Saturday, December 13, 2014

Hiring Laterals With an Eye on Business Development

The selection of lateral partners has long been the exclusive domain of lawyers. Not only are lawyers best able to evaluate the legal skills and reputation of another attorney, but determining with whom you would like to practice law in a partnership is an intensely personal choice. It's no surprise most firms keep lateral recruiting a lawyer driven and managed process.

But should they?

Innovative law firms are increasingly bringing other disciplines into the lateral recruiting, selection, due diligence and integration processes. In particular, business development professionals are being embedded throughout the process. Firms are using their marketing professionals to assess a candidate's business development acumen, evaluate client portability, pitch the firm more effectively and develop more strategic integration and marketing plans.

"Embedding us early in the process improves the ROI of the lateral because they start their plan the day they begin at the firm and it puts us 25 steps ahead," said David Kaufman, director of regional sales, U.S. and international offices for Nixon Peabody LLP. "It radically improves the integration process."
Business development professionals are also being called on to assess the business development strengths of candidates. Should a lateral's client not port over, firms want assurances that the lateral has the business development skills to build a new book of business.

"Attorneys tend to focus on the legal skill sets of attorneys and how they will fit in to the practice," said Keith Solar, San Diego office managing partner for Buchanan, Ingersoll and Rooney PC. "Our [business development] folks add value to the process by figuring out who really knows how to develop business."
Some firms, unhappy with the results of their lateral recruiting efforts, have even turned to marketing to re-engineer the entire process. That's what Mintz Levin did and the results have exceeded their expectations. Tapped by the firm's managing partner, Amy Fowler, Mintz Levin's chief marketing officer, mapped and examined the process starting from their relationships with recruiting firms and working through to the lateral's integration into the firm.

She found a need to deepen recruiting firm relationships, improve communication with the recruiters and tighten up the interviewing and integration processes. The changes she and Shannon Davis, director of legal recruiting, implemented include a mandatory lateral office tour facilitated by a dedicated business development manager, redesigning the interview process to ensure each attorney has a specific role in the interview and reorganizing the marketing group to better support laterals.

To manage the process, Fowler created a lateral recruiting committee made up of herself, the office managing partners, the firm's chief operating officer, the director of recruiting. The committee oversees every aspect of the process from interviewing and selection to managing any challenges that arise during the integration process.

Asked why the lateral recruiting committee was made up of office heads and not practice group leaders, Fowler's answer revealed the deep understanding she and the firm have gained in supporting lateral integration.
"We have a firm strategic plan and it includes the target list of practice experience we are looking for," she offered. "But the laterals will be working and socializing most closely with the people in their office. Having the buy-in of the office managing partners early on really helps ensure there is support for that lateral in that office. It makes a big difference."

One critical aspect to the recruiting process is the lateral's business and marketing plan, the development of which is also starting earlier in the process. David Salisbury, West Coast director of business development at Mintz Levin, interviews every candidate in the western region to assess the lateral's business development skills and build an individualized marketing plan for each lateral.

"Not only have we become pretty accurate in being able to assess a candidate's business development abilities, but the deep dive we do in our interviews helps us map out an integration and marketing plan that makes the best use of the laterals time during their on-boarding," Salisbury said. "It's on their desk the day they start."
Interestingly, the plan emphasizes the opportunities inside the firm for the lateral versus an emphasis on which clients of the lateral the firm can serve.

"We feel that offering opportunities with our clients for the lateral first builds trust," Fowler said. "We think it helps us start the relationship out on the right foot. It has the added benefit of helping us identify the work that the lateral can do while they are trying to port over their clients."

Several firms acknowledge their business development professionals as assets in selling the firm to laterals. But innovations in lateral recruiting include tapping outside expertise as well. Some firms are turning to outside consultants to re-engineer their recruiting program, solicit a third party's opinion on the portability of the candidate's client book, develop integration plans and hire business development coaches to work with laterals throughout the integration process.

This focus on lateral integration may be having the desired effect for both laterals and law firms. A 2014 Major, Lindsey & Africa survey of lateral partner satisfaction found a strong correlation between integration efforts and lateral satisfaction. Compared to the results of MLA's 1996 survey which found law firms were less than effective in four out of the five areas of integration, lateral partners now view their new firms as having been effective in integrating them along all five measurements of integration.

This column originally ran in The Recorder December 4th, 2014

Saturday, November 22, 2014

General Counsel Panel Notes from the ALM Western Law Firm Marketing Leaders Forum 2014

I've never sat through a boring General Counsel Panel. And this one proved no different. In fact, this might have been the most exciting panel discussion I've witnessed- complete with spunky debates between the audience and the GCs around a  variety of topics including AFAs, diversity and client interviews. Many thanks Molly Miller and ALM for organizing a terrific marketing conference with an outstanding speakers and topics.

