Alternative law firm business model
From Lawyers USA, we learn that the American Bar's Ethics Commission has recommended that states rules be changed to allow non-lawyers to own up to 25% of law firms.
Rules against lawyers sharing fees with non-lawyers might need to be loosened to allow U.S. firms to compete globally. The proposal says that any firm with non-lawyer owners must have “as its sole purpose providing legal services to clients.”
This is the foot in the door.The next thing you'll see is Latham & Watkins, or other billion dollar law firm opening offices in Wal-Mart or Target stores for curbside service. This is not necessarily a bad thing. It will certainly bring the law to the people ... And it will certainly change the perception of the law.
I've always maintained that the rules of professional conduct are controlled by the large firms, AmLaw 100 and 250. When their economic needs change, the rules get changed and the sole and small firm practitioners have to adapt accordingly. In other words, the rules are not made in a vacuum, not made because of their inherent righteousness or goodness. They change and are made to serve the economic interests of the few ... oh, if the public is served, so much the better.
But if you're a solo, watch out ... your interests may not matter. Such has been the case in recent times when solos' interests were not protected, in fact hurt, by changes in the rules .. But, here, to allow the larger firms to complete on a global scale, we see the rules begin to change and allow allied professions to join in the ownership of law firms, not merely as allied professionals independently serving the same client.
Economics control .. as always ... even here in the rules of professional conduct.
Today's law firms are struggling to pay for their 3 most importance expenses: labor, rent, and insurance. This week, Ed offers tips to help you manage your cash flow so that paying the bills doesn't break the bank.
Raising Legal Fees
Ed recognizes that raising your legal fees just doesn't "fly". This week, he offers some tips to raise the revenue of your firm without necessarily raising your fees.
Succession is uppermost in the minds of majority of lawyers
More than 23% of the Washington State Bar Association, a mandatory bar, are 60 years or older. Several years ago, the American Bar Association, a voluntary bar, estimated that 400,000 lawyers would retire in the next 10 years. For the ABA, that’s equal to its entire membership. And that's equal to about 40% of all lawyers and a majority of private practitioners.
How will the ABA, in effect, replace itself? Will the WSBA replace these 23% as they leave the practice? Law school admissions are down by more than 10%. Will our recent economic turmoil be played out in the supply and demand of legal services? This is the 50,000 foot, or macro, perspective.
At the ground level, lawyers in the Baby Boomer generation will need to look at their “second season.” What plans do they have for their future? Or, as I ask myself each day, “What do I want to be when I grow up?” What is it that “turns me on?” What do I enjoy doing? How is it that I want to make a contribution?
One-third of the 23% in Washington have said, their “exit strategy” from the practice of law is to “die at their desk.” In cowboy literature, it’s the equivalent of “dying in one’s boots.” In other words, doing what they're doing is what they love doing and that is how they want to be remembered, not as a faded shadow of themselves in retirement. Some might say that it is a shame that that is all they have, their law practice. On the other hand, think of the valuable contribution they're making to the lives of all their clients. Better that than nothing. Better that than feeling useless. Better that than aging overnight because your hobby and profession, one and the same, were removed from you.
A friend, and former trial court judge in California, Ellen Peck developed the idea of an “Estate Plan for the law practice.” She says it’s equivalent to malpractice not to plan for how one’s clients will be served in the event of death or disability of the lawyer.
Recently, I was engaged by the family of a deceased lawyer to value the practice and assist in its sale. On inspection, we found that there were inadequate time records; a trust account that was in shambles and needed an audit to reconstruct and reconciled; and inadequate client records to know precisely what had been done and yet needed to be done. This is a perfect example of where an “estate plan” for the law practice would have served everyone’s interests, the family, the clients and the judicial system.
Those lawyers who fail to address this issue put their families and loved ones at risk. Not only will the family have to deal with the emotional trauma of a sudden death, they will also have to deal with the economic turmoil left by the lawyer. If negligence is found after the lawyer’s death, or if the lawyer failed to balance the clients’ trust account (to the penny!), the family could be responsible.
In the case of a famous actor, who was educated as a lawyer, he failed to have an estate plan ... and his family paid the consequences (estate taxes). This left quite a hole in the wealth of the family. Fortunately in this case, there were no other repercussions. But, this result is not necessary.
