The Once and Future Firm: The Changing Nature of Law Firms

These are notes are from a panel discussion session at the American Bar Association 2011 conference in Toronto last Friday. Panelists included Arthur G. Greene, Boyer Greene LLC, Bedford, NH; T. Andrew Brown, Brown & Hutchinson, Attorneys at Law, Rochester, NY; Thomas C. Grella, McGuire Wood & Bissette PA, Asheville, NC; Ken Young, Young Mayden LLC, Charlotte, NC; and Mark Robertson, Robertson & Williams, Oklahoma City, OK & co-author of Winning Alternatives to the Billable Hour. Moderator was Prof. Gary A. Munneke of Pace University School of Law, White Plains, NY. Note: these are my selected notes from this session; any inaccuracies or omissions are my own. I welcome your comments and follow-up thoughts!

This was an informal discussion led by Prof. Gary Munneke. A range of topics concerning the legal profession and the management of law firms were covered. I found much of the discussion challenged or refuted common, widely-held beliefs. My overall take-away was that the nature of law firms are changing in some ways, but staying the same in others. There are differences between changes of small law firms compared to the large firms.

Question for Andrew Brown: Why did New York decide to undertake the study of the future of the legal profession?

[See undated press release from New York State Bar Association]

The Task Force was a project of immediate past president of New York Bar Association Stephen Younger – undertaken because of effect of the recession in 2007. They found the recession didn’t cause the current state, but highlighted the issues. How could lawyers shape their own destiny?

See the April 2, 2011 NYSBA Report of the Task Force on the Future of the Legal Profession [pdf]

The report looked at three aspects:

• structure and billing
• training and education
• work-life balance integration

Structure and billing

They found that smart firms are looking at restructuring; firms of the future will look very different. If you are planning to practice for 3-4 years, you will be okay, but if you plan to practice longer, you need to look at changing.

Training and Education

The report included feedback from deans of 15 law schools; they were all interested in participating; the idea that law schools are not willing to change is not true.

Experiential learning is more costly; law schools have to do more in training of lawyers.

Work-life balance integration

Lawyers are looking to work with more flexibility. Not less or easier, but they expect more flexibility in their work. Technology is changing rapidly and we can take advantage of it with respect to structure and billing, work-life balance.

Q: Do the findings apply only to New York?

Brown: It is not just a New York thing. The team they pulled together for the Task Force had broader views of things. Much of what they talked about have equal application to firms across the United States and some outside the US.

Q: Originally it was thought that when the recession would be over things would get back to normal. But we now don’t know when the recession will be over.

Brown: Downturned economy accentuated what was already festering. He doesn’t think we will go back to the world as it was. He doesn’t think there will be less legal work or less legal services, but the same number of attorneys will not be needed on U.S. soil.

Structuring and billing will not change; it is the pyramid structure of large and small law firms that will change. There will be more contract lawyers, increasing outsourcing (especially from India and China). Increasing technology use. A lot of what we are seeing is driven by technology.

The big changes we are talking about are not cyclical. We are not going back to the way the profession has been over the years. Things will look very different in the years to come.

Question for Tom Grella: What is it like for a managing partner in a big law firm? How do you deal with these forces affecting firms?

In managing a large law firm, he sees the need to focus on three areas:

• Flexibility
• Innovation
• Responsiveness

Those lawyers who only have 3-4 years left to practice perhaps do not have to worry about changing their practice. He has to emphasize being flexible with his partners. Ideas of the way things are changing may come from younger lawyers who are not yet partners.

They are attempting to get people to think in more innovative ways. They may be practicing traditionally but need to start thinking innovatively.

Two major forces on firms:

• Changing client expectations – clients are willing to jump to other firms to get their expectations met; he needs to continually push the importance of responsiveness to the staff
• Changing forms of competition

Q: Have you been responsive or reactive?

Grella: Both. When you don’t do things as partners want, they may see it as just reactive.

They have done a lot of planning. A lot of strategic planning is different than it used to be. He has had to come up with creative ways to get them to do strategic planning:

• E.g. Economic crisis summit he ran in the firm over a weekend 2 years ago; looking at new areas of practice and new ways of practice; also things they were doing they might consider dropping. It was really strategic planning
• E.g. Partner commitment planning
• They are now doing succession planning.

Q: What about leadership management?

Grella: Leadership and management are two very different things. “Management ties us down and keeps us from being able to lead.” Managing deals with day to day things. “Leadership lets us move forward.” He is a fan of leadership: building trust and serving other people. It is very easy to lose trust and credibility with partners.

Q: What are the regulatory issues lawyers are facing in the changing environment?

