By Marci Alboher, L Magazine, March 2001
Right now you’re focused on just getting the job. But soon you’ll be one name in a firm directory–one more organism requiring a computer, a paycheck, and assignments. So how does it all work? Here’s what’s keeping this ecological system in balance.
We’d like to believe our profession is about truth, justice, and other noble pursuits. But the law firm, where most of it is practiced, is ultimately a business that has to pay its bills, pay its associates, and, if it’s successful, have some dough left over to distribute profits to its partners.
Law school classes train you to think like a lawyer. Clinics and moot court give you a glimpse at the work of a lawyer. Yet most lawyers arrive at law firms with very little understanding about the business aspects of law practice. While firm styles vary depending on geography, size, and dominant practice, even the lowliest associate at a mega-firm will tell you, management affects you from the minute you log your first billable hour. For example, is the firm open and transparent or secretive and hierarchical? Does it plod along methodically or make decisions quickly?
With these issues in mind, we’ve decided to zero in on law firm management in order to give you a view from 30,000 feet–covering everything from how firms are organized to who decides whether you’ll share an office. In researching this article, we talked to partners and associates at firms ranging in size from 20 lawyers to over 1,400, as well as some consultants who advise them. We found some areas where we could generalize and others where there are no norms. But in the end, we concluded that the most important thing for you is to understand as much as you can about how a firm works, how you would fit in, and whether the management culture suits you.
They’re running the show. Here’s how.
When joining a law firm, you have a goal that is different from that of the average new employee: namely, that one day you will become an owner. That defining element underpins many aspects of a legal career at a firm. Lawyers we interviewed spoke about a feeling of “investedness” in the firm. They care about such things as whether money is being wisely spent or whether there are inefficiencies, things that may not be on the mind of a lawyer in the legal department of a public company. One senior associate referred to “seeing that apple of partnership before your eyes.” Others observed that once you’re a member, there is a bit of a “clubby” feel. And, as long as you are keeping your clients satisfied and contributing, there’s a sense that you’re running your own show, even as a young partner.
CHAIN OF COMMAND
Partnerships are generally controlled by a partnership agreement outlining such issues as how new partners are added, what decisions will go to a partnership vote, and how the firm will divide its profits. Depending on the size of a firm, the partners in charge will delegate some areas to other professionals or to committees focusing on specific functions like compensation, marketing, and recruiting. At small and mid-size firms, you will typically find a managing partner or small group of partners who handle business functions like leases, insurance, purchases of equipment, and hiring of staff and associates.
Once a firm reaches a certain size, it necessarily becomes more layered. At firms with more than a hundred lawyers, there can be scores of standing committees plus a number of ad hoc groups working on projects with differing life spans. At these shops, the structure looks a lot like the corporate institutions the firm serves. At the top, you’ll find a chairperson who acts much like the CEO. Then there is a managing partner, whose power varies from firm to firm (often, the managing partner is likened to a COO). The most important decisions of the firm will generally be addressed by an executive committee, the firm’s version of a board of directors. And these days, the CFO is another key player.
WHAT IT MEANS TO YOU: Are they running a tight ship? Or are you headed for a land of confusion? Your career could depend on the foresight, efficiency, and response time of the decision makers.
One thing to remember: all partners are not created equal. The most powerful partners will almost always be the ones bringing in the most business. That is not to say that lesser partners have no voice. As Jerry Levine, managing partner of Loeb & Loeb, explains, at his firm “you have the same voice whether you bill millions of dollars or not” on issues requiring a vote of equity partners. Generally, decisions like admitting new partners, moving to another location, opening a new office, or expelling someone from the partnership call for such a vote. According to Ken Hildebrandt, a law firm consultant with Hildebrandt International, voting is often a formality since a consensus among partners is reached before getting to a vote.
Where partners are not equals, however, is in terms of earnings. Not only will partners take home different shares of the firm’s profits, but the relative size of the pieces is not necessarily known by all partners (not to mention associates who may know a lot or next to nothing). Most important, no two partnerships are identical. The flexibility of partnerships allows for any structure that makes sense to the people who devise it.
WHAT IT MEANS TO YOU: Will you be at a place where news travels by leaks and surprises or will you feel plugged in and involved with what’s going on at the firm? Many lawyers say finding a mentor, or at least a loose-lipped partner, can help keep you in the loop.
