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Cautious Optimism

By Mark Green

Kentucky law firms see an uptick in demand for their services and are “cautiously optimistic” this year after a difficult 2009 followed by a 2010 whose chief success was that business essentially held steady.

It could have been worse – and was for larger firms in the nation’s money centers. In 2009, demand for legal services fell 4 percent nationally and nearly 1 percent more through the first three quarters of 2010, according to the 2011 annual Client Advisory published by Hilderbrandt Baker Robbins and Citi Private Bank.

“Although the drop in demand hit the largest firms the hardest, all segments of the market experienced an overall decline,” the Client Advisory states. “In 2010, the demand growth rates were almost flat, except for AmLaw 51-100 firms that continued to experience negative growth at the 2.3 percent level.”
This year, the advisory’s authors “expect to see the legal business stabilizing, though at a lower level than in the years prior to 2008.”

Large firms shed lawyers and cut the size of their first-year classes. The good news, however, is that talent previously absorbed by the largest firms – both associates and new graduates – became available for medium and smaller firms.
Two of the three Kentucky firm managing partners The Lane Report interviewed for this article reported increasing their number of lawyers during the past two years.

“Sometimes good talent just falls in your lap,” said Gaines Penn, new managing partner at Bowling Green-based English Lucas Priest & Owsley, which since 2008 has grown by four lawyers – about 25 percent. “We’re quite pleased.”

ELPO’s growth was not planned, Penn said. On the other hand, difficult times did not mean the firm would pass up opportunities, such as those presented when a good attorney with another firm wanted to make a lateral move, or summer clerks looked promising.

The situation was similar at McBrayer McGinnis Leslie & Kirkland in Lexington, said James Frazier III, managing partner. Since 2008, he has hired three first-year lawyers in 2009, another in 2010 and six laterals from other firms.

“I really believe it’s these kind of times you avail yourself of top talent,” Frazier said.

Frost Brown Todd is the largest firm in Kentucky by number of lawyers with 186; they are part of an overall five-state 450-lawyer practice that ranked 148th nationally in revenue in the 2010 Am Law 200 list.

Frost is down slightly in overall numbers of lawyers the past two years, said its Kentucky Chairman John R. Crockett III, but there were no layoffs. Normal attrition was allowed to take its course after the firm had grown by 75 lawyers in an early 2008 merger with Locke Reynolds of Indianapolis.

Frost, however, did achieve a 6 percent increase in revenues for 2010, said Crockett. “We’re pleased with that” in light of overall business and legal climate, he said. “We would really like to see the economy really rebound, which it has not done.” There was a “slight increase in demand for legal services,” Crockett said, but businesses cut spending on outside legal counsel – “for the first time in recent memory” – last year by 5 percent.

According to the Client Advisory, the legal business will stabilize in 2011 but at a lower level than in the years before 2008. U.S. business spending on outside counsel increased an average 7 percent annually for the nine years preceding 2008, but the “demand picture shows no signs of improving anytime soon,” according to the industry overview publication.

As reflected by the experience of Frost Brown Todd, the downturn did not hit AmLaw 2nd 100 and regional firms as seriously as the AmLaw 100, Client Advisory reports.

“Kentucky is more conservative,” Crockett said. “In our region, we tend to not have as high highs as the money centers do, and consequently we don’t have as low lows.”

Better service, strong marketing efforts
Frost, meanwhile, is having success with a management strategy focusing on improving client service. The firm was 25th nationally in customer service in 2009 rankings compiled by BTI Consulting Group, the legal strategic research organization. Frost Brown Todd improved to 12th nationally in 2010.

With business client spending falling or flat, law firm revenue growth comes at the expense of competitors, and client service plays a big role in any gains, according to BTI.

“Client service is more than knowing law and getting it right,” Crockett said. “We make it a point to understand their business and to deliver what they ask for, even before they ask for it.”

Marketing efforts dovetail with this client service strategy among firms The Lane Report talked to.

MMLK increased its marketing budget and hired an in-house marketing manager, Frazier said. The firm revamped it website, which has produced a 100 percent increase in online inquiries.

ELPO also updated its website and its marketing brochure. The firm recently upgraded its business development efforts by outsourcing that work to a professional, Penn said, replacing the “lawyers trying to figure out how to market” model ELPO?had been using.

While Frost Brown Todd renegotiated various vendor and service contracts to cut costs, it held its marketing budget steady.

