Career Development  -->  Law Firm Economics

 

Over the past 25 years or so, the practice of law has been transformed from a genteel profession to big business.  Lawyers have become profit centers; law firms have grown and consolidated; technological advances have sped up and commoditized the work; competition has increased; loyalty between lawyers and law firms and law firms and clients has decreased; and law firms increasingly are managed by non-lawyer professionals who are furthering the trend towards law as business.  These rapid and accelerating changes in the legal marketplace affect jobs for attorneys at all levels now and in the future.  To chart the course of your career, you need to be aware of them and do your best to make your plan and adjust it accordingly.

 

There are over one million practicing lawyers in the US.  The state of New York has nearly 150,000, with California not far behind.  Together, they make up almost a third of the legal market.  Texas is a distant third with almost 66,000.  Florida, Massachusetts, Illinois, Pennsylvania and the District of Columbia each have significant lawyer populations, as well, and the numbers of practicing attorneys are growing rapidly. 

 

There appears to be a strong market for legal services to support this expansion, however.  Revenues are growing twice as fast as the US Gross National Product.  In 2004, law firm revenues were about $200 Billion and law firm leaders are confident about future prospects.  According to a survey of leaders of the AmLaw 200 top-grossing law firms, 88% expected their revenues to increase by more than 6% in 2005—the fourth straight year of such growth.  Ninety percent expected to raise their billing rates and 73% expected their profits per partner to increase in 2005.  Litigation is the practice area of most expected growth both in revenues and lawyer headcount.  Two-thirds of the surveyed large firm leaders expected to open a new office or dramatically expand an existing office in 2005, with two-thirds of those contemplating growth in New York and 22% looking to expand abroad.    Twenty-six percent are actively seeking a merger partner. 

 

Most of the revenue expansion in 2004 was achieved through billing rate hikes and increased billable hours per existing attorney, rather than by hiring additional lawyers.  To continue this growth, however, law firms may need to increase lawyer headcount in 2005 and/or shed their less lucrative clients and practices.  There is concern that clients will protest continued billing rate hikes at rates double that of inflation.  Large corporations are leading the push for alternative billing methods, going so far as General Electric’s conducting online bidding for its legal work. 

 

In the past, lawyers often got their business through personal relationships and referrals.  Now, competition for clients is increasing.  Corporations have been issuing Requests for Proposals and conducting “beauty contests”, forcing several law firms to vie for their work.  Besides expertise and competitive billing rates, in-house counsel are considering the diversity of lawyers to be assigned to their work, as well as requiring firms to disclose whether the partners handling their matters are equity or non-equity status because they want to know what they are paying for. 

 

This competition for clients also has led to an emphasis on public relations, marketing, and advertising which, in the past, was looked down upon by lawyers and, in fact, was strictly regulated.  Now, virtually every law firm of any size has a website, and the larger ones have engaged in branding and full-fledged advertising campaigns, complete with glossy magazine spreads and billboards.  This is yet another way the legal profession has become more like big business.

 

Technology and the leveraging of associates and non-lawyer staff are increasingly important as ways to maximize revenues while minimizing costs.  Over the past 20 or so years, partner to associate ratios have increased from 1:1 to 1:3 or 1:4.  At the same time, attorney to secretary ratios have grown from 1:1 to 1:3.  Similarly, associates are thought of less as potential partners than as individual profit centers.  Properly utilized, each can contribute as much as an additional $100,000 of profit to the bottom line.  Associates have become fungible commodities with a concomitant reduction in loyalty between associate and law firm.  According to a 2003 NALP study, by their sixth year, only a third of associates remained with the law firms they joined upon law school graduation.  Today, associates do not expect to make partner, nor do they stay long enough to find out if they get the nod.  They choose their first jobs to get early training and hands-on experience, and big salaries to pay down their educational loans, then figure out what they want to do with the rest of their careers.

 

Similarly, over the same 20+ year span, senior attorneys have moved from partners for life to revenue-generating units who move from firm to firm to maximize their business development potential and individual earning power.    In recent times, as many as 40% of partners in some of the top law firms are lateral hires rather than home-grown.

 

Another Big Business trend is the increasing role of non-attorney executive leadership in law firms.  Most major law firms have emphasized the role of the managing partner to the point where it has become almost a full-time job, leaving little time for the practice of law.  Moreover, rather than governing by consensus of the partners, many firms have centralized the day-to-day operational decisions into the hands of a small, elected management or executive committee.  Increasingly, those attorneys in management positions are turning to professional staff, rather than to their partners, for assistance.  Many law firms have hired Chief Operating, Financial, and Marketing Officers.  One result of bringing in C-level staff from business is the increasing adoption of corporate practices by law firms, such as benchmarking, TQM (total quality management), “best practices”, and strategic planning. 

 

The way law firms are organized is being transformed, as well.  Many are moving away from the traditional partnership to becoming corporations, limited liability companies, limited liability partnerships, and the like.  These entities allow for more tax benefits, increased protection from liability, and more flexibility.  Furthermore, some firms are transitioning from being organized by practice groups to multi-practice industry-based teams to better attract and serve clients in a quest for faster responsiveness to market forces.

 

As law firms become more bottom-line oriented, their training programs for lawyers from senior partners to junior associates and even non-attorney staff now include not only programs on delivering quality legal services, but also on how to be a good business person, including management, leadership, marketing, business concepts, and client development.

 

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