Law is Big Business

Law is Big Business

Over the past 30 years or so, the practice of law transformed from a genteel profession to big business. Lawyers became profit centers; law firms grew and consolidated; technological advances sped up and commoditized the work; competition increased; loyalty between lawyers and law firms and between law firms and clients decreased; and more nonlawyer professionals took on management roles in law firms, furthering the trend toward law as business. These rapidly accelerating changes in the legal marketplace ­affect lawyers at all levels now and in the future. To successfully chart the course of your career, you need to be aware of these dynamics when you make your plan and continue to monitor them in order to adjust your strategy as needed.

In 2012, American Lawyer published its 25th annual AmLaw100 list. Despite what it referred to as “three decades of convulsive change,” 24 of the top 25 firms on the initial list in 1978 still do well. Of the remaining 175 firms on that first list, 46 no longer exist, 30 dissolved and 16 disappeared via merger. In 1978, the average size of the top 100 firms was 103 lawyers, with only 13 percent of them officed outside of firm headquarters. Today, 22 US-based firms have more than 1000 lawyers, and the average size of the National Law Journal’s NLJ250 is 505 lawyers. Despite these numbers, it’s not been smooth sailing for the legal profession.

The legal marketplace boomed in the mid-2000’s but crashed along with the national economy in 2008, and spent the next several years in the doldrums. When the first edition of this book went to press in 2006, there was a strong market for legal services with revenues growing twice as fast as the US Gross National Product. In 2004, law firm revenues were about $200 billion, and law firm leaders were confident about future prospects. According to a 2005 survey of leaders of the AmLaw200, the American Lawyer magazine’s listing of the 200 top-grossing law firms, 88 percent expected their revenues to increase by more than 6 percent over the next year — the fourth straight year of such growth. Ninety percent expected to raise their billing rates, and 73 percent expected their profits per partner to increase. Two-thirds of the large firm leaders surveyed expected to open a new office or dramatically expand an existing office the next year, with 22 percent looking to expand abroad. Twenty-six percent were actively seeking a merger partner.

The picture looks dramatically different as this edition goes to press in 2013. Although legal services revenue grew to $245 billion, the Hildebrandt Institute/Citi 2012 Client Advisory described the overall economic prospects as “uncertain.” From 2007 to 2010, law firm performance suffered stark declines in revenue, demand, and profits per equity partner. Hildebrandt Institute’s Peer Monitor Economic Index warned that 2012 could be one of the most challenging years in recent memory for law firms with flat demand, continued pricing pressures, and rising costs.

The financial crisis of 2008 was a catalyst for major changes in the US legal marketplace. To survive the Great Recession, law firms took drastic measures such as cutting thousands of associates, deequitizing partners, slashing budgets, and adding very few new hires. All sectors of the market, including large law firms, boutiques, and solo practitioners, experienced slow market growth, which intensified competition and cut profit margins. Law students found increasingly limited job opportunities, especially in the big firms, and all associates’ career paths narrowed as firms fought to maintain high profits per equity partner by keeping traditional leverage low. Clients increasingly refused to pay for junior associates to learn on the job. They demanded the same high quality legal work but pressured lawyers for lower fees, giving rise to a variety of tech-savvy legal services providers as further competition for the traditional law firm. Law firms continue to struggle to meet client demands for cost control, budget predictability, and value while maintaining profitability.

Most of the revenue expansion in the years immediately before the economic meltdown was achieved through billing rate hikes at double the rate of inflation, and increased billable hours per existing lawyer, rather than by hiring additional lawyers. After 2008, clients protested continued billing rate hikes and large corporations led the push for alternative billing methods while competition for their work intensified. In the past, lawyers often got their business either through institutional firm clients or personal relationships and referrals. Now, more clients utilize the Request for Proposals (RFP) process, conducting “beauty contests” where several law firms vie for their work. Several big companies, including GlaxoSmithKline PLC, eBay Inc., Toyota Motor Corp. and Sun Microsystems, use reverse auctions or competitive bidding to pressure law firms to lower their prices, especially on high-volume, commoditized work such as tax filings and intellectual-property transactions. Many lawyers now worry these auction-based pricing strategies will spread to more complex projects.
Besides expertise and competitive billing rates, in-house counsel consider the gender and racial diversity of lawyers proposed to handle their work, and ask firms to disclose whether the partners handling their matters have equity or nonequity status because they want to know the value of services received. Furthermore, in-house counsel often “unbundle” their legal work, assigning discrete tasks to the cheapest and most efficient provider.

This competition for legal business also led to an emphasis on public relations, marketing, and advertising, areas that in the past were looked down upon by lawyers and, in fact, were strictly regulated. Now, virtually every law firm of any size has a website and the larger ones have engaged in branding and full-fledged advertising campaigns, ­complete with glossy magazine spreads. Lawyers write blogs, and firms ask you to “like” them on Facebook and “follow” them on LinkedIn and Twitter. This is yet another way the legal profession has become more like big business.

Achieving equity partnership in a US law firms now takes longer and is more difficult than in the past. Associates are thought of less as potential partners than as individual profit centers. They now are fungible commodities with a concomitant reduction in loyalty between associate and law firm. Today, associates don’t expect, or perhaps even want, to make partner. Nor do they stay long enough to find out if they will get the nod, with approximately 80 percent of them leaving before partnership consideration. They choose their first jobs to get early training, hands-on experience, and big salaries to pay down their educational loans, and then figure out what they want to do with the rest of their careers.

Similarly, senior lawyers evolved from partners for life to revenue-generating units who can be deequitized at will. They move from firm to firm to maximize their business development potential and individual earning power. Today, as many as half of partners in some of the top law firms are lateral hires rather than home-grown. These trends accelerated during the recession and now are well entrenched.

Another big business trend is the increasing role of nonlawyer executive leadership in law firms.
Growth in size led many firms to move away from the inefficient and largely ineffective management-by-consensus professional partnership model toward a more business-oriented approach with a small elected management or executive committee making most decisions. Most major law firms emphasize the role of the managing partner to the point where it is almost a full-time job, leaving little time for the practice of law. Increasingly, those lawyers in management positions turn to professional staff rather than to their partners for assistance. Many law firms hired Chief Operating, Financial, and Marketing Officers. One result of bringing in C-level staff from the business world is the increasing adoption by law firms of such corporate best practices as benchmarking, TQM (total quality management) or Six Sigma methodologies, and strategic planning.

Law firm organization transformed as well. Many firms moved away from the traditional partnership model and ­instead are corporations, limited liability companies, limited ­liability partnerships, and the like. These entities allow for more tax benefits, increased protection from liability, and more flexibility. Furthermore, some firms transitioned from practice groups to multi-practice, industry-based teams to better attract and serve clients in a quest for faster responsiveness to clients and market forces.

As law firms become more bottom-line oriented, their training programs for all levels of lawyers, and even for nonlegal staff, now include programs not only on delivering quality legal services but also on how to be good businesspeople, including management, leadership, and marketing. In fact, several large firms partnered with top business schools such as Harvard, Philadelphia’s Wharton School, and Northwestern University’s Kellogg School of Management to create law firm management training programs for their partners, especially those in management roles, and for associates who show management potential. Although these management training programs are expensive to implement and firms “lose” the hours their lawyers could be billing to ­clients rather than attending courses, they see this investment in training as critical to future growth and success.

Valerie Fontaine
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