Legal Industry Outlook Assembly

    For such an unseasonably spectacular fall day, a sense of uneasy anticipation filled the conference room at Shook Hardy & Bacon on Nov. 7, as key executives from the region’s leading law firms gathered for the 2016 Legal Industry Outlook Assembly, just 28 hours before the polls would close on a presidential election. The outcome of that contest, and others on the ballot, was on grist for a series of candid assessments about what’s in store for area law firms, a vital cog in the machinery of commerce. So, too, were such factors as client concerns over billing rates and methods, demographic changes in the profession, impacts of technology and other mega trends. In a two-hour discussion deftly directed by co-chairs Madeleine McDonough of the host firm and Todd Graves of Graves Garrett, more than two dozen executives assessed looming threats—and potential opportunities. It was a powerful reminder that forces beyond our control shape our economic fortunes, but that we are not without the means to respond to them.

A Profession in Change

    Co-chairs Madeleine McDonough and Todd Graves launched the discussion with a question about the largest trends reshaping the practice of law today.

    “One of the challenges is that litigation has become so expensive,”  said Bryan Cave’s Elaine Koch. “It’s challenging even if a client has a very, very strong case,”
she said, and as a consequence, “I  have seen fewer things go to trial over the years.”

    Madeleine McDonough cited industry studies suggesting that only 1 percent of lawsuits proceed to trial. “There are more early settlements as the cost of lawyers has gotten more expensive,” she said.

    And yet, most at the table agreed, that is where the Kansas City legal marketplace continues to distinguish itself. Lower cost structures, compared to coastal firms, give local firms a competitive advantage when bidding for services outside this market.

    Another trend asserting its impact here, is law-firm consolidation, said Jean Paul Bradshaw, who recently became Kansas City managing partner for Lathrop & Gage. “So many firms are going through consolidation, and they have gone through several stages. They figure out they have to streamline their costs.”

    Pete Smith brought up the topic of technology, and how it’s changing not just the way cases are presented in court, but the way juries respond to what are supposed to be matters of fact.

    “A trial is a movie that is put on live and the lawyer writes the screenplay, produces it, directs it, casts it and stars in it,” he said. “And now, with the technology available and what you can do in trial, if you’re up against a lawyer and he knows how to present stuff digitally, that lawyer is going to win. It is just amazing when you see what juries do.”

    Every litigator, he cautioned, needs to be prepared to master those rapidly-emerging technologies, or risk being at a disadvantage in court.

    Co-chair Todd Graves asked whether it was becoming harder to get major corporate clients to align with firms here. Jean Paul Bradshaw noted that a number of prominent growing companies have been acquired by interests based outside this market—a trend that often sees professional services, like legal, accounting and banking—leave town, too.

    “Unless you’re at the entrepreneurial end,” he said. “There are firms in town that have done a very good job getting onto those entrepreneurial startup businesses. But I think it’s harder on the corporate end. They don’t look at Kansas City, by and large. I don’t think they realize the level of corporate talent there is in Kansas City.”

    The challenge for many, especially boutique and niche firms, Todd Graves said, is that if you want national work, “you’ve got to get past that credibility threshold.”

    John Granda of Stinson Leonard Street, itself the product of a merger involving two Midwestern firms, said having a base of clients outside the city establishes credibility. “But by the same token, I think bigger firms are trying to come to Kansas City for bigger clients and bigger transactions. Even though their nominal rate per hour is a lot higher than ours, they’re willing to reduce it substantially.”

    Husch Blackwell’s Maurice Watson said his frustration, as the firm’s chairman, was that many potential national-level clients stick with name firms from major markets because of the cachet of being represented by the most expensive legal talent in the land. They want those firms even when a matter is not legally or factually complex, he said, “because they want the imprimatur of a Paul, Weiss on the work and they pay dearly for it and they continue to do it, notwithstanding all of the pressures over cost.”

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_{1. Co-chairs Madeleine McDonough and Todd Graves started the discussion with questions about the biggest trends shaping the legal-services sector. | 2. Jeff Simon said an emerging issue for the legal community is the need to ensure that nothing erodes the faith that everyday citizens have in the judiciary. | 3. John Granda said the Kansas City value proposition continues to draw corporate clients from other markets to firms based here.}

    Polsinelli’s Kraig Kohring agreed, but said there’s still “plenty of transactional work that can be had by firms that are strategically placed to do that work for them at a price-point—price does matter in certain things.”

