Forbes article focuses on looming change for big law firms
Forbes.com has a good article on the business of big law firms and the pressure on firms to change the way that they do business. According to the article, the global economic crisis is accelerating trends that will alter the structure of law firms and the way that they do business. The article covers a lot of ground including the importance of "leverage" to law firm profitability, firm management and the expected trend away from the billable hour. Here are some of my favorite passages:
Law firms refer to the ratio of partners to associates as "leverage." In good times, the arrangement produces strong profits, but when revenues fall, highly leveraged firms can find it particularly difficult to sustain all those associates. As a result, if revenues at a law firm decline 10%, profits can fall 30%
"Most large firms are leveraged up for big deals. With no big deals coming through the door, there's not a lot of work for associates so firms have to [cut] employees. There's definitely going to be a sea change in the law industry as a result of the credit crisis."
Beyond staffing, Borghese says firms face pressure from clients to move away from a payment model based on hourly rates. "Billable hours will always be here, but you will see more of a movement toward retainers and fixed fees."
Susan Hackett, general counsel of the ACC, says the new approach to value is necessary because law firms had become so expensive that their fees often outstripped the value of the problem they were brought in to resolve. "You can have many lawyers and paralegals all billing on a matter worth $50,000 of exposure adding up to a grand total of $250,000. That's crazy."
In many firms, he notes, the highest fee-producing lawyer is viewed as a good lawyer and is automatically chosen to run the practice group, whether or not he or she is an effective manager.
One thing that the article gets wrong is its suggestion that clients always want alternative billing and lawyers always resist by demanding hourly billing. There have been several instances where I have proposed flat fees to corporate or insurance clients. In each instance the client rejected the concept and we stuck to hourly billing. I have yet to see in-house counsel embrace alternative billing in my practice.
