Ancillary Businesses Losing Appeal

Law firms once dreamed of owning separate businesses to bring in new streams of revenue, and while some achieved that goal, the industry is now largely backing away from a strategy that provided little economic benefit.

While some firms still own the stand-alone affiliates that mainly came into being in the 1980s and 1990s, many are selling the entities, and few new ones have popped up in recent years.

San Francisco-based Littler Mendel- son P.C., the labor and employment firm, is in 'preliminary discussions' to sell ELT Inc., an affiliate co-owned with a group of banks. ELT provides online workplace compliance training, said Garry Mathiason, a partner at the firm who is also ELT's chairman.

Partners at the firm have been pleased with ELT and hope to keep selling legal content to it after it's sold, but they don't see business ownership 'as a road to keep developing,' he said.

'The mental elements that make law firms and lawyers incredibly successful are incredibly destructive to business,' Mathiason said. Lawyers 'try to constantly work on eliminating risk, and businesses build on ways of trying to assume risk.'

Bingham McCutchen LLP in June sold its biggest affiliate, the wealth management company Bingham Legg Advisers, to Wilmington Trust Corp. The law firm had owned a 50% stake in the eight-year-old joint venture with Legg Mason Inc.

The firm sold the 30-employee Bingham Legg Advisers because its interests, and those of its partner, had changed, and there was 'a good opportunity to concentrate on the things that we really do best,' Chairman Jay Zimmerman said. The firm still has smaller consulting entities and doesn't have plans to sell them, he said.

The Bottom Line

The affiliates just haven't added much to the bottom line, said Jim Jones, an attorney and a legal consultant at Hildebrandt International, Inc. in Washington. 'It's never really proved to be a great bonanza for firms,' said Jones, who wrote the 2002 book Beyond Legal Practice: Organizing and Managing Ancillary Businesses. 'Most firms have probably realized that these are tough entities to manage.'

While Jones said he still gets inquiries from firms about affiliates several times a year, the calls are about restructuring or selling the units as often as they're about starting one, he said.

Holland & Knight LLP owned about a half-dozen consulting-service affiliates until about 2003, but some lawyers were always uncomfortable with the idea, said Kinder Cannon, the firm's general counsel. While owning them incurred no great costs, they didn't provide much economic benefit either, he said.

'There was this sense that we're not doing what we do best, which is practicing law,' said Cannon, who is based in the firm's Jacksonville, FL, office.

Since the collapse of Enron Corp. in 2001 and the related demise of Arthur Andersen, a consulting firm that once employed many lawyers, the pressure on law firms to compete by offering a variety of professional services has eased, Cannon said. Since then, there's been zero interest to get back in, he said. '[W]e've kind of purged it from our minds.'

A Counterexample

Not all firms are shedding their affiliates, however. Duane Morris LLP has six affiliates with substantive operations, in addition to the lobbying unit, said the Philadelphia-based firm's chairman, Sheldon Bonovitz. The firm's affiliates include:

• Three related entities in Pennsylvania, Maryland, and New Jersey that underwrite medical malpractice insurance for doctors and hospitals;
• DM Trust Co., a unit created this year to help immigrants to the United States transfer trust assets;
• The financial planning services unit Wescott Financial Advisory Group, with about $1.5 billion under management; and
• Wescott Healthcare, which advises hospitals and other health care entities on financial and operational issues as well as revenue recovery.

The entities that aren't in startup mode have been profitable and are growing, Bonovitz said. Declining to provide any financial statistics, he said the revenue is 'significant, but small in relation to the total partner income.' The firm's current strategy is to 'keep them indefinitely to provide a revenue stream for the partnership.'

The affiliates may also provide a lure for attorney recruits, Bonovitz said, but not because of financial reward. 'A person wouldn't come to us because of the economic benefits of the ancillary businesses, but it's attractive in that it reflects the personality of the firm.'

Lynne Marek writes for The National Law Journal, an affiliate of this newsletter.

