With the economy taking hesitant steps toward recovery, the law industry is positioning itself to benefit from that recovery as well as the remnants of the recession. Local firms have been grabbing new business from both bankruptcy litigation and opportunistic buyers. But law firms have felt some of the pain, seeing layoffs, deferred or canceled summer associate classes and a decrease in discretionary legal work. The Business Journal’s Michael Volpe talked with partners at some of the largest law firms here and asked how the legal business may change this year and how they expect to see the legal industry 10 years from now.
How will law firms’ business change in the next year?
Mike Flynn
Managing partner
Stradling Yocca Carlson & Rauth
The legal industry is under intense pressure to be more cost efficient this year. Clients are demanding value at a reduced cost.
I have talked to businesspeople who say they’re tired of when they call lawyers and there are three on the phone to answer one question. Clients are looking for more efficiency.
This is especially challenging for firms with national and international footprints because they have a cost structure that has to get paid for. It’s hard to pay for it without loading up a number of people. Ultimately, I think some international and national firms will fail, despite surviving last year. I think we’ll see some failures and some mergers in the year to come.
Ski Harrison
Managing partner
Rutan & Tucker LLP
Next year, we’re going to see additional layoffs and lot of re-structuring from firms that scraped through 2009. There have been a lot of cutbacks in the legal profession. Many firms either cut too deeply or not enough to survive in the coming year. Even with the hints of optimism that the economy could recover, it will be interesting to see how firms fare.
There will be continued discussions with clients about billing arrangements. I meet once a quarter with all the managing partners of the larger firms in Orange County. I have heard from them that there have been more requests for alternative billing from clients.
Bill O’Hare
Managing partner
Snell & Wilmer LLP
I think there will continue to be increasing pressure—particularly from larger consumers of legal services—to get greater predictability on what their legal services will cost.
During the next year, we’ll continue to see more alternative fee-type arrangements between firms and their clients. It’s not something I’m predicting at ours at this point. Yet there are a number of firms who have already tried to make adjustments and then every week you see someone else where the firm did more. I think that’s something that is going to continue to occur with every firm eventually.
Also at some firms there will be continued pressure to contain and continue to reduce associate compensation, where at some point it got out of hand. I suspect you’re going to see people for some time attempting to control compensation rather than getting back into the rapid escalation of pay as many firms indulged.
James McDonald
Managing partner of Irvine office
Fisher & Phillips LLP
Next year, I see clients taking a harder look at the law firms they use to ensure that the lawyers they retain are working as efficiently as they can and to ensure they are getting good value for the dollars they are spending on legal fees.
It’s too early to tell, but there is a lot of talk in the marketplace about alternative billing arrangements and the end of the billable hour. I think it is too early to predict such a dramatic change, al-though there are a number of corporate clients who are looking for alternatives to the billable hour.
The greater extent of clients is just looking for value and hasn’t been able to communicate it to their law firms. For example, in the litigation practice, clients want their lawyers to tell them early on in any case if this is a case that should be resolved without spending more money on legal fees or if this is a case that, if it were taken to trial, we would have a decent chance of prevailing.
Clients are looking to their lawyers for solutions to legal problems that make good business sense.
James Loss
Managing partner
Bingham McCutchen LLP
I don’t know that next year will be a great year of change. Obviously last year and the year before were years of right-sizing at law firms. People last year had to react quickly to costs and did so with big layoffs.
At Bingham, we had a very small layoff of associates across the firm, but nowhere near the numbers that some of the bigger firms had. There will probably be some fine-tuning of that in 2010, when people realize they cut back too much and need to rebuild a little bit.
I think people are going to take advantage of the fact that they have already reduced their head counts and try to keep everybody’s plates full. My guess is that 2010 will be relatively quiet in terms of those kinds of lateral and associate hiring and growth overall. It will be more retrenchment and jostling for market share.
Clients continue to demand more from their law firms so firms will have to provide better service and cost for clients. I don’t think there will be huge growth. Many law schools have their classes coming in deferred and most deferred them until right around now. Some law firms asked their kids not to come back until next year, so there won’t be a lot of first year growth or second year growth.
For the most part, it is going to be a year of sort of stability.
There is still a great deal of uncertainty. Even those people who talk like they have crystal balls have been scared a little bit by the fluidity of how things changed last year. There is going to be a very conservative approach to jumping back into the pool because people are just going to remember the trauma from 2008 and 2009.
Brian McCormack
Principal attorney
Callahan & Blaine
Corporations are looking for law firms to be a little bit more creative than simply their customary billing practices. I expect firms will come up with a hybrid of a reduced hourly rate and some contingency fees or something along those lines. We have corporations asking if we will take cases on a full-blown contingency, which is not something that has normally been done these days.