General Counsel Panel:

Panel Moderator:            
Molly Miller, Vice President & Publisher, Chief Content Officer, ALM, The Recorder and 

Panel Participants:          
Michelle Fang, General Counsel, Stub Hub, Inc.
MeMe Jacobs Rasmussen, Chief Privacy Officer, Vice President and Associate General Counsel, Adobe Systems incorporated.
Mark Tellini, Senior Vice President and Deputy General Counsel, Charles Schwab & Co., Inc.

Q: What do you consider the most valuable attributes of your primary outside counsel?

A. They know my business and where it is headed. They maintain personal relationships and are pleasant and congenial. They demonstrate mutual respect with our in house attorneys. This is really important. You'd be surprised how often this doesn't happen. And of course, they have to be brilliant lawyers. But those are the table stakes to work with us.

Partnership. It's all about being good partners. That means they anticipate our needs and challenges. They present solutions that make the most sense economically for us. They are sensitive to the internal dynamics and politics and work well together with our in-house lawyers. They don't take over a matter and go away only to report back when it's resolved. They "co-manage" the matter with us. They work closely with us. If they don't they probably won't be working with us long.

I agree. They have to understand our business and what others are doing in our industry- how others are handling the issues. They have to understand technology, too. They should be creative about their fees. They need to be practical though. We don't want to hear about some outlandish risk that has little chance of materializing. We don't have time for that nor do we want to pay for this type of 'turn-over-every-stone' type of analysis. Just give it to us straight. They need to be knowledgeable about our business. Training outside lawyers is a huge drain on in house counsel. The more you can get up to speed and understand our business, the better.

Q: RFPs have become a way of life in law firms. What are some ways that law firms can stand out and win your business in this process?

A: RFPs are basically a healthy way to keep outside counsel honest and hungry. The ones that shine in the RFP process are the ones that have thought through the strategy of a case, how to respond to publicity, etc. They give free advice. In fact, we approach the process from the standpoint of getting as much free advice as we can about the issues involved. I assure you, it is always well spent resources or bandwidth.

The interviews are the most important part for me. I listen to how people think about an issue. We had one guy who clearly didn't know our business well enough but I really liked the way he thought. I told my people to find a smaller issue we could give him so we could check him out better. But I couldn't go with him on this issue. He just didn't know enough about the issue or our business. We won't bring anyone in for an interview that we wouldn't hire. So if you get invited, go for it. Knock us out with what you know about us and the issues. And present a solution for us. That's what will win the work. Learn about our business 'off the books'. Don't learn it on our dime. But come in informed and knowledgeable. You can always tell who has done their homework.

I agree. Get to know the case before you come in. Review the briefs, talk to local counsel, offer to provide value to us that we may not get elsewhere. Be creative. And always speak well of the other firms. You never know what relationships are in the room and it just makes you look really bad if you denigrate either your competitors or incumbent counsel.

Q: What kinds of things have firms done wrong?

A: I hate memos. I hate paying for memos. I hate seeing research memos on the bill. I hate large blocks of associate time on memos, especially when I haven't asked for a memo. Get the point? And if the associate is doing the memo and it makes it to the bill because the relationship attorney didn't know he was writing the memo and it is not written off before I see the bill, that makes me even more angry.

I get upset with communications to my boss or my boss' boss. Those communications shouldn't come from you. As the GC I need to manage the message to my business folks. You don't know all that's happening in the company so you can do more damage sometimes than good if you don't run it through me. Trust me I'll give you credit. But I need to know about it before it gets to the business folks.

It's incomprehensible to me that an outside lawyer would talk to the business people without the GC knowing. That's a firing offense. We're 'whisperers' in the company putting context around the issues at hand. It's an important part of what we do.

Unreasonable expenses tick me off. Billing out of proportion to the matter at hand. If I have a simple question, I want a simple answer. If the answer is not simple, I want you to explain to me why it is not before you run off and research a lengthy answer.

Q: How should law firms approach you for more business?

A: Well, nagging for business won't work. It is irritating. You do good work and you'll get more work. Just because you happen to be in town doesn't mean I have to meet with you. Give me a way to decline gracefully. If you want to meet with me, bring me something of value. Tell me something I need to know or should be watching out for. Don't ask to meet to introduce your tax counsel, for instance, just because you're in the neighborhood. Especially when you know perfectly well we're happy with our current tax counsel. Ask if we're interested in meeting him or her and tell us why we should want to meet them. Now, if your guy handles tax issues for others in our industry and has a way for us to change how we're doing something that's useful, then yes, I'll make time to meet.

Q: We saw research indicating more work is moving in house. How do you decide which work to take in house?

