Legal Industry Outlook – Business and Corporate Law

After a Time of Unexpected Bounty, Unprecedented Change




For some of the area’s largest and most respected law firms, the downturn that has hamstrung the U.S. economy for years produced something quite unexpected: Some of their best years ever. That was one surprising revelation as a score of the chairs from business and corporate law departments and managing partners from several area law firms gathered May 7 at the offices of Dentons for Ingram’s 2013 Legal Industry Outlook. 

Serving as chairs and co-sponsors were John Snyder of host Dentons and Pete Smith of McDowell, Rice, Smith & Buchanan. The two firms nicely bookend the range of choices available for corporate clients in Kansas City. Part of the unexpected success since 2008 can be traced to strategic decisions made as law firms redrew their service lines, anticipating the conse-quences of foreclosures, failed development projects and business closures. Another part is that the firms began to think and act more like businesses than like some lofty enterprises operating above the rules of cash-flow management and cost containment. Now, with signs of economic revival emerging across the country, these and most law firms have emerged leaner and better-positioned to address new development and business creation.

What Recession?

1. John Snyder’s opening question on how the economic downturn affected firms represented at the table produced some surprisingly optimistic responses. | 2. Pete Smith asked whether the need to maintain revenues had prompted other firms to explore offerings of legal services they previously hadn’t provided to clients.


As an opening question, participants were asked how the economic slowdown of the past five years had affected their practice. To a person, they responded positively. 

“It has made both our lawyers and our professional staff more conscious of the things that make the long-term economically efficient,” said Mark Hinderks, managing partner of Stinson Morrison Hecker, voicing a common theme. “As a consequence, we’re able to provide better service to our clients at a pretty efficient price.”

In just about every law firm of size, some practice groups suffered. “We had, obviously, some practice groups that were slow. That’s not a big secret,” said Bob Keim, managing partner of Kutak Rock’s Kansas City office. At Kutak Rock, as just about everywhere, bond transactions slowed down. 

Roger Warren, of Sanders Warren & Russell, cited the fallout from problems experienced by mid-size and smaller construction companies, some of which had simply disappeared.

Bob Fisher, a partner at Dentons, noted that middle-market mergers and acquisitions and other private equity transactions suffered somewhat because of financing issues, but at Dentons, as at all the firms assembled, these slowdowns were more than offset by growth in other areas. 

Kutak Rock saw an increased business in workouts and slow debts. McDowell Rice, as Jon Margolies pointed out, has always had a significant concentration of its practice in debtor-creditor areas, corporate bankruptcy and litigation. “During the economic downturn, our business thrived,” said Margolies. 

Kansas City firms benefitted as well from what John Granda, chairman of Stinson’s corporate finance division, calls “the value proposition.” Said Granda, “There has always been a glass ceiling for Kansas City-type firms.” Much of the work they have historically competed for has gone to Wall Street. With corporations monitoring their bottom lines more closely, Kansas City firms became more attractive not just for their favorable rates, but levels of service.

Trip Frizell, head of the general corporate group at Polsinelli, confirmed Granda’s observations about KC’s value proposition. “We’ve seen tremendous growth in the larger city marketplaces that we’re in,” he said.

Kansas City firms not only secured new business that had been previously out of reach, but they also recruited new employees. “Talent that we hadn’t really seen in nine or 10 years because of the salary gap came knocking on our door,” observed Patrick Whalen, chairman at Spencer Fane Britt & Browne.

Just about every firm reported a general belt-tightening and an emphasis on efficiency that has served them well as the economic pressures eased. “We had to be much more disciplined in how we managed ourselves,” said Steve Carman, chair of the corporate department at Husch Blackwell. “As a result, we’ve come through the experience having learned those lessons, and we’re much better off and ready for things to start to pick up.”

The firms’ clients appear to have benefitted from the experience as well. During the downturn, “Client service meant more than anything,” said Tom Stahl, a partner at Lathrop & Gage. “There was also pressure on rates. You really had to give clients the bang for their buck.”

