Originally Published in Managing Partner Magazine
PART ONE
The period beginning with the Lehman Brothers Bankruptcy and the subsequent economic melt-down has not been particularly kind to a very large number of law firms in the U.S. and around the world. Certainly some have continued, unabated in their practice (depending largely upon the resiliency of that practice and what the practice focus may be). This extends to last month’s report on jobs in the legal sector indicating that another thousand plus jobs had been lost in the private practice sector in the U.S. in December alone.
It goes without saying that a number of law firms have been unable to manage very well in this period of time and so a large number have shut their doors, been absorbed, had their “best and brightest” hired away or had senior lawyers simply retire until there was nothing recognizable left of the firm. Of course, when a firm fractures or implodes it usually relates in some fashion to the issue of economics (expenses rising along with the concomitant diminution in revenue) although many other factors may be involved as well. Those Partners, Associates and Of Counsel involved with the fracture or break up (who have not actually engineered the break up over their departures) are then left on their own to find new homes, start new practices with others or make other plans for their own practice.
In these circumstances, there are always, in fact, particular reasons that certain of the firm’s lawyers were unhappy with the previous practice structure and methods. Sometimes this may have been about technology, as one example. Firms without a plan in place to absorb and utilize new technologies will simply disappear in the next few years and there is an observable, ever widening gap among lawyers in many firms over the usage of technology (including costs) and the often very personal changes which it forces upon lawyers who have been in practice a long time and who are unwilling to adapt to new-technology pressures.
However, technology isn’t by any means the sole or even the primary force driving the growing number of firm fractures and/or break-ups. It’s very much the economy, and returning to the economics theme, a good example of the problem of many firms, concerns the senior lawyers in those firms still holding onto residual revenue (billing credits based upon work generation in the past). This relates to clients who they have brought in or (as is often the case) they themselves have inherited. Other lawyers in the firm may have actually done the legal work for a particular client for many years but the residual credits continued to flow to that individual who was there first. Many of the firm break-ups in the last three years (particularly), have been the result of the individual lawyer who actually provided the services, being no longer willing to continue “pay” a portion of fees to someone who may be at this point years away from actually having performed those legal services for the client. When times were good and there was plenty of income, these concerns were handled delicately and then the lawyers were glued back together (at least temporarily) by extra cash bonuses, such that all was forgiven for the moment. The records show that the circumstances and the perceived inequities are never forgotten, however. Therefore, when things are not so rosy, these payments, as just one example, become a source of continuing irritation. In reality, when the fractures occur, in most cases the junior Partner becomes the beneficiary of the new attorney-of-record letter while many of the firm’s lawyers end up going their separate ways.
PART TWO
It is an unfortunate reality that a number of law firms have been unable to manage economically very well in the last three years. A large number have shut their doors (are shutting their doors), have been absorbed, had their “best and brightest” hired away or had senior lawyers simply retire until there was nothing recognizable left to the firm they had themselves begun. As noted in the first Part of this article, when a firm fractures it usually relates to economics although of course other factors are involved as well. The Partners, Associates and Of Counsel involved with the break up (who have not actually engineered the break up over their own departures) are then left on their own to find new firms from which to continue their practice, start new practices or make alternative plans.
Whatever the reasons for the fracture or break-up, the positive view suggested here is that the lawyers involved in these kinds of circumstances find themselves with new opportunities to make important changes in their next practice structure. Those lawyers from an earlier firm iteration who are fortunate enough to have a sufficient client base and/or a reasonable new-client pipeline often re-start the firm “under new management”. Often times the new firm rests upon some basic assumptions held by a number of the partners from the earlier firm iteration whose intellectual positions now may become a dominant force in the restructuring process. So, although a firm break-up is generally considered to be a bad thing to happen, looking at the positive side, it may actually provide some great opportunities for change including ameliorating compensation formulas, weeding out unproductive/unprofitable practice areas (and lawyers) and re-thinking the actual practice management of the new entity.
Experience tells us that it is very difficult, if not virtually impossible, for a law firm with a sizeable population to make fundamental alterations in the way the law practice is actually managed. However, a fracture or break up provides for a substantial lift to the idea of “change” which, as we are all aware, is never an easy thing to absorb. Consequently, while not actually enjoying a “tabula rosa” with which to work, the Partners in the new entity may enjoy a much better chance of altering some basic practice paradigms going forward in the new firm environment. So, the question to be asked is, “Where should the lawyers in a “break-out” firm from another firm begin the reconstitution of the firm practice?”
The answer of course begins with the intramural contract between/among the new Partners in the new entity. This is, in fact, the perfect time to assure themselves as Principals, that the issues with which they were beset before, are solved as well as they can be solved. In previous columns the core elements of such agreements have been addressed and we refer you back to those for their additional detail. Suffice it to say, however, that the important basics of the Agreement have to be addressed, including of course compensation but also important questions such as methodology for new Partner inclusion, partner departure of all kinds, general management structure, adherence to codes of professional responsibility and the like.
Beyond the Entity Agreement, what are the other prime issues with which to attend? The first suggestion has to do with management structure. How should you govern the new firm? The diagram below shows the simplest way and in many ways, still the best. The basics must be here including a clear delineation of authority. It works very well for virtually any sized firm so it is a good start. (See Diagram).
The next issue is, of course, how do we structure our practice for accountability and transparency? Using the basic diagram, the new entity must firm up responsibilities and assign duties. The Partnership/Corporation is the ultimate authority of course. The Executive or Management Committee should be charged specifically with policy and planning for the firm. Depending upon the individuals involved it may assign different tasks to different members so that there is a clear understanding of responsibilities.
The Managing Principal position will differ as well depending upon the skill set of the individual involved. One that includes a lawyer with a strong financial background would, of course, include that responsibility within their position description.
Practice Sections are designed to manage/orchestrate the case work of the individual lawyers. They are most responsible for the transparency of the practice and must work in close coordination with the Managing Principal. In a larger firm (over 30 lawyers for example), it is vital that the issue of supervision of lawyers and their practices be part of the basic paradigm.
Technology should also be at the top of the list of matters to accomplish in the new entity. Today, a substantial amount of organizational frame work can be accomplished using integrated information management. Putting the appropriate information in front of lawyer, staff and managing lawyers, contemporaneously, is the key ingredient to both managing case work as well as supervising other lawyers and staff. In the process of beginning a new entity (or re-starting an older firm) utilization of technological resources is a “game changer” providing the entity with efficiency, clarity, and safety and security in its practice.
As simple as all this may seem, many law firms with which we have worked over the last twenty years have no such organizational plan. In many firms there is unfortunately, little
in
the way of orchestration and structure and so those firms, under the toughest of circumstances, have little chance of survival. Much of the reason for their demise is this lack of accountability and organization. This is a reminder that when a lawyer or group of lawyers are starting over, as it were, it is critical to get the basics in place so that decisions can be made at the appropriate time and by the appropriate individuals. A fracture can actually have a positive result. It remains for those involved to see the opportunities for change and embrace them.
Thomas Berman can be reached at tberman@bermanassociates.net