A: Basically, when the cost benefit tilts in favor of taking it in-house. But there are other factors. We want to be able to scale up and down quickly or be flexible in handling our case load, so there's more to it than that. But essentially there's a point at which it's simply cheaper to do the work in house.

You can tell the firms that are customer service oriented. Some firms are really arrogant. Cost structure is a 'gating' issue for us. The New York firms have much higher costs, so where we can, we take that in house. But experience is the first consideration. If the expertise is with outside counsel, we keep the work there.

Q: How important is diversity to you in the selection of outside counsel?

A: To be honest, the quality and value of the work is most important. I've had situations in which I was assigned an attorney because the firm thought we prioritized diverse attorneys on our work. We ended up with a bad fit for the matter and that caused more damage.  The attorney simply was not well versed enough in the issue. It was a mistake on the firm's part to put them forward. I want the best you can offer me and secondly I look for diverse candidates for the work.

Q: AFAs have been discussed for some time now and most firms have a handle on fixed budget or project fees. But what has been your experience in shared risk fees? And if you have had success, how were they structured?

A: We haven't had much experience in shared risk fees. One reason is that I got bit by one that my predecessor negotiated and now I am hesitant to negotiate them. The AFA I am referring to included a $1.5 million success fee on a case that was a bet the company case. The problem was that that success fee was not budgeted and pulling $1.5 million from some other place in the budget was really a challenge. I'd rather just pay as I go.

We went through a convergence process and included AFAs as a requirement of the RFP. We saw a few firms drop out as a result but also saw some rather interesting arrangements. One of which was a collared fee arrangement but we haven't tried it yet.

Q: We are seeing the rise of pricing professionals. should these people be in the room at a pitch to you?

 A: The relationship attorney and the subject matter expert should be there. I really don't see the need for a pricing person to be there or the CIO or whomever. But whomever is there, they need to be able to speak intelligently about our business and the matter at hand. 

Q: How do you feel about client alerts and other information sent to you by law firms?

A: These can be a real irritant. I moved from patent law to another area of the law but I still get patent alerts. I wish firms would regularly clean up their distributions lists so I get the info I requested. One firm I work with sends me an e-mail to check which publications I want to continue to receive or whatever. That's fine. It's actually helpful to me.

Some firms just regurgitate information and push it out to us. There's usually not much more in the client alert than what I read in the papers. That can be a real problem. Firms need to get better at intuiting what is important to us and the company. Show us what you know and how it addresses what we need. If you do this, you'll stand out. Believe me!

Q: what about the privacy issues related to these client alerts- like being able to see that you opened the alert, sent it to others, etc. How do you feel about that?

A: Well, privacy is pretty important to our business so I may be a bit partisan on the subject. If you know how things work on the Internet, privacy is really not an issue. I know it creeps some people out to visit a website and then see an ad for that product teed up on your Facebook profile but to be honest, it's really how things are going to be and people should just get used to it. The fact of the matter is, I value my time above my privacy.

Q: What about client interviews? How do you feel about law firms hiring third parties to conduct client satisfaction interviews?

A: Why doesn't the lawyer just ask how they are doing?
Q: I think the idea is that they will get more objective feedback if you are interviewed by someone outside of the firm.

A: I prefer to hear from the lawyer. I guess I understand the rationale but maybe I'm unique, I tell it like it is.

Q: When was the last time a lawyer, off the clock, asked to sit down and find out how they are doing? See? That's the problem. We'd all like to have the open, frank conversations but they just don’t happen.

A: You may be right. I guess it makes sense to me for the firms that are marginal or not doing so well. But if they are performing well, they will know it. I keep giving them work.

Thursday, November 6, 2014

Business Development Questions All Laterals Should Ask

Many of the questions laterals should ask of a prospective new firm are obvious and include concerns regarding compensation, client and practice fit and the firm's culture. But an important and often neglected area of discussion is how well the firm is organized for, and committed to, business development.

All firms say they are committed to business development. But on deeper inspection, many firms do not invest in and support it at the level necessary to compete successfully in today's intensely competitive legal marketplace. Understanding the degree to which a firm supports business development should be a key consideration in the lateral's decision to move to a new firm.

There are no hard and fast rules for the types and amounts of investment that should be made in law firm business development. But a discussion regarding the scope of activities, the resources available and how deeply business development is embedded in the culture of the firm will go a long way to revealing the likelihood the firm will remain competitive over the long run. Here are two main areas of inquiry to address, along with the questions you should ask your prospective employer.

1. Determine if the firm is well equipped for business development.

Budgets: You want to determine how the firm allocates dollars for individual and group business development initiatives. What is the approval process? How are decisions made for the amount of money available for budgets and individual initiatives? How are client-development investments evaluated?

Technology: Here the goal is to discover what kinds of research tools are available. Does the firm have a client relationship management, or CRM, system? Does the firm have client financial analysis software?