Companies are looking at litigation next year from a business standpoint. Smaller businesses often will look for some sort of creative billing practice with smaller firms who are more likely to cut such a deal than the larger firms have traditionally.
How will law firms change in the next 10 years?
Loss
I suspect by 2020, this will be a profession we don’t even recognize. For example, I started practicing law in 1983 and if you look at what we did back then and what we do today, it’s almost unrecognizable because of technology and because of other social changes in the law firm environment.
If you give it another 10 years, you’ll have equally momentous changes as a re-sult of technology and global competition. One of those could be the emergence of mega firms, much like what we see with the accounting firms. We are already seeing it to some extent and my guess is that technology will greatly change the way that services are provided.
As a result, there will be new rules about the practice of law nationally. People will figure out we have very unusual issues regarding the state bars versus federal practices. Though it has been suggested in the past, I think we will have a public law firm by 2020.
As for changes on the day-to-day level, I suspect things will be drastically different from when I started.
When I was a young lawyer we would sit in a conference room for two weeks working on the prospective and nowadays there is one meeting in two days and the rest is done virtually.
The number of meetings with everybody in a room has dropped off substantially, largely due to the speed of technology.
Meetings will become even less frequent and more virtual. Some of these virtual meeting tools will change the way lawyers interact with other lawyers and clients.
Lawyers coming into the practice today will be seeing the same kinds of changes in the next 10 years that lawyers coming into the practice in the early ’80s saw in the past 20 to 25 years.
Flynn
Look at the accounting world and how that has changed in the past decade. There are the big four accounting firms and everybody else. So I wonder why it isn’t possible for that trend to stretch into the legal field with the creation of global mega-firms and everybody else. We’re already beginning to see it thanks to the economy as the larger firms continue to merge and expand.
As for changes to how law firms conduct business in the next 10 years, I think the effects of the last couple of years will stay with firms for the long haul. There is intense pressure from the client side to be efficient with time and cost. Clients want efficiency from their lawyers. When the economy was booming, it was easier to not be as efficient because it was not noticed, but now with everyone’s bottom line being watched, the legal bill is scrutinized a lot more than it used to be.
I see firms adapting our approach to dealing with clients, because we’re used to the scrutiny and working out alternative billing arrangements. Our clients are smaller and more entrepreneurial by nature, so that’s not a new world for us, but I think it’s going to be a new world for a lot of other firms in the coming decade.
John O’Hara
Managing partner
Newmeyer & Dillion LLP
For what the future holds, I wonder how the legal industry will deal with the increasing involvement of insurance companies.
For the most part, insurance companies have become big players in all aspects of our lives. Even in the legal business, especially in litigation matters, I wonder to what extent they will exert their influence on the legal community in the coming decade. Just look at the way they are exerting their influence in the healthcare side of things and trying to commoditize the legal world and exert influence on rates and payments. A true example would be how they have really influenced with work with Medicare and Medicaid as to what doctors get paid for.
They haven’t had that much influence on the legal arena yet, but I could see that increasing potentially in the next 10 years. It will be a battle as it’s not going to be welcomed by the legal circles, but there is going to be business concerns that can’t be overlooked even by the largest of firms.
International and emerging markets are going to be a bigger part of the world economy and that will spill over into the U.S. legal market. With China, India and other emerging markets growing, it will probably make firms invest in significant international practices to accommodate those economic changes.
Harrison
I suspect the future of the law firm business will be drastically different 10 years from now from what we’ve seen before.
Law firms are slow learners sometimes. They get themselves back into the same pickle that they were in before when they forget about the hard times. This downturn will stick for some period of time as firms will be more conservative in their approach to the business.
There were a lot of the firms that experienced real difficulty, thanks to the downturn. Many firms over-expanded by opening a lot of offices and hiring a whole bunch of different people. When the economy kind of stopped last year, they were stuck with a lot of surplus office space and too many employees. We’re talking about major firms that have been around for more than 100 years that just went under overnight, because they had 50% or more empty space in buildings that they were paying for.
Firms in the future, I hope, will be more conservative. They can’t just go out there and do crazy things like open six new offices and start a whole bunch of new practice areas that they haven’t ever been successful in.
Steve Nataupsky
Managing partner of Irvine office
Knobbe Martens Olson & Bear LLP
I don’t see much change in my field (of patent and intellectual property law) in the next 10 years. Even though we’re on the edge of change, I love that my field might be more predictable and more even. It doesn’t have as many highs and lows as some of the legal fields. It’s easier to manage change and the business because you don’t have these incredible highs and incredible lows other firms might experience. Even as the legal landscape changes, my field is going to be slow and steady with consistent growth in the next five to 10 years.