“We had the opportunity to show our clients what partners we could be,” said Jay Selanders, head of corporate department at Kutak Rock. “As a result, we gained a lot of trust and a lot of loyalty.”

Larry Frazen, managing partner of Bryan Cave, cited as a lasting benefit the focus on practice economics, especially as it related to client relationships. The firm addressed alternative fees, a departure from hourly rates, and ways the firm’s attorneys could deliver their services “in a way that really partners with our clients economically.”

Armstrong Teasdale did much the same, and the clients noticed. “I think a lot of clients have been very appreciative that we did work with them and try to find value in the way that we can provide services during a downturn,” said Scott Long, head of the firm’s business practice group in the Kansas City office.

“I think what we learned was the importance of getting close to our clients,” said Joe Hiersteiner, managing director of the firm now known as Seigfreid Bingham, P.C. For his firm, getting close to clients meant in some cases coming up with alternative fees or, at least, alternative collection arrangements. 

“By being sensitive to those client struggles,” said Hiersteiner, “I think we’ve come out of that with relationships that are much stronger than they were before.”

 

Corporate Transactions

Among the areas most affected by economic events of the past five years were corporate transactions. John Snyder quizzed his colleagues on whether financing had picked up and, if so, to what degree.

“It’s been slower than people had predicted,” said Larry Frazen. “I don’t think the banks have come in with both feet yet at all.” Frazen believes that the credit proposition has changed in part because of regulator demands on banks and the kind of loans they are able to make. “It’s slow to loosen up,” said Frazen, “but it is loosening up a little bit.”

As Trip Frizell noted, much depends on the industries involved. The traditional manufacturing industries have been slow, but the health care, energy and information technology sectors have been securing money “and have been able to find the deals.”

As a real-estate attorney, Snyder saw opportunities on the distress side for people with capital, buying distressed pools and working them out. “It’s been an interesting market,” said Snyder.

Joe Hemberger, a partner with McAnany Van Cleave & Phillips, had a similar perspective. “Our business practice had to shift a little bit,” he noted. “We were fortunate to slide into a lot of bank work and a lot of workouts, repossessions and foreclosures, and now that’s turning into loans.”

“There will always be plenty of bad stuff,” Pete Smith said in answer to Snyder’s question on what he had seen through his bankruptcy practice. As he noted, the need for bankruptcy attorneys never goes away, even if law firms are reluctant to call bankruptcy “bankruptcy.”

 

What Law Firms Do

Pete Smith wondered whether corporate law firms were unnecessarily limiting their practices. Smith, for instance, does family law when appropriate. “All your clients, they all have problems,” said Smith, “human problems.” He asked his colleagues if, during the downturn, they thought to expand their practices to deal with the range of problems clients face.

“You raise a good point,” said John Granda. “One of the reasons we’re able to keep our corporate lawyers busy is that we were not just doing transactions.” Stinson’s attorneys have also been doing securities compliance for public companies, corporate governance, and SEC enforcement. 

“The name of the game is to keep your people busy and to do interesting, challenging, well-paying work,” said Granda. “It’s good to be specialized, but not too specialized.”

“I think Pete’s question is one we all need to grapple with,” said Patrick Whalen. He, like Smith, was particularly concerned that other providers, accountants in particular, were moving into traditional roles long served by lawyers. “It’s pretty staggering what the trends indicate will be in the future,” said Whalen. “More and more activity is being peeled off.”

Bob Keim saw a difference between the way an attorney deals with small and mid-size firms and with larger corporations that have their own legal staffs. At large firms too, there has been little change in the way accountants and attorneys interact.

Joe Hiersteiner sees accountants less as competitors than as partners. “Keeping the accountant for a client happy is a good way to make sure that when the acquisition takes place, the accountant is talking to us about that acquisition as opposed to somebody else,” said Hiersteiner.

Larry Frazen observed that there was competition coming from “non-traditional deliverers of legal services.” He cited the discovery process, for instance, which is sometimes outsourced to considerably lower-paid lawyers in countries like India. Clients are demanding more for the same amount, said Frazen. “They want more value. I think clients understand that they have much more bargaining power now than they did.”

