Nicholas Murphy-Whymark sent me a link to an interesting article on law firm financial management called Riding the Perfect Storm by John Mullins. My first impression is that the points in the article were just common sense. Upon reflection, however, the article contains a lot of subtext, principally that lawyers need to change the way they conduct business in order to survive. They keep throwing Band-Aids on it, but fundamentally they are continuing to practice as they have in the past.
I think the discussion should extend beyond just financial management.
The law firm partnership structure, by its nature, is unsupportable. A partnership must be properly leveraged to be profitable. It requires a vast number of associates to consistently bill a ridiculous number of hours in order to maintain consistent Per Partner Profit. There is the lure of the partnership track, the idea that associates who work x number of years at a required level will be rewarded with an offer to become a member of the firm. When this occurs, more associates need to be brought on-board to bill a ridiculous number of hours… Resulting in more becoming partners… The model is a ravenous beast that must be fed. The reality is that, after a certain point, the only way a firm can survive is to merge with other firms and use this as an opportunity to reconfigure the partnership ranks.
When the global economic downturn occurred a few years ago, instead of making real change, most law firms cut administrative staff, reduced expenses and simply waited for the economy to rebound. As John Mullins states effectively, more is needed for law firms to survive.
There’s another perspective to consider. We’ve seen recent reports in the press on how some of the cost-management techniques used by law departments have been unsuccessful. In fact, in many cases these cost management strategies have resulted in higher overall legal expense. How is this possible? As it turns out, expected savings from discounted rates are negated by increased overall billing. Another interesting finding is that law departments that reduced the number of matters referred to a law firm for handling resulted in less partner attention on matters and many additional hours billed by associates without the necessary level of expertise to handle the matter efficiently.
Clients and now the UK court system are demanding accountability. Client systems that provide collaborative insight into case management, budgeting and billing processes have been de rigueur for years although, and I am generalizing, it seems like many attorneys do not understand this reality. Lord Justice Jackson’s review project in the UK has brought a dawning awareness that there is accountability in legal process management and failures can be catastrophic for a law firm. Why has it taken this long for this discussion to occur? Are we paying attention in the US?
For a different but related discussion, I recommend a Legal IQ podcast by Professor Richard Susskind, Advice on Information Governance and eDisclosure for Tomorrow’s Lawyers.