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26Jul 2017

Thank You Franchise Business Network Attendees

Franchise Business Network Attendees, Presenters and Sponsors

I wanted to thank everyone who attended the 2017 Franchise Business Network summer program and dinner. We had approximately 90 people in attendance throughout the day and the reviews thus far have been outstanding. The event would not have been possible if were not for the world-class line-up of presenters, and the incredible collection of sponsors that graciously provided their support.

Presenters:

Mike Maciszewski, Vice President, Alexius

Elior Shiloh, Partner, Lewis Brisbois

Jennifer Wisniewski, Vice President, Alexius

Diana Meade, CEO, OnePoint BPO

Ed Schenkein, Partner, Singer Lewak

Andy Elson, Chief Client Services Officer, Alexius

Gary Schlisner, CFO, InteliSecure

Jay Kramer, Partner, Lewis Brisbois

Greg Caldwell, Founder, Armadentity and Armadentity SecureFranchise

Fred Holt, Founder/CEO, Summit HR Solutions

Tom Stone (moderator)

Michael Feinner, CEO, MSF Enterprises, Inc.

Carolyn Miller, Founder, National Franchise Institute

Jodi Holloway, CEO/Strategist, DYZN Solutions

Reg Byrd, Partner, DCV Franchise Group

Chris Myers, CEO, BodeTree

Trish Barrett, Legal Consultant, Alexius, LLC

Amy Holman, Director of Legal Affairs, Modern Acupuncture

Melanie Hanson, General Counsel, Massage Envy

Elizabeth Nolan, Legal Advisor, Citywide Franchising

Sponsors:

Alexius

Blue Rock Search

Bodetree

FranchiseResales.com

Lewis Brisbois

One Point Accounting

Singer Lewak

Trinet

I would also like to thank everyone who attended the reception and dinner at my house later that evening. Three Tomatoes Catering did out outstanding job with the food and free-flowing libations seam to be a good indication that everyone was enjoying the evening.

Look forward to seeing everyone again next year.

Sincerely,

Kevin Hein, Chief Development and Strategy Officer, Alexius

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26Jul 2017

Alexius Hosts Labor Secretary Alexander Acosta

Saturday, July 22nd Alexius was proud to host Labor Secretary Alexander Acosta on behalf of the IFA for a informal discussion on some of the major labor related issues US franchise organizations are having to face in today’s political climate. In attendance were representatives of some of Colorado’s leading franchisors, franchisees and small business organizations, resulting in a fruitful exchange of ideas and concerns.

 

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About Rene Alexander Acosta:  (born January 16, 1969) is an American attorney, academic, and politician who is the 27th and current United States Secretary of Labor. A Republican, he was appointed by President George W. Bush to the National Labor Relations Board and later served as Assistant Attorney General for Civil Rights and federal prosecutor for the Southern District of Florida. On February 16, 2017, President Donald Trumpnominated Acosta to be United States Secretary of Labor. Acosta is the first Hispanic member of Trump’s cabinet. He is the former dean of Florida International University College of Law.

 

27Jun 2017

Franchise Business Network Meeting

Franchise Business Network Meeting

July 18, 2017 Denver Country Club

And the Hits Just Keep on Coming . . . Managing Franchise Systems in Times of Great Change

The franchise business model is under pressure from changing laws and new challenges – but franchise leaders have opportunities to rise to the challenge. During this event, industry leaders will discuss hazards to the franchise business model, hot topics such as transactions and data privacy, and how leaders can effect positive shifts through collaborative leadership and system change.

In the evening, we will unwind and visit with colleagues and peers while enjoying cocktails, fine wines, a French-themed dinner and entertainment at a party celebrating the best of franchising and our Colorado-based franchise community.

8:00 to 8:45         Check in and continental breakfast

8:45 to 9:00         Welcome and Introduction

 Kevin Hein, Chief Development and Strategy Officer, Alexius

9:00 to 9:45         My Way (Frank Sinatra, 1969)

 Recognition of Deal Maker of the Year in Colorado

 Mike Maciszewski, Vice President, Alexius

9:45 to 10:30       Jailhouse Rock (Elvis Presley, 1957)

 A Summary Review of Key Franchise Cases During the Past Year

 Elior Shiloh, Partner, Lewis Brisbois

10:30 to 10:45    Break

10:45 to 11:30    Building the Perfect Beast (Don Henley, 1984)

Changes in Revenue Recognition Rules and Constructing Financial Performance Representations Under the New NASAA Guidelines

Jennifer Wisniewski, Vice President, Alexius, Diana Meade, CEO, OnePoint BPO, Ed Schenkein, Partner, Singer Lewak

11:30 to 12:15    Won’t Get Fooled Again (The Who, 1971)

Understanding and managing cybersecurity issues in a dangerous world

Andy Elson, Chief Client Services Officer, Alexius. Gary Schlisner, CFO, InteliSecure. Jay Kramer, Partner, Lewis Brisbois, Greg Caldwell, Founder, Armadentity and Armadentity SecureFranchise

12:15 to 1:30      Lunch and Keynote

The Five Behaviors of the Cohesive Team

Fred Holt, Founder/CEO, Summit HR Solutions

1:30 to 1:45        Break

1:45 to 2:30        Changes In Latitudes, Changes in Attitudes (Jimmy Buffett, 1977)

Coaching Through System Change

Tom Stone (moderator), Michael Feinner, CEO, MSF Enterprises, Inc., Carolyn Miller, Founder, National Franchise Institute, Jodi Holloway, CEO/Strategist, DYZN Solutions

2:30 to 3:15        Money (Pink Floyd, 1973)

Franchisee Financing – New Rules and Access to Capital

Reg Byrd, Partner, DCV Franchise Group, Chris Myers, CEO, BodeTree

3:15 to 3:30        Break

3:30 to 4:30       Under Pressure (Queen and David Bowie, 1981)

Panel of the Pros – Keys to Managing Legal Risk Using Internal and External Resources

Trish Barrett, Legal Consultant, Alexius, LLC., Amy Holman, Director of Legal Affairs, Modern Acupuncture, Melanie Hanson, General Counsel, Massage Envy, Elizabeth Nolan, Legal Advisor, Citywide Franchising

4:30 to 4:45     Conclusion and wrap up

5:00 to 6:00     VIP Cocktail Party – 1533 East 7th Avenue
6:00 to 9:00     FBN Summer Event – 1533 East 7th Avenue (Separate Ticket Required = $75)
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20Apr 2017

Legal Marketing Spend Is Up– So Is Client Dissatisfaction. Now What?

