011.  The magazine took a credibility hit on that one, but has never adequately addressed the systemic problem illustrated by Howrey, Thacher Proffitt, Thelen, Heller Ehrman and others who kept posting good numbers right up until the time they ceased to exist. 

[ii] PPP is profits per equity partner.

[iii] RPL is revenue per lawyer.

[iv] See Endnote i.

[v] Buy a banker from the Legal Industry Groups at either Citibank or Wells Fargo a cocktail and he/she will tell you the numbers they receive in connection with their “privately published” surveys differ significantly from the very public numbers appearing in the AmLaw rankings.

Top 10 Reasons to Elect Me the Next Pope

Parsley Sage Rosemary & Ginsburg LLP

“Always a reasonable result for a reasonable fee, always”

MEMORANDUM

To:	Top 10 File
From:	Mike Marget
Date:	March 3, 2013
Re:	Top 10 Reasons to Elect Me the Next Pope

10. Both Bill Maher and Karl Rove have contributed to my Sistine-or-Bust Super Pope PAC.

 9.  I was once a Cardinal – Little League Keokuk County Bank Cardinals.

 8.  If elected, I will use my powers to bring peace between Kris Humphries and Kim Kardasian. 

 7.  My new diet and exercise regime will count as a first step toward eventual beatification.
 

 6.  I’m seldom wrong, which is modern day version of infallibility.
 

 5.  I’ve never violated the 5^th Commandment.
 

 4.  I will replace all the Cardinals with Ravens – because purple is a better color and, heck, they won the Super Bowl.
 

 3.  I’ll write really cool encyclicals like “Quomodosancta trinitas similis est baseball geminus-fabula compositum.”[i]

 2.  As an homage to traditionalists, I’ll take the name Pope John Paul John-Paul John-Paul Benedict I.[ii]  

1.    I look good wearing a miter ------------------------>

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[i] Roughly translated: “How the Holy Trinity works together like a really good double-play combination in baseball” (e.g., Tinker-to-Evers-to-Chance). 

[ii] Stupid joke:  Waiter:  “What would the Pope Emeritus like for breakfast today?”  Pope Emeritus:  “Ex-Benedict will have Eggs Benedict.”

 

Financial Data with Destiny

Parsley Sage Rosemary & Ginsburg LLP

“Always a reasonable result for a reasonable fee, always”

MEMORANDUM

To:	Managing Partners and Administrators
From:	Mike Marget
Date:	February 22, 2013
Re:	Financial Data with Destiny

        Managing a law practice has never been tougher.  Everybody is looking for that silver bullet to restore profitability despite waning demand for legal services.  Whatever measures your firm adopts to improve the bottom line, continuous access to actionable financial data has never been more important.

Since the onset of the Great Recession, large law firms have been relying upon their internal accounting systems as a strategic resource to make better daily business decisions.  Real-time access to firm financial data has become de rigueur, enabling both leadership and individual lawyers to identify trends at a macro level, and then drill down through the data to understand cause and effect by client, matter, fee-earner, practice group, area of law and other relevant metrics. 

        The sophisticated accounting software utilized by the largest firms is designed with a single purpose in mind – to make every lawyer a smarter financial manager.  Data is easily accessible online and provides a clear and accurate view into every important financial driver of profit and cash flow.  Depending upon the “access rights” granted specific individuals:

1.   Billing attorneys query the status of individual clients and matters – e.g., last invoice date and amount; total AR currently outstanding; date of last payment; and balance held as unapplied retainer or in trust accounts.

2.   Timekeepers may consult a calendar representation of hours reported with the ability to edit and spell-check the narrative language.

3.   Billing attorneys review aged accounts receivable and unbilled work-in-process reports on demand.

4.   Firm leaders analyze a myriad of information regarding clients, individual lawyers, practice groups and the firm as a whole.

5.   Key performance indicators – billable hours; billable hour value; fee billing; fee collections; effective hourly rates by timekeeper and group classification; utilization and realization; new clients and new maters opened – as compared to budget or targets – may be “sliced-and-diced” in various was to both to analyze current performance and project future results.

Financially-savvy firms use their accounting systems to recognize problems and monitor progress toward improvement.  For example, assume a “commodity” practice area where billing realization is below firm average or budgeted amount.  The low realization might be the result of staffing errors – too many hours worked by timekeepers with higher billing rates necessitating fee reductions in the billing process.  A possible solution might be to reallocate workloads so timekeepers with lower rates work on these commodity matters, while higher-rate individuals are assigned to other client work where they can realize their full rates.  Every law firm requires an accounting system capable of providing this type of insight into their financial operations.  

Unfortunately, not all law firm accounting software is created equal.  Many smaller firms are constrained by systems incapable of transcending rudimentary time-and-billing transaction processing.   

Fortunately, there are options for small and midsize firms to obtain sophisticated law firm accounting systems which need not involve an expensive capital outlay for the software and associated hardware purchases and maintenance costs.  One possibility is Software-as-a-Service (SaaS) where the software resides in a hosted, Cloud-based environment and “rented” by the law firm rather than purchasing it outright.  Another route involves outsourcing some, or all, of the firm’s bookkeeping and billing procedures to a competent third-party provider who will supply the sophisticated software as part of an overall services package.

Whether it is acquired by purchase/installation in-house, via SaaS, or through outsourcing, sophisticated accounting software can be transformative for the firm by providing greater awareness of the financial drivers of profitability and enabling better financial decision making. 

