October 23, 2012

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June 2009 Issue | Volume 35 Number 4 | Page 12

Ask Bill

Examining the economy’s long-term impact on the profession—a sea change or will the current law firm model prevail?

Q. Bill, my colleagues and I are debating whether law firms will ever again enjoy the prosperity of the last decade or whether firms could be taking a permanent hit in profitability. What perspective do you and your circle have on it?

A. Like everyone, I’ve been watching the economic crisis with keen interest and listening carefully as economists, politicians and friends offer their predictions about how long this situation will last, how bad it will get and how it will affect the legal industry.

To address your question, I’m going to start by musing about two recent news items that caught my interest. One was a New York Times column by the renowned global thinker Thomas L. Friedman about the “sustainability of our recent economic model,” and the other was a piece on public radio’s Marketplace program about Latino landscapers. It might sound crazy, but these two subjects are connected and not irrelevant to the plight of lawyers and law firms.

Friedman poses this provocative question: “What if the crisis of 2008 represents something much more fundamental than a deep recession? What if it’s telling us that the whole growth model we created over the last 50 years is simply unsustainable economically and ecologically and that 2008 was when we hit the wall—when Mother Nature and the market both said: ‘No more’?” Since reading Friedman’s column, I’ve been pondering what it might mean to our profession if he is right.

The Marketplace piece contrasted the plight of Hispanic construction workers with that of Hispanic gardeners and landscapers. According to the program, during the construction boom of the last decade, thousands of construction workers from Mexico and other Latin American countries found abundant work building houses throughout the United States; since the bubble burst last year, thousands of those workers have been laid off. Hispanic gardeners, on the other hand, “have held their own.” In fact, the program said, quoting a report from the Pew Hispanic Center: “Repair and maintenance professions, which include landscaping, actually gained 12,000 Latino workers” over the past year.

So what’s behind the difference in the situations of the construction workers and gardeners, and how is any of it relevant to lawyers and law firms?

Two Sides of the Game

Construction workers generally are in an “all or nothing situation” in their jobs—meaning that when the developer goes bust and you lose your job working for the builder, you can’t simply go out and build houses on your own. But landscapers’ work, according to the Marketplace report, is “tied to several different small contracts, several small employment opportunities,” so losing one isn’t going to mean an entire loss of your income. What’s more, even when banks aren’t lending money and builders aren’t building, people still need to have their lawns maintained, their hedges trimmed and the like.

It strikes me that we can look at law firms in a similar way, as falling under categories similar to either the new construction business or the repair and maintenance business.

Most smaller firms have kept to the “repair and maintenance” business through the years. Although some did get into the “construction” business by representing players in the financial game during the past decade, most remained the legal industry’s equivalent of the landscapers.

The big firms that spent the past decade or two working with banks, investment houses, large real estate developers, hedge funds, sovereign wealth funds and congressional lobbyists, on the other hand, were in the construction business big time. During those heady days, firms knew that clients who were looking at massive profit potential, whether in securitization of mortgages, sales of credit default swaps, or real estate development in the Gulf States, weren’t too concerned about getting giant bills from the lawyers whose work was helping them to clear the regulatory hurdles and get their money-making machines running in high gear. Those law firms could throw $400-per-hour associates at projects and generate multimillion-dollar profits per partner and still expect clients to pay the bill.

Well, you can easily guess which category of firms is laying off associates, firing partners and closing offices these days and which category is plugging away with only modest (if any) decreases in revenue.

So, how do others feel about this analogy, and how does it link to Friedman’s supposition of an unsustainable model that has hit the wall?

Toronto lawyer Simon Chester, a partner in 480-lawyer Heenan Blaikie, feels that my dichotomy is too stark and that some practices simply cannot easily be categorized as either “construction” or “repair and maintenance.”

“I’ve always worked in legal environments that were in many respects countercyclical,” Chester says. “So they weren’t like construction companies during a real estate crash—they actually saw work coming from such a crash.” He feels the changes happening in the economy “may be an opportunity as much as a catastrophe” and sees shifts in work coming for practices in areas such as insolvency and restructuring, labor, employment and pensions, commercial litigation, regulated industries and government relations.

“Yes,” he says, “if you constructed your firm by leveraging squadrons of due diligence acolytes, then you did well in mergers and acquisitions and clearly it won’t continue. But prior economic turndowns show that lawyers are needed for more than simply polishing the burnished ornaments of gilded capitalism.”

I would agree but point out, too, that while the bread-and-butter work looks good to firms in need of paying clients in these hard times, it also involves practice areas that would have been dismissed only a year or two ago by bigger firms hot on improving their profit-per-partner scorecard. The kind of firms that Chester describes having worked for, of course, appear to differ in that they had management possessed of wisdom and foresight and the courage to resist the temptation to become overleveraged—and they probably aren’t laying off most of their young associates right now, either.

How to Reshape the Model

For more perspective, I turned to seasoned law firm consultant William Cobb, who agrees with Thomas Friedman’s comments about the growth model hitting the wall and goes so far as to predict that the legal business model is “broken for good.”

