Must Growing Your Practice Mean Growing Your Firm?

Reprinted from:
Published 8/11

A legacy of the Great Recession is that law firms in the future likely will not indiscriminately pursue mergers with each other. Combining law firms to make them bigger only makes them better when the parties have thought through what they want to accomplish and what synergies exist between them. The recession showed that too few merged firms did so. Size inevitably creates inefficiencies, and firms are often slow to eliminate redundancies.

There is nothing new in this development. Corporate America periodically goes through "bigger is better" phases. In the 1960s, for example, merger mania appeared ready to gobble everything up, leaving few survivors. Back then IT&T and Gulf & Western, both long since deceased, were prime examples of the gobblers. In fact, I remember thinking that there would be only 4 companies left: IT&T, AT&T, GM and GE. Most of the conglomerates collapsed of their own weight. The phrase, "getting back to core competencies," became the watchword and large enterprises broke into smaller units. Such U.S. economic growth as we have is fueled by smaller, entrepreneurial businesses and the new ideas they create. These companies require smaller, more adaptable law firm structures to meet their needs. Law firms seem to follow their clients.

Going National

It must be said that large national law firms offer their clients many resources and economies of scale that smaller firms can't. The existence of a fit and compatibility among clients and practices is the starting point for deciding whether firms should grow nationally. A firm wanting to do this should know the exact details about its strengths, its client focus, how profitable the firm is, and what opportunities exist to get more work through national growth. With this knowledge in place, ultimately there are five criteria that determine whether a smaller firm's effort to grow nationally, by merger or organically, will be successful.

  • The nature of the practice. Natural resource, immigration and intellectual property law extend across state boundaries, while insurance defense and personal injury cases require local court appearances that are restricted by state boundaries.

  • The stature of the clients. A trendy company, or a sports or entertainment figure, can generate the sophisticated legal matters and media coverage to support a national presence.

  • The culture of the firm. Some lawyers don't want to expand beyond one office, fearing the time commitment needed to govern multiple locations. Entrepreneurial types see growth inevitable to business development. Reconciling these perspectives, or at least establishing the latter as dominant, is essential for growth.

  • The depth of the business plan. A plan focuses the firm's aim and energies and offers the best odds of achieving the desired expansion.

  • The effectiveness of business practices. National expansion will grow revenue but success depends on revenue billed and collected. The firm that consistently lacks a high realization rate on clients billed can fail with millions of receivable dollars on the books.

Simple Alliances

Large scale growth is certainly an option. But small firm and solo lawyers can reap big firm advantages by pursuing a variety of alliance strategies, from simple to complex, with their peer practitioners. On the simplest level they can share space in a diverse professional environment, with accountants, brokers and other non-lawyers. Another option is a "Fegen suite," or "executive suite," where lawyers share the expense of a reception area, conference rooms, clerical staff and office equipment. Small firms can even rent an office in a larger law firm on a month-to-month basis, with an opportunity to refer work back and forth, or to offer billable time in exchange for space.

Many small firms hire contract lawyers to provide legal counsel on a specific matter beyond their practice or geographic scope. In such a situation the contracting firm should contribute oversight of the outsourced legal work and communicate with the client on how the work is applied. The firm that initiates the contract arrangement becomes responsible—in a malpractice sense—for any errors committed even in a seemingly simple case. Moreover, the lawyer participants in a contract agreement should have their own fee arrangements in writing. The arrangements may be at an hourly rate, a standard flat rate, or any rate that is established in the engagement agreement and is acceptable to the client. The rate can be high enough to cover overhead expenses of the firm's own staff, such as secretarial help, paralegals, word processors and so on.

Collaborative Growth

A more sophisticated strategy for growth beyond a one-time alliance is a continuing one, which can be a tremendous advantage in supporting retainer client relationships. An ongoing alliance with another small firm, gives the firm that establishes the arrangement a tremendous advantage. From a cost perspective, the expenses involved in direct hiring are eliminated. Allied lawyers are not an out-of-pocket expense for billing purposes and the firm can customize the billing arrangements as needed, provided that the client knows of and approves them.

An excellent example was recently spotlighted by a leading Chicago legal publication. 1 Two small law firms in Chicago (nine-lawyer Varga, Berger, Ledsky, Hayes & Casey) and suburban Naperville (the Collins Law Firm P.C., with ten lawyers) have for more than a decade partnered to represent plaintiffs in environmental pollution cases. Four key lawyers, two from each firm, have secured millions of dollars in monetary settlements and remediation actions for their clients. The leaders of these two law firms have decided to call themselves a team—not to merge, but to publicize their capabilities together and start their own website,

Beyond a focused alliance, firms can maintain joint retainer arrangements. Target clients are often small businesses that have a variety of ongoing legal needs but are reluctant to commit to putting a single firm on retainer without being sure that counsel can indeed handle every issue that comes up. The lawyer does himself or herself no favors by offhandedly saying, "Of course I can," and then be unable to come through on a time-sensitive issue. The ideal arrangement is for the lawyer to offer assurance of being able to call on other allied lawyers for help if a need outside the normal field of expertise arises. This of course requires a substantial level of trust between lawyer and client and among the lawyers. The lawyer creating the alliance in effect functions as a general counsel to the small business, drawing on other "outside counsel" as needed. Such contract arrangements can contribute to work and cost efficiencies if used correctly, particularly if the lawyers involved bill at different rates.

Just as in a formal law firm merger, the "people factor" of collaborative or retainer arrangements is important. The lawyers involved ideally must share common values and professional rapport. When single firms dissolve the lawyers frequently complain that "we grew apart." This is a result of the failure to keep communications open and candid as time passes. When a joint arrangement is established, it is subject to the same need to keep the communication process open, candid and frequent. Communication is a continuous requirement to ensure that individual agendas do not subvert the alliance. Otherwise, without clarity on what the alliance is to achieve and how the partners are to achieve it, there soon will be no alliance.

Other Growth Arrangements

Beyond the options discussed, there are other collaborative arrangements that may be attractive and practical for solos and small firms. Two of them are worth noting:

  • Onshoring Alliances. Outsourcing firms, the companies that in recent years sent work done by American lawyers to lower-cost countries like India, are now creating "onshoring" jobs for lawyers in the United States as outsourced temporary legal help. These lawyers can be added to a legal team as needed on a virtual basis. Often they are based in lower-cost areas of the United States, like West Virginia and North Dakota. The lawyers offer more capabilities but are cost-effective because they focus on commodity work and because of the lower cost of living where they reside.

  • Virtual Alliances. Although these are still emerging, several groups of lawyer-entrepreneurs have started such ventures. The firms employ lawyers who work at home, saving on overhead and costing clients less in legal fees. The firm and its lawyers are available for contract arrangements, overhead expenses are minimal, and the lawyers keep a percentage of what they bill.

In all these alternatives, client service is the essential ingredient. Clients look for performance in the firms they hire, no matter what the size or shape of the firm. Performance is a factor of many different things: communication, understanding and focusing on the corporate client's objectives, use of technology, and specialized knowledge. Small and solo firms that can use innovative arrangements to enhance performance stand an excellent chance not only to survive but to thrive in a legal marketplace where national growth no longer can be assumed as the norm.

1 "Pair of Law Firms Combines Forces to Battle Pollution," Chicago Daily Law Bulletin, 6/7/11

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