Dawn of a New Business Model

Volume 39 Number 1

By

About the Author

Mary E. Vandenack is founding and managing partner of Parsonage Vandenack Williams LLC in Omaha, NE, a tax, estate planning, business and health care boutique firm. 

Law Practice Magazine | January/February 2013 | The Management IssueIt is fairly common for a small group of attorneys to break off from a large firm to create a boutique law firm. But it’s more unusual to follow the course charted by Morningstar Law Group, where lawyers left two large firms and joined to create a new business law firm offering services in multiple practice areas, including corporate, securities, real estate, litigation and intellectual property. On June 6, 2012, Morningstar Law Group opened its doors. The Morningstar founders include six lawyers who left K&L Gates, a firm numbering more than 1,700 lawyers, and four who left Womble Carlyle, a firm with more than 500 lawyers. One of the attorneys from Womble Carlyle is Kenneth Carroll, a former managing partner of its Research Triangle Park office. A few months after this new firm opened, Carroll agreed to answer a number of questions posed by Law Practice editorial board member Mary Vandenack about what drove the formation of Morningstar and its core principles.

Law Practice (LP): What inspired the formation of Morningstar Law Group?

Kenneth Carroll (KC): A number of factors were involved. We were all successful lawyers in big law firms, but the big firm environment was becoming increasingly unsatisfying. There is so much emphasis on maximizing individual financial statistics that it tends to discourage teamwork and true collaboration. We all wanted a firm in which everyone was invested in the success of everyone else—both lawyers and staff. In addition, the big firm practice of raising billing rates every year was becoming increasingly difficult for our clients. The big firms have large and costly infrastructures and layers of management that result in high overhead costs per lawyer. Too much of this infrastructure is unnecessary and unrelated to client service. To maintain the desired profit margins, the rising overhead expense has to be passed along to clients. We believe we can be just as profitable by focusing upon client service and eliminating overhead that is not directly related to the provision of client service. We also believe we can do this without self-serving management structures.

LP: What is the meaning behind the name Morningstar?

KC: We wanted to avoid using a string of lawyers’ last names. For one thing there were 10 of us, and that is too many names. In addition we wanted a brand name that would symbolize what we were trying to convey: the dawn of a new day in the provision of legal services.

LP: What have been the practical challenges so far in breaking off and starting a new firm?

KC: It is actually somewhat amusing for some of us because we have spent years counseling clients on starting new businesses, and now we find ourselves in the same position. Needless to say, there are a lot of practical things—not just legal—that you have to take care of when you start a new business. We had to spend time focusing on office space, furniture, equipment, hiring employees, providing them with appropriate benefits—all things that we had not really had to deal with before. Handling all of these things, in addition to maintaining an active law practice, takes a lot of time.

LP: Will Morningstar serve different clients than were served when its lawyers were part of big law firms?

KC: Yes and no. Practically all of the clients we were serving in our former firms chose to follow us to Morningstar. In addition, our model and platform has allowed us to attract new clients that would have been difficult for us to serve in a big firm with expensive overhead and increasingly high rates.

LP: How will Morningstar use technology in its mission to serve businesses more efficiently?

KC: Most firms have become pretty adept at using technology to serve their clients efficiently. Our efficiency comes more from our approach of using well-trained, experienced lawyers to perform client work in a more affordable platform. We did elect to put everything in the cloud in lieu of using an expensive dedicated server, we use VOIP [voice over Internet Protocol] for telephones and nearly all of our legal research facilities are online rather than in an expensive onsite law library.

LP: How will Morningstar handle service gaps that may exist as a result of fewer skill sets among its lawyers?

KC: Our firm goal is to become a full-service business law firm, and we already have many of the necessary skill sets in place. We obviously are looking to grow the firm in both the practice areas we currently handle and to add lawyers to create practice areas we do not yet have. In the meantime, we will have no problem co-counseling with other firms to cover any gaps in practice, including both of our former firms.

LP: One of the Morningstar Law Group’s core principles, articulated on its website, is “clients first.” What does that entail, and how does being a smaller firm help you embody that principle?

KC: It is not so much a question of how being a smaller firm will help us provide better service. Rather, the philosophy of the firm will enable us to accomplish that goal. We focus primarily on firm performance, not individual statistics. In most big firms not all partners are equal. In fact, it isn’t even close. That approach tends to create a lot of internal tension and competition among the lawyers—and sometimes leads to bad behavior. The focus on individual statistics results in lawyers handling matters that could be better and more efficiently handled by other lawyers in the firm, so that they can boost their personal numbers to increase their personal compensation. At Morningstar, we have tried to eliminate that internal tension and competition, which ultimately has nothing to do with client service. All clients are viewed as firm clients, not the individual lawyer’s client. We believe that philosophy encourages the correct approach, whereby the most appropriate lawyer in the firm handles each particular matter for the client.

LP: What is the “new model” that will be represented by Morningstar’s approach?

KC: As noted earlier, our model is to provide optimal legal services to business clients, using well-trained and experienced lawyers in a more affordable platform. Clients will deal directly with partners rather than going through layers of associates. By keeping our own overhead low and eliminating internal competition, we can provide these legal services more efficiently and more affordably to our clients. We have no minimum billable hours requirements, so no one has a quota to reach. We use a model that focuses on firm revenue rather than billable hours. We believe that approach creates more of an opportunity to use fixed fees and other alternative billing arrangements than the traditional billable hour model.

LP: Another Morningstar core principle is “true partnership.” Can you explain what that means?