To Pete Smith’s point of whether an attorney should handle all of a client’s needs, Joe Hiersteiner said that yes, ideally, the client comes to the attorney first with any kind of legal problem. “We hope that the relationship with a client is such that they really wouldn’t think about talking to anybody else about any problems they have.” The attorney might well refer the problem on to another firm, but that first contact is critical, as is the assurance that a problem will be well handled.

Tom Stahl agreed. “You have to be willing to help those people, no matter what.” Again, the response may be a referral to another attorney, but referrals have to be trustworthy. Trip Frizell described the attorney’s role as “gatekeeper,” especially when dealing with smaller clients.

 

Young Attorneys 

John Snyder shared with his colleagues the fact that his daughter is contemplating taking her LSATs and going to law school. He asked them, “Is she crazy?” 

“I don’t think your daughter is crazy,” said Steve Carman, “but maybe you are.” As he explained, the traditional model of the pyramid-shaped law firm with a large group of young lawyers training and doing lower-level work is no longer a viable model, especially with clients outsourcing lower-level work to other service providers. As a consequence, the opportunities for the young lawyers to jump right into challenging transactions are getting smaller and smaller every day. 

Mark Hinderks made the point that “there will always be room for smart people, especially those who are capable of forming relationships with clients.” Larry Tucker, managing attorney of the Armstrong Teasdale office in Kansas City, agreed. He told the story of the famed orator Daniel Webster who, when discouraged from becoming a lawyer because there were already too many—and this, two centuries ago—answered, “There’s always room at the top.” Said Tucker, “I think that’s still true.”

Carman didn’t disagree, but with so many trained lawyers available in Kansas City, law firms are shying from hiring new graduates. As Hinderks noted, “The thing that most of us are looking for are people who are both smart and personable and who can drive relationships.” 

Law schools, unfortunately, don’t teach relationships. For Pete Smith, this is a shortfall. “I want them to go out there and learn the small little chicken stuff for three or four years,” said Smith of young lawyers. 

The entry-level job is going to be more difficult to find, confirmed Joe Hiersteiner. Placement counselors at the law schools have reported that far fewer firms are coming to interview than ever before, and far fewer firms are hiring people right out of school. For the new hires, though, he did not see a real difference in the kind of experience they will have.

For firms like Baker Sterchi Cowden & Rice, where Scott Kreamer serves on the executive board, the slowdown in hiring out of law school has given his partners the opportunity to hire new lawyers that they would not have been able to get in the past. 

Just as usefully, there is among the new hires “a sense of loyalty that is developing that wasn’t there about five or six years ago with associates. They really appreciate the opportunities that you’re providing for them,” said Kreamer.

A related question that emerged was whether young attorneys write as well as they need to. “No, they do not know how to write,” said Roger Warren, speaking for the majority. “They don’t know how to spell. They don’t know how to punctuate. It’s generational.” As he noted, however, “We work with them a lot. They get better.”

Pete Smith has shared this concern. “I started hiring English majors,” said Smith, “and it’s been that way for a long, long time.”

 

Over-Lawyering

Pete Smith questioned his colleagues as to whether attorneys today provide an excess of lawyering when a minimum amount might suffice.

As John Snyder observed, that is a common perception among clients. especially in real-estate transactions. “By and large, lawyers are looking out for their clients and trying to get deals done,” said Snyder. “But I have certainly seen over the last few years more lawyers that are nit-picking commas and periods and dragging out processes that are not in the client’s best interest.”

“Some clients will want to be over-lawyered,” said Joe Hiersteiner. “They want that 47-page document that protects every possibility.” On the other hand are the clients who want to get the deal done as quickly and as cheaply as possible. “You have to figure out your clients,” said Hiersteiner, “to know which way that client wants to go.”

