Tag Archive: Finance
Yes, say some.
Only a short time ago, we believed that non-lawyers would be able to participate in the ownership of American law firms. The pressure, so we believed, would come from the British Empire. Australia already allows this and it will soon be permitted in England. But, not the U.S. … until now.
The District of Columbia permits non-lawyer ownership to the extent of 25% interest in a law firm. And, now, North Carolina has a bill before its Senate that would allow 49% non-lawyer ownership.
One argument is that law firms have expanded and are now very large organizations. In order to grow, they need additional capital … and capital is best raised in the capital markets, not from individual partners of law firms … and that means non-lawyer ownership. While large law firms are looking more and more like their corporate clients, it is still a stretch to suggest that law firms should raise outside capital.
Do law firms need to grow? Why can’t corporate clients’ interests be served well by smaller regional law firms? Why does the corporate law firm have to be as large as the client? We saw unions grow in both size and power in response to corporate and management growth and power. And we now see unions fighting to stay alive. Will that also happen to large law firms of the future? Will technology enable small groups of lawyers to be effective in large corporate representation?
Some argue that the rules of professional conduct wouldn’t bind non-lawyers in matters of confidentiality and charging reasonable fees. Further, the very independence of lawyer’s judgment might come into question. But, the rules have been bent, if not changed or discarded entirely, when large firms’ economic interests were at stake. So, it will be fascinating to see who argues on which side and how this issue develops.
Is it possible that this issue will finally cause the break up of the mandatory (integrated) bar association into State licensing agencies on the one hand and voluntary bar associations on the other hand … with the latter being the home of sole and small firm practitioners banding together to serve their own economic interests?
I recently wrote in my LawBiz Tips Ezine about how law schools continue to churn out new graduates even as demand for them drops, and cited a New York Times article on this issue that concluded: “Today, American law schools are like factories that no force has the power to slow down – not even the timeless dictates of supply and demand.”
Now it appears that the law of supply and demand has not been repealed after all. The Wall Street Journal reports numbers from the Law School Admissions Council showing that the number of law-school applicants this year is down 11.5% from a year ago to 66,876. The figure, which is a tally of applications for the fall 2011 class, is the lowest since 2001 at this stage of the process, which is almost 90% completed.
The reasons aren’t hard to understand. Firms increasingly prefer to hire lateral attorneys who have already had on-the-job training and books of business, rather than new graduates who don’t understand “The Business of Law®” and will take years to begin returning a profit on the investment made in them. And from the student side, the realization that going six figures into debt to get a J.D. degree that offers no assurance of gainful employment is not exactly a smart idea – especially for those whose main motivation to attend law school was to make the supposed “big bucks” available rather than to pursue a legal career.
So who is hurt most if the law school bubble does burst? We can only hope it will be the law schools themselves, who continue to pour huge resources into “gaming” the law school rankings so that they can move up from number 19 to number 17 and thereby (they presume) entice more students to enroll. When the housing bubble burst, it was – and continues to be – the financial geniuses at the banks who were left holding the bag. Are law school administrators any smarter?
Effective March 15, the Howrey law firm, which once employed as many as 750 lawyers, dissolved. As in past megafirm failures … Brobeck, Altheimer, Thelen, the list goes on … there never is just one, but a variety of root causes that feed the primary death blow, an exodus of lawyers.
In Howrey’s case as a litigation-focused firm, according to the firm’s CEO (quoted in the ABA Journal), up to 11% of the firm’s billable hours were devoted to contingency matters. “Some people, including some fairly high-level people, sort of bailed on us when they didn’t get exactly what they wanted,” the CEO said. “You have to ask your partners to be patient until it [contingency billing] pays off, and not everyone is patient enough.”
In pure contingency law firms, that’s exactly what every equity lawyer does, wait. Wait until the judgment or settlement is paid. Why should that be different with the Howrey firm? Lawyers working on contingency matters bring no money into the firm, yet are responsible for many dollars flowing out … in the form of lawyer and staff compensation and expenses advanced to sustain the lawsuit. And if the result of the case doesn’t benefit the firm, the loss can be substantial.
But, the lawyers of the firm knew that. Thus, the question, why is it now that there is objection? Though conjecture, apparently, Howrey partners wanted pure hourly billing, less contingency work … and were uncomfortable with advancing costs for matters in which they were at risk. They seemingly could not determine, to the satisfaction of enough, how to divide the compensation pool when revenues arrived out of sequence to the work performed connected with those revenues.