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Competition for corporate legal work is keen. Law firms vie with each other for a shrinking segment of outsourced legal work. Corporate legal departments and a growing array of well capitalized, tech and process savvy service providers now account for an almost 50% of legal spend. It’s not surprising, then, that law firms are stepping up investment in marketing and business development activities. Will this narrow the growing delta between rising demand for legal services and declining call for law firms? Short answer: not unless law firms address the myriad of reasons for client dissatisfaction as well as differentiate themselves.

A joint study conducted by the Legal Marketing Association (LMA) and Bloomberg Law found that more than two-thirds of attorneys and business development professionals agree their firm is increasing its emphasis on marketing and business development– only 6% disagree. Nearly half of those surveyed report their marketing budgets will increase more than 10% over the next two years, even as firms continue to engage in belt synching to prop up profit-per-partner (PPP).

The primary reasons firms cited for expanding marketing budgets relate to internal pressure to generate revenue, law firm convergence-fewer outside firms used by clients, and keeping pace with other firms that are hiking marketing spend. But jacking up marketing and sales spend will only yield a positive return on investment for firms if they: (1) tackle client dissatisfaction; and (2) differentiate themselves. These will be the linchpins of success.

‘What We’ve Got Here Is Failure To Communicate’

A recent study of the British legal market commissioned by LexisNexis and Judge Business School at Cambridge University contains a stark finding: ‘There is unambiguous evidence of a significant and persistent disconnect between law firms and their clients.’ The disconnect has resulted in a steady migration of work from firms to corporate legal departments as well as a growing client receptivity to service providers and other non-traditional sources for legal services.

The LexisNexis survey cites three persistent causes of the client/firm disconnect: (1) clients want solutions and law firms offer advice; (2) law firms strive for perfection while clients generally want a ‘good enough’ basis to solve a problem–this varies with the value a client assigns to a matter; and (3) law firms fail to provide cost and time predictability–they have not invested in project and process management capability that is common among their clients (and, more recently, in-house legal departments).

The divide between clients and firms is more profound than firm delivery and pricing deficiencies; it also involves a knowledge gap. A stunning 40% of clients in the LexisNexis survey noted that senior partners of  their law firms lacked more than a basic knowledge of their businesses. No wonder there is convergence and a willingness to look beyond incumbent firms. Add to that client dissatisfaction with firm cost, incremental delivery improvement, and law firms’ failure to take an enterprise approach to client matters rather than a transactional one, and you’ve got quite a list of client gripes. The consequences are starting to become noticeable. It’s not just a buyer’s market–it’s also one where buyers are not satisfied by what most law firms are selling. And clients are voting with their feet.

The Law Firm Herd Mentality

Law firms have a herd mentality in an age where differentiation and customer satisfaction is paramount. Take for example Cravath’s announcement last year that it was raising associate salaries. The timing was curious since clients were already in open rebellion about excessive law firm bills and fees. Cravath could get away with the pay hike because it is one of about twenty brand-differentiated firms that work on high-value matters where legal fees are inconsequential (read: they can afford it and they really are separated from the herd). But that did not stop about one hundred other large firms from quickly matching—or exceeding—the Cravath benchmark.

And so it is with marketing budgets—many firms are substantially upping them because ‘other firms are doing it.’ But what exactly are firms marketing? What’s the message and how is it really different from a raft of other firms? If you look at a random sampling of large law firm websites you will see common language—‘we partner with our clients;’ ‘we are value driven;’ ‘we have assembled top talent that handle some of the most complex matters;’ and so on. What’s conspicuously absent is any evidence of differentiation—as to expertise, results, efficient use of technology, process/project management, client service, knowledge of clients’ businesses, fee flexibility, etc. Also absent is reference to customer satisfaction and data to back it up. Most firms believe they provide outstanding service. The 2015 Lexis Nexis Bellweather Report highlighted another perception gap between firms and clients– 80% of lawyers responded they’re good at client service while only 40% of clients said they received good service from their lawyers.

Differentiation Requires Soul Searching

Most large firms are undifferentiated. Many engage in the same practice areas; have offices in similar locations around the country or around the globe; have comparable salaries and billing quotas; and have grown through mergers/acquisitions and lack integrated IT systems and cultures. Generally, each firm has one or two departments (practice areas) upon which its reputation is staked and a couple of ‘superstar’ lawyers. For a long time, firms sustained themselves by relationships with particular clients. That still exists, of course, but only so long as results are delivered. That’s why clients, like partners, are peripatetic as never before. Clients are demanding value and efficiency– two outputs the traditional law firm partnership model was not constructed to produce.

Which brings us to that long, hard look in the mirror firms would be wise to take. The question they should ask themselves is: ‘What is it that makes our firm distinct from others, and what services, products, and processes do we offer that cannot be obtained from other sources providing a comparable level of service, results, customer satisfaction, consistency, and value?’ The days of large firms being all things to all clients in all geographies are over.