    John Snyder noted the globalization factor, and how it had impacted his firm. His was a Chicago-based firm—Sonnenschein Nath & Rosenthal —that had about 70 lawyers in Kansas City before merging with British-based Dentons in 2010; now the office here is part of a global firm with 7,000 lawyers. “We’re in a global economy,” he said, “and having offices everywhere is the best way to serve clients.”

    Many firms, Pete Smith said, risk losing local business if they modify their strategies to attract out-of-market business. “I’m pretty familiar with what a lot of your rates are, and they’re beyond the rates for most Kansas City-type work,” he said. “What that leaves for the rest of us is some business that is good-paying business that your ancestors and predecessors would be shocked you’re turning down.”

A Question of Value

    “Most of the Kansas City firms like ours that are headquartered in Kansas City but with a national foot print still very much value that Kansas City work,” said Kraig Kohring, and are priced to allow for that. “We may get priced out of certain things at a really low level, but I think for the most part, middle market corporate work, litigation work that’s Kansas City-based, is being done by Kansas City lawyers.”

    Phillip Rouse of Douthit Frets Rouse Gentile & Rhodes, said that in addition to managing a firm, “I also own several businesses, and as an owner, I’ve used several of the firms here. I’m paying a New York lawyer $1,000 an hour and he’s doing some fine work for us. So it kind of depends. Why would I pick that Dentons lawyer over my own firm? Because it was  a niche subject. That guy had special expertise nationally.”

    Spencer Fane’s Mike McCann said it was important that firms cast a broad net—and a fine one—when seeking business from this region. When you talk about Kansas City, you talk about the region,” he said. “Even in small towns there is usually one company that’s worth a lot of money, I mean hundreds of millions of dollars. There’s probably not two or three of them, but there’s one. They need that expertise. I think you have to understand what you’re trying to do and the value you give to these clients. And it’s got to be commensurate with what you’re charging.”

    That, said Elaine Koch, gets to the issue of value. “We’ve had clients, I’ve dealt with two of them personally, who left the bigger firm thinking they were going to get a much better rate at a smaller firm and found out that the hourly rate was lower, but they ended up paying as much or more.”

    The notion of value being based on hourly rates, said Maurice Watson “is an absurdity.  Most businesses will say, ‘How do you go about measuring value by input, rather than output, by how much time you’ve spent on it, rather than the result you receive?’”

    Gilmore & Bell’s Rick Wright chimed in, noting that 95 percent of the firm’s revenue was on a fixed-fee basis, not hourly. Regardless of a firm’s size, he said, “you must create a culture that empowers lawyers to explore alternative fee arrangements, and that has to carry over to the way you measure the contributions of your attorneys.” At his firm, the measurement for lawyers is the amount of cash they bring in the door on a year-to-date basis, and how that compares with previous years.

    From a client’s perspective, alternative fees generally mean “they’re saying let’s talk about getting the same result and paying you less,” said Todd Graves. “They’re not talking about let’s pay you the same and get a better result. That’s why we talk about it all the time.”

    And yet, said Jean Paul Bradshaw, “hours still matter in the sense of efficiency: How many deals can we do, how hard can we work and how many projects?”

    Many corporate clients, said Husch Blackwell’s Jeff Simon, still can’t get their minds around the value proposition of alternative fees. “I had a conversation with one who said, ‘My concern about these things is that you fixed-fee it and then you push the work down to the lowest possible level, and we would rather pay an hourly rate and maybe pay a little more to know the lawyer I’m dealing with and know who’s doing what and be able to monitor and keep track of that.’”

    ut from the lawyer’s side, Simon said, the billable hour, recorded in increments of 6 minutes per hour, is “a horrible way to keep track of your work.”

    “My fear,” said Maurice Watson, “is that too many of us and too many of our clients will wait until a point of tipping when it changes overnight and we won’t be prepared for the new world, and a whole bunch of firms will fail.”

    And yet, said Kraig Kohring, the commonality for all firms is that “there’s a demand from clients in this marketplace for predictability and certainty, and it’s just a matter of what you’re going to do to deliver that.”

    Shook’s Ellen Sullivan saw communicating with clients in their language as a key. “I think transparency is really important to our clients, so they do understand the value to them not the value really to us,” she said.