Planning: Find out how much planning is done in the firm. Does the firm have a strategic growth plan? A marketing plan? Practice group plans? Industry plans? Top client plans? Individual attorney plans? Is there a written integration plan for laterals? How often are these plans updated and how are the plans managed?

Support Staff: You need to know what kind of backup you'll have before you move. Does the firm have professional business development staff, as opposed to just marketing staff? Are they assigned to practice areas, industry groups or client teams? How involved are they in each attorney's practice plan?

Training: You want to know what types of business development training are offered and how often. Does the firm provide access to business development coaches? Does the firm maintain a library of business development literature and guides?

Public Relations: An important consideration is if the firm provides PR and media relations support. How is that service accessed? Is the support in-house or provided by outside experts? Does the firm primarily focus on local, regional or national media, or all three? Does the firm target its clients' industry trade publications as well as legal journals?

2. Find out if the firm is demonstrably committed to business development.

Communications: You want to know how well the firm communicates internally about business development opportunities, successes and failures as well as upcoming pursuits. Do meetings in the firm regularly feature updates on business development and marketing, new clients, new matters and practice group updates? And importantly, are the business development professionals in the firm participating in the major strategic decisions of the law firm?

Client Interviews: First, you want to determine if the firm conducts client interviews. Who conducts them? Are comments shared only with the relationship attorney or are those comments shared broadly in the firm? Does the firm conduct post-mortems on RFPs? How are those results shared?

Client Teams: You should ask if the firm has client service teams in place. How are the teams organized and how effective are they? Who selects which clients will have a team? Who determines the team members? Are there incentives or rewards for managing client service teams separate from origination or other compensation metrics?

Social Media: Evaluate the strength of the firm's social media presence. Does the firm have active blogs? How are those blogs promoted, maintained and supported? Does the firm encourage use of social media like LinkedIn, Twitter and Facebook? How many of the attorneys have LinkedIn profiles and how many are actively using LinkedIn and participating in groups?

Content Marketing: You should know if the firm encourages the development of thought leadership, not just client alerts or newsletters. Does the firm provide support for content creation including ghost writers or hours dedicated to associate research time? Does the firm use a content distribution service such as JD Supra? Does the firm distribute its materials through a variety of channels, in addition to its website, like through blogs or micro sites, through LinkedIn, by email and through content distributors?

There are several other areas to evaluate to better understand the firm's commitment to business development. Look at charity and community involvement, advertising and sponsorships, events and client entertainment.
Generally, the size of the firm will dictate the resources available. But size has little to do with the depth of the firm's commitment to business development. A deep, embedded commitment to supporting every attorney's practice is what laterals should be looking for in their new law firm platform.

This article originally ran in The Recorder on November 4, 2014  

Eric Dewey is managing principal of Group Dewey Consulting, focusing his practice on business development coaching and lateral acquisition support services. He writes the Lawyer Up! blog. He is based in Northern California and can be reached at or 502-693-4731.

Monday, November 3, 2014

Linked In Basics in Ten Easy Steps, Part 4

This is the fourth in a four part weekly series on using Linked In for business development.
8. Seek Out Business Development Opportunities:
LinkedIn tracks who has viewed your profile.  You can find this on your Profile page on the lower right hand side.  Review this regularly to look for possible referral sources, connection opportunities, or reasons to contact someone.  If you've recently met with or pitched someone, you'll often find them or a company representative show up as having viewed your profile.  Sometimes who viewed your profile is a precursor to the posting of an RFP. If you have no connections to the person viewing your profile, you may not be able to see all of their information without paying for LinkedIn's premium service.  There are several packages at various monthly price points that you might choose.  Once you've clicked through to find out who's viewed your profile, you can find upgraded costs by clicking the yellow "Upgrade" button. You can quit the service at any time so don’t worry about having to sign up for a whole year. Sign up on a month to month basis and see if it provides value and see whether or not you use the premium service on a regular basis.
9. Check your privacy settings.
Determine how you want to be found and viewed. Turn off activity broadcasts when you are in edit mode so you don’t bombard connections with every change you make to your profile. But don’t forget to turn it back on. Set who you want to see your activity feeds to everyone, your expanded network or just your first degree connections. Review what you want people to see when they view your profile. Make sure you include an e-mail address that your connections can access. Restrict who can see your connections to only your connections. Consider turning off the feature ‘viewers of your profile also viewed these other profiles’. The benefit of this feature is being able to see who you are being compared to. The downside is that it gives those viewing your profile other suggested profiles to view thereby increasing competition.
10. Distribute content through Linked In
I promote a writing style which makes content easier to re-purpose and distribute called ‘140, 1, 4.’ The content should be written in the form of a pyramid in which the essential information or some compelling proposition is stated in the first 140 characters. Then, write a complete overview about the topic in the first page being careful to address all the major points of your proposition within that one page. Then use the following four pages to elaborate on your point. This will give you a strong, ‘tweetable’ proposition to distribute through linked In, Twitter and other channels, a one page summary for the time constrained reader and a more in-depth analysis for those willing to read five pages of material. Be sure to embed white papers, client alerts, blog posts and publications in your profile.
Linked In will likely become the CRM system of choice for the global business community. Putting your best foot forward by having a thorough and well written profile is critical. And the sooner you get the basics done, the sooner you can begin to master its powerful features and utilize it for business development.
If you'd like help using Linked In for business development, contact Eric at You'll find that I am an eager resource and that it costs nothing to talk.

