By Erin Coe, Law360
While flat demand for outside lawyers has behemoth law firms struggling to change their business models, upstart boutiques and non-law-firm service providers are tailoring legal advice and leveraging technology to reinvent how services are delivered to clients, chipping away at work traditionally done by BigLaw in the process, experts say.
Large firms have been built on an established model of hiking up their hourly rates annually, while increasing the number of attorneys on projects and the number of hours they work, but that approach has become harder to maintain in a market where demand for sophisticated legal services is not increasing for outside attorneys.
As major firms grapple with how to change the course of giant bureaucracies, attorneys who have departed from BigLaw to start their own boutiques, as well as nonlawyer businesses, are taking advantage of their smaller size not just to reduce overhead to lower costs for clients, but to offer more customized and efficient ways of providing legal services. As a result, they are winning business once exclusively reserved for large firms, experts say.
“When you break out from a large law firm, you can leverage technology and different cost efficiencies,” said Debra Baker, principal at Legal Vertical Strategies LLC. “By being in a smaller environment, you’re able to evaluate and innovate and execute more easily and with more flexibility.”
Creating a highly specialized, nimble law firm that directly competes with the largest of firms can be a model for success, according to Sean Southard of Crosbie Gliner Schiffman Southard & Swanson LLP, a firm that Baker advises.
When Southard and four other partners from 200-lawyer firm Allen Matkins Leck Gamble Mallory & Natsis LLP launched their own commercial real estate firm in San Diego in July, they wanted to create a business model that would benefit their clients in ways that a traditional law firm model — that relies on partners racking up billable hours and cross-selling work — does not.
The firm, known as CGS3, has no minimum hour requirements and gives no credit for the origination of new work because the view is that every client is the firm’s client, not the partner’s client. The firm maximizes the use of its office space, boasting an average of 300 square feet per attorney, and the firm’s use of technology programs like document management and online cloud storage systems make it virtually paperless. It also outsources its information technology, human resources and other administrative functions to a firm in New York.
“There is no hierarchy, and there is no room for egos in this law firm,” Southard said. “Everything we do is about providing the best value to clients, not about being a discount law firm. There is always going to be someone cheaper. … We aim to add real value through our subject-matter expertise, efficient handling of matters and breadth of our relationships across all sectors of the commercial real estate market.”
While big law firms have had a difficult time making real estate practices profitable because the work doesn’t tend to support the huge profit margins that bet-the-company-type cases command, CGS3 is focused entirely on leasing, acquisitions and dispositions and loan work, development deals and construction agreements, which are the core everyday needs of its real estate clients, Southard said. And he said this focus is paying off for the firm, which is attracting one or two new clients who are marquee players in the commercial real estate sector every week.
“We started with five attorneys and now we’re up to eight attorneys and two paralegals, making us one of the largest transactional real estate groups in the city, and we’re just five months old,” he said. “Profits per partner are important, but if you listen, and more importantly, respond to what your clients’ demands are and you are smart in how a project is staffed, … the profits will come.”
CGS3 is no exception in the marketplace, especially as companies are becoming more price-sensitive on legal expenses and more open to alternative choices, according to experts.
“I think there is still a tendency in BigLaw to bill hours and utilize associates in all areas,” Baker said. “There’s a pressure to create work, but the work is not necessarily valuable.”
Upstarts and nonlaw service providers are capitalizing on BigLaw’s revenue-driven system to find tangible ways to help clients cut costs and reduce legal risks, according to Baker.
“That may be through flexible pricing structures, such as an alternative fee arrangement, or through a technology tool they can provide so that clients stay on task better and don’t miss key deadlines,” she said.
Nonlawyer firms are entering the market touting technology that performs electronic discovery and document review work at cheaper rates than the hundreds of dollars an hour associates are charging at big law firms, according to Steven Harper, a retired Kirkland & Ellis LLP partner and an adjunct professor at Northwestern University.
“From word processing to document review and even paralegal work, anywhere that technology can make the work easier and faster, nonlawyer firms can compete,” said Ed Poll, a legal consultant at LawBiz Management Co.
Other businesses made up of a mix of attorneys and nonlawyers are launching consulting firms specializing in compliance and regulatory analysis that caters to the industry in which a client is operating, according to Michael Rynowecer, president of The BTI Consulting Group Inc.
“Clients are open to and looking for both law firms and upstarts that can provide that insight,” he said. “What you’ll hear from clients is that boutiques and upstarts are willing to go deeper and provide more pointed recommendations for clients, while law firms tend to be a bit more conservative and give a range of advice.”
The area is a lucrative one. Companies with at least $1 billion in revenue spend a total of $5.73 billion a year on regulatory work done by outside counsel and consultants, and the area is growing at roughly 3 percent a year, according to Rynowecer.
In addition, firms in the privacy and security area that sometimes consist of nonlawyer consultants with information technology and military intelligence backgrounds are being utilized more often by corporate counsel because they can quickly drill down to the cybersecurity issues at hand and can provide specific advice on a company’s data security exposure and risks, according to Rynowecer.
“We are at the earliest stages of watching this trend unfold,” he said. “Specialized consulting firms will be a permanent part of the industry and eventually law firms will develop and create these consulting firms as well by setting them up as ancillary businesses.”
Major litigation and transactions are big law firms’ bread and butter, but those cases and deals may include tasks that don’t require lawyers at big firms to get them done, according to Harper. Innovators that are able to do certain legal work at a lower rate without compromising the outcome will continue to pose a threat to big law firms, he said.
“If you think of a law firm as a pyramid where there are a small handful of equity partners on top and worker bees at the base, and you take away the activities and tasks that the worker bees tend to do, that’s an essential element of the profit machine that becomes smaller,” he said. “If you keep chipping away at the base, soon you’ll have something that doesn’t look like a pyramid anymore.”
While Rynowecer doubted the various upstarts and nonlawyer firms presented a large-scale threat to law firms, he did think they could be a thorn in the side of certain law firms involving certain clients.
“The threat is that you have this professional who is developing a relationship with your client and potentially setting a standard for client service or service delivery, which the client will compare with the other service providers it works with,” he said. “It’s someone else you have to worry about.”
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