My Top 10 Reactions to the White House Petition Seeking to Ban My Top 10 Lists

Parsley Sage Rosemary & Ginsburg LLP

“Always a reasonable result for a reasonable fee, always”

MEMORANDUM

To:	Top 10 List File
From:	Mike Marget
Date:	February 22, 2013
Re:	My Top 10 Reactions to the White House Petition Seeking to Ban My Top 10 Lists

10.    This is so not going to look good on my Linkedin profile.

  9.   Some people get Oscar nominations; I get a lousy petition.

  8.   How can people be so hateful at a time when Kim Kardashian is so happy?

  7.   Could it have anything to do with all the Star Trek references?

  6.   I bet Leno’s behind this.

  5.   It was just a matter of time.

  4.   People actually read this junk?

  3.   Et tu, Mom?

  2.   What would Piers Morgan do?

  1.   Payback – from now on Top 20 Lists!

Lower Realization -- Sometimes an Acceptable Tradeoff

Parsley Sage Rosemary & Ginsburg LLP

“Always a reasonable result for a reasonable fee, always”

MEMORANDUM

To:	Managing Partners; Practice Group Leaders
From:	Mike Marget
Date:	January 9, 2013
Re:	Lower Realization – Sometimes an Acceptable Tradeoff

Since the onset of the recession, clients have gained the advantage in fee negotiations.  Yet Legal Industrial Complex firms still managed to increase their hourly rates in 2012.  According to a survey published last month by The National Law Journal, median partner rates jumped 4.5% to $517 an hour and median associate rates increased 3.5% to $323.  The survey covered 55 firms ranging in size from 128 to 3,000+ lawyers.

While these rates may not resonate with your particular practice, it is a prudent business exercise to review pricing issues from time-to-time.  

Over the years I’ve had “discussions” with partners and practice group leaders who prided themselves on high realization.  They seldom needed to write-down time, collecting 98%-99% as compared to their standard hourly rates.  High realization percentages are wonderful when you are absolutely certain those rates are at the ceiling as to what the market will bear.  But such certainty, you should be bold and sacrifice a few realization percentage points in a quest for higher aggregate fees.  Let me demonstrate how this is important.

Assume you work 1,800 billable hours a year; have a $250 standard hourly rate; and enjoy 98% realization.  You will collect $441,000 on your work. [1,800 x $250 x 98% = $441,000]  Digging into the details of your practice reveals 900 of those hours are worked and collected at your standard $250 hourly rate, while the balance is for more rate-sensitive clients who are charged $240.  (This is illustrated in Example 1.) 

Then further assume, you decide to test drive a 4% rate increase on your standard rate, pushing it to $260 an hour. 

What is the worst that could happen?  Your rate-sensitive clients balk at the increase, so those hours remain at $240.  Theoretically, you could lose the other 900 hours if the new $260 rate is too high.  But in the real world, you are a lawyer and everything is negotiable.  If necessary, you’ll discount the new $260 standard rate with the pitch, “My standard rate is $260, but for you … $250.”  As illustrated in Example 2, you will still generate $441,000 in revenue even though your realization has dropped to 94.2%.  In essence, you enjoy the same revenue stream despite a lower realization statistic. 

On the other hand, if you manage just 1 additional hour at a rate higher than $250, you are ahead.

What is the best case scenario?  Assume you get the 4% increase on all your time currently billed at $250 an hour.  This is illustrated in Example 3.  The additional $10 an hour jumps your total revenue up to $450,000.  However, due to the $20 an hour negative spread between your new standard rate of $260 and the $240-an-hour cap on half your time, your realization drops to 96.2%.  Again, you achieve higher revenue despite the lower realization rate.

There is also an alternative almost-best case scenario.  Assume you cannot replace all 900 hours at the new higher standard rate?  Instead of 900 billable hours at $260 an hour, you produce only 865.  No worries, I’d still call this a win.  See Example 4.  With these numbers you are still generating the same $441,000 of revenue, but need to work only 1,765 billable hours in the process.  Sure, your realization drops to 96.1%, but the lower number of billable hours provides you 35 additional hours without any revenue decline.  That’s 35 free hours to devote to business development efforts which will eventually generate new work and create incremental revenue.

	Example 1	Example 2	Example 3	Example 4
Standard hourly rate	$250	$260	$260	$260
$240/hr clients
Billable hours	900	900	900	900
Effective hourly rate	$240	$240	$240	$240
Fee revenue generated	$ 216,000	$ 216,000	$ 216,000	$ 216,000
Other clients
Billable hours	900	900	900	865
Effective hourly rate	$250	$250	$260	$260
Fee revenue generated	$ 225,000	$ 225,000	$ 234,000	$ 225,000
Result
Billable hours	1800	1800	1800	1765
Effective hourly rate	$245	$245	$250	$ 250
Fee revenue generated	$ 441,000	$ 441,000	$ 450,000	$ 441,000
Realization rate	98.0%	94.2%	96.2%	96.1%

Now, I’m not about to paraphrase Dick Cheney and say “realization rates don’t matter.”  Rather, the point is realization rates, like deficits, need to be evaluated in a larger economic context.  Higher rates may mean higher write-offs and lower billable hours – but what is important is the bottom line. 

Maybe a higher standard rate for new clients simply becomes a starting point for fee discussion in 2013.  After all, a 10% discount from $260 an hour is preferable to discounting from $250.  Like the aphorism says, “If you don’t ask, you don’t get.”  Sometimes you do get!