Monday, October 27, 2014

Linked In Basics in Ten Easy Steps, Part 3

This is the third in a four part weekly series on how to use Linked In for business development.
5. Join and Participate in Groups – Or Start Your Own:
Search for professional organizations not only that you already belong to, but also look for ones your potential clients take part in.  Join groups in which your peers, colleagues and competitors are also members.  Join your college alumni group.  Most groups often have discussion boards or threads where members pose professional-related questions.  Join the discussion if you have a bit of expertise to offer.  Or start your own group to focus on issues, post articles, start discussions, take questions, etc. related to your practice. Add value to the group on a regular basis by starting discussions, commenting on discussion strings or sharing information. Where possible make introductions between group members and others in your list of connections or suggest groups to connections who might benefit.
6. Increase Your Search Visibility:
You’ll want to make sure that people interested in the type of law you practice can find you.  If you make your profile page public, search engines like Google and Bing will index it. Take the time to optimize your summary, using your full proper name versus “I” or “me.” You might also want to enter links to websites you want to highlight, like a personal blog or the firm’s website.  Incorporate keywords and key phrases throughout your profile that potential clients look for.  Think about what are the critical terms and phrases used in your practice area and industries. What key words would your potential client be likely to search for?  These are not necessarily legal terms, but the terms that your clients would use instead.  The more of those you include in your profile, the more likely you are to be found by potential clients.  Place these key terms throughout your profile: in your background information, your summary, your title, and your skills & experience. 
7. Interact and Engage Your Audience:
"Recommend" your connections.  When you write a recommendation for someone or endorse specific skills, they often times will do the same for you, adding to a more complete professional profile.  However, be careful to only endorse those with whom you have worked or have deep knowledge of their capabilities. The quality of endorsements reflects much more powerfully than a large volume of endorsements.
On your home page, your connections share news and information.  You can easily engage your audience by re-sharing with your own connections any posts by others that are relevant to your industry.  Share news items, awards, and articles posted about you on the Firm’s website by linking to that page.  Likewise, comment on or "like" the news, information, and commentary shared by your connections.  More points of contact make you more recognizable and "top of mind" as an expert in your field for future business development opportunities. 
If you would like help using Linked In for business development, contact Eric at You'll find that I am an eager resource and that it costs nothing to talk.

Monday, October 20, 2014

Linked In Basics in Ten Easy Steps, Part 2

This is the second in a four part weekly series on the basics of using Linked In for business development.
2.  Personalize Your URL:
You have the option to claim your name as part of your LinkedIn web address, rather than a standard web address with a long list of numbers at the end.  Find this under the Edit drop-down menu on your profile home page, click "Manage your profile settings" then find "Customize your public profile URL" along the right side, as shown here.
Example: ""
3. Connect with your Colleagues and Business Contacts:
Take time each week, each month, etc.  to update your LinkedIn Contacts.  On your Home page, you will see People You May Know on the right side of the page.  If you've kept your profile updated with affiliations and groups you belong to, LinkedIn will better be able to suggest people with whom you should connect.  The more experiences you add, even non-work related experience, the easier it will be for LinkedIn to connect you with others within those networks.
Add your colleagues at the firm, along with your professional network outside the firm.  Add new contacts you meet at networking or social events.  LinkedIn is one of the most searched professional sites online.  Just as our in-house CRM shows who knows a specific contact, LinkedIn also shows who you already know that may know a business contact you are trying to connect with, and that can lead to a touch point to facilitate an introduction.

Or vice versa: contacts may find you can help facilitate a business introduction for them.  If you find you need to delete a contact, you can remove them under the Network – Connections tab.  It’s worth periodically culling out connections that don’t augment your profile in some way. Often times, others will attempt to connect with you just to increase the number of connections they have believing that large networks gain them higher rankings in search results. However, the behavior of searching on LinkedIn is really through the process of searching ‘degrees of separation’. Knowing this, it is more important to ensure that the connections you have are of the best quality, have similar good quality connections, are meaningful and offer the potential to help someone out in the future.