One of the legal marketplace’s many ironies is that so many firms have joined the ‘bigger is better’ stampede when, in fact, clients want a more specialized, agile, integrated, and process driven legal service provider that excels at what it does and produces consistent, measurable, efficient, and effective business solutions . This is not to say there is not a place for a firm that is bigger and addresses the client concerns exposed by LexisNexis and a slew of other surveys. Of course there is. That is difficult to achieve, however, by a patchwork of acquisitions unaccompanied by integration of technologies, culture, and a slew of other client centric capabilities. To be effective—differentiated—scaled legal providers must have expertise across geographies; integrated IT platforms; the ability to service clients on an enterprise basis; and operate as an extension of the client’s internal as well as outsourced resources. That’s a rarified version of ‘bigger is better’ that most large law firms bear little resemblance to.

Conclusion

Law firms are smart to increase marketing and business development budgets. That investment should start with a frank assessment of how the firm identifies itself in the marketplace and how—if at all–it is differentiated from its peer group. That assessment should be shared with clients and the broader marketplace to prevent a perception gap. There’s little to market if firms don’t confront the causes of client dissatisfaction and demonstrate a commitment to rectify them. That’s the most effective marketing of all.

30Mar 2017

Corporate Departments Are Taking The Lead In Creating A More Diverse Legal Industry

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The legal profession has a dismal record on diversity—especially large law firms. Between 2007 and 2015, there was a decline in the number of black attorneys in big firms. And, per the same study conducted by the Minority Corporate Counsel Association and Vault.com, the number of Asian-American lawyers receiving promotions in 2014 was less than in 2007.

Women, who now comprise about half of the entering US law school population, have fared only slightly better. While the gap in pay disparity between female and male attorneys has narrowed during the past decade, the playing field is not level for them, either. Female attorneys still make only 87% of their male counterparts, and women comprise only 20% of partners at large firms according to ‘The Glass Slipper Report.’ Just 4% of large firms have female managing partners. Why are law firms so behind the societal curve?

Firm Structure And Culture Are Inimical To Diversity

Large law firms share a common organizational structure and performance/reward system. The traditional law firm partnership model is decentralized; each equity partner is a separate profit center—a tent in the bazaar. That militates against adoption of broad initiatives, especially those that disrupt the status quo. The law firm performance/reward system is tipped heavily in favor of business origination, and rainmakers—especially older ones–have no financial incentive to build for the future of the firm. The absence of residual ‘equity’ (as opposed to law firm partner profit sharing mistakenly referred to as ‘equity’) has been one reason why law firms have been so slow to adopt change that threatens its model. Those at the top of the pyramid are running the table, not worrying about the next rack. And while diversity and other shifts in firm culture are no doubt good long-term, firms are disinclined to undertake initiatives they view as dilutive of year-end profit (PPP). Diversity is a long-term investment, and the traditional partnership model is a short-term for all but a handful of elite firms.

True, many firms have launched diversity initiatives. But diversity—like other cultural commitments– is more than a policy to hire candidates from different backgrounds, ethnicities, genders, and sexual preferences. Diversity requires an ongoing organizational resolve to identify high-potential diverse candidates; to provide them with mentorship; to encourage and enable them to acquire a sound understanding of the client’s business, objectives, and risk tolerance; provide them client interaction; and meaningful periodic review intended to drive the individual’s success within and outside the organization. Mentorship takes time and commitment—from mentor and mentee. Bottom line: don’t expect traditional partnership model law firms to become diverse institutions any time soon.

Corporate Legal Departments Reflect Enterprise Commitment To Diversity

Corporations understand that diversity pays many dividends. Corporate legal departments, in turn, have adopted the enterprise commitment to diversity, and that’s a big reason why diversity candidates fare better in large corporate legal departments than in law firms. The delta can be explained by two key differences: (1) enterprise culture; and (2) performance/reward criteria. Corporate America sees the long-term benefits of diversity; law firm leaders tend to take a short-term view due to firm structure. Likewise, in-house lawyers are incentivized to identify, mentor, and promote young talent. Law firm partners—especially older ones—have little incentive to do so. That’s changing because corporate legal departments are insisting outside counsel get serious about diversity.

Diversity In A Buyers’ Market: In-House Counsel Are Pushing Firms

The legal industry is a buyers’ market, and corporate legal departments are exerting leverage on law firms beyond taking more work in-house, exacting steep discounts, and sourcing more work to well-capitalized, tech and process savvy legal service providers with corporate models that more closely resemble their own. They are also insisting that law firms deploy a diverse workforce for their matters. That’s taking on different forms.

Microsoft has adopted a ‘carrot’ approach, offering annual bonuses to its outside law firms intended to increase diversity in partnership and firm leadership roles. Hewlett-Packard (HP) takes a ‘stick’ approach to the diversity issue with its outside law firms. Kim Rivera, HP’s chief legal officer, recently announced the company’s new get-tough-on –diversity policy that applies to all US-based law firms with 10 lawyers or more retained by HP. After a one-year phase-in period, HP will impose up to a 10% hold back of firm fees if certain firm diversity requirements are not met. To comply, firms must have at least one diverse firm relationship partner regularly engaged on billing and staffing issues or at least one woman and one racially/ethnically diverse attorney, each performing or managing at least 10% of hours billed to HP.

MetLife is about to unveil a new diversity initiative with outside counsel, one the corporate legal department has spent the last few years developing internally. MetLife’s ‘Talent Stewardship Initiative’ is largely the creation of Ricardo Anzaldua, the company’s Executive Vice President and General Counsel. Ricardo’s commitment to diversity runs deep, dating from his teenage years in South Texas. During the course of his illustrious legal career, he has rued—and sought to rectify—the legal profession’s lamentable record on diversity. It’s little surprise that he’s a good fit at MetLife, a company where diversity, in his words, “is a part of how we do business.” He has built on that corporate culture by creating the stewardship program—part of a larger, multi-pronged approach to the diversity issue.

