New approach for advice merchants
By Steven R. Strahler
March 16, 2009

True Partners Consulting LLC doesn’t wow clients with a wide range of services or whack them with non-negotiable hourly billing rates.

The Chicago-based firm sticks to corporate tax advice and will accept fees based on a client’s tax savings, even in the form of company stock.

“Being able to share some of the risk helps you get your foot in the door,” says Cary McMillan, 50, a former Andersen partner and Sara Lee Corp. executive who founded True Partners three years ago.

The firm reflects a new approach for consulting, legal and other professional services firms contending with the deepest recession in 25 years.

An era of runaway growth is ending and with it the big increases and hiring and compensation that drew a generation of young talent to these firms. In a maturing industry, clients are gaining new leverage to demand lower prices and better results.

Most vulnerable to market changes are large, diversified firms with high overhead. Many of the winners in the post-recession era will be specialized outfits with fewer but more-experienced employees.

Firms accustomed to charging high fixed fees will have to accept billing arrangements more closely tied to the outcomes they produce for clients. And an industry that hired thousands of highly degreed young professionals annually at ever-higher pay rates will pare back hiring and salaries.

The rapid growth of professional services firms over the past three decades reshaped Chicago’s economy, providing not only more jobs but higher-paying ones than most in the shrinking manufacturing base. But after rising 7.8% to $43.4 billion last year, the Chicago-area services sector will see growth slow to 2.2% this year before increasing to 4.9% in 2010, Moody’s Economy.com predicts.

Despite the recession, the share of local gross metropolitan product contributed by legal, accounting and other professional services firms will continue to grow — to nearly 11% by 2010, more than triple the 3.6% share in 1978, according to Pennsylvania-based Economy.com.

But the days of expanding at a healthy multiple of overall economic growth are over. Professional and business services firms in Illinois shed nearly 7,000 jobs in January, second only to the 11,000 lost in manufacturing, according to the Illinois Department of Employment Security.

“It’s hard to look through our client base and see anyone that’s not affected by the situation we’re in,” says Chuck Allen, CEO of Oakbrook Terrace-based accounting firm Crowe Horwath LLP, which shed 150 employees, or about 6% of its workforce, in November and December.

Wages for accountants, tax preparers and bookkeepers, which have increased 37% over the past five years, are projected to rise only 1.6% this year and less than 1% next year.

At True Partners, Mr. McMillan says partners make less than they might at the Big Four accounting firms, but they also supervise less work. The experience level of his veteran crew is a key selling point for corporate clients tired of underwriting the training of young auditors and consultants at the Big Four, he adds.

With revenue expected to climb as much as 35% this year, to $43 million, Mr. McMillan says the firm will add 50 more professionals to its staff of 225 consultants. On a recent assignment, True Partners was paid 20% to 30% of the first-year portion of millions of dollars it was able to knock off a client’s local multiyear tax bill. So far, the firm has not been offered stock in any client.

In some fields, demand will shift to independent contractors with less overhead, which are able to undercut large consulting firms burdened by employee costs.

“There’s huge pressure on pricing — 20% (discounts), maybe more,” says Peter Bendor-Samuel, CEO of Dallas-based outsourcing consultant Everest Group.

WORLD-WEARY

Global firms like information technology consultant Accenture and accounting giant KPMG LLP, whose geographic diversity is considered an asset, will be hurt by the worldwide slowdown — which could last longer than the U.S. recession — and stronger dollar. KPMG in January polled its 11,000 European workers to see who, if given the opportunity, would cut their hours or take time off. KPMG declines to comment.

Corporate clients are cutting technology budgets by 5% to 30%, killing the old staffing model of IT consultants working on-site for two or three times what inside employees cost, says Mark Jeffery, managing partner of Evanston-based consultant Agile Insights LLC.

“There’s a real opportunity for upstarts like myself,” he says.

With three-fourths of corporate chief legal officers planning to cut costs this year, Economy.com predicts that Chicago-area legal industry output will dip slightly to $7.51 billion, the first decline since 1995. Employment, meanwhile, is expected to fall 3% to 44,600.

“I think the demand for law services is going down, even without the recession. People are very conscious of the cost. They’re cutting, cutting, cutting,” says Roger Stelle of Meltzer Purtill & Stelle LLC, a 25-lawyer firm in Schaumburg with banking and developer clients. It laid off two attorneys last fall. “This is a very trying time.”

The recession, coupled with technology and outsourcing that has commoditized many legal services and pressured billing rates, has undermined the pyramid structure of many big law firms — where an average of three associate attorneys support each partner.

“The lowest part of the pyramid is being shed away,” says Hugh Totten, a Chicago lawyer hoping to capitalize on industry changes. “A lot of what we do now can be replicated by pressing a button, like a will. Don’t think that is not going to get into other areas of the law.”

Chicago’s mightiest legal names — Sidley Austin LLP, Kirkland & Ellis LLP, Mayer Brown LLP and Jenner & Block LLP — are dumping attorneys. Another large firm, DLA Piper LLP (US), is broadening its partnership base by requiring non-equity partners to pay up to become full-fledged partners, in effect reducing the firm’s credit risk.

“A lot of what we do now can be replicated by pressing a button, like a will,” says Chicago lawyer Hugh Totten. “Don’t think that is not going to get into other areas of the law.”

“Without question, firms are going to be smaller,” says New York-based legal consultant Bruce MacEwen. “There will be fewer ‘full-service’ national law firms.” Pressure will build on state bar associations, he adds, to allow law firms to attract outside investors.

‘YET-TO-BE DEFINED’

Leaders at Chicago’s major law firms say it’s too early to forecast exactly what will happen to their traditional operating and billing methods. “It is likely that law firms will change in some as-yet-to-be-defined fashion,” says Kirkland Senior Partner Kevin Evanich.

Jenner Managing Partner Susan Levy says, “Some clients have told us, ‘Here’s a matter, but this year let’s not try to spend money.’ A lot of clients are seeking discounts, more than before.”

To win business, more law firms will have to impress companies like FMC Technologies Inc. in Houston, which withholds up to a quarter of what it owes for legal services before deciding at yearend whether firms deserve full payment or even a bonus. FMC Technologies’ legal expenses have declined steadily as a percentage of revenue since 2001, says General Counsel Jeffrey Carr.

Meantime, law firms increasingly are agreeing to fixed fees, which allow clients to quantify costs. “We’ve been talking about this for years, but the rubber is meeting the road now,” says Baxter International Inc. General Counsel Susan Lichtenstein in Deerfield.

Mr. Totten’s Valorem Law Group LLP is adopting contingency-fee practices more commonly associated with personal injury attorneys. In one case, Valorem gets paid only if client Kayak.com collects unpaid bills from a major vendor, says Karen Klein, the travel site’s Chicago-based general counsel.

In another case, Valorem’s ultimate compensation is based on the outcome of a breach-of-contract suit in federal court here. If client RF Surgical Systems Inc. of Bellevue, Wash., loses, Valorem accepts a 50% discount. If Valorem’s defense succeeds, the law firm gets stock options in RF Surgical, which makes a product that tracks the location of surgical sponges in patients.

“They’re taking a gamble,” RF Surgical CEO Kevin Cosens says. “They’re truly a partner because they’ll have an equity position in our company.”