Whether it's a recession or a depression we're in, several lessons have surfaced we cannot ignore. This week, Ed ponders what we can learn from this crisis to ensure we're on the right track for the future.
Effective March 15, the Howrey law firm, which once employed as many as 750 lawyers, dissolved. As in past megafirm failures … Brobeck, Altheimer, Thelen, the list goes on … there never is just one, but a variety of root causes that feed the primary death blow, an exodus of lawyers.
In Howrey’s case as a litigation-focused firm, according to the firm’s CEO (quoted in the ABA Journal), up to 11% of the firm’s billable hours were devoted to contingency matters. “Some people, including some fairly high-level people, sort of bailed on us when they didn't get exactly what they wanted,” the CEO said. “You have to ask your partners to be patient until it [contingency billing] pays off, and not everyone is patient enough.”
In pure contingency law firms, that's exactly what every equity lawyer does, wait. Wait until the judgment or settlement is paid. Why should that be different with the Howrey firm? Lawyers working on contingency matters bring no money into the firm, yet are responsible for many dollars flowing out ... in the form of lawyer and staff compensation and expenses advanced to sustain the lawsuit. And if the result of the case doesn’t benefit the firm, the loss can be substantial.
But, the lawyers of the firm knew that. Thus, the question, why is it now that there is objection? Though conjecture, apparently, Howrey partners wanted pure hourly billing, less contingency work … and were uncomfortable with advancing costs for matters in which they were at risk. They seemingly could not determine, to the satisfaction of enough, how to divide the compensation pool when revenues arrived out of sequence to the work performed connected with those revenues.
If fees to the firm based on contingency reached 11%, it’s almost like having one client exceed the 10% threshold, a level that I’ve said before is dangerous. Control of this much money was essentially out of the partners’ hands, unless the firm only took on matters that were virtually sure things … which conversely would lessen the likelihood of a big contingency payout.
Other factors to consider that would lessen the threat to my 10% rule is that it's unlikely that any one matter reached 10%; if the intake decisions were wise, the firm benefited more than it suffered from periodic big revenue bumps; in today's world of "value billing," the firm would be at the forefront of aligning its interests with those of its clients. The firm should have been able, with good cash flow management and a committed group of partners to the team concept, to marry both worlds of contingency and hourly billings.
The ultimate lesson in this dissolution seems to be that Howrey fostered an environment of solo silos (with some lawyers piling up cost but poised to earn a great deal of money if "their" ship came in), not an environment where everyone was pulling for the whole (irrespective of how they brought in the revenue.
Any firm that encourages lawyers to maximize their individual compensation may have fast near-term growth. But approaching compensation as an institution makes for greater firm harmony and longevity of the firm as an institution ... and, in my opinion, greater long-term value for all.
NEW ONLINE FORUM LAUNCHES FOR LEGAL PROFESSIONALS
Ed Poll Unveils LawBiz® Forum as New Online Community
VENICE, CA MAY 5, 2009 - Nationally recognized law firm management expert Ed Poll, JD, MBA, CMC, announced today the launch of www.LawBizForum.com, an online destination for lawyers, sole practitioners, partners, managing partners, of-counsel and in-house counsel, and others who are members of the legal community providing services to the American people.
LawBiz® Forum will promote discussion about issues that enable lawyers to more effectively and efficiently deliver their services to their clients, such as management, marketing, technology and finance, and others. LawBiz® Forum is a place where the legal community can exchange ideas and techniques in order to improve the personal and professional lives of its members.
“Law is an honorable profession. Only lawyers are given the unique responsibility in the United States Constitution to help those accused of a crime, a fundamental right guaranteed to all citizens,” remarks Poll. “This helping, caring nature of the legal community sometimes is forgotten by the psychological, social, and economic pressures facing lawyers, and I created this forum so that we can care for each other.”
LawBiz® Forum will have several levels of membership. All visitors to the site can review the discussions at no cost. However, members will be able to contribute to the discussions, participate in exclusive webinars, and have online access to Poll’s books and audio products.
In addition to LawBiz® Forum, Ed has a popular YouTube Channel and has also started to use Twitter as a way to reach out to the cyber sphere.
About Ed Poll
Ed Poll, J.D., M.B.A., CMC, is a nationally recognized expert in law practice management. He helps attorneys and law firms increase their profitability consulting with them on issues of internal operations, business development, and financial matters. Poll brings his clients a solid background in both law and business. He has 25 years experience as a practicing attorney and has also served as CEO and COO for several manufacturing businesses. In 1990, he founded LawBiz® Management Company and is now focused on coaching lawyers, speaking, and writing.
Poll is the author of numerous publications that have become the definitive works in the legal field, including: Law Firm Fees & Compensation: Value and Growth Dynamics (LawBiz© Management Co. 2008), Attorney & Law Firm Guide to The Business of Law: Planning and Operating for Survival and Growth, 2nd ed. (American Bar Assoc. 2003); The Profitable Law Office Handbook: Attorney’s Guide to Successful Business Planning (LawBiz® Management Co. 1996); Secrets of the Business of Law®: Successful Practices for Increasing Your Profits! (LawBiz® Management Co. 1998)