4. Add Recommendations:

An easy way to enhance your reputation is to obtain recommendations from quality, well regarded sources. These recommendations add up to social proof that you’re a professional others can depend on. The best way to get recommendations is to ask for them. The Request Recommendations tool is simple to use, but take the time to edit the default message by tailoring it for your audience.  Access this thru your Privacy & Settings page.  Do this sparingly. Target those who have direct experience with you and your work. For connections or clients that you have not spoken with recently, include a point of reference to jog their memory in your note.  As for the message itself, be short and to the point. A good way to start your message is to acknowledge how much you value their opinion.  Start writing recommendations for others you know as well, and you may find many will reciprocate.
If you'd like help using Linked In for business development, contact Eric at You'll find I'm an eager resource and that it costs nothing to talk.

Saturday, October 18, 2014

Forensic Business Development Research

Prospecting for Legal Work by Monitoring Unusual Business Activities

Wayne Gretzky understood the need to anticipate. So have savvy investors and investment and commercial bankers. They have learned the art and science of predicting where problems may occur in a business and they use that information to hedge their bets and protect their assets. The same techniques can help lawyers anticipate where legal issues could potentially develop. 

A Canary in the Coal Mine

Companies who run into legal issues, more often than not, had warning signs which provided clues of these developing problems. If you are informed and attentive to these signs, you can gain a competitive business development advantage and provide distinctive value to clients and prospects.  
What types of legal work can be detected through these clues? Often, you can reveal:

·         Companies who may have an acquisition appetite or be a target.
·         Companies who may need to raise capital.
·         Companies who may experience regulatory investigations or are dealing with compliance issues.
·         Companies who may face various types of litigation.
·         Companies who are potentially facing bankruptcy.
·         Companies who may be thinking about selling key assets.

These and numerous other types of legal work can be revealed through a process called ‘Forensic Business Development Research (FBDR)’. FBDR is a set of techniques and processes to identify and monitor potential early warning signs of legal problems. It monitors unusual business events, activities and indicators reported through a variety of channels which, either singularly or in combination, provide early warning of potential problems in a company.

“What Keeps You Up at Night?”

Any lawyer who goes in to a client or prospective client meeting asking ‘what keeps you up at night’ runs the risk of being perceived as not having done their homework. The client knows what keeps him up at night and you should too. Business development works best when you provide value first to establish a relationship. Providing value means telling the client something they don’t already know.  

Forensic business development research allows you to shift from probing for information, to exploring ways in which you can add value to the company- exploring reasons why the company should hire you. It shifts the conversation from ‘What keeps you up at night’ to ‘Let’s discuss how you can sleep better.’

The benefits of FBDR are numerous. This early warning process enables law firms to target their communications and BD efforts to existing and prospective clients in an environment with little to no competitive pressure. It often allows lawyers to engage clients in discussions regarding potential legal issues before they have occurred. The process also helps prepare attorneys for discussions with prospective and existing clients by providing them with specific, well-informed and formulated questions and strategic intelligence on the company and its competitors.

Forensic business development research requires a monitoring of numerous events and activities including financial indicators, managerial developments, operational changes and market conditions. It often requires monitoring over a long period of time in order to detect trends or slowly developing issues. The process is not foolproof, of course. However, even if the process doesn’t reveal developing problems for your list of companies, monitoring and analyzing multiple factors will provide greater business intelligence on these clients and prospects. Because public companies are required to file more information with the government than are privately held companies, forensic BD research among private companies is much more difficult and less reliable, though still not impossible.

26 Early Warning Indicators

Management Practices Indicators:

Review risk factors and management’s discussion of these risks

Every annual report includes information about the most significant risks that apply to the company or to its securities. Companies generally list the risk factors in order of their importance. Some risks may be true for the entire economy, some may apply only to the company’s industry sector or geographic region, and some may be unique to the company.
Company leaders also must discuss their perceptions of the risks that the company faces. Pay attention to the points made in this discussion and determine whether company executives have a firm grasp on the scope and intensity of these risks.

Changes in accounting firms

In and of itself, a change in the accounting firm is not an indication of problems. However, the advantages over time of using the same accounting firm are powerful enough that a change in firms can be considered an unusual event. If the accounting firm has also refused to provide a clean bill of health in the analysis of the company’s financial records, something the accounting firm is required to report, the change in accounting firms is a definite red flag. The explanation for the change should be sensible and pass the sniff test. In other words, if making the change presents significant benefit to the company, the change may make sense. But if the capabilities of the old and new accounting firm are equal, or there is disagreement between the accounting firm and the company’s management, it deserves further investigation.