If fees to the firm based on contingency reached 11%, it’s almost like having one client exceed the 10% threshold, a level that I’ve said before is dangerous. Control of this much money was essentially out of the partners’ hands, unless the firm only took on matters that were virtually sure things … which conversely would lessen the likelihood of a big contingency payout.
Other factors to consider that would lessen the threat to my 10% rule is that it’s unlikely that any one matter reached 10%; if the intake decisions were wise, the firm benefited more than it suffered from periodic big revenue bumps; in today’s world of "value billing," the firm would be at the forefront of aligning its interests with those of its clients. The firm should have been able, with good cash flow management and a committed group of partners to the team concept, to marry both worlds of contingency and hourly billings.
The ultimate lesson in this dissolution seems to be that Howrey fostered an environment of solo silos (with some lawyers piling up cost but poised to earn a great deal of money if "their" ship came in), not an environment where everyone was pulling for the whole (irrespective of how they brought in the revenue.
Any firm that encourages lawyers to maximize their individual compensation may have fast near-term growth. But approaching compensation as an institution makes for greater firm harmony and longevity of the firm as an institution … and, in my opinion, greater long-term value for all.
In today’s Managing Partners Roundtable, we talked about the costs of digitizing all files the firm maintains. One partner suggested that failure to do so might result in malpractice allegations. This is an interesting concept, one that I don’t believe has yet taken hold.
Cons: Expensive, time consuming, lawyers must be involved to determine which file matters can be "cleansed" and tossed, files must be taken apart to scan, decisions on what hard copy to toss now and what to save (and for how much longer)
Pros: Reduction in amount of real estate needed to store files, lower cost of occupancy resulting from a conversion, searchability by keyword rather than memory, one time investment.
Several years ago, a Chicago law firm began this process by scanning documents through a photocopy machine. Their contract provided for payment only when paper was copied and printed, not just scanned. Thus, this segment had limited cost. Disabled people were employed to do the work, thus enabling the firm to do well by doing good, and maintain its cost of labor at a lower cost than would have resulted with its own personnel. The entire process was conducted in the evening so the normal workflow of the firm was not disrupted. This firm was ahead of its time in this process.
In today’s meeting, I learned of a major firm that completed this project last year at a rather high cost. But, the investment was believed to be essential to an efficient future operation of the firm. And, of course, younger lawyers are so conversant with the electronic world that some seldom even touch paper anymore.
Technology has and will continue to have a major impact on the efficiency of the delivery of legal services and the costs to clients.
My friend and colleague Carolyn Elefant, on her MyShingle.com blog, recently spoke to me about issues in selling a law practice (/). Carolyn raised an excellent point when discussing an advertisement by a 70-year old lawyer in Kansas who sought to sell his practice. The advertisement featured the fact that the firm uses practice management software tools like Amicus, HotDocs and QuickBooks, and has a database with a list of 4000 contacts. As Carolyn observed, such information is ample evidence that the firm has at least made an adequate investment in technology.
This is an important point in two respects. First, if a lawyer contemplating retirement has not kept the practice’s technology up to speed, the value is going to be diminished in negotiations once a potential purchaser realizes that a substantial IT investment will be necessary. The principle is the same as that of a house purchaser who wants $20,000 off the purchase price if the house needs a new roof that the purchaser will have to pay for.
The second important point is more positive. If you have done the right things with your practice – kept technology up to date, invested in new office space with modern infrastructure, maintained strong referral relationships with other firms – be sure to communicate those facts up front. Their value may not be easily quantifiable, but they definitely support the firm’s goodwill: its reputation, client base and client loyalty. The decision to sell a practice is no time to be modest, or to assume that the firm’s virtues are self-evident. Communicate those virtues up front, and make sure potential purchasers know how their worth supports your asking price.
In today’s WSJ, a lead article talks about the courts in New York requiring the lenders in foreclosure suits to be honest in the filing of their documents. This follows the Florida cases with "robo signers." Affidavits claiming full knowledge of the facts of each matter were signed by employees of the lenders and the mortgage servicing companies as well as improperly notarized. Lawyers are being blamed for filing defective documents.
Lenders made the loans, their servicing agents prepared the information and signed the affidavits under penalty of perjury. Yet, the focus of attention seems to be falling on the attorneys. Somehow, attorneys are expected to verify that their clients are telling the truth. I thought that was the function of the trier of fact, either the jury or the judge. What am I missing here? Or, is this just one more case of seeking to toss the blame anywhere but where it belongs.
Lawyers in our system of justice are the messenger. Lawyers present the evidence in the light best suited to tell the client’s story … but it is the client’s story … and the only obligation on the part of the attorney is not to allow known perjury to be placed before the trier of fact. How and why is that now being altered?