Do all lawyers need to have a succession plan was one question raised in my recent WSBA presentation. Yes, and no. No, in the sense that some lawyers … those lawyers in firms … will have other lawyers in their immediate environment to take on his/her practice and files. Thus, the lawyers will be protected. The interests of the lawyers will be protected and the heirs will receive their appropriate due. This assumes, of course, that the firm has addressed the issue of how to compensate the lawyer for the value of his practice. That, unfortunately, is not always the case. But at least, the files will be parsed out and the clients protected.
One-third of the lawyers in WSBA … and more in the ABA … are sole practitioners. They must have a plan or force their heirs and loved ones to close their office and transition their clients to other lawyers who can serve their interests.
And Yes in the sense that all lawyers need to decide when to retire … to leave the practice … how they will do that, whether by merely closing the doors (a tragedy in my opinion) or selling the practice … and what they will do in their “second season.”
One WSBA member said we’ve always gone TO somewhere. We went to grade school, went to high school, went to college, went to law school … became a lawyer … and now, what will we do … where will we be going TO? That is a question that all lawyers must address … or “die at their desk.”
Can non-lawyers own a law firm?
Yes, say some.
Only a short time ago, we believed that non-lawyers would be able to participate in the ownership of American law firms. The pressure, so we believed, would come from the British Empire. Australia already allows this and it will soon be permitted in England. But, not the U.S. ... until now.
The District of Columbia permits non-lawyer ownership to the extent of 25% interest in a law firm. And, now, North Carolina has a bill before its Senate that would allow 49% non-lawyer ownership.
One argument is that law firms have expanded and are now very large organizations. In order to grow, they need additional capital ... and capital is best raised in the capital markets, not from individual partners of law firms ... and that means non-lawyer ownership. While large law firms are looking more and more like their corporate clients, it is still a stretch to suggest that law firms should raise outside capital.
Do law firms need to grow? Why can't corporate clients' interests be served well by smaller regional law firms? Why does the corporate law firm have to be as large as the client? We saw unions grow in both size and power in response to corporate and management growth and power. And we now see unions fighting to stay alive. Will that also happen to large law firms of the future? Will technology enable small groups of lawyers to be effective in large corporate representation?
Some argue that the rules of professional conduct wouldn't bind non-lawyers in matters of confidentiality and charging reasonable fees. Further, the very independence of lawyer's judgment might come into question. But, the rules have been bent, if not changed or discarded entirely, when large firms' economic interests were at stake. So, it will be fascinating to see who argues on which side and how this issue develops.
Is it possible that this issue will finally cause the break up of the mandatory (integrated) bar association into State licensing agencies on the one hand and voluntary bar associations on the other hand ... with the latter being the home of sole and small firm practitioners banding together to serve their own economic interests?
Open Letter to the State Bar President
I agree with you completely. There is a tremendous "justice gap." I'm glad the State Bar is seeking to do something about this. I wonder, however, why the State Bar doesn't expend the same energy on helping its own members, lawyers. One study reported by the State Bar several years ago indicated that 50% of lawyers in this state earn less than $100,000. Just think, if the State Bar would actually help its members be more effective with their clients, be more efficient in the delivery of their services and, yes, be more profitable, members of the Bar would then i) be less tempted to invade client trust accounts (a public service issue) and ii) have money to contribute to narrow the "justice gap."
Instead, however, the Bar does things that are perceived by our members to be antithetical to the interests of lawyers … The list is rather long and I won't bore you here with issues on which I've spoken before. But, until you (the organized, mandatory Bar) works with its members … until you (the organized, mandatory Bar) has as at least one of its primary goals the interests of its members, you have a great deal of courage (some might say gall) to ask struggling lawyers to contribute more than they already do.
If our Bar were a voluntary Bar, I suspect less than 50% would join … Then we would not have governance issues imposed on us by the legislature. Of course, we would also be far more interested in the thoughts and concerns of our members than is currently the case.
Clearly, these are my own thoughts, not those of any Section or other body of the State Bar … but these thoughts were clearly expressed to me just this morning by another attorney. I thought you should know, considering you're asking us for money.
And let me take this opportunity to wish you and your family the best of the holiday season. You've taken on a very tough job, some would say a thankless job, and I wish you great courage and strength.