The Talent Stewardship Initiative creates sponsor relationships where senior leaders are accountable for providing experience, exposure, training, and leadership guidance to employees with potential for advancement. The program is intended to identify and nurture the professional development of promising young lawyers and compliance professionals, pairing them with senior management who ‘have been in their shoes’—and succeeded providing hands-on guidance. Both sides are vested in the other’s success. Selected participants have no guarantee of staying in the program—they must demonstrate a commitment to succeed with demonstrable results. Their ‘stewards,’ likewise, have ‘leadership skills’ as part of their job description, and their success in the program is one way their leadership is measured. The program is a long-term commitment to the success of the enterprise and an outstanding succession planning tool. It is also has a salutary impact on the legal profession, ensuring that the next generation has more diverse leadership.

Conclusion

At a time when public confidence in lawyers and the legal system has ebbed, a more diverse legal profession is not just an aspiration but also a necessity. It’s unlikely that change will come from law firms—it seldom does. The best hope for a more vibrant, diverse legal industry is that legal consumers like MetLife lead by example—and leverage–to change the industry’s cultural stasis. That will open the leadership doors to a wider pool of worthy candidates better equipped to restore public confidence in lawyers and faith in the legal system.

16Mar 2017

‘Legal Innovation’ Is Not An Oxymoron—It’s Farther Along Than You Think

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The legal industry is known for adherence to precedent, not innovation. While precedent remains a guiding principle in the practice of law, innovation is transforming the models, methods, and players involved in the buy/sell process of legal services. Technology, process, access to institutional capital, re-reregulation, client demand for enhanced value, and changes in other professional service industry delivery models—notably medicine and accounting– are legal innovation’s principal drivers.

Legal innovation has lagged compared with other industries. Law’s Uber has yet to pull up to the curb. But that does not mean that the breadth, scope, and pace of legal delivery innovation has not picked up in recent years. Consider, for example, that in-house corporate departments and legal service providers (read: legal providers that do not ‘engage in the practice of law’ but deliver ‘legal services’) now account for nearly half of total legal spend. The rapid growth of these new supply sources—and their tech and process savvy delivery capability and corporate structures that are better aligned with client standard operating procedure—is a paradigmatic shift away from the long-dominant law firm partnership model. So while no dominant provider has emerged to replace traditional law firms, it’s clear that the search for new delivery models is well underway and yielding an ever-expanding array of client options.

BigLaw partners still rake in princely sums, and entry-level lawyers at their firms earn a lavish lunch less than $200K, but that hardly supports the case that the traditional law firm model is alive and well. Consider the shift in buying practices among corporate clients and the delta between overall legal demand and flat demand for law firm services during the past five years. Then note the shrinking number of equity partners, the smaller classes of incoming associates and the overall declining percentage that large firm lawyers represent in the overall legal population. This is the fallout from changing customer expectations and their internal steps—as well as the growth of well-funded providers—to fill the void being created by buyer migration from the traditional law firm partnership model.

Let’s consider for a moment ‘disruptive innovation,’ the oft-misapplied term coined by Clayton Christensen to describe a paradigmatic industry shift. Professor Christensen’s theory posits that change takes hold in the lower end of a market, introducing new customers into the marketplace by creating ease of access, lower cost, and greater efficiency. That’s precisely what is happening in the retail segment of the legal industry.

LegalZoom, a legal technology company that now has over 3 million customers—and sky-high approval ratings– is successfully using technology to improve access, promote efficiency, and reduce the cost of legal services. They are also bringing new customers into the market. The company is also creating a template for how, when, and for what service level lawyers are required for different tasks and functions. LegalZoom is pioneering levels of lawyer touch-point determined by the value assigned by the customer, not the provider. This ranges from self-serve (standardized documents); to limited access (short online chats with lawyers or calls on a fixed fee basis); to full-blown engagements (with approved panel counsel). This approach is a paradigm shift worthy of the ‘disruptive innovation’ moniker. More importantly, it is one that will migrate to more complex matters in the corporate segment of the legal market. The question will be: who and what is the appropriate resource to deploy for a specific task—or matter– based upon its value to the client?

Corporate clients are already engaged in this process—a paradigm shift—in a number of ways: (1) an increasing willingness to procure services from providers with delivery models different than the traditional law firm partnership model; (2) taking more work in-house; (3) sourcing work—either internally or externally—to providers that are better aligned than law firms with the company’s risk tolerance and enterprise objectives; (4) utilizing technology, process, and ‘the right person for the right task’ to promote efficiency, mitigate risk, and reduce cost; and (5) rejecting the longstanding myth that only law firms—and lawyers—must perform all ‘legal’ tasks. Legal problems are increasingly viewed as business challenges raising legal issues.

Why have law firms not taken more aggressive steps to protect their once-dominant market dominance? There are several reasons: (1) there was little need to innovate until the global financial crisis of 2008 changed the way business is conducted—even law; (2) law firm senior partners lack the financial incentive to invest in the firm’s future because their ‘equity’ is not residual; (3) law firms were able to prop up profits by internal cost-cutting measures rather than client-centric innovation—no more; (4) law firms were able to prop up profits by internal cost-cutting measures rather than client-centric innovation—no more; (5) firms lack the investment capital to make long-term investments in innovation and there is a generational/economic divide between older and younger partners; (6) rather than innovate, firms have tried to ‘reinvent’ their brands by merger. This is neither innovation nor is it a generally a winning formula based upon a recent study conducted by ALM Intelligence

Law’s Uber moment has yet to occur, but there is a wealth of evidence that innovation is driving change—in the buy/sell dynamic; in client expectations; in the more widespread and effective deployment of technology and process in legal delivery; in the tasks that lawyers perform and for whom they are employed/managed; in the price sensitivity for all but the highest-value tasks and matters; and for the melding of legal, technological, process, and collaborative skills required to deliver legal services. And while a handful of law firms—Seyfarth and Allen&Overy are two prominent examples—are traditional model outliers that have engaged in real innovation in service delivery, the bulk of the innovation has come from corporate legal departments and elite legal service providers. Is it any wonder, then, that these two groups now account for almost half of total legal spend?

