A changing of the guard

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Legal historians might look back at the spring of 2011 and judge it the time when the old law firm model began to pass away and a new one began to take its place. Specifically, they might contrast last month’s dissolution of Washington-based global firm Howrey LLP with today’s announcement by 300-lawyer Irwin Mitchell LLP (the first by a major UK firm) that it intends to convert to an Alternative Business Structure under the Legal Services Act.

Personally, I was sorry to see Howrey go, especially since I’ve written about several worthwhile initiatives the firm undertook these last few years, including Howrey University, merit-based associate compensation, and joining the short-lived associate apprenticeship trend. Whatever else it did wrong, Howrey did or tried to do a number of things right.

But the process by which it sank deserves further examination. Most of the Howrey post-mortems identified some common causes of Howrey’s fate: too-rapid international expansion, an increasing numbers of conflicts, an over-reliance on contingency litigation that suffocated cash flow, low-cost non-lawyer competition for process work, and eventually, a growing loss of confidence in leadership. Some of that holds up, and some of it doesn’t. But if it sounds to you like these factors are not unique to Howrey, but in fact could be shared by a number of other law firms, you’re right.

Yet an even more important factor, also shared by several other firms, lurks behind the collapse: a culture too weak to withstand all these pressures. An article about Howrey in CPA Global’s New Legal Review included this observation from legal consultant Brad Blickstein: [T]his firm had been on the cutting edge for a long time. Attorneys, however, do not tend to embrace change. For a firm to be “non-traditional”, its attorneys have to believe. The firm grew so quickly through the merger that many partners did not grow up in this culture. When times got rough, they did not have the fortitude or desire to continue being non-traditional.

Writing in the Washington Post, Steven Pearlstein drew a similar conclusion: Howrey … was not a strong partnership. Over the past 20 years, it had more than tripled in size by luring away lawyers from other firms and setting them up in offices that had little traffic with each other, or with the lawyers back in Washington. For the most part, these were lawyers willing to switch firms because of the prospect of earning more money and attracting more clients, and for many years, it worked out just that way. But then, suddenly, it didn’t, for one year and then a second, without any clear indication of when or whether things would finally turn around. And it was then, by last autumn, that it began to be clear that the personal roots were not deep enough, the bonds of loyalty not strong enough, to hold Howrey together.

There’s more Howrey in many law firms today than those firms would like to admit. Firms built primarily (if not entirely) on the foundation of partner profitability shake and totter whenever that foundation is threatened. Think back to the financial meltdown and to the massive associate and staff firings that followed: they were done solely to preserve profitability levels and prevent the kind of crisis of confidence and partner desertions that marked the beginning of Howrey’s end. If there’s nothing keeping partners within your walls beyond their annual draw — and that’s the dominant modern law firm model — then a Howrey-style disaster is always going to be one string of bad results away. That’s a risky and stressful way for a law firm to live.

At the same time, from England & Wales, comes the first sign of a different approach. Here are some excerpts from the news that Irwin Mitchell, a full-service firm with an affinity for personal injury work, has retained an investment bank to guide it through the ABS process:

All options are up for consideration, with the aim being to raise a war chest to fund future growth. Managing partner John Pickering said: “Conversion to an ABS will broaden our access to capital and enhance our funding flexibility as we execute our strategic growth plan, while ensuring that we can continue to provide the very highest standards of service to our clients. … The Legal Services Act will create exciting growth opportunities for strong, well-financed legal services businesses to accelerate their growth plans. Irwin Mitchell intends to be at the forefront of these changes and we have therefore taken the decision to seek external investment to further our ambitious plans for the business.” …

In preparation for the conversion, Irwin Mitchell is to restructure into a two-tier business, with the creation of a corporate vehicle. The firm will continue to operate as a limited liability partnership (LLP) and the new holding company is intended to become the controlling member of the LLP. Irwin Mitchell has a strong personal injury base and in recent years has invested in its affinity business to build up branded consumer-focused products. This has been part of a long-term strategy to build up a series of branded goods that could be offered to the consumer market. In March last year, the firm signed a deal with the Daily Telegraph that enabled it to offer legal services to the national newspaper’s readers.

