To see just how far law firm culture has shifted toward the bottom line these days, look no further than the downtown L.A. office of Goodwin Procter LLP.
If a lawyer there wants notes typed up, he won’t have the luxury of handing them over to a typist, but instead will place a call to a word processor in West Virginia. The same goes for document preparation or any questions about accounts payable.
You won’t find much of a law library, either. The firm doesn’t give more than a few square feet of valuable real estate to the space-eating tomes that once signaled a firm’s gravitas – but now can largely be replaced by online databases.
Even the office space itself reflects savvy cost-cutting: Last year, the firm combined its two L.A.-area offices into one space downtown to save itself $1 million a year.
These aren’t desperation moves: Goodwin and other top firms are seeing some of their best profits ever. But firms have hardened into bare-knuckled businesses, a gradual trend that’s been accelerating since the economic downturn. It’s all part of a shift at many top firms that once rested on comfortable margins, when they could run up legal bills and charge clients a dollar a page for document copies.
“Everyone’s becoming more competitive now,” said Lew Feldman, chairman of Goodwin’s L.A. office. “During the boom years, everybody was throwing money away and expecting to find gold in toilets. That’s not the case anymore.”
The competition to raise profits per partner, that all-important metric that attracts top partners from other firms and elite law school graduates, has intensified since the downturn, as has pressure from corporate clients to rein in legal costs.
In response, firms are becoming more efficient by outsourcing support staff and even attorneys, consolidating the number of vendors they use and renegotiating leases. They also are becoming increasingly cutthroat in poaching rainmaking attorneys from other firms.
“I don’t think it was a flick of a switch – it’s been happening since the early ’80s – but clearly there have been changes in how firms operate as a business, and more pressure on metrics,” said Peter Zeughauser, an industry consultant in Newport Beach. “The downturn has increased and accelerated that pressure.”
Indeed, a recent study by Datamonitor Group in London predicted the size of the global legal outsourcing industry would grow from $400 million last year to $2.4 billion next year.
Changing culture
It’s certainly far different from earlier days, when there was less stress on financial performance and it was a given that attorneys would stay at firms for their whole career.
Back then, firms measured themselves against others in court, because profits weren’t as widely understood, said Gordon Bava, one of the first attorneys at West L.A. firm Manatt Phelps & Phillips LLP.
Before Manatt grew to eight offices and hundreds of attorneys, its mission in the beginning was to become as successful as powerhouse O’Melveny & Myers LLP – but mostly by trying to beat it in court.
“There has been a shift of adopting business practices in the legal profession, which can be healthy,” said Bava, who was also Manatt Phelps’ managing partner through the 1990s. “There was always a concern about making money, but there is more talk now about profits per partner and partners switching firms.”
Bava and many other big law firms began implementing measures in the 1980s and ’90s to make firms more efficient businesses, with an eye toward profits. That continued with globalization and advances in technology over the last decade.
Today, pressures to ratchet up profits per partner, and thus to lower costs, have intensified, firm leaders say. Rainmakers who bring business to a law firm have become more valuable, and a firm’s profits are one of its biggest selling points.
More partners are jumping firms, and the spread between what the highest- and lowest-paid partners at top law firms make has widened, with some of the highest making as much as 10 times as others. Earlier this year, James Wareham, a partner in the Washington, D.C., office of L.A. firm Paul Hastings LLP, raised eyebrows when he was poached by DLA Piper for a reported $5 million a year.
“The bottom line in firms today is making sure you maintain a level of profitability to attract the best laterals and best practices that can come over to your platform,” said Goodwin’s Feldman.
Cutting costs
In response to these pressures, as well as pressure from clients to lower legal costs, firms are looking to cut down on those parts of the business that don’t generate revenue.
One recent manifestation has been in outsourcing, laying off and relocating support staff. In addition to Goodwin, blue-chip firm O’Melveny & Myers announced this year it was laying off support staff and outsourcing back-office functions.
Paul Hastings, which posted record profits per partner last year, will eliminate 45 to 50 document-processing jobs in Los Angeles by early next year in favor of outsourcing.
“It’s becoming increasingly competitive, and law firms need to differentiate the value they offer if they want to have a seat at the table,” said Hastings spokesman Allan Whitescarver. “It’s pretty different from 10 or 20 years ago, when the legal marketplace and certainly clients were not facing the same pressures.”
And it’s not just in Los Angeles. Last month, New York firm Pillsbury Winthrop Shaw Pittman LLP announced it would move support staff to Nashville, Tenn., while Houston firm Fulbright and Jaworski LLP announced layoffs of support staff.
In addition to support staff, more law firms are outsourcing basic attorney work such as document review to cheaper attorneys in places such as India or North Dakota.
Integreon Managed Solutions Inc., which has offices in Los Angeles and other U.S cities but also India, the Philippines and five other foreign countries, claims to provide outsourcing and other services to 32 of the 50 biggest law firms in America.
Mark Ross, the company’s vice president of legal solutions, said at least half of its clients have outsourced legal work but almost none will admit to it.
“Up until recently, the legal profession had remained somewhat untouched by the same economic forces as any other industry, but that’s no longer the case,” he said.
Some firms, like Goodwin Procter, also have been cutting costs by renegotiating leases and consolidating vendors. Others have been less drastic.
Charles Woodhouse, executive director of Gibson Dunn & Crutcher LLP, said the firm hasn’t made many cuts due to the downturn. But the firm, which posted record profits per partner last year and crossed the $1 billion threshold in revenue, has made at least one minor change: Plants are no longer in every conference room, nor flowers on every desk, and they’re changed out less frequently.
“It’s more on the fringes than anything else,” Woodhouse said.
Continuing trend?
Experts say they don’t see the pressures from clients to lower costs or from competitors to raise profits slowing down any time soon. Winners and losers could shake out as a result.
Woodhouse sees it as less a matter of increasing competition than a premium on financial stability.
“I think there are firms that if they’re not weathering the storm as well, they’re going to be more susceptible,” he said. “I think the top performers at those firms are looking for stability and there have been opportunities on the lateral hiring front.”
In fact, Gibson Dunn has been aggressively growing, poaching partners, including a group of six partners in Dallas this year, and opening offices in Hong Kong, Brazil and the Middle East.
“There’s definitely an increasing separation between top firms and the second tier,” said Christopher Petrini-Poli, chief executive of Chicago legal consulting firm HBR Consulting. “This has been incubating for some time.”
As for Goodwin’s Feldman, he said the trends have been brewing for decades and will likely continue. He doesn’t remember the days of three-martini lunches, nor does he lament them.
“Well-run firms have an advantage in today’s marketplace. They can invest in their human capital, social capital and technology to a greater extent. They can raise great talent internally. And, they can attract elite talent in the legal community,” he said. “But, there are those that are still hanging on to a lifestyle model somewhere out there, I’m sure.”