Big money is eying—and investing in– the legal vertical because of its immense size and disruption potential. Legal technology companies are proliferating; artificial intelligence is already part of the legal landscape—just last week a UK insurance company teamed with an ABS legal service provider to role out an AI-powered app to answer coverage questions for policyholders; and global legal service providers like Axiom and UnitedLex, among others, have global footprints and nine-figure revenues. Most importantly, consumers are embracing delivery options different than the traditional partnership model. This will stoke the innovation fire already ablaze in the legal industry.

Conclusion

The pace of innovation in legal delivery will continue to accelerate during the next few years. And while many envision disruption in binary terms–law firm vs. service provider; AI vs. lawyer; insource vs. outsource—it’s more nuanced than that. Disruption in legal delivery will not be a ‘one-size-fits-all’ approach. Clients assign different values to different tasks, functions, matters, and portfolios. Value is derived from context. For example, a product liability case is nuisance value if it’s a one-off but high value if it could give rise to a multiplicity of similar actions.

The value of a matter drives the election of resources most appropriate to meeting the client’s objective. The disruptive legal delivery model will be one that provides a scalable array of solution tools—human and technological; legal and business; embedded and agile– that produce efficient, cost-effective, and risk-appropriate resolutions to client challenges. That’s precisely what top lawyers have always delivered and it will be the winning formula going forward.

This post was originally published on Forbes.com.

9Mar 2017

Alexius forms franchise financing affiliate.

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Alexius forms franchise financing affiliate, Frescoe

Alexius, LLC, a Denver-based managed legal services company which serves numerous brands within the franchise community, is pleased to announce the formation of its affiliate, Frescoe, LLC (“Frescoe”).

Frescoe will provide two unique services to the franchise community: (1) it will facilitate the creation and management of impound accounts for franchisors requiring some form of financial assurance in order to secure franchise registration in the states of California, Illinois, Maryland, Minnesota, New York, Virginia, and Washington; and (2) it will provide competitively priced escrow services for franchise companies engaged in the sale or acquisition of company-owned stores and other mergers and acquisitions activity.

Each of the aforementioned registration states can require franchisors to deposit all initial franchise fees due to the franchisor into a restricted account in a bank located in that particular registration state. The funds from these accounts cannot be released until the franchisor has substantially completed all of its pre-opening obligations and the franchisee is ready to open for business.

Despite the restricted nature of these accounts, impound accounts are advantageous to the franchisor and its franchisees. For the franchisor, this approach ensures that the funds from the initial franchise fees are immediately available to the franchisor when the franchisee is ready to open for business. At the same time, this approach benefits franchisees by preventing undercapitalized franchisors from having the ability to unwisely spend the franchisees’ initial franchise fees before they have provided their franchisees with all of the initial services they require to successfully open and operate their franchises.

Frescoe has priced its services in a manner that will make opening these accounts more affordable than securing a performance bond or working directly with the escrow department of a bank in these registration states.   Furthermore, the fee paid to open and manage an impound account will be minimal in comparison to the risks incurred by a franchisor who chooses to defer collection of the initial franchise fee and hopes that the franchisee will still be able to pay the initial franchise fee when it opens for business.

“We have watched our clients struggle for years with financial assurance requirements,” said Frescoe’s President, Kevin Hein. “First, many small and emerging franchisors do not have access to additional capital or affiliated entities that can provide guarantees. Second, performance bonds can cost many thousands of dollars on an annual basis, must be paid for in full as a condition of registration (even if the franchisor has no actual franchise prospects in the given state), and are often not available in some of these states. Third, when a franchisors choose to defer initial franchise fees and other start-up fees, they often find that the money to pay these fees is no longer available when the franchisees are ready to open the location for business. For these reasons, we are pleased to be able to offer a reasonably priced solution that provides the ultimate in security for the franchisor and its franchisees in these states.”

As of the date of this press release, Frescoe has secured a banking relationship in California and is now offering impound services in California. Frescoe’s management team anticipates the company will be able to offer impound services in the remaining six aforementioned registration states by the end of the first quarter in 2018.

2Mar 2017

Legal Education’s Other Challenge: Retraining Practicing Lawyers For A New Marketplace

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Legal education has received a great deal of criticism in recent years—cost, student debt burden, declining enrollment and selectivity, a baffling building boom, graduates that are neither practice nor market ready, dismal job statistics, etc. What has been largely overlooked in the legal education discussion is the plight of a far larger segment of the legal ecosystem– practicing lawyers.

It’s A Whole New Ballgame

Lawyers are toiling in an industry that has been overhauled by a perfect storm of change agents– the global financial crisis of 2008 and its fallout; client dissatisfaction with existing delivery models; the escalating role of technology and process management in legal delivery-often referred to as ‘disaggregation’; an influx of legal service providers and the growth of in-house legal departments (read: law firm competition); and the creation of new delivery models. How will practicing lawyers receive the (re)-training necessary to survive—much less to thrive—in the new legal delivery order?