I noted last week that law firms, as compared to non-lawyer legal businesses, likely will have a tougher time attracting equity investment (for an excellent illustration why, check out John Wallbillich’s fictional law firm IPO). So it might be that Irwin Mitchell will fail to find a backer to its liking.

But it’s clear that the firm has been preparing for this move for quite some time, carving out a commoditized services section on its website. At a time when small-firm franchisor Quality Solicitors is about to open legal service kiosks in British bookstores, consumer and small-business legal work seems to be leading the revolution. More interestingly, recall that the world’s first law firm to acquire outside investment, Australia’s Slater & Gordon, was also a personal injury firm that floated shares on the stock exchange and proceeded to go on a massive and profitable law firm buying spree.

But most interesting of all might be a common reaction, in reader comments and Twitter posts, that a public offering or other equity investment in Irwin Mitchell will quickly result in a number of senior partners cashing out and leaving everyone else behind. “ABS is just money for old men. Prepare for the senior associate exodus,” says one commenter at The Lawyer. Steven Harper echoes that thought: Many of those in big law who already take a short-term economic view of their institutions would leap at the opportunity for a one-time payday that discounted future cash flows to today’s dollar. In fact, a big lump sum will tempt every equity partner who worries about next year’s annual review.

But I wonder whether for some firms, that would be less a fatal flaw than simply part of the plan. It’s possible Irwin Mitchell may have decided that what it offers is more important than who offers it. It may have decided that in the future legal marketplace, lawyer-critical work — major assignments that only a very few lawyers are trusted to handle — is a diminishing asset, whereas ordinary-course-of-business and commodity work is set to grow rapidly.

It may, in fact, have recognized the problem common to law firms everywhere — that rainmakers and other heavyweights exercise an unhealthy degree of influence over a firm’s fortunes — and responded with a strategy that lessens the risk and impact of that problem. It may envision a law firm model where the firm’s overall profitability, not each partner’s individual profitability, is the driving force. A firm like this might be only too happy to see some partners cash out, because the firm has bigger plans than simply being that partner’s most convenient current platform for generating profit and can do without the risk of his or her abrupt departure.

It’s still very early days, of course. But it’s possible we’re seeing the sun start to set on one law firm model and start to rise on another. Howrey illustrates that the fundamental purpose of the traditional law firm — to maximize profit annually for its partners — damages and can fatally undermine its culture, and is unacceptably prone to the risk that panicking partners will make a run on the bank and leave. Irwin Mitchell suggests that an alternative model — deliver legal services systematically, efficiently and effectively to generate a reliable firm-wide profit, minus the risk that partner defections could sink the whole enterprise — might catch the attention of both the purchasers and funders of legal service businesses. If both of these are true, then we might currently be watching a changing of the guard.

Jordan Furlong speaks to law firms and legal organizations throughout North America on how to survive and profit from the extraordinary changes underway in the legal services marketplace. He is a partner with Edge International and a senior consultant with Stem Legal Web Enterprises.

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2 Responses to “A changing of the guard”

  1. Peter Lederer

    A very useful and thoughtful post, Jordan. One question: you write:
    “Think back to the financial meltdown and to the massive associate and staff firings that followed: they were done solely to preserve profitability levels and prevent the kind of crisis of confidence and partner desertions that marked the beginning of Howrey’s end.”
    There has been repeated suggestion that bank loan covenants, triggered by drops in associates’ billable hours recorded, forced a significant portion of the associate firings. Do you think this played a role?

  2. Jordan Furlong

    Peter, thanks for your comment — that’s a good point. In fact, the role of loan covenants and law firms’ overall debt situation is one that comes up often when I talk with people about firms’ pressure points. Most law firms are built for the short run: they pay out their profits every year, they make very little investment in R&D or long-term planning, and they depend to a surprising amount (considering how profitable they are) on their bankers to keep the lights on and the doors open. Any kind of serious cash call could cripple a lot of partnerships. So yes, I agree that these covenants have played a part in the past, and I suspect there’s a very good chance they’ll play an even larger part in future.

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