Long-established law firms do not generally have the luxury of choosing a single clean and tidy business model or pricing structure for their firm. They are often cluttered for historical reasons with anomalous and ill-fitting practices, departments and offices.
In the current competitive marketplace, firms are finding it increasingly difficult to juggle the differing needs of mixed practices, particularly when they offer high-level services at premium prices at the same time as supplying lower-level services at discounted rates. It is equally tricky to organise, market and brand firms in a unified manner when volume sales sit alongside highly specialised services.
Internal tensions can also arise in mixed practices if the firm tries to harmonise partner rates across the firm, standardise revenue targets or impose salary scales for its lawyers. Even the imposition of standard chargeable-hour targets can cause problems if, in one part of the firm, there are lawyers working on a handful of large projects with high peaks and low troughs of demand whilst, elsewhere in the same firm, lawyers have the constant demands of a high caseload, often resulting in higher chargeable time captured at lower rates.
Additionally, the needs for staffing, technology, space and marketing differ greatly across a mixed practice. Firms often do not need prestigious city offices for lower-level work, whilst mid-market commercial lawyers will often eschew heavy marketing expenditure in favour of relationship-building support.
There are two main ways to confront the challenges of mixed practices and historical clutter.
1. Business units
First, many firms are managing to square the circle by operating different business models for parts of their firm by structuring their practice groups as semi-autonomous separate business units. Each unit operates according to individually tailored partner-to-staff ratios and works to its optimal profitability formulae. Some firms have taken the autonomous business unit approach to an extreme by organising different brands for different parts of the firm. Examples include Lawyers on Demand, created within international law firm Berwin Leighton Paisner, and Involegal, set up by Welsh firm Hugh James.
Internal politics and organisational gymnastics however create some difficulty with this approach, mainly because most firms find it somewhat difficult to vary their key financial indicators and central cost bases to accommodate a range of different practice types. In short, there is a risk that low pricing models and the price sensitive client will, over time, drive out the higher-value services and the more rewarding clients. At the same time, the business model of a volume-based business must, by its nature, incorporate an overheads structure with lower-than-average rates of compensation, lower-qualified case workers and utilitarian budget premises.
2. Hiving off
The second approach is to hive off freestanding practices that do little or nothing to enhance reputation, create new business or generate profits. Sometimes firms have practice areas that keep people busy and generate enough revenue just to break even. In such firms, areas like personal injury litigation are tied to the history of the firm or are so large that they become politically difficult to discard, even when it is clear that the practices are harming the firm’s reputation.
Fortunately, some non-core practices often temporarily have more attractive revenue streams than other mainstream practices. This can place them on a more level footing and removes some of the defensiveness that is often involved in practice management discussions.
If a practice enjoys no synergy with the law firm as a whole, or burdens the firm with disproportionate working capital demands, it may be possible to create an excellent opportunity for the partners in the non-core practice to build their own freestanding firm, organised optimally to suit their needs. The hived-off firm can operate with lower cost structures to match lower billing rates and can control its own recruiting and promotional policies.
A firm can facilitate such spin-off practices with the agreement that they will enjoy a mutual referral policy and assist in the creation of the firm through prompt repayments of capital accounts, operating cash loans to the new firm, and access to technical expertise in office management, IT and financial matters. The result is a spin-off with minimal cost and disruption to the firm and the ability to maintain a satisfied relationship with the partners involved.
For example, in 2009, Allen & Overy spun off its private client practice and White & Case hived off its Bangkok office. More recently, Clifford Chance has spun off its Kyiv office.
Although most firms in times of plenty will live with a higher overheads structure for their volume business in attempts to ward off the operation of Gresham’s Law (under which bad coinage is said to drive out good), the required balancing act becomes increasingly difficult to maintain over time.
Whilst many firms have found it possible, within reason, to operate different business models for parts of their practice, there remains a strategic issue which will need to be determined at some stage. This is because firms need to seriously consider the strategic importance of maintaining areas of the firm that offer no synergies with the rest of the firm, whilst burdening the firm with management inconsistencies or economic headaches.
This article first appeared in Managing Partner in September 2015 (Volume 18 Issue 1) and is reproduced with their permission