On January 2, 2008, three other lawyers and I opened the doors of Valorem Law Group. We were all from different firms, all refugees of big firms and all litigators. At Valorem we were going to continue to serve our large corporate clientele doing complex business litigation but using fee arrangements not based on hours billed. We have followed this path for almost five years.
While many things about Valorem are unique, our transition from BigLaw to a much smaller firm was not. The past is replete with stories of firms created because an area of law had fallen into disfavor; a firm spinning off its insurance defense practice is fairly common. Until recently, however, it has been uncommon for lawyers to come together from different firms under the umbrella of a common set of values or objectives. Yet this phenomenon is occurring more frequently, and it is important to understand why, and what factors are significant for the success of a new venture.
The why is fairly easy to identify. Think Howrey. Think Dewey. Think of the firms being gobbled up by international firms. Many lawyers are finding themselves in firms completely unlike the one they joined. Many others are worried about the financial viability of their firms, preferring to control their own destiny rather than tying themselves to the future of a firm they really don’t know. Clients, likewise, are showing an increasing willingness to move work away from big firms to secure lower fees. So we see more and more people starting, or thinking about starting, new law firms. Few have experience doing so, and those lawyers are interested in hearing or reading about the experiences of those who have.
Everyone who has started a new law firm knows that what you do when you start, and which clients you are doing it for, rarely continue to be what you do and for whom for any great length of time. The pressure to develop new and repeat sources of business is extreme. Thus, while being able to move clients to your new firm is very important and certainly eases the transition, those transitioning to a small firm must do so anticipating the significant business development challenges they will confront, often immediately upon launch.
Almost everyone has heard of firms that make up the Am Law 100. A good number of consumers are familiar with the firms on the Am Law 200 list. But no one other than your families and friends will know about Bucci Beyer Schrier Tate Lieb & Derbyshire, or whatever name you choose for your firm. Congratulations, you have just moved from a world of branded credibility to a world where marketing is based on making new, individual, personal contacts and developing those contacts into sources of business.
The name of your firm is important. “Old normal” law firms are named after people, generally several of them for each firm. Most are now just referred to by a single name—think Kirkland, Wachtell, Cravath, Sidley or Covington, to name a few. Others are referred to by two names—Gibson Dunn, Arnold & Porter or Mayer Brown. Those names, by themselves, make no attempt to communicate a message and, in fact, do not do so independent of the firms’ branding efforts. So imagine how little a name like O’Malley, Gottlieb, Johnson & Shumaker conveys.
Why is this important? Think of law firms as grains of sand. The quality of their lawyers may make them the greatest grain of sand in the history of grains of sand. But then picture prospective clients as tourists visiting a huge beach. No grain of sand stands out from all of the other grains of sand, no matter how good or bad any particular grain might be. Names are the first point of differentiation. Our name, Valorem, was chosen because the word is Latin for “value,” the message we wanted to communicate. Other “new normal” firms have chosen to use words rather than names, and those firms have become a bit more memorable. So, for example, many have heard of Clearspire, radiant.law, Sapientia, Summit and others. Even if these firms gain just a nano-advantage, that distinction may be enough to separate them from the other grains of sand in a way that helps clients remember them—and ultimately engage them.
The other key formation issue is deciding what you are going to do and what you stand for when doing it. Many firms try to be everything, and maybe that works for them. But most clients will tell you that a firm that tries to be good in many areas generally turns out to be less than good in many of them, and savvy clients do not want to risk engaging you in one of your less than best areas, nor do they have the time to figure out which areas are your strong suit. This is not to say you need to specialize in some narrow niche. Litigation is a fairly broad area, but when you add to that broad area a variety of nonlitigation services like real estate, finance, etc., clients start to wonder. The fact you have done work in an area does not mean you should represent yourself as capable in that area. Better to be the best in a narrow area than good in many, at least if your chosen clientele is larger or midsized corporations.
DESIGN ISSUES—YOUR BUSINESS MODEL
When you start a new firm, you are starting a business. Businesses operate based on a business model. The business model you operate on will be a chosen one or one implemented by default. It is hard to pinpoint any examples of success associated with default models, so developing the model you want to employ is important. Are you going to bill by the hour or use alternative fees? If the latter, will your fees be front-loaded or back-loaded? The latter is difficult because your expenses are, to a great degree, front-loaded or constant. What behaviors do you want to promote? Are you experience-driven or leveraged? This impacts how many lawyers you might need and at what level of experience.
