March 20, 2011

Law firms are big business, nationally and locally. In the United States, more than $250 billion a year is spent on legal services, and the Washingtonregion gets more than its fair share of that amount. The D.C. Bar has almost 50,000 active members, and around 60 percent of the 250 largest law firms in the country have their headquarters or significant branch offices here. No other city in the country boasts such a wide array of legal practice.

But an industry that once experienced extraordinary growth, with revenues and profits increasing at near double-digit rates, saw profitability plummet as the recession deepened. Demand for services and outside counsel spending dropped by 5 percent and 11 percent, respectively.

This crisis -- recently illustrated by the dissolution of Howrey -- demands that law firms rethink their leadership and begin acting like businesses.

“What we are seeing is a sea change in the legal industry. After years in which the primary focus of law firm managers has been on growth and expansion, we are now seeing the emergence of a strong buyer's market in which clients are looking at the overall value of the legal services they receive,” said Jim Jones, senior vice president of Hildebrandt Baker Robbins and former managing partner of Arnold & Porter.

“The emphasis going forward will clearly be on finding ways in which legal services can be delivered more efficiently and cost effectively,” Jones said. “And that, in turn, will drive a re-examination of the ways law firms price their services, manage their work and recruit and develop their talent.”

What can law firms do to remain viable and vital? The short answer is leadership. Here are some examples of what's needed:

For reasons of tradition and credibility, law firms are run by lawyers, despite the fact that lawyers are not trained in business and management. To be successful, law firms must create executive teams that include business-savvy non-lawyers. They have to think more strategically about the broader economic climate, industry trends, client needs and internal policies.

Law firms should introduce pricing models based on metrics other than billable hours. Examples include a flat-rate where a fixed sum is charged for defined services, or value added to client businesses. This is a big departure from the neat and tidy billable hour, but it's necessary to satisfy budget conscious chief counsels.

Firms could create alliances or even initiate mergers to offer clients more comprehensive and coherent representation. While many law firm partners would recoil at the comparison, Target is successful because it's one-stop shopping. For example, Martindale.com, a legal information and referral portal, lists no fewer than 65 separate practice areas. Consolidation will make satisfying consumer needs easier.

Finally, law firms must do a better job of managing their top talent. There's no shortage of lawyers, but retention of the most talented ones is an important human capital strategy. Further, internal compensation systems need to be aligned. Practice heads should be compensated based on practice area performance, not individual performance.

The legal industry is a powerful local economic engine and is one of Washington's great success stories. But, law firms have never thought of themselves as businesses.

That thinking should change. James R. Bailey is the Ave Tucker Professor of Leadership and director of the World Executive MBA at the George Washington University School of Business and a fellow in the London Business School Centre for Management Development.

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