Old firm models turned upside down

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Editor’s note: The following is the fifth in a multi-part look at what legal, real estate and business leaders expect to see in their industries in the new year.
Contrary to national trends, partners at some of the largest law firms in Rochester said business was good in 2009 — and they expect it to improve in the new year.
Some also acknowledge, however, that significant challenges could transform the standard law firm business model in place for a half century.
“The business model has pretty much been turned upside down in the last 12 to 18 months,” said Michael Blanchard, executive director of ChamberlainD’Amanda LLP and a partner in the Law Practice Advisory Group LLC, a management consulting group.
Nationally, firms are projecting a 4 to 10 percent decline in partner profits for 2009, Blanchard said.
After years of measuring professional success by hourly rates or billable hours, “those two profit levers are kind of off the table at this point, in this economy,” he said. “Efficiency and value are going to have to drive law firm profitability now.”
In the face of increasing competition, firms are carefully reviewing their billing practices and employment policies, as well as client services.
“It’s a real time of reflection and a real time to reevaluate where firms go from here,” Blanchard said.
“They say the recession’s over, but … it’s going to be a slow climb out, I think,” said Susan Laluk, a partner at Boylan, Brown, Code, Vigdor & Wilson LLP and president-elect of the Monroe County Bar Association.
The buzz on billables
The latest trend in law firm management is increasing “pressure for alternative billing arrangements,” Laluk said. “You’ve heard talk about this for a long time, but you’re finally beginning to see it happen.”
Although the billable hour continues to be the dominant paradigm, client pressure is mounting for less expensive, more predictable alternatives, Laluk said. Instead of paying lawyers for time spent on a project, results-oriented clients want attorneys to have a more vested interest in their matters.
Outside the billable-hour box, attorneys already use many varieties of “alternative fee” methods. For routine matters such as simple wills, incorporations and real estate closings, it is not difficult to set a flat fee.
In more complex transactions involving several variables it is more difficult to assess how much time and effort will be required.
“If your price it too low, the lawyer loses money; if your price it too high, the client’s unhappy,” Laluk said.
Attorneys are exploring a variety of alternatives, including fixed or flat fees, hourly rates with a cap or a volume discount, and retainer agreements with corporate clients that provide certain routine services for a fixed monthly fee. In litigation or major transactions, a bonus might be awarded if a certain result is reached.
Blended rates charge clients a set amount per hour, regardless of whether a partner or first-year associate works on the matter.
Scott Turner, managing partner at Nixon Peabody LLP’s Rochester office, said he thinks it’s too soon to predict a real trend toward fixed fee arrangements.
“A significant number of clients continue to feel comfortable with the billable hour model,” he said.
James Spitz, CEO at Harris Beach PLLC, estimated about 30 percent of his firm’s work is not billed on an hourly basis.
“I think the jury is still out as to whether that will grow,” Spitz said.
Robert Brown, founding partner and CEO at Boylan, Brown, Code, Vigdor & Wilson LLP, said lawyers should be proactive in looking beyond specific fee arrangements to consider how best to meet client needs.
“We tend as lawyers to produce Cadillacs no matter what the client ordered. Sometimes they don’t want to drive Cadillacs — sometimes they want to drive Fords,” Brown said. Lawyers must “determine what [clients] want to drive.”
The costs clients are willing to bear depends on their risk management analysis. On a regulatory issue where insurance is prohibitively expensive and the costs of failure are relatively high, clients probably will pay a premium to ensure counsel leaves no stone unturned in researching the matter.
If the client could purchase less expensive insurance, an attorney should advise his or her client of the alternative.
“I think what we need to do is be much more sophisticated in terms of time and billing,” Brown said.
Employment
Several of Rochester’s largest law firms are hiring, but not the way they used to.
“We used to go out and just hire. We’re not doing that anymore, we’re being much more targeted,” Brown said.
His firm also is following what he called a short-lived trend, by moving some work to less expensive paraprofessionals.
There will be “some permanent changes in staffing and compensation models as a result of the current time of troubles,” Brown said.
Maureen Alston, managing partner at Harter Secrest & Emery LLP, said her firm hired seven lateral associates in 2009, in addition to its summer associate class. Harter Secrest plans to add as many as 10 more people in 2010 in Buffalo and Rochester.
“A lot of high quality, very talented people [are] looking for work,” Alston said. “We have a philosophy that if a really great candidate comes our way, we do everything we can to grab them. That was part of our strategy, when we knew we were going into a recession. We just decided this was a golden opportunity.”
Harris Beach hired five attorneys and seven IT professionals in 2009 to work in the emerging area of electronic information. Spitz said he expects that group to grow again in 2010. The firm hired six new associates to start in September, and will offer a 2010 summer associate program with seven interns statewide.
Harris Beach is “still looking for opportunities for those in the lateral market and coming out of the big cities, where the employment market’s not so bright,” Spitz said.
Turner said his firm also will be opportunistic in hiring.
Nixon Peabody deferred its entering class from September 2009 but will begin welcoming those new associates in early 2010 and plans to have a summer associate program comparable to previous years.
“Over the long haul, there is a sort of inevitable ebb and flow within law firms, as within any professional business. Our expectation is that we want to be adding people in the Rochester office” Turner said.
ChamberlainD’Amanda, with 26 attorneys the smallest firm contacted for this article, doubled its associate ranks to six in the past year, Blanchard said.
Footprints
Several attorneys said their firms plan to strengthen their regional footprint and niche marketing efforts.
“We need to use our unique footprint to competitive advantage,” Turner said.
As an international firm with a significant number of offices in smaller markets such as Rochester and Buffalo, Nixon can “provide very sophisticated services to your clients, but with lower costs and, therefore, prices … than if you were only established in very large markets,” Turner said.
Renovations to Nixon Peabody’s Downtown offices are expected to be completed in September.
ChamberlainD’Amanda renegotiated its lease Downtown’s Crossroads Building last summer, reducing its square footage by about 10,000 square feet, or 20 percent, to increase profits, Blanchard said. The firm had occupied two full floors, but has given back a third of one floor.
Alston said Harter Secrest will focus on cross-selling its brand and “keeping our culture of collegiality and collaboration, … despite the fact that we are growing larger and larger.”
Spitz said his firm “continues to look for new opportunities to grow the Harris Beach footprint,” but will remain fiscally prudent. “What’s going to impact all of us in New York State is what’s going to happen with the state budget and what’s going to trickle down to the local budgets,” he said. “If we can get the state economy on the up tick, that will be a part of the solution of those difficulties.”
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