As to whether technology has contributed to the creation of excess documentation, Bob Fisher admitted that the stacks of paper had gotten much higher. Although much of this is commoditized boilerplate, he acknowledged that if it is not explained to the client, “He doesn’t understand the tonnage, and if you have to wade through it page by page, he really won’t like it.”

“How much of that stack of paper has to be there?” Snyder wondered. He does, however, see a counter-trend among attorneys who are tightening up the profession to get deals done, because, if not, they are going to lose business. 

One more kink in the technology revolution, Steve Carman believes, is the tendency, among young lawyers especially, to communicate by e-mail. Meetings and phone calls, he argued, work much better in clarifying issues.

“Young lawyers don’t want to talk to each other,” affirmed Roger Warren. “We talk to them all the time about it: communicate with the other side, pick up the phone and call them. It’s a big problem.”

One additional explanation for over-lawyering, Larry Tucker explained, is an increased willingness by clients “to criticize, threaten and sue their coun-sel.” As a consequence, attorneys are tending to practice the legal equivalent of defensive medicine, which can lead to an excess of precaution and paper.

 

Opportunities

“Where’s the market going?” John Snyder asked his colleagues. “What are your firms doing to differentiate yourself and how do you acquire clients that are unique?”

Husch Blackwell recently completed a strategic planning process that suggested the firm ought to do what the accounting firms are doing, said Steve Carman. That is to align the firm along industry lines. Given the opportunities available in Kansas City, the firm identified six industry categories and developed and promoted its expertise in each.

“We want to be able to say to our clients,” said Carman, “we have a large group of people who understand your industry from top to bottom. And that, to me, is the biggest change I’ve seen in almost 30 years.”

In a similar vein, some of Kutak Rock’s large institutional clients may want the firm to build a practice group around the client needs, structured finance for example. Said Bob Keim, “I think that’s the way it’s been for the last 10 to 15 years.”

The last three or four years, Lathrop & Gage’s national office has been focused on intellectual property, said Tom Stahl. As the firmed moved into different, larger markets, the firm promoted both its expertise and its Kansas City prices. “It was easier to try to expand the firm instead of trying to be all things to all people when you go to a national office,” said Stahl.

“To me,” said John Snyder, “even with all these changes over the years, it’s still a relationship business.” By this he meant that you have to get out and show the client what the firm can do. “You always need to be thinking about what your clients are doing.”

 

Self-Definition

The question was asked as to how law firms today define themselves in regards to their mission and their capabilities. At Kutak Rock, said Jay Selanders, the message is “National Scope, Local Results.” As to the “elevator speech,” Kutak Rock’s is that theirs is a Midwest firm with Midwest rates and Midwest values with offices on both coasts and an international presence.

When asked, Pete Smith tells prospects, “Our law firm leads with the lawyers and not the law firm. My lawyers care a lot about you winning or getting you a good result. That’s what we try to do.”

George Halper, a partner with McAnany, Van Cleave & Phillips, said his firm’s slogan, only half-jokingly, is “We serve the entire metropolitan area.” MVP happens to have long-term roots in Wyandotte County and their headquarters now straddles the state line.

 

Summary

“The one take-away I have is that the Kansas City legal market is a little more insulated throughout the past five years than other markets,” said John Snyder. “Other markets did not have as good a past five years.”

“This was a time when we all came to realize that we’re in a national or international market that has changed and is never going to change back,” said Larry Tucker. “It has created higher expectations by clients for efficient and effective delivery of legal services.”

“If you’re not moving really fast,” said Scott Kreamer, “you’re going to fall behind, and that’s a take-away we all knew, but it’s just reinforced by listening to what everybody’s said.”

“You have to take care of your existing clients first,” said Joe Hiersteiner, and if you do that very well and you’re very careful about expenses, and you’re a flat organization with low overhead, “I think that we’re all going to be OK.”

“It seems to me we’ve got some structural, competitive advantages in Kansas City in providing legal services throughout the region, maybe even throughout the country,” said Patrick Whalen, “and I think that’s going to continue to be the story for all of our firms.”

On this final point, all seemed to agree.