The Partner’s Guide to Business Development: Marketing Your Practice to Differentiate, Grow and Boost Profitability

By Denis Kudriashov and Kim Montes

The Partner’s Guide to Business Development is a book that is specifically geared towards lawyers and helps them more effectively market themselves and their firms.

• Language: English
• Publisher: BookBaby
• Release date: Jul 23, 2014
• ISBN: 9781483534176

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Understanding The Business of Law

The Business of Law

Lawyers are trained to practice law and sometimes have a poor understanding of business development and profitability. According to the American Bar Association’s Law Practice, When each individual has a solid grasp of how the firm functions from a revenue and expense standpoint, the firm as a whole benefits—because everyone understands the impact of their actions on the firm's financial results. (Seigneur)

The legal business model has been based on an hourly time and materials pricing model that did not reward efficiency or always align with the client’s interests. Clients have also faced automatic annual pricing increases that were up to five times the rate of inflation and were expected to accept these price hikes without question. Law firms determined the definitions of service and value, with some considering all services worthy of premium rates. Lockstep compensation plans for attorneys and partners were based solely on seniority instead of rewarding ability, experience, and performance. Attrition levels for associates were high due to punishing demands on time that did not allow for any type of balance or personal life.

Ultimately, law firms have operated under a business model that did not promote accountability, align with client interests, or reward efficiency and positive outcomes.

With increasing competition and consumer choice, change in the legal marketplace is inevitable and accelerating rapidly. Alternative fee structures shift some or all of the fee risk to law firms and are often based on outcomes – not hours. Firms can no longer inflict hefty annual price increases and expect to retain loyal clients. New resources and service models are changing the definition of value. And there is a move to new merit-based compensation plans and performance bonuses for associates, lawyers, and partners that may not guarantee high salaries based solely upon seniority.

In order to continue to operate successfully in a time of economic instability, law firms are revisiting strategies and reevaluating clients, service offerings, and practice groups to determine which activities are the most profitable. Financial metrics and trends are driving strategy as firms consider options such as growth and expansion, alternative fee arrangements, and ROI-based marketing strategies. As clients demand that firms do more with less, building efficiency and finding ways to increase the bottom line are more effective ways to improve client retention and boost profitability, rather than raising hourly rates.

The bottom line is that law firms need to make major changes to business development, operating models, and cost structures to survive and thrive in today’s economic environment.

The last decade has produced tremendous change within law firms at an unprecedented pace. Most of the change has been focused upon internal structure and financial concerns and little concern has been paid to operational efficiency or creating a better value proposition for clients.

Many firms have responded to economic pressures with mergers, acquisitions, or expansion to new markets in new locations. Although these strategies sometimes work, they send the message that the answer to success is elsewhere – with new people or places, rather than with present firm personnel and clients. This attitude is far from motivating, and buying revenue through mergers and acquisitions can be expensive and may produce more problems than it solves.

Cutting costs may be necessary, but it is not the answer to coping with financial pressures. Focusing on reducing non-essential expenses may save some costs in the budget, but it will make little difference overall. Staff reductions have also been very common, but this also reduces the firm’s professional capacity, and leaves it unprepared for new business or increasing market demand. In the long run, cutting costs is a short-term fix producing marginal benefits.

The reality is that many firms are focused on the wrong things.

Despite declining revenues, law firms should focus on their people. This means identifying, recruiting, and hiring qualified professionals, and then training, mentoring, promoting, and retaining them. Losing skilled legal professionals is a costly proposition, and it quickly wipes out any savings that are realized through cost cutting. Human capital is the foundation of law firms, and it is people that create revenue.

Successful and profitable law firms focus on providing real value to clients, which leads to an increased market share and retention. Like staff attrition, losing and replacing clients is costly. Our focus throughout this book will be on creating a client-focused culture of development that benefits both the client and the law firm.

New Trends Reshaping The Legal Profession

The legal profession has seen major changes within the last decade. Law has evolved from being a profession to operating as a business. Just as other industries have experienced consolidation, large law firms have become giants through mega-mergers and acquisitions. Fees for the priciest lawyers first hit $1,000 an hour in the mid-2000s, a rate more common now among prestigious firms, and a survey published by the National Law Journal revealed that rates now go as high as $1,800 (The Economist, 2014). Geography has also changed for law firms, as some have expanded internationally and others are relocating operations to lower cost locations within the U.S. Specialization of practice areas has become a common differentiator. Another change is a move to in-house corporate legal departments in place of outside counsel.