Law firms once dreamed of owning separate businesses to bring in new streams of revenue, and while some achieved that goal, the industry is now largely backing away from a strategy that provided little economic benefit.

While some firms still own the stand-alone affiliates that mainly came into being in the 1980s and 1990s, many are selling the entities, and few new ones have popped up in recent years.

San Francisco-based Littler Mendel- son P.C., the labor and employment firm, is in 'preliminary discussions' to sell ELT Inc., an affiliate co-owned with a group of banks. ELT provides online workplace compliance training, said Garry Mathiason, a partner at the firm who is also ELT's chairman.

Partners at the firm have been pleased with ELT and hope to keep selling legal content to it after it's sold, but they don't see business ownership 'as a road to keep developing,' he said.

'The mental elements that make law firms and lawyers incredibly successful are incredibly destructive to business,' Mathiason said. Lawyers 'try to constantly work on eliminating risk, and businesses build on ways of trying to assume risk.'

Bingham McCutchen LLP in June sold its biggest affiliate, the wealth management company Bingham Legg Advisers, to Wilmington Trust Corp. The law firm had owned a 50% stake in the eight-year-old joint venture with Legg Mason Inc.

The firm sold the 30-employee Bingham Legg Advisers because its interests, and those of its partner, had changed, and there was 'a good opportunity to concentrate on the things that we really do best,' Chairman Jay Zimmerman said. The firm still has smaller consulting entities and doesn't have plans to sell them, he said.

The Bottom Line

The affiliates just haven't added much to the bottom line, said Jim Jones, an attorney and a legal consultant at Hildebrandt International, Inc. in Washington. 'It's never really proved to be a great bonanza for firms,' said Jones, who wrote the 2002 book Beyond Legal Practice: Organizing and Managing Ancillary Businesses. 'Most firms have probably realized that these are tough entities to manage.'

While Jones said he still gets inquiries from firms about affiliates several times a year, the calls are about restructuring or selling the units as often as they're about starting one, he said.

Holland & Knight LLP owned about a half-dozen consulting-service affiliates until about 2003, but some lawyers were always uncomfortable with the idea, said Kinder Cannon, the firm's general counsel. While owning them incurred no great costs, they didn't provide much economic benefit either, he said.

'There was this sense that we're not doing what we do best, which is practicing law,' said Cannon, who is based in the firm's Jacksonville, FL, office.

Since the collapse of Enron Corp. in 2001 and the related demise of Arthur Andersen, a consulting firm that once employed many lawyers, the pressure on law firms to compete by offering a variety of professional services has eased, Cannon said. Since then, there's been zero interest to get back in, he said. '[W]e've kind of purged it from our minds.'

A Counterexample

Not all firms are shedding their affiliates, however. Duane Morris LLP has six affiliates with substantive operations, in addition to the lobbying unit, said the Philadelphia-based firm's chairman, Sheldon Bonovitz. The firm's affiliates include:

• Three related entities in Pennsylvania, Maryland, and New Jersey that underwrite medical malpractice insurance for doctors and hospitals;
• DM Trust Co., a unit created this year to help immigrants to the United States transfer trust assets;
• The financial planning services unit Wescott Financial Advisory Group, with about $1.5 billion under management; and
• Wescott Healthcare, which advises hospitals and other health care entities on financial and operational issues as well as revenue recovery.

The entities that aren't in startup mode have been profitable and are growing, Bonovitz said. Declining to provide any financial statistics, he said the revenue is 'significant, but small in relation to the total partner income.' The firm's current strategy is to 'keep them indefinitely to provide a revenue stream for the partnership.'

The affiliates may also provide a lure for attorney recruits, Bonovitz said, but not because of financial reward. 'A person wouldn't come to us because of the economic benefits of the ancillary businesses, but it's attractive in that it reflects the personality of the firm.'

Lynne Marek writes for The National Law Journal, an affiliate of this newsletter.