Most practicing lawyers were prepared for a legal marketplace that is vanishing. Their law school experience was steeped in doctrinal learning and, perhaps, a dollop of ‘real life’ exposure via clinics. And while that was just fine as recently as a decade ago, it’s not now. Legal delivery, once synonymous with the practice of law, is now a three-legged stool comprised of legal, technological, and process expertise. The vast majority of practicing attorneys have had little or no preparation for navigating the impact of technology and process/project management on legal delivery. Nor have they learned about collaboration, leadership, financial fluency, or other skills at law school or on the job where they are consumed by billing hours and making a living. That’s why practitioner re-education must be a part of the legal education reform discussion. It’s not just law students who must be educated for the new legal marketplace and where it’s headed; it’s practicing lawyers, too.

The Alignment of Law Schools and Law Firms

Law schools have had a long, symbiotic relationship with law firms. The Academy was a conveyer belt for graduates’ passage to firms. Young lawyers acquired practice skills on the job, and clients absorbed the training cost. The traditional law school curriculum was doctrinal and remained relatively unchanged for decades. Law firms, likewise, did little to change their structures or delivery models because there was no pressure to do so.

The closing decades of the twentieth century and the early part of the new millennium were boom times for law schools and firms. Law firms grew and expanded their geographic footprint to service the needs of their clients, and this played well with their pyramidal structure. Likewise, law school enrollment swelled as demand for lawyers increased. This meant that law schools—especially highly ranked ones—became even more selective and profitable. A spate of new ones appeared and had little difficulty filling seats. Law schools and law firms had a good, long run.

The bull market for the Academy and firms has ended. Law firms have lost their stranglehold on market share because of high cost, inefficient delivery, a model misaligned with client expectations, and a generally slow, ineffective adoption of technology and process management. This has resulted in the rapid rise of corporate legal departments and legal service providers that have reduced legal cost, promoted efficiency, and introduced new delivery models and structures that meld legal, technological, and process expertise. The new delivery paradigm also includes a better understanding of the client’s business, risk tolerance, and notion of value. Corporate legal departments and service providers now account for nearly half of total legal spend, and the trend lines point to their continued growth at the expense of law firms. Demand for law firms has been flat for years even as overall demand for legal service has continued to rise. The delta can be explained by the new delivery paradigm that identifies legal knowledge as one of a number of elements in tackling business challenges.

Fallout For Law Schools

Shifts in the marketplace have taken their toll on law schools, most of whom still train students as if law firms are the only game in town. The Academy has been slow to recast its curriculum to prepare students to work in a new legal delivery model that expects lawyers not only to have legal skills but also to be conversant in IT, process, financial fluency, leadership and collaboration. Worse still for law schools—and more so for students—law firms are shrinking incoming classes since clients no longer subsidize associate training and assign that work to sources other than law firms.

Employers want law graduates that are practice and market ready so they can ‘hit the ground running.’ The American Bar Association (ABA) has recently directed law schools to augment the curriculum to include experience-based learning (e.g. hands-on training) as well as courses on technology. This is a first step towards aligning law school training with the changing demands and expectations of the marketplace. Another helpful move would be for law schools to tap into the resources of the University and to promote inter-disciplinary training for law students with business, technology, communications, and other professional schools.

But what about practicing lawyers who find themselves in a rapidly changing marketplace that demands new skills they do not have?

The Case For Legal Re-education

Lawyers in the middle-and later stages of their careers anticipated a secure, predictable career that no longer exists for all but a handful of rainmakers and practice experts. They were trained to ‘know the law’ on the assumption that was all lawyers needed to succeed. That no longer cuts it. So how do practicing lawyers acquire key competencies such as understanding of how technology/AI is applied in legal delivery; project and process management; collaborative skills; and financial fluency to cite a few? Continuing legal education (CLE) is a start, but it is often more of a box-checking exercise to maintain licensure than a comprehensive professional re-education.

What’s needed is a more intensive, granular, training for practitioners—an executive education boot camp that provides: (1) context for how and why new skill sets are required; (2) an overview of what those skills are and their key elements; (3) hands-on/experiential exercises supervised by experts; (4) lessons learned/reflection; (5) a synthesis of how these skills play into new legal delivery models; and (6) discussion of where “alt-law firm” opportunities lie.

Some Suggestions for Cost-Effective, Efficient Delivery of Legal Re-Education

Legal re-education can be delivered in a number of cost-effective ways. One is via the creation of executive training programs that are administered either at law schools, for-profit institutions, or the ABA and other public interest organizations. Cost could be kept to a minimum by the efficient use of technology– MOOCS, webinars, etc.– and by enlisting faculty who regard teaching as a way of ‘giving back.’ Law schools could play a key role, drawing from the resources of the University—collaborating with business, technology, economics, and other schools to offer a more integrated, holistic approach to legal delivery for undergraduates and practicing lawyers alike.

LawWithoutWalls (LWOW) provides an outstanding example of a collaborative, holistic approach to contemporary legal education that draws from multiple sources within and without the legal ecosystem. LWOW is a multi-disciplinary think tank and training ground operating at the intersection of law, business and technology. It connects the different players in these areas and creates an integrated global environment in which participants engage in hands-on projects to promote innovation in legal delivery. LWOW’s focus is to prepare law students to become ‘change agents that are transforming the way lawyers and business professionals partner to solve problems.’ Its enlightened methodology, pedagogy, leadership, and resources could be leveraged as a paradigm to re-train practicing lawyers and, in so doing, benefit clients and the general public.

Law schools could work with alumnae to subsidize the cost of executive training courses and to promote goodwill. The Academy could also forge partnerships with corporate legal departments, law firms, leading service providers, and the public sector to promote and support these programs. A re-trained legal workforce would not only advance the efforts of participants but it would also serve many broader social objectives including ameliorating the access to justice crisis. It is in society’s best interest to have a modernized legal workforce that can better serve individual clients and the public at large.

