The current economic downturn has focused attention of the legal profession on the basic structural, economic, and work process models that have dominated law firms for many years. A number of firms have begun to experiment with modifications to these models – some of them minor and some revolutionary – while other firms are actively discussing whether changes to their traditional approaches are needed.
A key question facing all law firm leaders today is whether all of this experimentation will come to an end once the economy recovers and something approaching “normal” demand growth returns, or alternatively, whether we are at the beginning of a period of fundamental structural change that is being accelerated by the recession and that will ultimately profoundly affect the practice of law. A recent survey of leaders of the AmLaw 100 firms showed that many of them believe the latter is the case and that the basic law firm model that has endured with only minor change for at least a generation will be permanently and irreversibly changed over the next few years.
For the better part of the past three decades, almost all law firms have adhered to a single monolithic model that has defined how firms are structured, how lawyers are recruited and evaluated, how legal work is staffed, how legal services are priced, how support functions are organized, etc. To be sure, there have been variations among firms and, from time to time, aspects of the model have been tweaked – e.g., to include paralegals in the early 1970’s or special counsel or contract lawyers in the past few years – but, in the main, there has been a “dominant approach” that has characterized how law firms have done their business for a very long time.
Some of the key aspects of this “dominant” model have included:
- A talent management system based essentially on an “up or out” approach under which firms hired the “best and the brightest” young associates from law schools, put them through eight to ten years of demanding work, and weeded out those who were not deemed suitable to become partners – a system that drove very high attrition rates (typically 16-18 percent per year);
- A pricing model that was based essentially on the billable hour and that hence provided little real incentive for efficiency in the delivery of legal services;
- An evaluation and compensation system that rewarded partners and others for the amount of time required to complete matters rather than the profitability of such matters to the firm;
- A work process and support model that was premised on a deep suspicion of the value of non-lawyer professionals and a reluctance to partner with other professionals in multi-disciplinary approaches to client problems;
- An economic model that was heavily dependent on significant (6 to 8 percent) annual rate increases in order to sustain its growth; and
- An overall model that was premised and focused far more on growth and expansion than on efficiency and cost effectiveness in the delivery of legal services.
At Hildebrandt, we believe that successful law firms of the future are likely to depart from this traditional model in a number of important ways. But the result will not be the evolution of a single “new model” but rather the proliferation of a variety of models in which firms tailor their responses to their own unique circumstances – to their client bases, areas of practices, service delivery strategies, etc. As part of our LawVision services, we are currently working with many of our clients to rethink their basic business models and to redesign parts of them in ways that make sense for their individual needs.
The Importance of “Ripple Effects”
One of the consequences of changing parts of the traditional law firm model is the “ripple effects” that such changes can have on other parts of a firm’s management or operating systems, sometimes in unintended or unexpected ways. For example, a shift in a firm’s pricing model in which even 20 percent of total revenues are accounted for through non-hourly rate-based pricing practices can result in significant pressures to modify the firm’s evaluation and compensation system. If the billable hour is no longer the way the firm “keeps score” for a significant portion of its work, there are ripple effects that impact how lawyers are evaluated and compensated, as well as how work is managed and assigned, how results are measured, how “success” is rewarded, etc.
Similar ripple effects can result from changes to a firm’s talent management model. If, for example, a firm shifts from locked-step compensation for its associates to a competency-based “levels” system (as many firms are now doing), the results are likely to be disappointing unless the firm takes seriously the changes such a shift requires in the training, monitoring, evaluation, and assignment systems for associates. If associates are to be promoted on the basis of their having demonstrated certain competencies, they will understandably look to their firms to provide the training, opportunities, and experiences necessary for them to advance.
The depth of our experience at Hildebrandt and the breadth of our practices make us uniquely suited to assist our clients in understanding the ripple effects of changes they are considering. An important part of the LawVision services we provide is to insure that there are no unexpected or unintended consequences of actions that firms take to respond to new market or economic realities.
Navigating the Unknown
There are, of course, a number of known forces that are driving changes in the traditional law firm business model, for example:
- Growing client frustration with the rapidly escalating cost of legal services;
- Client expectations for more efficient delivery of legal services, including their willingness to disaggregate work on particular matters to achieve such efficiencies;
- Dramatically decreased demand for legal services in certain practice areas (reflecting the current economic downturn);
- Radical restructuring of the financial services sector in ways that impact traditional high profit client relationships of many law firms;
- Changing regulatory environment for many other industries; and
- Current oversupply of new lawyers that has resulted in many firms laying off professional staff, deferring start dates, and cutting back on summer programs and overall hiring efforts.
There are also, however, trends and potentially disruptive changes on the horizon that we may not yet fully understand or even perceive that could have significant impacts on the legal profession. While these trends are, by definition, more difficult to ascertain, they could include shifts in political or social environments (e.g., further developments in tort reform or financial standardization); more aggressive intrusions into the legal market by other types of service providers (e.g., outsourcing companies or other professional service firms); changes in the regulatory systems governing lawyers (e.g., the allowance of non-lawyer ownership of law firms in the UK, Australia, Spain, and elsewhere); evolutions in technology that drive further commoditization of certain kinds of legal work; etc.
With Hildebrandt’s experience of over 30 years in working with law firms and law departments, we are well equipped to help our clients navigate the future – both known and unknown. Through our extensive research efforts, our research partnerships with the Citi Private Bank and other organizations, and our use of unique research and analytical tools (such as Peer Monitor), Hildebrandt assists clients in identifying and tracking trends that are likely to impact the legal market in general as well as specific firms. With over 60 consultants worldwide specializing in the legal industry, Hildebrandt occupies a unique position as a true thought leader in our market.
Hildebrandt LawVision Services
Within our LawVision services, Hildebrandt has actively worked with clients on a variety of initiatives to modify existing firm structural and operational models. Our work has included projects related to:
- Pricing and financial management, including the development of alternative (i.e., non-billable hour-based) pricing models and the metrics to measure performance under them;
- Design of new staffing models to align the delivery of legal services with client perceptions of value;
- Creation of new talent management systems, including “locked-step to levels” transitions for associates, as well as changes in evaluation and compensation systems;
- Work process redesign to reduce overhead and operating costs;
- Modifications to compensation systems to incentivize and measure behaviors needed under changed pricing models; and
- Leadership development and change management to drive and achieve buy-in to the structural and operational changes required under new models.