Future Trends

Change is here to stay, and future trends present both challenge and opportunity to law firms.

Billing rate pressures will continue. Economic recovery has been slow and law firms have felt the pressure to lower rates as a result of clients’ financial challenges. Billing rates that increased dramatically a decade ago may continue to exist at the most prestigious law firms, but the majority of firms are offering discounts. Discounting is prevalent among key clients, but smaller clients may not enjoy the same savings.

Alternative Fee Arrangements are here to stay. In an effort to shift risk and increase accountability and alignment with client interests, more firms are offering Alternative Fee Arrangements (AFAs). Hourly billing will not disappear, but clients will have more options, depending upon the type of matter being handled. A 2013 survey conducted by Altman Weil found that two thirds of all AFAs are provided in response to client requests, compared to the one third that are offered proactively by law firms." (Clay, 2013). However, they found that AFAs were almost twice as likely to be profitable with the proactive firms. Law firms that accept the reality of AFAs and offer them proactively will also be more likely to gain a competitive advantage.

Virtual Firms are emerging as an attractive option. Virtual firms are emerging, with models ranging from solo practitioners delivering online services to large firms operating outside of a traditional setting. Some multi-lawyer firms have centralized meeting spaces for client meetings, with lawyers based at home offices or executive suites. Virtual assistants are also used to provide administrative support. Firms are also using collaborative cloud-based management systems, which allow lawyers to be location independent. Virtual firms can offer a full range of services while reducing both costs and client fees. As Burton points out in an article on virtual law firms, some virtual firms emerge not because of the economy or lack of jobs but because the lawyers recognize that the way things always have been done may not be the right answer from a client-service perspective. (Burton, 2012).

More senior lawyers are on a non-partner track. In an effort to reduce costs, some law firms are adopting a two-tier system, with lawyers on a non-partner track earning less than their counterparts. While this option does decrease the demands on associates and offers more family-friendly flexibility, there is some controversy. As an article in the New York Times put it, The nation’s biggest law firms are creating a second tier of workers, stripping pay and prestige from one of the most coveted jobs in the business world. (Rampell, 2011). Graduating from law school and becoming an attorney is no longer a guarantee of a high salary and a comfortable lifestyle. As a result, law school enrollment rates may decline in the future.

Firms are decoupling associate compensation from seniority. The most visible impact of the recession has been decreasing salaries and waves of layoffs, but another trend has been the emergence of merit-based compensation in place of lockstep promotions. Lockstep compensation plans used to guarantee salary increases based solely upon seniority, but new models of merit or performance-based compensation are designed to increase accountability and produce more desirable results. According to a 2009 survey conducted by Citi Private Bank’s Law Firm Group, nearly half of the top 50 firms in the Am Law 100 planned to switch to performance-based compensation (Goldberg, 2010).

Smaller Firms Anticipate a Bright Future. Although big firms will continue to thrive, more boutique firms will be established that specialize in areas such as intellectual property, labor, unemployment, or health care. These smaller firms may have lower rate structures, but other boutique firms with high-rate clientele may be absorbed into larger firms. In their quest for savings, companies that used to hire the large firms are instead sending work to smaller firms, according to a recent article in the Wall Street Journal (Smith, 2013). While the largest firms’ share of legal billings has dropped from 26% down to 20%, midsize firms are gaining ground. Since 2010, firms with 201-500 lawyers have increased their market share from 18% to 22%, and mid-sized firms handling litigation generating more than $1 million have jumped from 22% to 41% in the same period. Although large corporations may use elite law firms for complex and critical transactions such as large acquisitions or class action suits, they are turning to smaller firms with lower overhead to handle more routine work. After the economic downturn in 2008, companies have become increasingly comfortable sending more of the complex, high-rate work to smaller firms in lower-cost locations. Many of the small or midsize firms have partners and attorneys who trained at the largest firms and then moved on. The WSJ article notes that nearly 75% of those surveyed would choose to use a qualified lawyer from a less prestigious firm if they could save 30% in legal fees.

Technology is changing the playing field. Technology is changing the legal field in many areas, from education to research to the definition of value. Technologies such as Internet search engines and online law libraries are causing firms