More jokes have been told about lawyers than any other professionals. But the business of law firms is no joke. $250 billion a year in the US, and Washington gets more than its fair share of the bounty.
For the last 50 years law firms have done astonishingly well. Revenues have soared to levels that make other industries greenish with envy. Like brethren professional service firms, law firms don’t have much overhead, which, coupled with cost of services, means spanking profits. To their detriment, though, as LLCs, those profits aren’t withheld for investment or rainy days. They’re parceled out in bonuses; it’s a cash business.
So the bottom fell out in 2008, just like it did for all of us. Decreased demand for services and general counsel spending, coupled with increasing price pressures from competition and clients, stymied law firms. Layoffs, hiring freezes, compensation cuts, dumping pricey office real-estate, shrinking expense accounts, and other Draconian measures followed. Unprecedented stuff in an industry accustomed to our largess.
Jim Jones, Senior Vice President of one of the oldest and most prestigious law firm consultancies, Hildebrandt Baker Robbins, didn’t mince words when asked about it: “What we are seeing is a sea change…. [That] will drive a reexamination of the ways law firms price their services, manage their work, and recruit and develop talent.” Mark Phillips, a former lawyer and current doctoral candidate in business administration studying law firms at GWSB, put things more bluntly: “In my experience, law firms have relied far too much upon a grossly antiquated business model. Many firms have now run that model into the ground. The chickens are coming home to roost.”
Rooted in traditions molded by longstanding munificence, law firms are, well, reluctant to change. But circumstances demand it. Other professional service firms have adapted by adopting best business practice. Why not law firms? Here are a few things they can do to remain viable and vital.
- Think more strategically about the broader economic climate, industry trends, client needs, and internal policies.
- Engage in branding and other marketing practices, even if it seems crassly commercial.
- Erect executive structures that integrate business-savvy non-lawyers into the authority hierarchy.
- Introduce pricing models based on metrics other than billable hours, such as value added to client businesses.
- Align and contract vendors and service providers to maximize value chains.
- Form strategic alliances or even initiate mergers with other specialized firms to offer clients more comprehensive and coherent representation.
- Engage in more vigilant talent management, and when that talent is elevated to leadership roles in practice or firm governance, compensate them fairly and employ meaningful development opportunities.
The legal industry is one of nation’s great success stories; especially so in Washington, the interface of business, government and society. They offer a critical service to society, provide tens of thousands of good jobs, and post impressive price-earnings ratios. They are powerful economic engines. But, they’ve never thought of themselves as businesses.
That thinking should change.
A version of this appeared in the Washington Post.