Lack of a ‘clean bill of health’

Accounting firms are required to state their opinion as to the quality of the financial data submitted for review. In some cases, where the accounting firm cannot validate the source or reliability of the information, the firm will make a statement to that affect in the company’s filing. In some cases, the accounting firm will state that it does not give the company a clean bill of health.  In such cases this is the result of known or perceived improprieties found by the accounting firm. These situations universally require further investigation and very often point to emerging legal issues.

New positions created

Companies often create new positions to deal with key challenges faced by the company. A first time position dealing with issues such as risk, compliance, or other areas can indicates recognition by the company that it has challenges in the area. 

New skills and capabilities in new hires

Similar to when a company creates a new position, a significant change in the description of the skills and capabilities they desire in the candidate can reveal issues that the company is attempting to address in their talent recruitment efforts. This can include new educational or professional certification requirements, experience in particular areas or issues, and other skills and capabilities. Judgment is required to assess whether the change is a response to new market or competitive pressures or whether it is resulting from operational challenges.

Departures of key executives

Companies hire and fire executives for a variety of reasons, but some of these reasons can be indications of internal problems. Executive also leave on their own volition for a variety of reasons. And it is a rare occurrence for a key executive to leave a company for reasons that might lead to legal problems. But, the situation does occur. Taken in combination with other factors experienced by the company, this could be an indicator of developing problems at the company.

Departure of key board members

A change in one or more members of the Board of Directors is a development that requires more research. Research is especially warranted when the exiting board member has a strong reputation and there is a weak explanation of their departure.

Big insider or institutional sales

Key executives in the company and institutional investors have greater knowledge of what’s going on in the company. Executives that begin selling large blocks of stock either in a measured disposal over a short period of time or in one large block can indicate that future problems for the company may be on the horizon.  

Dividend cuts

Companies rarely cut the amount of the dividends that they pay to investors each quarter. Doing so sends a signal to investors that the company needs cash and reducing the amount of dividends payments to investors is one of the last places a company will look for savings. So when this happens, look for more signs of developing problems at the company.

Selling flagship products, equipment or property

Companies don’t sell their prime products, brands and assets unless they are forced to let them go. In some cases, the sale can be calculated to raise capital for new investments but more often than not, it is an indication of financial difficulties in the company.

Significant reductions in people or benefits

If you are going through tough financial times, one of the first things you will likely do is look for ways to cut your expenses. Companies do the same thing. And they will start with the largest expenses first. One of the first large expenses that they will look to cut are staff positions and benefits related expenses. Cuts in staffing, especially those made suddenly vs through attrition, are red flags for problems. In most states it is relatively way to make personnel cuts. The second area often cut is a bit harder. Having reaped all the benefits they can get from cuts in personnel, companies will seek to make deep cuts in their health benefits, pension plans or other benefits. Deep and sudden cuts, particularly when they take place in conjunction with financial indicators are a sign that trouble may lie ahead. Watch for these items to be in a news release or the annual prospectus.

Financial Performance Indicators:

Multiple periods of negative cash flow

When cash outflows exceed cash inflows, the company has what is called ‘negative cash flow’. While it’s not unusual to have a month or two of negative cash flow, a prolonged period or increasing gap could indicate that cash in the bank is running low for a company. Without new capital from sales, equity investors or lenders, a company in this situation can quickly find itself in serious financial trouble.

High debt to equity ratio compared to peers

The debt-to-equity ratio is a handy metric for gauging a company's debt default risk. It compares a company's combined long- and short-term debt to shareholders' equity or book value. High-debt companies have higher D/E ratios than companies with low debt. Comparing the debt profile of multiple companies within an industry helps put the level of debt in context. Some industries operate with a high level of debt so understanding the industry practices with regard to typical debt loads is an important part of the analysis.

Interest payments on debt

A company's income statement will show what it pays to service its debt. The company should be able to pay its expenses and interest obligations from the revenues it is reporting. In fact, there should be a comfortable margin above this level so profits to the company owners can be paid. In companies that are failing or about to fail, this gap narrows and may become negative, indicating the company is on its way to financial distress or failure.  Use the interest coverage ratio to determine the company’s ability to pay its debt obligations. The lower the ratio, the harder it is for the company to pay its debts.

Significant or sudden drop in reserve for doubtful accounts  

Companies dedicate a reserve to cover the cost of uncollected receivables. A large increase in the reserve amount may indicate management's anticipation of collection problems. If the company has only a few large clients, this could present significant challenges. A significant drop without a reasonable explanation could indicate manipulation of revenues since the reserve goes directly to the bottom line. Either is worthy of further investigation.    

Changes in inventory volume

Significant changes in inventory can be indicative of manipulation of the cost of goods sold. If inventories ramp up faster than sales volume, and again there is no reasonable explanation such as new product releases or increased marketing, questions should be asked and further research performed.

