The Path Forward for Law Firms in the Post-COVID World
31 July 2020
The COVID-19 pandemic has held a magnifying glass to the business operations of law firms and has, perhaps, condensed the timeline of change in the notoriously hidebound legal industry.
The COVID-19 pandemic has held a magnifying glass to the business operations of law firms and has, perhaps, condensed the timeline of change in the notoriously hidebound legal industry. During the economic downturns of 2001 and 2008, we saw a number of major traditional firms collapse; meanwhile, the legal world has been challenged by innovative firms using technological advancements to focus on new ways of fulfilling the goals of both partners and clients. Will the changes coming out of the pandemic result in a new model taking over?
After more than a decade of founding and leading one of the new-model firms, my peers and I have recommendations on what changes firms can make to survive and thrive in a post-COVID world. Some of the changes are obvious, others are more esoteric. But they all stress the same central elements: Firms must be nimble to meet the goals and aspirations of their partners and clients.
What are some areas that we should look at?
The most obvious change that firms need to make is in the work environment. Law firms have long clung to the idea that their best trained lawyers are not able to understand how to set their own schedules. Law firm management still pushes the idea that partners and associates are more focused on 20th century trappings of success—such as a larger office—than on a better work experience and higher take-home pay.
Some firms have touted gimmicks such as a one-day-a-week work-from-home plan, half-halfheartedly recognizing attorneys’ desire for a better work experience while still largely adhering to a decades-old idea of how a law firm is supposed to work. But the COVID-19 pandemic has forced the wider adoption of the full-time work-from-home model, and in doing so proved to traditional law firms what the more innovative firms have known all along—that working in a central location does not in and of itself provide a real work benefit.
In designing our law firm, we focused on an experience that is more conducive to attorney work. This is not to say that we eliminated office space entirely; rather, we built a system which allows for a flexible office arrangement while thoughtfully designing a modern collaboration model built around video conferencing and the cloud. Our attorneys can work where they want without losing team-building opportunities. Law firms should trust that their most valuable producers are able to make thoughtful determinations as to how to best grow and manage their practices. Putting this trust in the attorneys will greatly improve their performance.
When the danger of the coronavirus relents, the legal industry may expect that attorneys will race back to their regular routine—long commutes to expensive offices where they face long hours and intense pressure—even at the cost of productivity, attorney satisfaction and efficiency. But attorneys who have actually experienced the benefits of the new model may not happily go back to the old one.
The Compensation System
The pandemic hit law firms at a bad moment in their yearly fiscal cycle. The shutdown started in March, only a few months into the new year. For most businesses, this timing is irrelevant. But law firms have created a perverse incentive system that hands out large checks in the form of bonuses for associates and draws for partners at the end of the year.
This system creates two problems. First, firms drain their accounts to pay off this large cost, which leaves them in a “cash poor” situation through the first half of the year, needing to borrow heavily to smooth out their earnings for the year. Second, attorneys in the firm who are dissatisfied in any way are more likely to jump ship as soon as they get their payout at the end of the year.
For some firms, this borrowing binge could be what causes them to topple. Firms that don’t have enough cash on hand see rainmaking partners leave out of fear of having to cover the shortfall. This can start a “spiral of death” that has proved disastrous for many law firms.
The legal industry could use this moment to move away from the old year-end payout and instead adopt a model that smooths out payments year-round. This will prevent unneeded borrowing and also slow the traditional “rush to the exits” that happens at the end of the year.
Profits Per Partner
One reason for this outdated compensation structure is the law firm world’s obsession with one metric: profits per partner. Much as public companies have come under criticism for their need to hit quarterly targets rather than focusing on long-term profitability, law firms have been totally focused on the immediate year’s profits per partner. The only way to improve that metric in the short term is to have fewer partners, and to pressure those partners to bring in more profits.
Measuring its success in this narrow way pushes a law firm away from making investments or employing strategies that may increase short-term costs, even if they are likely to pay off well in the long run. For example, the firm cannot invest in talented lawyers in the early stages of building their profitability—that would bring down the yearly profits per partner, though such an investment may eventually create a highly profitable partner in the firm.
Partners accustomed to judging their firm by the annual profits per partner who see that metric fall in any given year may conclude that the firm is failing, and leave, taking their revenue with them.
At our firm, we have seen repeatedly that longer-term investments lead to greater efficiency and a higher quality product. Both attorneys and clients have noticed this, and the results have begun speaking for themselves.
These three elements of the traditional legal industry—the maintenance of large and expensive office space; the annual payout and its detrimental effects on the firm’s finances; and the narrow focus on immediate profits per partner—are each unproductive business decisions. Combined, they are potentially disastrous.
These problems, long recognized by more innovative law firms, have recently been brought into sharp focus. The fallout of the COVID-19 pandemic has shown that the more flexible model of practicing law, which leverages the full potential of technology, can serve both attorneys and clients; and that the heavy encumbrances of the old-model law firm may drag it down in tempestuous economic times.
What we are now witnessing is a boom in interest from law firm partners in new-model firms. This is not just attorneys reaching out to my firm; we are seeing other new-model firms sprouting up across the globe. If the leadership of big firms do not pay attention and make long-term changes, they may just be starting to pay the price for their decisions.
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