ILTA Day 2, Session 1 (August 21, 2007): Economics of Law Firms

Speakers were Bruce McEwan, a very well-known law firm economist and author of Adam Smith, Esq., and John Alber, KM Partner for the forward-looking firm Bryan Cave.

This session started with CISCO GC Mark Chandler's statement on failures of current economic model:

"The present system is leading to unhappy lawyers and unhappy clients."

Current Market conditions:

• Average margin is high 30s;
• Clients are thinning the ranks of firms they choose to hire;
• Creation of very small panels;
• RFPs and tenders are becoming routine;
• Due to extraordinary price and budget pressure, clients are driving change;
• Clients are starting to band together on issues like associate compensation (for instance, Credit Suisse will not pay bills from 1st year associates); and,
• Big clients are starting to reduce the number of firms they work with from 100 to 50 or 20.

Bruce believes that the economics of the business may completely change soon. For instance, two Australian law firms recently announced that they are going public (Slater & Gordon went public May 21, 2007; see also Bruce's own interview with its managing partner, Andrew Grech. ).

LegalOnRamp.com

This service was presented as an example of client-driven change. It is driven by AmLaw100 firms Orrick, Pillsbury, and Baker & McKenzie (and corporations like Cisco or Sun) and is designed to provide answers to fairly generic questions. It is a work-in-progress, and has social networking features. If you log on, it is presence-enabled, so the user can see if anyone who is a friend is online.

Law Firm Responses To Economic Conditions

· Technology;
· Some growth in fixed fee engagements, risk sharing arrangements;
· Creative technology responses including increased use of business analytics tools to refine pricing, staffing models.

IT people can help lawyers start to understand economics of the practice.

"Trade Zone";

This application is a decision tree addressing international trade issues. While it cost cost $200K /year to run and keep up-to-date, Bryan Cave obtained all of the clients' business, about $1.5 million a year.

Bryan Cave also implemented a Redwood-designed "Attorney Dashboard."

This business analytics package lets a partner plan or budget an engagement by selecting available lawyers, and by automatically calculating rates and leverage, shows profit margins depending on the selection of who does the work. The Attorney Dashboard takes every dollar of expense and compensation and allocates to every fee earner to generate a gross margin.

For instance, an "unleveraged" deal where are a partner did 30 hours of work and the associate 70 can be directly compared with a leveraged deal where are the partner works 10 hours and the associate 90. The margin doubles when the work is leveraged.

Many lawyers assume that if the partner does most of the work, they'll make more money. But the reverse is true.

The Dashboard has apparently functioned as an effective training tool as well as a line business tool. John Alber reported that Bryan Cave's rollout of the Attorney Dashboard has had a measurable increase in leverage, and hence firm profits, among partners who have used it.

If attorneys understand the economics of practicing law, they will have a better access to fixed fee arrangements.