Lawyers, Law Firms and Exceptionalism

Commiserating on the demise of giant Canadian law firm Heenan Blaikie in a Letter to the Editor to The Globe and Mail of February 7, 2014, retired lawyer Stephen Barker took issue with referring to the legal profession as the “law industry.” He adds that most “industries” have low standards of public service. 

This is not new news. The law industry, is in fact, an industry; every industry has its own peculiarities.

More importantly, every industry is subject to the laws of economics (laws of supply and demand, market cycles), competition (and competitiveness), and the 4-stage marketing cycle. The fourth stage is: market saturation (also called market decline in marketing speak).

For decades, lawyers and law firms, especially the Bay Street mega-firms, have believed that they are special. Exceptional. Unique. Even mystical. This is exceptionalism and it is not serving the law industry well.

With our collective adoration of Apple, everyone with enough money or credit now has an iPod, iPhone, and iPad. That’s why the analysts are nervously awaiting the next iWhatever.

But whereas other industries such as manufacturing and retail went through plant closings and massive job losses in the 1990s and 2000s, the legal industry remained largely insulated. Let’s just say they had a longer ride than most industries.

This change has been coming since 1990 when lawyers were first permitted to advertise their services. In my early days at McCarthy Tetrault as director of marketing and communications, lawyers kept correcting me: the polite term was “business development” as opposed to the more crass “marketing.”

In 1993, we had a protracted debate about the content of an ad we intended to place in The National Post Magazine. I suggested that it would be a wise move to thank the firm’s blue-chip clients for giving us work. Given my change management background, this was a no-brainer to me. Publicly thanking clients goes a long way to cementing business relationships.

Yet the reaction of many was: “Thank our clients? Why is this necessary?” That was exceptionalism speaking.

The answer: “Because those clients could give the work to another firm.” In law firms, it’s always about who is willing to give you the work.

According to both The Globe and Mail and The National Post, Heenan Blaikie was a profitable firm, but it was not profitable enough for some. A profit of $75 million for 2013 to divide among 200-odd partners still meant that some partners faced a 15% pay cut. And left for greener pastures at other firms. When it comes to salary, lawyers are über-competitive.

A decade later, I was at giant accounting firm KPMG during the demise of Enron and Arthur Anderson, and the subsequent re-regulation of the accounting industry in the wake of Sarbanes-Oxley.

There are more similarities than differences between the law industry and the accounting industry. Here are some lessons from the accounting industry that Canada’s law industry may want to chew on:

  1. There are four giant accounting firms in Canada: Deloitte, E&Y, KPMG, and PWC. However, there are 25 national law firms, chasing the same lucrative corporate work that typically follows the ebb-and-flow of the economic cycle. In accounting firms, the overheads are so high that even the Big Four cannot afford to serve mid-market companies; they can only serve ROB 1000 companies and multi-nationals.
  2. After the re-regulation of Sarbanes-Oxley in the accounting industry, firms had to choose only one of tax, audit, or financial advisory work that they would performed for any one client. This was done to avoid conflicts of interest. However, in large law firms, the problem of conflicts goes to the other extreme—and frequently gets in the way of trying to grab marketshare away from other firms. I have known several partners who have left large law firms to set up boutique firms because they were conflicted out of work that they had been chasing, sometimes for as long as a decade. In the meantime, they were still responsible for billing 1,800 hours annually.
  3. The partner-to-associate ratio at Heenan Blaikie was almost 1:1 (217 partners to 238 associates, according to one report). At KPMG, it was between 4 or 5 associates to one partner; over at PWC, it was about 7 or 8 associates to one partner. The higher associate ratio helped to cover overhead, training, and topping up the pension fund. 
  4. After the demise of Heenan Blaikie, is law firm management at other firms proactive enough to see what changes need to be made now? And, make those changes promptly?
  5. Law schools need to teach courses about business, marketing, finance, operations, HR, and so on. In future, many lawyers will have to start their own boutique firms, or change careers to deal with the glut of lawyers. Young lawyers deserve to be prepared for a vastly different future, which is already on our doorstep. 
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Comments

  1. Jana,
    You are a person after my own heart. I am an accountant who now works with small law firms to help them build better practices.
    While you are talking about much bigger firms than I deal with, in this article, the principles are exactly the same.
    The partner associate ratio at Heenan’s was way too low and it would be one of the reasons why they were making poor profits. No surprise that the practice fell apart.
    I think I read they were making about $345K per partner. A partner in a bigger firm generally wouldn’t bother to get out of bed to make profits like that.
    My observations of the profession, is that if you want to make really good profits as a partner in a law firm, you become a partner in a big firm, or a small firm.
    ( Heenan’s if they were in Australia with 200 partners, would be classed as a big firm but there are exceptions to all rules)
    The mid sized practices ($5mill to say $20mill revenue) are more likely to be the poor performers.
    They are too small to have the systems and discipline of the bigger firms ( eg partners have to meet budget or they are sacked), but not small enough where all the partners still have a hunger to build a great practice.
    Thanks for contributing to the Successful Small Law Firms group in LinkedIn. I encourage any principals of smaller law firms in Canada who like the idea of making great profits, to also join.

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