Grella: More efforts (at least in N. Carolina) to regulate at the Bar level; however, it is becoming more difficult to regulate, especially with unauthorized areas of practice. It is getting harder to know what the practice of law is; it is getting harder to regulate.

Munneke: The shrinking professional monopoly combined with global work is causing changes.

Grella: In N. Carolina lawyers had a monopoly on real estate closes; they were going to be closed down by the government, but they were able to argue this kept costs down. They may not be as lucky to hold onto the monopoly in the future. In areas that look like they are doing the same as others, they need to find ways to differentiate.

Question for Arthur Greene: How will the future play out differently for large and small firms?

There have been a lot of layoffs and changes in the mega-firms; but approx 70% of lawyers are in smaller firms (under 50 lawyers). The recession has had an impact on smaller firms, but not as much as the larger firms. As long as they have had more than one practice area, they have survived.

He sees trends that will predict what will happen in 5-10 years for smaller firms. For small firms in the same community where lawyers have equal reputations, you would think they are doing equally well. However, when he looks at their financial reports (which he is privy to), he sees a disparity between firms and what managing partners are taking home.

Factors contributing to successful firms:

• leadership – firms that are doing well always had good leadership; firms that are not don’t have the leadership and they don’t understand that is their problem
• approach to marketing – networking and staying ahead of the curve in terms of clients is so much more important today
• being innovative – a lot of small firms are doing well being innovative
• attention to succession – firms are most at risk when the founder retires. Do they see themselves as a firm or individual lawyers? Is there an “institutional approach” in decision-making?

These areas are putting firms in a stronger position.

Q: You seem to be saying there will be less restructuring in small firms that are fairly lean than large firms that have a lot of associates at the bottom.

Greene: Yes. When large firms with “boat loads” of associates come up short on work, they can lose hundreds of thousands of dollars very quickly.Small and mid-sized firms are in a better position to manage their way through it. They were able to not lay off those who were important to their future. They laid off associates (and sometimes partners) that were not going to help them in the future.

Q: Are the competitors to firms: banks, paralegals and online services?

Greene: Yes, these are competitors to small firms; but there are great opportunities to small firms. Big firms grew because corporations became global; however, there is a lot of work that is local in nature. Those are the markets that are open to the small firms.

Q: Some people have said it is crazy to open a new practice at this time.

Greene: For someone just out of law school, it would take an extraordinary individual to open a practice. In cases of small firms spinning off of large law firms, there are opportunities for innovation, especially for more experienced lawyers.

Question for Ken Young: We saw a lot of lay offs of lawyers in 2008-2009. What did this teach us for hiring in the future?

Young specializes in employment of lawyers and opening offices. These four years have been very interesting in lawyer hiring.

3 Ls:

1.  leveraging in hiring is over – young associates flushed money up the pyramid to partners who perhaps were not working hard enough. This model is no longer happening. Associates are being hired for very specific needs (e.g. ERISA, bankruptcy). Smaller firms are being very careful. They are recommending to hire slowly; turnover is costly. Best firms are now interviewing candidates 4 times to get inside a person’s
2. lock step – idea that if you make your goals you will become a partner. Now more large firms are going to large bands of associates; some associates may never get outside the firms band. Some may advance more quickly if they are entrepreneurial. A lot of partners also lost their jobs. Firms are now leaner, more careful about who they hire.
3. lower expectations – get inside the heads of those you are hiring and find out what motivates them. They may not want to make partner. In your hiring, you cannot assume that because they are top of the class they may not have the same five year plan you had when you came out of law school. Why did they go to law school? You’ve got to engage and get inside their heads. They might also not be trustworthy and someone you wouldn’t want to send your clients to. They might not fit your culture. Even people who impressed you out of law school. When you talk with a young lawyer or a lateral candidate, take the time to talk to them and make sure they are like you and your firm.

Q: Is the idea of becoming an equity partner an impossible dream for students getting out of law school today?

Young: For someone to make equity partner in this market, they will have to be entrepreneurial. Not necessarily entrepreneurial in getting clients, but in developing an area of specialization that makes them a “go-to” person. But it makes a much more “special person” to become equity partner.

Q: If someone leaves the city, does the firm keep them on by virtually?

Young: Yes, smart firms are slow to hire and keep people on longer, even if it means letting them work virtually.

Q: Do younger people bail out and move to smaller firms to become partner? Is that even possible today?

Young: That is actually a good plan. If you are not going to make partner, it is good. He is seeing seven year lawyers (especially in New York City) who are willing to take four year positions.

Q: Do you see law firms using mergers and different alliances to bring in the talent they need and want rather than growing them?

