What Lies Ahead for 2006

It doesn't take great foresight or a crystal ball to recognize that law firms will face some serious challenges in 2006. Coming events have already cast their shadows. Some of the challenges have existed for several years. Others are new. What they add up to are two basic questions most law firms must answer: “Do we recognize the challenges facing us?” and “How are we going to address them?” This article discusses several of these challenges and, where possible, suggests some alternatives for meeting them.

The issue of ethics is now one of the most troubling and confusing challenges. Many states continue to issue opinions that indicate the use of technology for client development is governed by ethics rules. Some of these states are adopting more relaxed rules regarding client development, largely as a result of the ABA's Ethics 2000 initiative. At the same time, however, other states  ' including Texas, South Carolina and Missouri ' have adopted changes in their rules that impose greater restrictions, particularly for personal injury lawyers. And, as of this writing, none of these diverse (dare we say “contradictory”?) rules have addressed the subject of blogs that, of course, are spreading like a prairie fire.

State ethics rules must take priority but these create even more challenges for firms that have multi-state locations. Must they follow the rules of the state in which their “headquarters office” is located or must they follow different rules in different states? Or can they “shop around” and decide to follow firm wide the more relaxed rules in one of the states in which they have offices? The answer to that question is probably “no” but who knows for sure?

In the midst of these uncertainties, the Legal Marketing Association is weighing the adoption of its first policy statement on ethics. However, the best guidance currently on the entire ethics issue probably comes from ABA staff counsel Will Hornsby on his blog, “The Boundaries of Legal Marketing” (www.willhornsby.com).

Management Training

Many firms have come to realize that, while the practice of law is a profession, a law firm is a business ' and in the growing number of large firms it's a multi-million dollar business. However, despite this fact, only a few firms have recognized that, if a law firm is a business, then their senior management needs training in how to manage the business. Reed Smith was one of the first firms to do so. Working with the Wharton School at the University of Pennsylvania, it initially launched Reed Smith University to provide training in leadership. Subsequently other management subjects have been added to the curriculum. Last year the Hildebrandt Institute, in conjunction with George Washington University, created the first graduate certificate program in Law Firm Management. These are encouraging steps. However, not many states grant CLE credit for management training although the accounting profession has given CPE credit for many years for MAP (Managing an Accounting Practice) programs.

Several other firms have recognized that associate training and mentoring programs generally end when associates become partners. Therefore, these firms have established training programs for their newly elected partners in management, leadership, business development and “firm citizenship.” While these programs are not directed toward the firms' senior management, they still show recognition of the need for at least initial management and leadership training. Most of these programs have not involved “partnering” with a respected business school, which is a major and expensive approach that is probably more justified for high-level training. Instead, they have been developed by using consultants or professors who have the expertise in the necessary areas ' as well as the teaching ability. There may be other approaches as well.

How to Compensate Firm Managers

While the challenge of providing management training is only starting to be recognized and addressed, the question of how to compensate partners who accept major management roles while still practicing law is an issue a growing number of firms have been wrestling with for a while. The challenge is why should these partners give up some of their practice ' and therefore some of their income ' to take on management responsibilities and devote sufficient time and energy to them. Because this will reduce, to a greater or lesser degree, a partner's billable time or economic “productivity”, firms must take new approaches to compensate their partner-managers. This has given rise to a new term in law firms, “management compensation.”

The first step is to identify the management positions to be considered for a different approach to compensation. The principal one, of course, is the managing partner or equivalent. Other positions that might be considered for management compensation are practice group leaders and chief operating officers if the COO is a practicing lawyer.

There are two basic approaches to calculating the amount of appropriate compensation. Firms that emphasize achievement of billable-hour goals often give credit for a certain number of billable hours based on the percentage of time the partner is expected to devote to the management position. Another approach is to establish a part of the partner's compensation as a “base salary”. That figure is based on several factors including the expected time commitment and the partner's compensation history. A related challenge is how to compensate these partners when they return to full-time practice. Most firms provide some economic consideration for a few years while these partners attempt to rebuild their practices.

Aging Partners

Another challenge that firms are recognizing is the aging of their partnership. One factor causing this is that “baby boomers” are approaching retirement. Another is the age gap that exists in some firms because they sharply reduced, or even eliminated for several years, the hiring of entry-level associates during economic downturns. The continuing trend to create a tier of non-equity partners has also added to the problem. The result is that, in some firms, there is a dearth of younger partners who are sufficiently experienced to assume client responsibilities and also step into senior management positions.

Some firms have attempted to address this challenge through lateral hiring. An extreme example of this is one firm in which the managing partner and all five members of the executive committee are lateral hires who joined the firm within the last 5 years. Other firms have chosen to accelerate the training and development of younger partners and even senior associates. However some firms have either been reluctant to take these steps or have not had success with them. Some of these firms have merged into (read “been acquired by”) other firms or have simply dissolved.

Other Challenges

The above challenges are certainly not the only ones that firms face today. Electronic discovery is a major one. Blunders and mistakes have caused firms to lose cases that might have been won. Outsourcing is another trend that also brings its own set of challenges. It has expanded from word processing and filing services performed by non-lawyers to patent applications, the preparation of divorce papers and legal research, all performed by experienced but less expensive lawyers in remote locations. And of course there is the continued pressure by corporate general counsels for firms to control and even reduce their fees.

The alternatives for meeting some of these challenges are fairly obvious. Firms only need to address them. In the case of the newer challenges, however, it is almost a matter of trial-and-error until a satisfactory solution is reached.

