• By Ashe Lockhart
• Thursday, July 5, 2012
>> In recent years, law firms, especially large firms, have been under pressure to pay top dollar to associate attorneys and to maximize profits per partner. At the same time, high operating overhead has placed extraordinary demands on law firms to achieve compensation and profitability goals, which forced hourly rates up and incentivized attorneys to bill as many hours as possible. Meanwhile, clients have been trying to control legal expenses and are closely scrutinizing law firm rates and billing practices. You could see the conflict coming long before the fight broke out.
The recent financial crisis has greatly exacerbated the preexisting tensions between attorney compensation, partner profitability, overhead costs and client demands. The result has been unprecedented layoffs of attorneys and law firm personnel, removal of law firm equity partners, across the board salary cuts and even insolvency, bankruptcy and dissolution of law firms once thought unsinkable. Some commentators have gone so far as to pronounce the end of Big Law. At the very least, the economics of law practice generally, and of large law firms in particular, has changed – probably forever.
As the responses to financial strains continue to play out, law firms are reviewing the profits and costs of practice areas and individual attorneys. At the same time, attorneys are evaluating their financial needs, professional goals and lifestyle choices. The outcome of this process is hard to predict. Already, significant numbers of attorneys have become unemployed, moved to other firms, taken in-house counsel jobs, started solo and small firms or left the profession altogether – and the trend toward layoffs, lateral moves and startup firms is likely to continue.
Moreover, most attorneys who leave large firms or established practices are not prepared for the onslaught of technological, operational, administrative and management issues associated with starting and operating a new firm or practicing in a smaller firm. Even something as basic as setting up email and BlackBerry service can be a challenge in a new or small firm. Attorneys who take in-house positions realize their support systems are quite different or non-existent and are sometimes dismayed to learn that their large corporate employer may not have a document management system. On top of that, existing smaller firms generally struggle to keep up with technology, streamline operations and update partnership arrangements.
More importantly, most attorneys in large or established firms have never dealt with the nuts and bolts of operating accounts, trust accounts, payroll processing, accounts receivable, accounts payable, tax withholdings, malpractice insurance, employee benefits or managing a P&L. Many attorneys starting a new firm or moving laterally to an existing firm do not have experience with organizing a business entity, obtaining Bar certification for the entity, much less structuring attorney compensation arrangements and partnership agreements.
The point of all this? While hanging one’s shingle, a lateral move to a small firm or starting a firm with several colleagues may be the best option for many attorneys in the current and foreseeable economy, the learning curve can be very steep and may involve considerable trial and error, which can be costly and a drain on productivity. Most attorneys simply do not have the training or experience to efficiently deal with the administrative, technical and management roles that are inherent in an entrepreneurial law firm environment. We are then, In a manner of speaking, a profession caught between a rock and a hard place.
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