Conclusion

 Legal re-education is important not only to the hundreds of thousands of lawyers ‘no longer at ease here, in the old dispensation’ but also to society. An au courant workforce would enable lawyers to apply their skills to maximum advantage for the benefit of individual clients as well as the greater good. That’s a solid investment.

14Feb 2017

Franchisors Beware: New Accounting Rules Will Significantly Impact Revenue Recognition, Creating Great Risk for Your Business Model

SRA Accounts Rules software & service support for law firms

In a little noticed change to the generally accepted accounting principles formally approved a year ago

this week, the Financial Accounting Standards Board and the International Accounting Standards Board

jointly issued ASC 606, Revenue from Contracts with Customers: Identifying Performance Obligations and

Licensing (Topic 606), also known as ASU 2104-9. ASC 606 provides new guidance for franchisors and

their auditors, requiring them to evaluate the services the franchisor provides for the initial franchise

fees and multi-unit development fees more carefully. This will affect how revenue can be recognized on

the audited financial statements disclosed in their franchise disclosure documents. This rule change will

become effective for audited financial statements issued after December 15, 2017 for publicly traded

companies and for audited financial statements issued after December 15, 2018 for all other franchisors.

The net effect of the new interpretation is that most franchisors will be required to recognize a

significant portion of the revenue generated from the payment of initial franchise fees and multi-unit

development fees over the life of the franchise agreement or the multi-unit development agreement,

rather than recognizing the revenue in the year in which the first franchised location opens for business.

For many franchisors, the revenue reduction could be quite dramatic. For example, if the term of the

franchise agreement is ten years, the first-year revenue from each franchise sale could be reduced by as

much as ninety percent. In the case of multi-unit development agreements, the franchisor will now be

required to recognize the development fee revenue as each location opens, rather than the day the first

franchised location opens under the terms of the multi-unit agreement.

This new interpretation of the revenue recognition rule will have several significant impacts on

franchisors. First, it will dramatically reduce the financial statement income that a franchisor will be able

to report from initial franchise sales in first year, while at the same time increasing short-term and long-

term future liabilities on the balance sheet. This could effectively reduce or eliminate the profitability of

most growing franchise systems that rely on franchise sales for a significant portion of their revenue

during any calendar year. This could potentially make such franchise systems less attractive to

prospective franchisees and current franchisees looking to expand.

In addition to the reduction in revenue, the resulting increases in short-term and long-term liabilities will

materially impact the franchisor’s balance sheet. In many cases, this could lead some registration states

to impose financial assurance requirements on more franchisors seeking franchise initial registration or

renewal. Depending upon the financial assurance option chosen by the franchisor, these requirements

can significantly increase operating costs or deprive emerging and high-growth franchisors of the

franchise fee payments they need to continue to grow and support the franchise system.

Finally, once a franchisor adopts this accounting approach, auditors will likely require that the franchisor

restate its financial statements for the prior two years. In many cases, these restated financial

statements will make the franchisor look financially weaker. This could open the door for franchisees

who are unhappy with their relationship to sue franchisors for rescission of their franchise agreements

under the theory that they were misled about the state of the franchisor’s financial position. This could

give any franchisee who purchased a franchise during the two-year period prior to the adoption of the

new accounting rule with a “get out of jail” free card merely based on the change to the accounting rule.

Most franchisors are now in the midst of their 2016 audits. However, it is not too early for franchisors

to begin discussions with their auditors and legal advisors regarding the implications of this rule in the

coming years. It is critical that franchisors seek the advice of accountants, attorneys and other advisors

who understand the interplay between this new interpretation and the way these new rules will play

out in the real world. By analyzing the way in which the revenue is defined and described in the

franchise agreement and the multi-unit agreement carefully, it may be possible to reduce the impact of

this new rule on the franchisor’s revenue. But franchisors cannot afford to ignore this development or

“kick the can down the road.” The new implementation deadlines are right around the corner.

By: William A. Hoppe, CPA

Kevin P. Hein, Esq.

Alexius, LLC

February 13, 2017

9Feb 2017

The 2017 Georgetown Report And The Sunset Of The Traditional Law Firm Model

Traditional-Law-Firm-Model-300x200

The Center for the Study of the Legal Profession at Georgetown University Law Center and Thomson Reuters Legal Executive Institute recently released their 2017 Report on the State of the Legal Industry. ‘The Georgetown Report,’ as it’s commonly referred to, confirms that corporate legal buyers are directing more work away from large law firms, electing to take it in-house or to legal service providers (read: alternatives sources to the traditional law firm partnership model). The Report provides a broad range of data confirming weaknesses in the traditional model: flat demand for law firm services in a market with growing demand; shrinking leverage (one of the cornerstones of the BigLaw model); reduced realization; intense competition; and the failure of most law firms to innovate in a market demanding it. The Report also cites growing market segmentation among law firms with about 20 pulling away from the pack once collectively called ‘the AmLaw 200’ and later ‘AmLaw 100.’  It also notes that clients are increasingly  sending work “down market” to smaller firms with specific expertise and lower rates.

The Report’s headline grabber is ‘the death of traditional billable hour pricing’ over the past decade and ‘the widespread client insistence on budgets (with caps) for both transactional and litigation matters.’ This conclusion overlooks an even bigger item– many of those matters are no longer assigned to law firms in the first instance. Example: Shell Oil has formed a global in-house litigation team for the bulk of the company’s largest litigation cases and recently handled a  multi-billion dollar corporate portfolio divesture in-house.