JOINING THE CLUB
When it comes to adding members, firms generally choose those who can bring business to the firm or who have made themselves indispensable to one of the firm’s existing clients. David Ross, managing partner of Seyfarth & Shaw’s New York office, says it’s the clients who tell him when it’s time to make someone a partner. He recalls one young lawyer who was always busy, yet when the partners conferred, they realized that no one was giving him any work. Soon they figured out that clients had been calling him directly and he had been rounding up junior associates to help him get the work done. That lawyer was quickly made a partner. Though Ross’s firm has no mandate on how many new partners it will add each year, he says, “When they make it, it’s generally not a close call.”
Big firms have a committee that reviews candidates for partnership. Those committees interview all potential candidates as well as the partners they have worked for before making decisions. At small and mid-size firms, partnership decisions are more informal. It used to be that lawyers were considered for partnership after a certain numbers of years–the seven year “up or out” philosophy. But consultant Ken Hildebrandt says that is changing since firms are realizing that there is a place for experienced lawyers even when they are not ideal candidates for traditional equity partnership. With titles like “of counsel,” “non-equity partner,” and “contract partner” becoming increasingly common, law firms are offering some different options to lawyers who either don’t make the cut or who make affirmative decisions to opt for a more balanced lifestyle than partnership affords.
WHAT IT MEANS TO YOU: If you’re gunning for partner, get the intelligence on what it takes to get there–the balance between the ability to bring in clients, the stamina to bill enough hours, and anything else the firm weighs in its process.
How the costs of doing business add up. Quickly.
The economics of a law firm are pretty straightforward. You look at what money comes in and what expenses are needed to operate the business. After paying the salaries of associates and staff, the largest expenses are rent and technology. According to John Willems, the administrative partner of White & Case, those three items can constitute nearly 90 percent of a law firm’s expenses. After that, firms vary widely in where they spend money, with budget items like marketing and public relations, office decor, and partners’ retreats taking up a firm’s available cash. After all those bills are paid, what remains are the profits available for distribution to the partners.
THE INCOME SIDE
This is where you come in. At firms of any size, one thing holds true across the board. The only way money is made is when lawyers generate fees from their clients and those fees are collected (the major exception to this is the plaintiff’s firms, which we’ll get to later). As any partner will tell you, generating revenues is critical. It’s not enough to do good work; you need to become proficient at working efficiently so that the time you spend can be billed.
Bills are generally sent out on a monthly basis, and even among the top tier of clients, collecting on those bills can be a problem. Collections as a percentage of hours worked, the so-called “realization rate,” ultimately determine a firm’s profitability, and because of its importance, firms must think carefully about the creditworthiness and solvency of the clients they take on. Whether the lawyers themselves or a collections department does it, communicating with clients about delinquent payments is one of the painful truths about law firm practice.
There are some firms, like plaintiffs’ firms specializing in class actions or product liability, where billing doesn’t matter at all since they get paid on a contingency basis. According to Amy Blumenthal, who founded her own practice after cutting her teeth at one of the country’s biggest plaintiffs’ firms, there are measurables in such a firm as well, but they are more about the quality of your work product (e.g. successful motions, favorable trial verdicts) than how many hours you worked.
WHAT IT MEANS TO YOU: Will you be working on collections or will the accounting department handle that? Will you feel pressured to bill 2,000 hours or more a year?
THE EXPENSE SIDE
There are no standards for how firms decide how much to spend on various expenses–and spending varies widely based on geography, size, and practice area. Large firms create budgets and business plans, whereas smaller firms tend to make decisions more on the fly. Ed Poll, a law firm consultant whose clients are mostly medium-sized firms, says these firms typically make spending decisions “on the run” when they have money in their accounts, but rarely do they do it with any kind of business plan or budgetary vision in mind. He notes that the smarter ones will at least think about the “payback period” of an expenditure–how long it will take to pay back its cost.
The biggest expense for law firms is the salaries of its non-partner lawyers as well as those of staff and non-legal professionals. As the recent salary wars at the largest firms show, firms raise salaries when they feel they must to attract the best lawyers. And when salaries go up, there is a price to be paid–either in the rates charged to the clients, the hours the lawyers are expected to work, or the draws taken by the partners.
The larger the law firm, the more non-legal staff it employs to manage the specialized functions of the firm which do not involve legal work (e.g. marketing, human resources, public relations, collections, accounting). At small and even some mid-size firms, lawyers tend to do more of those other functions themselves and the non-legal staff may be as streamlined as an office manager, receptionist, a few legal assistants, and the occasional paralegal. At these firms, lawyers and staff are hired on an “as needed” basis, whenever the firm feels that an increase in work is sufficient to support more lawyers.
