Q: One Connecticut blogger suggested law firms should get away from being driven solely by maximum profits per partners to get attention from legal journals. Is that too altruistic of a view for an attorney to take?
A: Maximizing profits per partner each year is not an effective long-term profit strategy because it creates perverse incentives and reinforces short-term thinking. Sometimes, law firms have to make investments in acquisitions, for example, that strengthen the firm’s long-term strategic position and service portfolio. These investments require capital, which law firms cannot raise in financial markets. Thus, the only source for such capital is current profit. By focusing too much on current profits, firms hamper their ability to affect long-term profitability. Maximizing short-term profitability is probably not even a sustainable profit strategy. This is where the perverse incentives come into play. There is a limit — imposed by savvy clients — to their ability to simply crank up rates, overwork matters and otherwise try to maximize revenue per lawyer. Eventually, they become non-competitive.
Q: What are some of the steps law firms need to take to enhance profits? What practices have become outdated yet are still being embraced?
A: Change recruiting and matter-staffing practices. During the last decade, big law firms recklessly “bulked up” and drove starting salaries to unsustainable levels. When business softened, associates had nothing to do because — in some firms — partners started doing a lot of work on some matters to keep themselves busy. With the rush to bulk up, rather than follow a more gradual and sustainable growth model, they also hired a lot of graduates that were not of the same high quality that clients demand of partners. The result was wholesale layoffs that will eventually become costly as the economy turns around. My advice: Cut recruiting programs in half, pay fair starting salaries, hire only the best and most highly motivated people and invest heavily in training, career development and retention.
Embrace “alternative fees” — their time has come. But, more importantly, invest in learning how to apply project management skills to control legal costs. Clients are suffering from sticker shock after the last decade. CEOs and CFOs are putting increasing pressure on in-house and outside lawyers alike to get control of legal costs. The law firms who learn how to manage matters well and keep costs in line will ultimately prevail. Develop a strategic plan and use that to set the firm’s investment agenda and capital budget. I’m not talking about budgeting capital for equipment purchases. I’m talking about capital to invest in strategic growth and — if appropriate — practice diversification. These are long-term commitments that require today’s partners to forego some of their current incomes so that the firm will be in a better strategic position to weather future economic storms.
Q: How profitable is the law continuing to be as a profession? Will it continue to be the profession it is now where partners can make mid- to high six-figure salaries at the largest Connecticut firms?
A: The simple answer is “yes.” Can they accomplish that by continuing “business-as-usual”? No, emphatically. The larger-firm business model has a lot of inefficiency built into it. In Economics 101, we learned about the four factors of production: land (physical plant), labor (lawyers and support staff), capital (excess cash to invest in and finance operations), and management (making it all work successfully). Law firms are pretty good at understanding the first two factors. They are only now figuring out the third. They have a very long way to go when it comes to the fourth.
The keys to having a more efficient business model are:
• Getting away from the billable-hour and hourly-rate model. In the future there will be increasingly fewer situations in which open-ended hourly fees will be appropriate.
• Increase and enforce standards for making equity partners. Too many equity partners got where they are because they got “time-and grade” promotions. A law firm is not an academic institution where tenure is the goal.
• Start training people to manage. It’s not just managing partners of which I speak. Firms need to develop and train practice group leaders how to manage. In addition, “first-chair” partners need to be trained in how to manage matters as projects. So, big firms will need what we so often find in industry and other professions like accounting — senior management, middle management and project management.
• Recruit more selectively. Hire fewer new grads. Invest in training and retention. Weed out non-performers early. Look for high-quality laterals who have been well-trained at bigger firms. Train associates how to manage projects.