Changes in contingent liabilities

Significant or sudden changes in contingent liabilities without a reasonable explanation can be an indicator of financial trouble. Contingent liabilities include significant litigation, or regulatory fees and penalties a company typically experiences. It can also include guarantees made on behalf of associated companies or guarantees made on product or service claims.  Regardless, questions should arise when there is a significant or sudden change in the value of these liabilities.

Low price earnings ratio but high book value

Plotting the price earnings ratio against a company’s book value can help you determine the potential acquirers and acquirees in an industry or geographic market area. Companies with a high price to earnings ratio and small book value are companies which are small and fast growing. Typically this growth is the result of a competitive advantage and often is attractive to slower growing, larger players in the market (the low price earnings ratio and larger book value companies). Large companies which are growing slowly often look to acquisitions of other companies to improve their earnings. Plotting the ratio and value on a ‘two over two’ graph of the companies in an industry will enable you to isolate the two types of companies and determine which might be potential targets.  

Operational Indicators:

Significant changes in the cost or availability of raw materials

Companies which are dependent upon raw materials for the production of their goods and services are particularly vulnerable to changes in the cost of those materials.  Monitoring when legislation, market changes or new regulations affect the cost or availability of materials is one way to anticipate potential legal needs. For example, horizontal drilling technologies tipped the economics of fracking and led to huge increases in the availability of natural gas reserves in the U.S. Companies whose futures contracts were tied to oil and gas prices, didn’t enjoy the price drops this new supply created. So companies began to re-negotiate their contracts and untie their pricing contract from the increasing oil prices. This has led to litigation between the contract holder and the supplier.

Changes or loss in key suppliers

One doesn't fire a good client unless that client presents little or no future for the business. If the client has not paid its supplier, the first order of business is to stop doing business with the client. Whether the result of the company’s inability to pay its bills or due to disagreements in other terms in the agreement, there’s a good chance that changes in a key supplier can result in litigation. These situations warrant further investigation.

Significant price reductions

Sudden and significant price reductions are often an indication that the business needs more cash to service its debt or pay suppliers. While sometimes a price reduction can indicate investment in a new product or service line, these changes warrant further questions. And again the answer to why the reduction was made should make sense.

Change in marketing or business strategy

A significant change in marketing or business strategy can indicate a troubled company or, at least, a disconcerting outlook for the company. Companies rarely make an about face on their marketing or business strategy and do so only when conditions or times leave them no other choice. A company that abruptly changes its strategy or business model often are panicking and acting somewhat irrationally. A change in strategy typically requires a significant investment in marketing and operations in order to affect. It brings numerous risks and ‘unknowns’ for the company and many times forfeits loyal customers for the promise of future, more profitable customers. Therefore, significant changes in strategy should be accompanied by a logical and realistic business case. Where the business case is suspect, look further for other developments that can confirm or deny the potential for developing legal issues.

Loss of a significant business alliance or partnership

The loss of a strategic business alliance can indicate problems in the relationship between the two companies. In some cases the benefits to both businesses may simply have run its course. But more likely, a split is an indication of a strong disagreement between the two companies either because they are in competition for the rights to certain assets or technologies or because suspect business practices have wedged the two apart.

Deterioration of product or service quality

Companies that are struggling to pay their bills often look to cut expenses in production and service. This results in the deterioration of product and service quality. With the ubiquity of user review websites and tools such as Yelp, Angie’s List and other rating systems, it’s becoming easier to monitor an uptick in negative experiences. Many big box retailer sites and shopping sites (such as Amazon) include user reviews for the major manufacturers and brands featured on the site. This enables a relatively easy way to compare product and service quality across industry players.  

Market Condition Indicators:

New competitors

Strong, new competitors entering a geographic area or industry can upset the balance of that market and, if not managed well, lead a company into financial distress. WalMart is famous for putting smaller retailers out of business in the markets it enters but even lesser known brands can cause an intensification of the competitive environment that leads some companies toward financial distress.

Alternative providers

The sudden appearance of a new, well-funded or game changing alternative provider can fundamentally change a company’s business strategy and sometimes lead to financial distress in the affected companies. A prime recent example of this was the introduction of Uber and Lyft, applications which fundamentally changed the taxi cab business over the short course of a few months. (In fact, these applications are now threatening to change the fundamental business models of the local delivery service industry and even private ambulance services). Once these services gained traction in a couple of big cities, litigation, lobbying efforts and even taxi cab company bankruptcies quickly followed.

In conclusion

Once again, it’s rare that a single indicator will reveal significant legal problems. More often, the indicators build over time, the evidence revealed as the issues become more severe. Developing the analytical abilities to assess indicators early enables firms to get the earliest shot of helping the client with these issues. Monitoring these general areas of your clients' and prospective clients' businesses can provide you with a significant advantage in your business development efforts.