NALP: the future of law firms

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Back from a lengthy trip, I have a lot of catch-up blogging to do. Just to get the ball rolling, here are my speaking notes from last Friday’s plenary session at the NALP Annual Education Conference in Toronto, in case they’re of interest.

I was honoured to be part of a distinguished panel of speakers, moderated by Ida Abbott and including Ron Friedmann, Rick Matasar, Tim McManus and Vernā Myers, on the future of law firms. I’ll pick up on a few of the points raised during the wide-ranging 90-minute plenary later on, but for now, here’s what I prepared in advance:

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Massive upheaval is underway in the legal marketplace, and one of its effects is that the typical law firm business model will no longer be sustainable. Among the reasons why are several that fit under the headings of clients, capital, talent and structure.

Clients

1. Law firms are set up to extract the maximum amount of fees from clients on any given matter, and billing by the hour is an excellent and proven enabler of that goal.

2. But clients are finally pushing back, for real. They’re demanding three “C’s” from their law firms in terms of costs: containment, certainty, and correlation with their objectives. Clients want legal fees to be predictable and tied to the value of the service to the client; billing legal services by the hour doesn’t do that. Firms have the ability to create and meet project budgets and goals, but have no incentive to do so.

3. Legal departments are under massive cost pressures, from globalized competition and what promises to be a nasty recession. Legal spend is low-hanging fruit. If firms can’t provide cost containment and certainty, the client’s procurement department will, without the firm’s consent or involvement.

4. Performance-based fee structures will eventually become commonplace: the lawyer and client together establish the value of the service to the client as the basis of the fee, creating incentives for the firm to exceed its fee for surpassing expectations on budget, time, communication, innovation, teamwork, etc. It requires both an open, trusting relationship, and the acceptance and sharing of risk by client and firm. Currently, the client takes all the risk.

5. A few firms are already doing this: Valorem in Chicago, Summit in Seattle. Eversheds’ Global Accounting Management System gives clients 24/7 access to estimates and current legal costs and approval power on all legal work. These are the firms of the future.

Capital

1. Law firms essentially distribute their profits at the end of every fiscal year through partnership draws. This leaves little or no money for long-term investment in the enterprise and leads to short-term, annual-profits-per-equity-partner thinking. Businesses these days don’t operate like that and stay solvent very long.

2. Future law firms will have to operate as corporations, not partnerships. Among the pressure points: the UK’s Legal Services Act will allow law firms to go public and raise massive amounts of capital through IPOs, as has been done already in Australia. Some firms will take advantage in order to buy talent, upgrade technology and expand overseas; other firms will have to follow suit or be utterly outspent.

Talent

1. Law firms are Boomer business models, based on the idea that time is a means to an end. The next 25 years’ worth of lawyers will be Millennials, for whom time is an end in itself.

2. Millennials want rapid advancement, meaningful work, engaged bosses, intensive training and mentoring, and constant positive feedback. 40% intend to stay at their current position less than two years; 60%, less than 5 years. “Work-life balance” rates an 8.63 score out of 10 in their surveys, and 73% are worried about maintaining “personal-professional balance.” (Source)

3. The current law firm economic model depends heavily on associates willing to spend several years grinding out billable hours on lower-level tasks (because partners who hoard work and client contact), in hopes of one day becoming partners. This is a huge disconnect

4. This is not just for the next few years, and this is not just about those darned kids; this is an entire generation that will soon become the dominant cultural force within law firms.

Structure

1. In future, firms will see more emphasis on equity partners, fewer or no non-equity partners, and maybe not even associates. Firms will rethink how they retain services of non-partner lawyers: short-term contracts, part-time consultants, and outsourced and offshored talent are among the possibilities.

2. New methods are going to emerge for valuing the services of a lawyer, and they will revolutionize both the internal metrics (how lawyers are assessed and compensated) and external metrics (bills issued to clients) of law firms. Above all else, the client will increasingly be the business model’s focus.

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One Response to “NALP: the future of law firms”

  1. J Goodwin

    Well put, quality summary. I’m still grappling with the real benefit in going public raising capital by other means, unless you’re referring to an ancillary benefit from the changed mindset. I think acting as a corporation would be a great thing, but I question how quickly stodgy firm partners will embrace the idea of acquiescing control over management of costs and their long term future. From the outside, it seems like it’s entirely management by committee, with no real desire to plan or think strategically, but also reticent to cede control. Is your perspective on this different?

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