Cobb believes that “the tipping point has finally come for the leveraged growth business model that law firms have used for 40 years”—a model, he points out, “focused on more hours to get more income.” Now, he says, because of the economic shifts “clients are powerful enough to demand effectiveness and efficiency.” Thus, according to Cobb, firms must create a new model: “The new business model requires project management skills and the ability to manage the delivery of legal services with fewer people.” And, he adds, “Lawyers must now move to what all other professional services firms have had to institute—fixed price and incentive fee services. Lawyers can no longer place the risk on the client with hourly billing.”

Consultant Larry Bodine also agrees with Friedman. “When I first heard about lawyers charging $1,000 per hour,” he recalls, “it was the sound of a bubble popping. I’m sorry, but no lawyers who cannot shoot laser beams out of their eyes are worth that much money.” In his view, clients are “in an organized revolt” over out-of-control legal costs—which could not have come at a worse time for law firms already undergoing massive layoffs.

“The handwriting on the wall is turning into headlines in the news,” Bodine says. “Major corporations are actively seeking smaller law firms to get lower rates. Clients want cost-efficiency and an end to the billable hour.” So, he predicts, the firms that will survive the recession will do the following things:

  • Have rates markedly lower than in 2008 and offer flat rates per project or procedure
  • Be run like real businesses, which know their costs, can calculate a profit margin, and offer just-in-time services at the best possible price
  • Produce budgets for all legal work
  • Give personalized service and get to know their clients' business objectives
  • Fly coach and not stay at The Four Seasons

Rob Millard, of Edge International, says that there is “more than a grain of truth in what Thomas Friedman writes,” but that “over-pessimism is not warranted.” Millard takes the long view of the situation: “This is more about adjustment and change—albeit radical, disruptive, desperately uncomfortable and undeniably unpredictable change—than simple doom.” He sees Americans and Europeans becoming more frugal and less materialistic and inflated property prices reverting back to line up to late-1990s trends. “Let's face it,” he says, “housing deflation alone means that literally trillions of dollars have simply disappeared from the world’s coffers (if they ever really existed) and the world's economies—not just the banks—have to stabilize around that reality.”

Deeper in the Crystal Ball

Getting back to the situation with the Hispanic construction workers, Marketplace reported that “people who were in construction are now crowding into gardening,” leading to “price competition that was once considered taboo.” Now that those lawyers whose practices are more like landscaping than construction are doing much better than the big firms, it’ll be interesting to watch whether large firms troll the waters for clients and legal work that they would have thrown back only a year ago. Will the kind of work—and billing rates—that they once saw as unprofitable now be seen as more desirable (especially compared to having no work at all)?

And if Thomas Friedman is right in saying that we have “hit the wall,” and if the legal industry is in the midst of a life-changing occurrence, will it ultimately be a good or a bad thing? My learned colleagues all seem optimistic, despite the onslaught of gloomy news.

Chester suggests that market and governmental shifts mean new opportunities for lawyers “to help adjust to those changes.” And, he adds, “a 21 st century may also need lawyers as counselors, advocates, wise owls and interpreters. As Justice Holmes told us, ‘it is still possible to live greatly in the law.’”

Millard says that considering, among other things, “how the global economic model is going to realign over the next decade, even as growth returns, certainly we cannot expect a return to anything like the ‘normality’ that we had before.” But that isn’t something he sees as bad for the profession: “All these changes imply new legal needs that never existed before,” he says. “If we consider the role of lawyers as being partly to help ensure that transition on such a grand scale takes place in an orderly fashion … there will be as much need for lawyers—perhaps more—than in the past.” In fact, he thinks that lawyers will play a far wider role than merely interpreting the law for clients. At the same time, he goes so far as to predict that we will see radical changes in jurisprudence “as the pace of change accelerates until law itself finds it impossible to catch up.”

Finally, management and marketing consultant Merrilyn Astin Tarlton sees another positive outcome emerging from all the disruption: “Perhaps lawyers and law firms will begin to think harder about what their clients need instead of what the lawyer wants—and begin building services to meet those needs. When clients are in growth mode, they may need quick turnaround, scorched earth and no stone unturned, regardless of the price. When things slow down or take a turn for the worse, they may need you every bit as much, but this time to help find ways to minimally cover their backsides while better managing the costs.” As she puts it, “If ever there was a good time to learn to listen , this would be it.”

So where does all of this leave us? There are clearly those who agree with Thomas Friedman and believe that the country, the economy and, yes, even the legal profession are in the midst of a fundamental sea change. Some lawyers, of course, will disagree and believe that it is only a matter of time until things get “back to normal.” There are tens of thousands of unemployed construction workers hoping they are right. I tend to believe that the future belongs to the landscapers.

Have questions about your career, your practice, your computer or anything else? Send them to Bill Gibson at kwg@gibsonmediation.com

About the Author

K. William Gibson is a personal injury lawyer and arbitrator in Clackamas, OR, and author of How to Build and Manage a Personal Injury Practice ( ABA, 2006).