The mortgage companies are now saying that the cost of foreclosures and loan modifications will increase, hurting consumers! Wow, it is an affront to human intelligence to suggest that the cleanup of their corruption (filing false documents with the court) will cause consumers to pay more!
Today, I had a discussion with a very bright individual who is seeking new office quarters. He was having difficulty with the math, so he thought. He was seeking to understand the interplay between basic rent, common area charges (charges for maintenance, taxes, etc. that the landlord assesses at the end of each lease year to cover the cost of operating the building, paid pro rata by each tenant), and his actual cost of occupancy (total actual rent!).
I suggested that he walk away from this bottom down thinking. Instead, I suggested he look at the situation bottom up, and get his real estate broker involved to earn his keep.
First, figure out what you want to pay for monthly and/or annual rent. You can do this in a number of different ways. You can say that historically I’ve earned X% profit on Y number of revenue dollars; when I move into new quarters, I will earn more revenue because (better facilities, closer to prospective clients, larger space to hire more staff, etc.) and therefore, with the same percentage for occupancy cost, I can pay more …. and that number is $X.
Or you can say my revenue is likely to stay the same even after the move (or I’m not sure and I want to be conservative) … and don’t want to pay more than the same rent I’m paying now. That number is $X.
With that number in mind, tell your broker to find you the space you require (with the specifications you want) for that amount. Don’t worry what words are used, whether base rent or common area charges, etc. The lease contract must state that the maximum annual rent will be $X.
If the broker says that you can find plenty of space for that amount, great; if he says you’re crazy, there is no space for that amount, then you have choices to make: Work harder, work smarter to earn more revenue/profit to pay the higher rent, reduce your profit and take-home pay, or join forces with another to share the space and cost of the space.
But, don’t let others dictate how you should think. Don’t let the system force you into a thinking pattern that will confuse you or prevent you from knowing what your cost of operation will be.
In the recent California Lawyer’s Annual Professional Liability Insurance Report, the writer quotes the ABA. Their study shows that 44,000 claims were lodged against insured lawyers nationally within the study’s three year period. Of this group, “…(s)olos and smaller firms were sued the most: 70 percent of all insurance claims were brought against lawyers in firms with one to five attorneys.”
I suppose this was the basis for arguing that lawyers either need malpractice insurance or should disclose to their clients that they don’t have such insurance. Yet, if 70% of the legal community works in the small firm environment, wouldn’t it make sense that 70% of the claims would be filed against this goup?
Despite these statistics, there is no study ever cited that shows how many claims, IF ANY, were filed against the approximately 30,000 (20%) attorneys in California who do not carry malpractice insurance. There is no study to conclude they have claims filed against them; there is no study to conclude they have been unable to negotiate settlements with their aggrieved clients, if any; there is no study to conclude these are “bad” or negligent attorneys from whom the public needs protection.
Despite this, the Bar (now about 23 states) has moved forward in lock-step to punish this group of attorneys by increasing their already marginal cost of operation and forcing them to become adversarial with their prospective clients by having this discussion.
Clever lawyers who may seek to avoid the negative consequences of this new rule can take a number of alternative paths to side-step the issue. They can obtain the most minimal policy, the true net effect of which will leave nothing for the client at the end of any malpractice litigation. They can bury the required disclosure language in a long written engagement agreement, seldom read by clients, thus avoiding the necessity of raising the issue with the client. Among other tactics.
As in other instances, the Bar fails to protect its members who pay their salaries and fails to protect the public by availing attorneys with affordable negligence insurance.
West Pub. Co. has announced the pre-release offering for my new book, Growing Your Law Practice in Tough Times.
I’m very excited about the new book … and encourage you to take advantage of West’s offer. You can also see the new offering at LawBiz.
NALP survey suggests that 2% of 2008 graduates opened a solo practice within 9 months of graduation! That’s a lot of folks who will be representing clients without prior experience either in the management of a practice or much experience in the technical practice areas (tax, family law, bankruptcy, etc.).
I wonder what kind of representation their clients are receiving … and how does one interpret or define "competence?” What do you think?
There is a movement afoot to create an apprenticeship program for lawyers. Georgia and Utah both require first year associates to enter a mentor program; of course, there is no requirement that senior lawyers be mentors, so I’m not sure how their programs work in actual practice.
And Howery has recently announced an apprentice program that is getting a lot of attention. Their new hires will split their time between shadowing senior partners, taking classes and working on "low-grade" client matters, being billed out at very low rates.
The recession/depression ("The Great Reset") has provided the excuse for a recalibration of the economics of law practice by many, both clients and law firms.