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_{1. When he evaluates job candidates, Pete Smith said, he’s looking for big-picture thinkers who will enthusiastically seek out new business. | 2. Jean Paul Bradshaw said Kansas City firms are at a natural disadvantage trying to recruit outside corporations to secure legal services here. 3. Maurice Watson said many potential national clients overpay for services by seeking brand-name firms. | 4. For Elaine Koch, the rising costs of litigation are an increasing concern.}

The Search for Talent

    Another trend affecting law firms is a shrinking talent pool. Much like the construction sector, which shed a huge number of jobs during the Great Recession and postponed hiring for several years, law firms are looking around now and finding that associates with three to five years of experience are in short supply.

    There are candidates out there, said Pete Smith,  but “the challenge for me is finding lawyers that are great lawyers who really care about winning and serving their clients, wanting to get the job done at an effective price, and who understand that business can’t just be sent to them on a platter or from the home office, that they’ve got to go out to get that business and do what it takes to get involved in social affairs, business affairs, charitable affairs, to go out and represent yourself and have people have enough confidence in you” to seek your firm’s services.”

    Todd Graves asked whether firms were back in hiring mode, and if so, whether law school graduates were part of that, as opposed to hiring experienced lawyers away from other firms.

    “We are still hiring,” said Madeleine McDonough, but “now we’re not seeing as many law school graduates and not as many smart, highly qualified law graduates.”

    At Seyferth, Blumenthal and Harris, said Kim Jones, “We don’t hire new grads. That’s actually part of our deal—that new lawyers are not going to learn on your time, and we’re looking for sort of mid- to senior-level folks with experience and knowledge who can hit the ground running.”

    At Dentons, said John Snyder, if a law clerk can fill a need, that’s the preferred hiring path. “We try really hard in the vetting process to make sure we hire the right one that we really want, because we really want them to work out so we can give them an offer,” he said. 

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_{1. For Nathan Garrett, the growth of government and its aggressive stand on criminalizing investigations looms as a threat to confidence in the system. | 2. Teresa Mata said Millennials indeed are looking for meaning in their work, including new lawyers. | 3. John Snyder addressed the impact that globalization, both in business and within law firm structures, was having. 4. Kraig Kohring said he was surprised to hear colleagues say that civility between lawyers remained an area of concern at this point in history.}

    Snyder also sits on the board of governors at his alma mater’s law school in Lawrence, and he has witnessed the shrinking enrollments that followed the recessionary hiring decline.

    “Law schools are doing the same thing: They’re trying to shrink the number of law students.” At KU, he said, the classes of 200 during his education are closer to 120 today, a decline of 40 percent, creating a more competitive environment.

    Scott Kreamer said the effect of such reductions nationwide means law schools are no longer looking at the bottom of the barrel to find applicants. “We’re still interviewing law clerks; we think it’s a great opportunity,” he said. “There are not that many people that are hir-
ing clerks, so you’ve got some opportunities there to get some good people, although it is getting more competitive.”

    The top performers academically, said Jean Paul Bradshaw, are still highly qualified—what’s changed is the depth of the bench behind them.

    Martin Pringle’s Scott Tschudy said the risk his office takes, as a firm of 50, is serving as a farm system for large firms. “You get them trained up and now the challenge is, they get lured away by a bigger firm so I’m not sure that model is going to survive, candidly, because that seems to be what’s happening.” The clerk who becomes an associate, then a partner, is becoming a rarity, Tschudy said.

    Of particular concern, said Maurice Watson, is that Millennials coming out of college today aren’t as willing to take on the drudgery often associated with the first years of a job at a larger firm—they want to make a difference. Today.

    “The ones we lose are often the most talented ones, and they have a lot of other options, including going to work at Google and doing a non-legal job or going to start some kind of legal processing startup, which most of us don’t even know what that is,” Watson said. “We need to understand that there’s a wake-up call and unfortunately, too many of us that don’t have a perspective that is shared by the folks we’re hiring.”

    Teresa Mata of McAnany Van Cleave & Phillips—who was the lone Millennial at the table—said her firm remained focused on hiring attorneys who will be there long-term. But “I can speak from at least a Millennial perspective, that we want to be challenged, we want rewarding work and that’s what we try to (find in) the people we recruit.”

    Pete Smith put hiring in football terms: He’s looking for quarterbacks, not defensive ends, because they understand bigger-picture thinking. “For the most part, we don’t believe in the team approach,” he said.

Law in the Trump Era

    Much of the second half of the assembly took on a more philosophical and civic tone, as opposed to administrative or operational. It started with Madeleine McDonough’s question on how the outcome of the next day’s presidential vote—which would give us President-elect Trump— might affect law firms.