“We have reallocated it,” Crockett said. “But we did not think it was appropriate, even during a downturn, to miss the opportunity to continue to get out in front of clients, to understand what challenges they’re facing and see if we can help them navigate those waters.”

The Kentucky managers all said their firms’ sponsorship dollars are spent more frugally now than before.

At MMLK the firm has held the line on salaries and bonuses the past two years, Frazier said, and renegotiated service and supplies contracts. Among other cost-cutting measures is an increased shift to digital resources, away from the traditional shelves of law and reference books, a centuries-old archetype of the profession that today serve mostly to fulfill outmoded expectations – “Clients like to see them there.”

ELPO has clipped annual allotments for continuing legal education and other discretionary spending, Penn said, but is taking a measured approach.
“We’re not trying to do anything drastic in the way we operate,” he said. With an overall goal of staying competitive, the perspective is: “We’re going to come through this cycle, and where are we going to be when the economy turns around? What can we do now to strengthen our position so that when the recession is over we’re in a better position, better able to serve the client and pick up even more business?”

Real estate down, bankruptcy up
The firms offer fairly consistent feedback on how various practice sectors are performing. Real estate remains down. Bankruptcy practice has been strong, with the firms getting work from debtors as well as creditors. Healthcare has been stable. Litigation has been steady, but did not meet general expectations that it would improve in 2010.

“Businesses are making different litigation choices now than in the past,” Crockett said.

Merger and acquisition work is showing signs of life. News reports for the past year indicate disciplined corporations have piled up more than $1 trillion in unspent profits – economic and regulatory uncertainty making them reluctant to hire or use on capital projects – that are going partially toward acquiring those who look undervalued.

Merger and acquisition activity begins in New York and spreads outward, Frazier said, and MMLK has picked up three major projects.
Because it has been such a tough two-plus years across the spectrum of the business world, law firms, like other businesses, have had to put more effort into in house-accounts-receivable work.

Clients have slowed their payments, Crockett said, with payment realization down 1-1.5 percent at Frost Brown Todd. He termed it “significant to us” but not as big a problem as some large firms are experiencing.

“We understand our clients’s problems and hope they understand ours,” he said. “We are a law firm, not a bank.”

“You want to work with clients,” Frazier said. “We’re in this together.”

MMLK created a full-time position to work exclusively on accounts receivable, he said, and has created or agreed to a variety of new payment plans.
“In the end it’s a cash flow business,” he said. “You have to collect billings to keep the lights on.”

Meanwhile, the billable hour remains by far the most-used legal fee relationship, the Kentucky firm managers all report, contrary to news accounts in recent years of its demise. There are plenty of alternative fee agreements, for instance, flat charges for services in which there’s little likelihood of encountering surprises.

“But at the end of the day, our clients still ask for the hourly rate basis,” Penn said. “People are familiar with how that works.”

Trends: elder law, efficiency
As for rising trends in legal services, Penn said elder law practice is becoming a hot topic. Baby boomers are moving into their retirement years, and ELPO is handling more legal issues related to growing older such as estate and long-term-care planning along with disputes involving health and nursing-home care.

Crockett sees continued pressure on firms to become more efficient.
“Those firms that will be winners the next five or 10 years are those that are the most nimble and innovate, those firms that deliver a high and consistent work product.”

Frazier believes that ongoing merger and acquisition activity could lead to revival in the commercial real estate sector.

Larger firms will be conservative and continue hiring smaller first-year classes, Crockett said, with return of the 2000-08 boom times unexpected for the foreseeable future. Frost Brown Todd, he said, has rebuilt its first-year lawyers program – new hires now aim for 1,000 billable hours and 1,000 training hours versus a former goal of 1,800 billable hours their first year. The 1,800-hour expectation for all associates does apply in the second year and onward.

MMLK has a growing specialization in its lobbying and government relations operation, which has been built from founder Terry McBrayer’s extensive political background – including three state House terms in the 1960s and ’70s, a run for governor, and serving as point person for President Bill Clinton in the state during his eight years in office. Long prominent in government relations in Frankfort, the firm opened a Washington office in 2010.

ELPO has a significant manufacturing client practice, mostly automotive suppliers. That sector had a good year in 2010, Penn said, and expects 2011 to be even better. Overall, the firm expects a slight improvement this year.

“We’re cautiously optimistic. We expect there to be an increase in our business, but we’re not expecting a big spike,” Penn said. “Any upward direction is good, right?”

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