The eye-popping profit-per-partner (PPP) numbers that persist for many firms—something not specifically mentioned in the Georgetown Report– create a false-positive image of their fiscal health. High PPP has been achieved principally by internal cost slashing including staff cuts, reducing real estate overhead, and other measures. It also involves thinning the equity ranks and jettisoning ‘service’ partners who are highly valuable to clients but a potential drag on PPP. The Report notes that firm internal cost cutting has gone as far as it can go, suggesting that PPP at most firms will begin to dip. That will only fuel the lateral frenzy and add to the long-term instability of most firms. PPP was long the glue that bound firms together. Now, it is a vulnerability for all but the fiscally strongest in a Darwinian ‘survival of the fittest’ marketplace.

The Georgetown Report also cites, ‘erosion of the traditional law firm franchise,’ a euphemism for ‘clients no longer need large law firms to handle many legal tasks.’ Erosion of leverage–equity partners atop a pyramid of other lawyers billing lots of hours at high and non-discounted rates, and ‘market segmentation’—a few elite firms distancing themselves from the pack– are additional trends cited by the Report and supported by its data. The inescapable conclusion is that most large firms are confronting an existential crisis that demands an aggressive response lest they experience a collective ‘Kodak moment.’ So far, most firms have been at best reactive and at worst static to the rapidly changing market. That’s one reason why in-house legal departments and service providers now account for nearly half of total legal spend.

 There’s More to It Than That

There are other, more fundamental and systemic reasons why legal buyers are turning away from traditional law firms. For a long time, firms monopolized the supply side of legal expertise when that was the only element of legal delivery. Consumers effectively had no viable, scalable, and ‘safe’ alternative supply sources. Also, legal fees were a trifling line item on the corporate budget. That’s changed, of course– especially during the past decade. Legal delivery is now a three-legged stool supported by legal, IT, and process expertise. Law firms remain strong on legal expertise but that’s just part of the equation. Plus, the dramatic rise in their cost has far outpaced other goods and services at a time when legal expense—like virtually every other line item—is closely scrutinized in a business climate that demands ‘better, faster, cheaper.’ And consider that the urban myth that ‘work performed by law firms is bespoke’ has been debunked. Disaggregation—the creation of a legal supply chain—is now standard fare as buyers commonly engage more than one source for individual matters or portfolios that were once handled start-to-finish by law firms.

Corporate legal departments and service providers have stepped in to fill the law firm vacuum. They tend to be more innovative than law firms, utilizing technology and process far more effectively than firms that remain loathe to provide a meaningful seat at the management to anyone but (rainmaker) lawyers. Corporate legal departments and service providers, in contrast, commonly function as corporations, not fiefdoms. Their DNA more closely resembles clients than law firms do, and they accord technologists, process experts, and others essential to the legal delivery commensurate status and rewards.

There are several other systemic challenges confronting traditional law firms–minimal capital invested in research and development; an economic model that rewards inefficiency more than efficiency; limited understanding of the increasingly complex business of multinational clients—especially contrasted with in-house counsel; and a failure to appreciate that “legal” problems are—from the client perspective—“business challenges”

Why Don’t Law Firms Retrofit Their Model? 

 The Georgetown data confirms that the traditional law firm model no longer dominates the legal marketplace, nor does it align well with its direction. This begs the question: ‘why don’t firms retrofit their model?’ Simple answer: there exists an economic conflict between aging equity partners ‘running the table’ and the next generation that is beginning to appreciate its vulnerability. Translation: don’t expect the old guard at law firms to morph into innovators, especially where to do so would require them to be the largest investors in a model with no residual equity. The absence of real residual equity value at law firms is yet another nail in its coffin. Contrast this, for example, with senior in-house counsel that have a very significant financial interest in the long-term success of the enterprise—even after they retire.

In-House Legal Departments and Service Providers Have Limitations, Too

In-house legal departments are more palliative than cure for the vacuum left by law firms. While they continue to expand in size, influence, and portfolios, their cost is rapidly escalating, too. There is also an inherent conflict in the dual role in-house counsel is asked to serve—defenders as well as business partners of the company. This is not to say that equipoise cannot be achieved, but there is risk, too. Outside counsel can serve a valuable role in mitigating this potential risk factor–but there is no longer need for the entire traditional firm model to achieve this. Firm lawyers can be cherry picked to serve this purpose.

Likewise, service providers bring a great deal to the table, but they too have limitations—especially in the U.S. where the current regulatory scheme prohibits joint ownership between lawyers and anyone other than lawyers. Service providers, on their own, cannot ‘engage in the practice of law’ even though they perform many of the same functions as law firms. Apart from U.S. regulatory hurdles—for which there are workarounds—is the ‘stigma’ many top lawyers feel for taking their talents anywhere other than law firms, corporate legal departments,  government, or public interest groups . This will change over time, but it’s a tough sell for legal service providers to attract elite legal talent to complement their IT, process, and stable of other experts that are the ingredients in the legal delivery stew.

Wanted: A Safe, Scalable, Cost-Effective and Integrated Delivery Model 

What’s missing in the current legal landscape is a safe, scalable, cost-effective, legal delivery model that integrates the legal supply chain. There are many different structures and models that would accomplish this objective– the most likely being a Clearspire ‘two company model’ where a law firm enters into a bundled services agreement with a legal service provider. Another iteration might involve a corporate legal department breaking off and rebranding itself as a law firm that is pared with legal operations capability, either in-house or via an established outside service provider. Additional elite legal talent would be readily available because there will soon be a diaspora of lawyers looking for a new model and a new home that aligns better with their interests as well as their clients’.

Conclusion

The Georgetown Report confirms where the market is. The more interesting question is where it’s headed. Doubtless, new delivery models will soon appear that better align the interests of the three principal stakeholders in legal delivery: (1) lawyers, paraprofessionals, and other experts that perform the work; (2) the delivery entity that bundles it; and (3) clients. My bet is that a new legal delivery paradigm will emerge that will transform the fraying legal guild into a 21st century model that will benefit clients, lawyers, and society. Stay tuned….

This post was originally featured on Forbes.com.

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