    Kim Jones anticipated that, with respect to labor and employment law, much of the work done by the Obama administration over the past eight years could be undone, creating additional demand for legal services in that arena. Under Trump, she thought, “a lot of these regulations are going to go away, which will be an interesting sort of outcome, too.”

    Tristan Duncan of Shook, Hardy & Bacon cited the potential for change within the EPA—orders limiting coal-burning emissions have applied to regional utilities in particular, and those companies have invested millions to comply and adopt alternative supplies. In an environment of less federal regulation, “whether the states pick up the slack, I share my clients’ frustration.”

    Nathan Garrett whose clients at Graves Garrett often are dealing with government investigations, said growth of the federal bureaucracy had produced an agency he recently had to deal with, but one he’d never heard of despite working those circles for 20 years. “Government agencies,” he said, “have sort of become all about themselves and their own self-sufficiency driving things now.” No matter which political party is in power, he said, little is done to rein that in.

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_{1. With law-school enrollment down nationwide, Scott Kreamer said, fewer unqualified students are being admitted, and fewer are entering the work force. | 2. Karrie Clinkinbeard said that if the legal community is to resolve its issues with civility, it must start by mentoring younger lawyers on how to conduct themselves. | 3. Scott Tschudy said a concern of smaller and mid-size firms is the risk of training new lawyers and seeing them recruited away by large firms. | 4. Nearly 95 percent of the business booked at Gilmore & Bell is fixed-fee work, said Rick Wright.}

Faith in the System

    That prompted a heartfelt discussion of how Americans today view law enforcement, regulation, even the judiciary, and whether they believe the system gives everyone an equal opportunity to secure a just outcome. This election cycle, Jeff Simon said, had produced not just rancor between candidates, but what seemed to be an unprecedented number of attacks on our institutions. “If that creeps into the judicial system, into the courts, and people don’t believe in the ability to find justice in the courts, or that the courts themselves are rigged, where do we go from there?”

    Tony Rupp cited the looming Supreme Court retention vote in Kansas as an example of that. Such ballot measures, he said, “certainly have a chance to shake up the confidence in the system.”

    Todd Graves worried that government had taken a harsher stand on enforcement, shifting from civil charges against companies where laws may have been broken, and targeting leadership with allegations of criminal conduct. “The government actors, the prosecutors, haven’t been around a negligence standard a lot, and it becomes ‘it happened, therefore it was negligent,’ and the stick they carry is very strong, where your client may be barred nationwide from doing what they do. That ups the ante, and I think that’s a dangerous thing.”

    Environmental law, said Jean Paul Bradshaw, was producing the same regulatory approach. “Agencies tend to take on their own persona regardless of whether there’s a Republican or Democrat in the White House, but certain agencies are more prone to that, and EPA is one of those that more strongly acts in cases that might have been a civil case before now all of the sudden is a criminal case.”

    “Increasingly, though, isn’t the government losing these cases where they are criminalizing behavior?” Maurice Watson asked.

    That’s correct, Todd Graves said, but “we win these cases every day, and you never hear about them.”

    The bigger issue is the potential cost incurred, even for companies that are cleared. While government resources aren’t unlimited, they can make for a formidable opponent.

    “It depends on which side of the wall you’re on,” said Nathan Garrett. “But it is a fact, and what becomes very much of an issue, actually, is your capacity to pay.”

    The system, said Jean Paul Bradshaw, “is supposed to be measured by a concept of justice, even on the civil side. So incenting people for their job to be evaluated by how many dollars they bring in, that gives them an incentive to do something that takes that questionable case and pushes it someplace else.”

    “I think all of us have to be concerned about the integrity, the public perception of the integrity and the credibility of our judicial system,” said Maurice Watson. “There has been a real attack on many
of our institutions, political institutions, but also on our judicial institutions and our judiciary and our legal system.”

    Jeff Simon issued both a caution and call to arms when he said, “the integrity of the system shouldn’t be a partisan issue one way or the other for lawyers. For us, I think we do have a special obligation to society at large to beat that back, whether coming from right or left, and it comes from both directions. Where we see it, where we see the system doesn’t have integrity, we have to call it if we see it. We have a special role in that regard that’s going to be tested.”

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_{1. Tony Rupp had to look no further than the Supreme Court retention votes in Kansas to see examples of how trust in the judiciary may be at risk. 2. Reflecting changes in law-firm administration, Amanda Ketchum and Shelly Freeman were part of the most diverse legal assembly conducted in 17 years. 3. Phillip Rouse said his other businesses in Kansas City rely on outside law firms, including some pricier legal advice from firms in New York.}