By way of example, Valorem’s partners decided we wanted to break away from hourly billing, that we wanted to be paid more for achieving our clients’ objectives and less for failing to do so, that we wanted to foster extensive collaboration among the senior lawyers to take advantage of our collective rather than merely individual experience, and that we wanted to eliminate internal ego—the “I’m better than you” stuff that influences everything from compensation to office size.
Many start-up law firms eschew offices altogether, opting for open-space offices or cubicles. Others simply lease existing space and make use of whatever offices are present. Others design offices to promote their brand, their comfort or their expectations of future revenue. It is true that offices say something about you. Make sure you know what your choices say about you.
DESIGN FEATURES, INCLUDING COMPENSATION
It is difficult to overstate how pervasive behaviors associated with hourly billing and “eat what you kill” compensation systems are in most lawyers today. Changing those behaviors will not be easy, and success requires equal measures of design, execution and the creation of virtuous circles of review and improvement. Since I just mentioned collaboration, let’s start with it as an example.
Valorem, like other firms, has skin in the game on its engagements. This means we get paid more if we achieve our clients’ objectives than if we do not. For us, this translates into an upside-down pyramid structure, with several more senior, experienced lawyers than junior associates. Having the most experienced people work closely together, even on the same matter, increases the likelihood that we will achieve our clients’ objectives and earn our hold-back payments. Accordingly, it was important that our model not only make collaboration important, our model had to make it easy to occur. We accomplished this by determining that the firm’s founders would earn the same amount, regardless of business origination. That way, the question (spoken or not) that frequently undermines firms—“What’s in it for me?”—is never asked. This was a radical change for all of the founders, but with more than four years of experience, it is one of our most important decisions.
In larger institutions, there is room for a clear hierarchy. In fact, firms are designed to promote a clear hierarchy (i.e., a pyramid shape). Fred Bartlit of Bartlit Beck, the dean of “new normal” firms, once said that in smaller firms it was important that “forwards play forward; guards play guard.” He meant that people needed to play to their strengths, and firms would not succeed if everyone had to do everything. If everyone had to generate work and service the work they generated, you would have a firm of silos. Instead, those who wrote brilliantly should do so, and those who tried cases should do so as well. He didn’t mean that cases should be handled in a series of hand-offs but rather that teams be created that combined the various talents of team members. There are, no doubt, many different approaches to size, shape, modeling and compensation, but these design features are hugely important items that must be discussed before launch.
THE BENEFITS OF SMALL
Many benefits accrue from being small, and knowing them and taking advantage of them is important. Listed below are some of the obvious ones:
There are far fewer, if any, conflicts, and the time to clear conflicts is measured in minutes, not days.
There is superior flexibility on fee structures.
A lower cost basis is extremely significant. The IT and Accounting Department overhead for large firms is just under $40,000 per year. For small firms, the amount is about $12,000. It’s a big difference, and a difference that provides value only for the large law firm, not for its clients.
There’s only one office rather than many of them. Do clients benefit from a firm’s presence in Moscow? Dubai? Some may, but most don’t, and it is a virtual certainty that those outposts are net drains for firms, meaning other clients have to pay for their existence.
Small provides better insight into business risk. Small firm lawyers are businesspersons, whereas few BigLaw lawyers ever get near an income statement, let alone have profit and loss responsibility. The insights you get as a result of profit and loss experience influence your practice.
Perhaps the biggest advantage is the ability to work with others who provide superior value on component pieces of what you do. The best illustration is document review in larger lawsuits. Large law firms love document review. It enables them to use high-priced associates to do process-focused work at a high hourly rate. There are, however, many entities that focus on document review that do a superior job at a much lower cost. Small firms do not want to carry the capacity to do document review. Teaming up with the firms that specialize in it allows you to present your client with a superior work product at a lower price. It is great for the client and a strong selling point for your firm.
Many other benefits are associated with being nimble. You no longer need to get permission from a committee to do something you think is right, and no sign-offs from managing partners who are never around. You answer to few, and the speed of decision making will make your head spin until you get used to it. When you look at the way your current firm operates, you will be able to develop a long list of “better, cheaper, faster” items that will make a small firm stand out by comparison.
In the “olden days,” as my kids refer to the 1980s, large firms were important to clients. They had libraries and body count, both of which were critical to handling large cases. Today, technology ensures that every firm has access to the same information, and lean, focused teams provide a more efficient and generally more effective approach to most day-to-day legal work—and at a much lower price. The incentives for starting a new firm grow daily, and more lawyers are taking advantage of the opportunity. It can be an exciting time, but partners in new firms need to transition from being “just a lawyer” to a “businessperson-lawyer.” It is a challenging transition, but ever so rewarding.