Young: Yes, he just saw a merger between a 500 lawyer firm and a 45 lawyer firm where the point was not to grow larger. With the financial markets in London and Asia, we are going to continue to see mergers. Note if you have a 7 or 8 lawyer firm, you don’t need to merge with someone to be bigger.

Q: If law firms grow by buying experience in talent, where do new lawyers get experience?

Young: Hopefully they get work where they can. They need to be smart with how they are practicing.

Several firms started by young lawyers from large firms: the entrepreneurial ones have teamed up with those they were in law school with to start a firm, but they had three years of training.

Question for Mark Robertson: Please comment on billing practices; in the New York Bar Association Task Force the one lightning rod issue was billing. People were saying hourly billing is dead, but large law firms said it would be back.

Robertson: Those who think alternative billing will disappear have their heads in the sand.

Alternative billing is historically not alternative; before 1950s, hourly billing did not exist. Clients were quoted a price and if they liked it, they hired the lawyer. They did not charge by the hour until the early 1960s. Before then they looked at the work they did, they would estimate what was fair. In the 1950s there was a study that said that lawyers who kept track of their hours made more money; lawyers after that “screwed it up.”

Tracking hours is a measure of the lawyers’ costs, not the value to the client. Hours should still be tracked to see if you are making money.

Wall Street firms were heavily influenced by their clients and had to cut staff. Many have a two-year gap in their succession plan. American Corporate Counsels (ACC): have put forward a value challenge that they ask or demand their firms follow. [see: ACC Value-based fee primer] Wall Street firms are more demanding; they look at the method of billing.

Additional thoughts:

Greene: With respect to billing methods: he was liaison to the Billable Hours task force from 1998. They spent a year working on the subject; it was a group of lawyers from a range of firms plus professors, and there was a division then also. At the time those who defended the billable hours were lawyers from New York and Washington who billed over $700 an hour.

Young: Clients like it when you approach work like a business person and not like a plumber.

Brown: What makes people fearful is the thought of losing money. When you talk abut changing billing structures, they get fearful because they think they are going to make less money. This is not true. He can think of ways they have the opportunity to make more money; they have to think in smart ways.

• Figure out ways to do the same work in less time, but at the same time you make clients happy.
• Knowing the law is not enough; you need to find ways to be entrepreneurial. Younger lawyers are going to be out there doing different kinds of work, impacting the profession.
• Contracting work is going to be big and continue to get big. Lawyers often need help; as law firms, you may looking at ways to service the needs of other law firms.

Grella: We are a business, and we are in business to make a profit. There was previously a big controversy about whether they are a business or a profession; however, they have a business to run. They have to be flexible and aware of the changing environment. You may a good leader and a good litigator, but you may not be the best person to be in charge of a practice group. Practice group leaders in his firm do not have training in marketing so they bring experts in. You should consider as your managing partner or CEO someone who is not an attorney; hire someone who has the skills needed to run an organization.

Robertson: Alternative billing does not just mean one fixed fee. One firm bills according to how the client sees value. There was a time when lawyers did tax returns, not accountants. Lawyers have a monopoly on representing people in court. Other than that, for most mainstream issues people represent themselves. Why are they hiring you to do something? Can they hire an investment banker to do a complicated transfer? As lawyers, need to define the value of services being provided to clients. Ultimately who decides what is reasonable is not you, it’s your client.

Audience question (barrister from England): apart from solicitors, barristers can now partner with whomever they want. He practices with two paralegals.

Robertson: He advises young lawyers to get jobs as paralegals if necessary.

Audience question (representative from a law school): for law students who are graduating, how can they position themselves to be attractive to small firms?

Brown: if you are a law school turning out students for a smaller market, smaller firms are looking for students with experiential learning, clinical learning. Many interviewers are not asking about this, so it is sending the wrong message to the law schools.

Young: differentiating factors: if someone has worked between undergrad and law school, this shows someone who has a drive to work.

Grella: Tier of law school means nothing to him; he is looking for someone with good communication skills to talk with the client. He is looking for things people have traditionally not looked for in the past.

Munneke’s concluding concepts

The economic model for large firms is changing; small firms are being affective. They are looking to a larger paradigm shift.

Other issues:

• contract lawyering
• public funding of law firms in the UK
• the general practice is dead, specialization is necessary
• the role of information is changing, clients can get it on their own.

Parting considerations:

• How will the organization and structure of your practice change?
• How will you train staff and lawyers?
• How will you find the balance between life and work?
• How will you harness technology to work for you?
• Who will be your clients?
• How will you reach them?
• What services will you provide?
• Who will be your primary competitors?

See also americanbar.org/lpm – some of the Task Force material will be posted there.