It doesn't take great foresight or a crystal ball to recognize that law firms will face some serious challenges in 2006. Coming events have already cast their shadows. Some of the challenges have existed for several years. Others are new. What they add up to are two basic questions most law firms must answer: “Do we recognize the challenges facing us?” and “How are we going to address them?” This article discusses several of these challenges and, where possible, suggests some alternatives for meeting them.

The issue of ethics is now one of the most troubling and confusing challenges. Many states continue to issue opinions that indicate the use of technology for client development is governed by ethics rules. Some of these states are adopting more relaxed rules regarding client development, largely as a result of the ABA's Ethics 2000 initiative. At the same time, however, other states  ' including Texas, South Carolina and Missouri ' have adopted changes in their rules that impose greater restrictions, particularly for personal injury lawyers. And, as of this writing, none of these diverse (dare we say “contradictory”?) rules have addressed the subject of blogs that, of course, are spreading like a prairie fire.

State ethics rules must take priority but these create even more challenges for firms that have multi-state locations. Must they follow the rules of the state in which their “headquarters office” is located or must they follow different rules in different states? Or can they “shop around” and decide to follow firm wide the more relaxed rules in one of the states in which they have offices? The answer to that question is probably “no” but who knows for sure?

In the midst of these uncertainties, the Legal Marketing Association is weighing the adoption of its first policy statement on ethics. However, the best guidance currently on the entire ethics issue probably comes from ABA staff counsel Will Hornsby on his blog, “The Boundaries of Legal Marketing” (www.willhornsby.com).

Management Training

Many firms have come to realize that, while the practice of law is a profession, a law firm is a business ' and in the growing number of large firms it's a multi-million dollar business. However, despite this fact, only a few firms have recognized that, if a law firm is a business, then their senior management needs training in how to manage the business. Reed Smith was one of the first firms to do so. Working with the Wharton School at the University of Pennsylvania, it initially launched Reed Smith University to provide training in leadership. Subsequently other management subjects have been added to the curriculum. Last year the Hildebrandt Institute, in conjunction with George Washington University, created the first graduate certificate program in Law Firm Management. These are encouraging steps. However, not many states grant CLE credit for management training although the accounting profession has given CPE credit for many years for MAP (Managing an Accounting Practice) programs.

Several other firms have recognized that associate training and mentoring programs generally end when associates become partners. Therefore, these firms have established training programs for their newly elected partners in management, leadership, business development and “firm citizenship.” While these programs are not directed toward the firms' senior management, they still show recognition of the need for at least initial management and leadership training. Most of these programs have not involved “partnering” with a respected business school, which is a major and expensive approach that is probably more justified for high-level training. Instead, they have been developed by using consultants or professors who have the expertise in the necessary areas ' as well as the teaching ability. There may be other approaches as well.

How to Compensate Firm Managers

While the challenge of providing management training is only starting to be recognized and addressed, the question of how to compensate partners who accept major management roles while still practicing law is an issue a growing number of firms have been wrestling with for a while. The challenge is why should these partners give up some of their practice ' and therefore some of their income ' to take on management responsibilities and devote sufficient time and energy to them. Because this will reduce, to a greater or lesser degree, a partner's billable time or economic “productivity”, firms must take new approaches to compensate their partner-managers. This has given rise to a new term in law firms, “management compensation.”

The first step is to identify the management positions to be considered for a different approach to compensation. The principal one, of course, is the managing partner or equivalent. Other positions that might be considered for management compensation are practice group leaders and chief operating officers if the COO is a practicing lawyer.

There are two basic approaches to calculating the amount of appropriate compensation. Firms that emphasize achievement of billable-hour goals often give credit for a certain number of billable hours based on the percentage of time the partner is expected to devote to the management position. Another approach is to establish a part of the partner's compensation as a “base salary”. That figure is based on several factors including the expected time commitment and the partner's compensation history. A related challenge is how to compensate these partners when they return to full-time practice. Most firms provide some economic consideration for a few years while these partners attempt to rebuild their practices.

Aging Partners

Another challenge that firms are recognizing is the aging of their partnership. One factor causing this is that “baby boomers” are approaching retirement. Another is the age gap that exists in some firms because they sharply reduced, or even eliminated for several years, the hiring of entry-level associates during economic downturns. The continuing trend to create a tier of non-equity partners has also added to the problem. The result is that, in some firms, there is a dearth of younger partners who are sufficiently experienced to assume client responsibilities and also step into senior management positions.

Some firms have attempted to address this challenge through lateral hiring. An extreme example of this is one firm in which the managing partner and all five members of the executive committee are lateral hires who joined the firm within the last 5 years. Other firms have chosen to accelerate the training and development of younger partners and even senior associates. However some firms have either been reluctant to take these steps or have not had success with them. Some of these firms have merged into (read “been acquired by”) other firms or have simply dissolved.

Other Challenges

The above challenges are certainly not the only ones that firms face today. Electronic discovery is a major one. Blunders and mistakes have caused firms to lose cases that might have been won. Outsourcing is another trend that also brings its own set of challenges. It has expanded from word processing and filing services performed by non-lawyers to patent applications, the preparation of divorce papers and legal research, all performed by experienced but less expensive lawyers in remote locations. And of course there is the continued pressure by corporate general counsels for firms to control and even reduce their fees.

The alternatives for meeting some of these challenges are fairly obvious. Firms only need to address them. In the case of the newer challenges, however, it is almost a matter of trial-and-error until a satisfactory solution is reached.