Tier 1 Law Firm: Know Thyself

If you’re in law firm management, you’ve probably been feeling a bit like Ebeneezer Scrooge staring at an unhappy future as several bloggers** recently painted a relentlessly challenging picture of the law firm of the future. (In Charles Dickens’ A Chrismas Carol, Scrooge’s deceased partner, Jacob Marley, warns him in a dream that he is headed for a dismal fate if he does not pay attention to the message of the Ghost of Christmas Past, the Ghost of Christmas Present and the Ghost of Christmas Yet to Come.) Over the course of the last week, Toby Brown, Ron Friedmann, Jordan Furlong, Steven Levy, Bruce MacEwen, John Wallbillich and I have written about the growing pressures on law firms to refine their business models and business practices so that they can flourish in the new law firm economy. Toby Brown describes that new law firm economy as one in which there are three tiers of firms:

Tier 1 — high stakes matters; 15-20% of the market and declining
Tier 2 — mid-level stakes; 50-60% of the market and growing
Tier 3 — nuisance matters; 20-25% of the market and relatively stable

While every lawyer likes to think of their firm as a top-tier firm, chances are that very few firms will actually be able to survive and thrive in Tier 1. John Wallbillich suggests that about 40 global firms will inhabit that top tier. The Lawyer.com points to their transatlantic elite “Sweet Sixteen.” Even if we don’t know the exact number of firms in Tier 1, we know that it will be a number that is substantially smaller than the AmLaw 200. And, we know that getting into and staying in that group will take considerable effort. These firms will need to attract and keep legal stars. These firms will need to support those star lawyers with law firm machinery that can deliver excellent services at a defensible price. In this regard, any firm that aspires to remain in Tier 1 needs honesty and discipline. Where does the honesty come into play? Each top tier firm has to be brutally honest with itself — understanding its strengths and weaknesses, acknowledging that while it may charge top dollar for its work, not all of its work is necessarily complicated, innovative or high risk. Some of it is routine, repeatable and could benefit from a more systematic approach.

One way to think about the array of work within a firm is to plot it against John Wallbillich’s Legal Fee Pyramid (PDF). In a high-stakes matter, the judgment and experience of the senior legal expert on the team may be worth more than $599 per hour (in some firms more than $1000 per hour). But what about the work of less experienced personnel on the due diligence effort? Or the eDiscovery work? Or drafting relatively routine documents? Or planning a closing? For each task or phase of a matter that falls low on the pyramid, a firm must carefully examine the workflow to ensure that it is as streamlined and economical as possible. Done well, this means imposing law factory discipline on those parts of the practice that are most susceptible to client fee pressures. There is no substitute for a clear-eyed honest effort in this undertaking.

Why? Isn’t the whole point of being a Tier 1 firm that you’re free of fee pressure? Not exactly. Even Tier 1 clients want to prevent runaway legal spending. And, as I heard at a recent conference, there is growing pressure on Tier 1 firms to curtail spending on litigation matters. Surely non-litigation matters are not far behind. In fairness, while the conference participants might grouse about the highest billing rates, they did not dispute the value provided by the most experienced lawyers in Tier 1 firms. Rather, they were focused on ensuring that the work done by the less experienced or less expensive people in the Tier 1 firm was necessary, focused and efficient.

At the end of the day, even Tier 1 firms are not immune from client concerns about legal spending. Those client concerns may get expressed in a variety of ways such as a request for a discount, an unwillingness to pay for certain “overhead” expenses or a decision to move eDiscovery in-house or off-shore. Smart Tier 1 firms intent on not only surviving but thriving will undertake a close self-examination to ensure they understand how they work before those client concerns about spending are expressed. Otherwise, those firms will be looking at involuntary discounts, lower realization rates, and growing competition for the spots on a client’s shrinking legal panel — all of which add up to diminished partner profits.

All of this calls for more disciplined firm management. Gone are the days when a firm’s one sentence billing statement (i.e., “For services rendered….”) cloaked a variety of work and expenses. Just as clients are demanding more transparency on the bills, firms should be insisting on more internal transparency. Until a firm truly knows itself, it will never be able to explain and fully defend its value proposition to its clients.

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** Here are links to various posts on the Law Factory vs Bet the Farm (or Bet the Company) Firm Debate to date:

[Photo Credit: Jake Bouma]

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