Category: Management
In the Opinion section of today’s Wall Street Journal, two fellows from the Brookings Institute espouse their philosophy for deregulating the legal profession: Let anyone practice law; whether they’ve gone through law school or not, and allow anyone to own a law firm.
These are not new ideas, but the assertion that these ideas are the key to lowering costs of delivery of legal services is misplaced.
First, the licensing of lawyers is to protect the public; they are not there to protect the interests of lawyers. For example, an individual must be competent to represent and advocate for the interests of a client. It’s the same principle as licensing doctors. Incompetence either in court or in the operating room can cost people their lives.
Second, technology provides many avenues to reduce legal costs. Removing the licensing requirements has no impact on this issue. Yes, requiring a license does cost money and does cost time (opportunity costs for the student), but it also impacts the quality of services delivered … just as in the case of medicine (oh yes, and plumbing), etc. Why not remove licensing requirements for everyone in everything, from medicine, to plumbing, to driving a car. Licensing assures a minimum standard of quality. Licensing requirements in specific areas of human endeavor are society’s way of self-protection. Caveat emptor is acceptable, but not to the degree apparently desired by the authors of the Brookings report.
If lower legal costs are the objective, the argument should focus more on the pricing modalities as they impact the cost of legal services rather than the governance of the law firm. We’ve talked about this on previous occasions.
Third, the underlying premise that licensing provides an insurmountable barrier to entry and substantially raises costs by controlling supply might be true if one doesn’t look at the facts of recent and current reality. There are many more lawyers than the current demand can accommodate. Many lawyers cannot find work. Thus, it is illogical to suggest that licensing is the cause for higher legal costs. Those lawyers who are working often provide legal services at lower rates than they used to charge. Even large law firms find significant resistance to raising their rates. Are legal expenses high? Yes, but compared to what? How low should these prices be before they are acceptable? And, if there is no regulation, we might likely see larger law firms pattern their pricing after one another, just as the unregulated airlines currently do, so that the benefit of lower costs would not be evident.
There is no price regulation now in the airline industry. Yet, it’s remarkable how similar airline prices are. Yes, there are a few low cost airlines such as Southwest. And, yes, there are also lower cost law firms as we sit here today, even with the regulations we have in place. The only benefit of the authors’ "non-licensing" proposal would be the destruction of minimum standards of quality. Caveat emptor might be acceptable if the public had a way of knowing what the quality standards should be … but they don’t and they won’t.
Combining other skills such as accounting into one organization (the old "multi-discipline" argument) is not required … many law firms already work closely with allied professionals for the benefit of clients. This is merely a non-issue.
Dewey, which went into Bankruptcy Court last night, did not fail for lack of credit. The firm had been extended bank lines of credit. It failed for lack of effective management. It’s unlikely that investors or others would have given Dewey more money if they understood the true nature of the firm’s economics and governance. Thus, this is also a non-issue for the authors’ arguments.
In sum, law firms function no differently from all other businesses. Good, solid business decisions must be made to attract customers/clients and operate cost-effectively. Dewey failed on both counts. The arguments put forth by the authors would not have changed this outcome. But, in the terms of business, by going into bankruptcy, the firm may be able to disgorge its unfunded pension obligations and become a viable candidate for acquisition by another large firm. That’s when the principle of caveat emptor really comes into play – as a normal risk that businesses take every day.
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Letter to the Editor re Dewey LeBoeuf:
Your staff reporters, including Jennifer Smith, seem fixated on the Dewey law firm and its challenges. While one or two such articles would be of interest to both lawyers and your general readership, I suggest that recent articles have suggested nothing new and merely seem like “kicking a dead horse,” or worse, merely filling space in your paper.
Dewey highlights the unfortunate interplay of bad luck (the Great Recession and unexpected change in our economic health) and poor management (failure to anticipate alternative scenarios). Once again, it is confirmed that law practice is a business. As I’ve been saying since 1995 when I received the registered mark for The Business of Law®, law practice is a business. Yes, it’s a profession AND also a business, a service business. Dewey & LeBoeuf confirms this as does the former chair, Tower Snow, of the now defunct Brobeck law firm, who said law is subject to the same economics as every other business and profession.
Among other challenges facing Dewey are: i) the “bleeding” of lawyers leaving the firm a few at a time until the firm will face hemorrhaging, ii) unfunded pensions that will be a drain on the firm assets and future revenue, thus setting up vicious generation warfare in the future, and iii) debt from their expanded lines of credit. Of course, none of these challenges are fatal in themselves, but are compounded by virtue of management in whom the majority of the firm has lost confidence.
Your reporters should give Dewey some space to work out their problems or, perhaps even better, talk about the issues (not the personalities or the law firms specifically) that the firm is facing. That would be interesting to your readers because it not only applies to the legal community, but to all of your readers in the companies they operate.
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Judge Lippman, Chief Judge of the New York Appeals Court, announced a pro bono requirement to gain admission to the New York Bar. Every new lawyer will have to prove their performance of 50 hours of pro bono practice before being admitted to the New York state bar. Mandatory pro bono is now a reality in New York.
He said, "If pro bono is a core value of our profession, and it is—and if we aspire for all practicing attorneys to devote a meaningful portion of their time to public service, and they should—these ideals ought to be instilled from the start, when one first aspires to be a member of the profession."
His first error of judgement, in my opinion, is to conclude that pro bono is a "core value" of the legal profession. While many lawyers "give" many hours freely of their time and expertise, it is not the essence or "core value" of the legal profession. This has been substantiated many times over when bar associations call on their members to provide free services for low and moderate income people. Many do step up to the plate. But, not all. Thus, it’s obviously not a core value of the profession.