FROM THE PRESIDENT OF THE STATE BAR OF CALIFORNIA
Dear Colleagues:
As you renew your State Bar membership, I am writing to make sure you are aware that one of the most vital roles of the State Bar is to distribute funds to support legal aid to low income people. Please join these efforts by supporting the Justice Gap Fund. I am asking you to join me in two ways:
- When you pay your 2011 State Bar dues, please donate $100 or more to support legal aid for low income people. All gifts are tax deductible; and every dollar goes to help those in need. You can even make a gift online at http://calbar.org/justicegapfund. Donors of $1,000 or more will be recognized as “benefactors” of The Justice Gap Fund.
- Share this email with your colleagues and friends and urge them to contribute. Last year, only about 4% of California lawyers contributed. If every member of the Bar were to donate the recommended $100 amount, more than $20 million would be raised for the Justice Gap Fund. Even if every attorney were to donate only $25, there still would be over $5.4 million available to provide services to vulnerable Californians.
The “justice gap” is the gap between the number of people who need legal services and the resources available to provide those services. There simply aren’t enough resources to provide legal services to all of those in need. Every day legal aid intake workers have to turn away people who are struggling with heartbreaking legal issues. The Justice Gap Fund is one way that we, as lawyers, can help to close this “justice gap.”
According to the California Budget Project, in 2009 more than 5.6 million Californians were living below the federal poverty line -- $21,756 for a family of four. (A full-time minimum wage worker makes about $5,000 less than that.) If working a full-time job is not enough to ensure that your family has enough to eat, how do you cope when your sick child is wrongfully refused insurance coverage, when your husband begins to show the strain of unemployment by abusing your children, or when your elderly mother is evicted because her landlord’s house was lost in a foreclosure? When low-income people cannot afford an attorney to help them claim what is right and fair, legal aid is there to help. But the system is so overburdened by the sheer number of people who need help, many of those people now have nowhere to turn.
Closing this gap is one of the most important things that the State Bar does, and we’ve never needed your help more to ensure that access to justice, the very underpinning of our society, is truly available to all.
Sincerely,
Bill Hebert
What will be the value of your practice?
I met with an attorney today ... he's 61 ... who is terrified that he now is solo and has never had to do anything in his career to attract clients. He was always part of a firm that delivered litigation clients to his doorstep. Now, he doesn't have that ... What can/should he do?
No matter what he does, the ultimate challenge for him will be on retirement, not that far away. Will he have developed any goodwill to be able to add more wealth to his capital for his heirs? The answer is: Maybe, but more likely not. That will be a crime after having been a very good lawyer for his entire career.
What are you doing to enhance the value of your practice? Do you have a succession plan? Does your law practice have an "estate plan?"
Customer priority
As quoted by Alan Weiss, citing an IBM survey, CEO's focus on three elements:
1. Embody creative leadership (take prudent risk, invite disruptive innovation)
2. Reinvent customer relationships (set priority of customer intimacy)
3. Operating dexterity (flexible cost structures and opportunistic capabilities)
Shouldn't this be what law firms do? Take prudent risk to grow the practice and enhance the well-being of its members and staff; focus their energies outward, to benefit their clients, which would include both pricing and costing flexibility.
Too often, law firms are all about their lawyers, and they forget the well-being (intimacy) of their customers/clients.
Lateral hires are in a seller's market!
I've just talked with two legal industry "executive search" recruiters. They have never been busier in the last 5 years! And quality laterals are being sought!
That tells me that the economy is in recovery mode; that lateral partners are still being pruned from large law firms; that partners are getting tired of the politics in larger law firms where they see no rational basis for decisions being made that may very well impact their economic future; and that most law firms have yet to act as enterprises rather than as hotels for sole practitioners. Laterals with good books of business can just as easily move to another firm that will provide them with a larger umbrella and greater opportunity ... or even start their own boutique law firm.
This further suggests that while the economy has forced changes in law firms, the sea change some discuss hasn't yet taken place ... and may never. As I've said before, we're in an evolutionary, not revolutionary, mode. Write me with your thoughts and experiences on this.
Twitter and money - an oxymoron?
Can you imagine that Twitter, WITHOUT any revenue stream, is valued at $1Billion! Wow. Not many employees and no revenue stream ... and no prospects in sight to get revenue.
Just think what your law firm, with a decent revenue stream, might be worth? What is the difference? And why isn't your firm worth $1B?