KC: As mentioned, not all partners are equal in a big law firm. It is much more about individual statistics and how credit is apportioned among lawyers. Lawyers spend an inordinate amount of time and effort trying to manipulate the system to enhance their statistics rather than focusing upon practice building and client service. In addition, big law firms have, because of their size, adopted hierarchal management styles with more centralized management—typically a management committee and a managing partner—and this management tends to become self-perpetuating and self-serving, creating artificial goals that celebrate management rather than client service. In fairness, when you have hundreds of partners, it is next to impossible for every partner to have meaningful input in running the business and making key business decisions. The downside to this centralized management is that it tends to create a sense of apathy and disenfranchisement among the working owners, i.e., equity partners, which I find troubling. You end up feeling like an employee rather than a business owner, and in fact you really are nothing more than an employee because you rarely ever are consulted about significant decisions in a meaningful way. We have 10 partners so far, and we sit around the table and discuss pretty much everything.

LP: What specific approaches will be adopted by Morningstar to provide better value and more flexibility in providing client service?

KC: I think our model of using well-trained and experienced lawyers in an environment that fosters true teamwork and collaboration will result in better value and flexibility for our clients. We do not have layers of administration and overhead to pay for and therefore can maintain our own profitability while passing savings along to the clients.

LP: Compensation issues are the root of many law firm departures. How did Morningstar Law Group design its compensation system, and how do you think that will resolve the typical compensation issues?

KC: Partner compensation in big law firms has become increasingly problematic for many partners because of the spread, the ratio between highest paid and lowest paid partners. For decades, the spread was roughly 3:1. That type of ratio lessened the internal tension and competition. Because of the increased emphasis on individual financial statistics, in today’s environment that ratio is commonly 10:1 or even greater. That approach inadequately recognizes the many nonfinancial contributions made by partners that benefit a firm and make it successful. At Morningstar, our compensation structure takes into account all of the contributions, both financial and otherwise, of the partners.

LP: What do you see as Morningstar’s most significant challenges over the next year?

KC: Growth. To accomplish our goal of becoming a preeminent business law firm, we do need to add some additional lawyers and additional practice areas. Morningstar is not an “every man/woman for himself/herself” firm. We believe that it will be a great platform for lawyers who want rewarding careers and will take pleasure and pride in a financial model in which a rising tide truly lifts all boats. We believe we can make plenty of money and enjoy doing it. We hope to show lawyers that there is a better, more enjoyable way to do what we do.

LP: As you grow, will Morningstar seek experienced lateral attorneys or new graduates? Why?

KC: Our primary emphasis will be more on experienced lateral attorneys. The old leverage model of hiring lots of entry-level lawyers to handle routine matters and bill lots of hours is seriously wounded, if not dead. There may come a time when we selectively hire new graduates, but we will need to view that more from the expense side and not the revenue side. In other words, we will view hiring first-years as an investment in our firm rather than as an immediate revenue source.

LP: Assuming your success, what are your plans to avoid becoming that which you left?

KC: The 10 partners who formed Morningstar share a common philosophy. In our early discussion about the possibility of forming this new firm, one paramount characteristic stood out: the complete absence of personal greed. That does not mean that we are not ambitious or that we do not want to be successful and earn good money. However, we define success in ways beyond just the amount of money we individually earn. Although our desire is to grow our firm, we recognize that our model is not for everyone. We want lawyers who share this common philosophy. If we can achieve that, we will never become that which we left.

LP: How has the practice of law changed over the past 10 years?

KC: The increased use of technology has radically changed the practice of law over the past decades. Law is now a 24/7 profession. Clients want immediate attention to their matters, and technology has provided the means to provide that.

LP: What do you think are the key things that business clients are looking for from a law firm currently?

KC: I think business clients—and all clients for that matter—expect prompt, efficient and accurate advice, and legal services at a fair price. Needless to say, the business environment has been difficult over the past four years. Profit margins have shrunk, and businesses are looking to cut costs wherever possible. One of the expenses they are looking at closely is how much they spend on legal services. The big law firms are struggling with this because of their own expensive infrastructure. We want clients to know that we hear them, understand them, and we have a solution.

LP: Break-offs and implosions of big law firms have been a significant recent trend. What types of issues do you see as the basis for this?

KC: The “misery index,” to borrow a phrase from former President Carter, is very high in large firms for many of the reasons I mentioned earlier. The income spread, the internal competition, the emphasis on individual statistics and the lack of meaningful input in a business that you “own” have all resulted in low morale throughout the organization at almost all levels. Also, detached management has contributed to this situation by making bad decisions, such as incurring large amounts of debt through engaging in mergers for short-term gain and through paying bounties to attract lawyers with books of business rather than focusing on growth from within driven by common philosophy and shared vision.

LP: What do you see as the key challenges for large law firms hoping to avoid splintering and division?

KC: Large law firms need to focus more on collegiality, teamwork and mentoring, and less on individual statistics and management for its own sake. They must be careful not to take good lawyering for granted. They need loyalty to become a two-way street again. You cannot expect loyalty from your people if the firm has no loyalty to them. They also need to be more cautious about hiring expensive laterals and engaging in mergers that too often do not deliver what was promised. In short, they need to establish and maintain a consistent firm culture in which everyone is invested and incentivized to support the success of everyone else.

LP: What advice would you give to a lawyer considering departing from his or her firm to start a new venture?

KC: I would first ask myself, Why I am considering doing this? It needs to be for the right reasons. Being angry probably is not the right reason. For me, it was a very difficult decision to leave the firm where I had practiced for 27 years. I have great respect for that firm and have many, many friends there. It was just no longer the right environment for me. To anyone who is considering it, I would encourage them to carefully plan for it and to speak to former colleagues or peers who have done it. They can be a font of information and are always willing to share their experiences.

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