He then said that "We think that if you want that privilege, that honor of practicing law in the state of New York…then you are going to have to demonstrate that you believe in our values." He is really saying that if you want to practice law in NY, you better meet my values. Interesting that he says that practicing law is a privilege, not a right. Seems as though we’re taking a test to get our driving license. Driving a car is a privilege and in order to get you on the streets, you need certain requirements. I guess Judge Lippman equates getting a law license with a driver’s license.
Why does this new requirement apply only to new lawyers? Why doesn’t this requirement apply to all lawyers in NY, even those who have been practicing for a few years? Judge Lippman’s excuse for this discriminatory practice is that existing lawyers’ practices are very diverse and some lawyers already are having difficulty earning enough money to put food on the table. Thus, they should be excused from this requirement. The real reason is that the Judge would have a rebellion on his hands if he tried to spread the requirement to all present lawyers in the state.
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In current times, we are becoming more familiar with law firms imploding, collapsing and even going bankrupt, literally. Wall Street Journal and it’s reporter, Jennifer Smith, seem to be taking a great deal of pleasure in highlighting and repeatedly featuring the sad demise of the Dewey law firm.
Dewey highlights the unfortunate interplay of bad luck (the unexpected change in the general economy) and poor management (failure to anticipate alternative scenarios). One or two articles with new information would be illustrative; howevwe, the Journal seems to relish in "kicking the dog while down."
In the future, the Journal might do an article about how a firm in Dewey’s position might avoid collapse. Would that be too much to expect?
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In a recent issue of a major legal publication, as reported by the American Bar Association, the magazine looked at pension plans of law firms. It appears that a number of the country’s largest law firms have pension plans that are unfunded. In other words, these are firms with pension plans, but without money to pay the obligations of those pension plans as their lawyers retire. What we will increasingly see are law firms with the bulk of their lawyers leaving the practice for retirement with the hope and prayer that the fewer remaining, younger partners will be willing to fund the firms’ obligations. We will also see many situations where these younger lawyers will find it to their economic advantage to torpedo the existing law firm and its pension obligations in exchange for creating a new firm with no pension obligations. Doing so will give them the opportunity to take on more of the revenue that is produced by their efforts. They will earn more and pay less.
This phenomenon will exacerbate the generation warfare that is building in today’s law firms.
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The Wall Street Journal, perhaps reflecting the concerns of its corporate readership, continues to emphasize what it considers to be the overpaid lawyers at the pinnacle of the profession. In a recent article that had the less-than-subtle title, “Biggest Lawyers Grab Fee Bounty,” the Journal reported that partners in the top 25% of more than 4,000 law firms examined in a new study boosted their average price to $873 an hour last year, up 4.9% from 2010. At the same time, the lowest-billing partners struggled to keep pace with inflation. Partners in the bottom 25% of surveyed firms charged an average of $204 last year, up just 1.3%. As the paper said, “That disparity between who can raise prices – and who can’t – spotlights a growing segmentation in the $100 billion corporate legal market.”
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Once again, it is confirmed that law practice is a business. As I’ve been saying since I received the registered mark for The Business of Law®, law practice is a business. Yes, it’s a profession AND also a business, a service business. Dewey & LeBoeuf confirms this.
This large, national law firm has just retained outside bankruptcy counsel. Why? To consider whether they can create a controlled bankruptcy … filing a bankruptcy application with creditors and potential acquirer already in place. The beauty of such a filing is that it will i) stop the bleeding of lawyers leaving the firm a few at a time, ii) eliminate the unfunded pensions that would be a drain on the firm assets and future revenue, and iii) enable another firm to complete an outstanding acquisition quickly with a clean balance sheet and revenue stream intact. A side benefit of eliminating the unfunded pension obligations would be to avoid generation warfare that frequently arises between retiring partners and younger partners left with the responsibility of using current revenue to pay for the old debt.
This process is precisely the same process used by so many other companies, including some of the large companies in the recent financial crises that survived, but in different configurations. This is the same process as the airlines are implementing today … to reduce their obligations to labor. This is the same process being contemplated by a number of prominent government entities (cities and counties) to get rid of their unfunded pension obligations that are expected to require more than 60% of their current tax revenues.
So what is different about Dewey? Nothing. We are in the world of business, The Business of Law®.
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Among the topics discussed on this day were:
- Social media
- Financial metrics of a successful law practice
- Marketing gravity and the need to have something in each stroke of the marketing wheel
- Cash flow as the single most important financial statement for a law office.
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The Law Practice Management Institute raised a number of issues and produced great discussion among the attendees. Some of the issues in the first day were:
- Creating a marketing plan is important for success
- Alternative fee structures and billing modalities opened possibilities not previously considered
- Sending a satisfaction survey to clients helps maintain and build the relationship as well as provide a defense against malpractice and disciplinary complaints
- Guaranteeing satisfaction with the service of the law firm will reduce the hesitancy of many clients to engage your firm
- The statistics of why clients leave their present firm and why they refer their present firm to their friends and colleagues was an eye-opener.
- Always put yourself in the shoes of the client and seek to understand, and avoid, what makes the client unsure and/or angry about your service.
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In a recent episode of Blue Blood, the granddaughter was lamenting that she didn’t support a friend in need as much as she thought she should have, and that her grandfather would be disappointed in her. An uncle (son of the grandfather) of the girl said "(Grandfather) would say that ‘its what you do next that counts…’"
As we review where we are n our career, in our law practice, it’s not what we’ve done to get here that should be our focus, but rather what we will do next. Create the plan to seek your goals; move along the path toward your goals, one step at a time; and always keep your eyes open for opportunities along the way, some of which may cause you to change your plan.
See our soon to be released new book, 16th Anniversary Edition, Profitable Law Office Handbook: The Attorney’s Guide to Successful Business Planning. Pre-publication offer: 30% discount! Good until May 31, 2012.
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