Thursday, May 7, 2009

Law Firm Practices and the Global Financial Crisis

The current issue of Knowledge@Wharton carries an article Legal Strategy 101: It's Time for Law Firms to Re-think Their Business Model that looks at the impact of the global financial crisis on law firm practices around the world, and considers possible strategies available to law firms and their clients to weather the storm.

The fundamental issue the article identifies relates to the interplay between leveraging and the hourly billable rates that law firms normally follow:

The sudden and steep drop in business has been particularly hard on law firms because of their structure, according to [Wharton management professor Olivier Chatain]. A typical law firm is owned by its partners, who are supported by the work of many associates. Law firms refer to the ratio of partners to associates as "leverage." In good times, the arrangement produces strong profits, but when revenues fall, highly leveraged firms can find it particularly difficult to sustain all those associates. As a result, if revenues at a law firm decline 10%, profits can fall 30%, Chatain says. "These firms are very sensitive to downturns. [Because] the partners have to break even every year, they have to do immediate cost-cutting to make sure they adapt their overhead and expenses."

The article evaluates a number of strategic options for law firms: cost-cutting, review of billing practices and migration to models (other than hourly billing) that may be palatable to clients, outsourcing legal work, partnership with non-lawyers (subject to applicable professional regulations), and induction of professional management into law firms. Overall, an interesting piece of reading.

Hat-tip: Yashasvi Mohanram

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