Salaries of non-legal staff are considered a part of overhead, so many firms will try to keep those expenses as low as possible since the amount paid for expenses directly cuts into what partners will take home.
WHAT IT MEANS TO YOU: Will you have a good assistant, paralegal support, and other appropriate staff so that you can focus on those billable hours? Think about the trade-offs between salary and free time; the more a firm pays its associates, the more it expects them to be profitable investments.
Though rent is one of the largest expenses of a law firm, it is something that junior lawyers seldom think about since leases are often long term and were in place well before they moved in. Finding proper office space, negotiating lease terms, or arranging a move to larger quarters are decisions usually handled by a partner or committee specially formed for that purpose.
For some firms, like a class-action practice seeking to intimidate its opponents, appearance is everything; they will spend freely on imported woods and chandeliers if it sets a sufficiently imposing tone. The same is true for firms with fancy corporate clients, who may feel a firm’s dated decor and shabby address reflect poorly on them. On the flipside, firms with more modest clients may choose simple offices in lower rent neighborhoods to avoid comments from clients that their billing rates must be too high.
WHAT IT MEANS TO YOU: Will it be a matter of minutes or years until you have a private office? Look carefully–a sea of empty offices in a high-rent district could mean a firm is heading for financial difficulties.
Technology is one of the most important expenses a law firm incurs. Of course there are machines like telephones, computers, fax machines, and powerhouse photocopiers (all of which require periodic updating) that are taken for granted. Certain practice areas, like litigation, require extensive software and systems to keep cases organized. Even storage of the firm’s files, once a question of square footage, is now a matter of information technology, with firms investing in “knowledge management” systems so that the contents of each lawyer’s files are available on a shared network. And then there are firms that outfit all attorneys with pagers, wireless e-mail, laptops, home computers, and cell phones–something that can be either appealing or annoying for the lawyers–but either way, quite costly.
Decisions on technology are critical. Firms need to make sure their lawyers have all the necessary tools to do their jobs, and they also need to be technologically compatible with their clients. On decisions about technology, often the lawyers getting involved are those most comfortable talking gigabytes and RAM. When a firm is of sufficient size or if no one in-house feels competent for the task, they hire IT professionals or outside contractors to do the job.
WHAT IT MEANS TO YOU: Will your technology be cutting edge or cutting corners?
Spreading The Word
One expense getting a lot of buzz lately is marketing, an area rarely mentioned, let alone publicly discussed, just 20 years ago (lawyer ads were illegal until 1977). These days, mid-sized law firms are hiring ad agencies, and smaller ones are taking time to work on marketing efforts such as designing the firm’s Web site, speaking at conferences, and publishing articles and client newsletters.
Among white shoe firms, traditional advertising is still a bit taboo. Yet even these firms have always gotten their names out. Tombstone ads in legal periodicals announcing new partners and lateral hires, sponsorships of charitable events, and recruiting efforts are all forms of marketing that cost money whether in actual dollars or a lawyer’s time that can’t be billed to a client.
But mainstream advertising like the kind done in the rest of corporate America is growing at a steady clip and along with it are the number of firms that have added or beefed up their marketing departments. According to Silvia Coulter, marketing director for Boston-based Hale and Dorr, law firms are often one of the top three advertisers in many regional publications catering to particular industries. In addition to advertising campaigns, some of the more innovative firms can be found as sponsors at trade shows and forming strategic alliances with accounting firms and other organizations targeting the same market.
WHAT IT MEANS TO YOU: Will your Aunt Mildred have heard of your firm?
ASK & LISTEN
Use this knowledge to find the right fit
Remember, it’s not all about them; there are two sides to this relationship, so think about what type of atmosphere you need to thrive. Do you want to be taken care of by those more senior to you or would you rather be helping to steer the ship early on? If the former, think about a traditional firm with a rigid hierarchy. If the latter, find a firm that prides itself on its informality and involves young lawyers in the firm’s management. Are you motivated by job security? If so, look for a firm with a very stable practice that won’t careen with the economy. Chances are you’ll earn less than you might like in boom times, but you’ll hold onto your swivel chair when the bottom drops out.
You can get a sense of these things by talking to associates about how involved they are in the firm’s operations and how much they know about the firm’s financial health and plans for the future. Firms have personalities; before you take the plunge just make sure you’re compatible with your future partners.
Copyright© 2001 NLP IP Company