Faster, Cheaper, Better: The New M.O. for Law Firms

In the past six months or so, two law firm mergers of significance came about in the KC market, with markedly different incentives behind each.

The one that captured the most headlines was the Jan. 1 official merger of Stinson Morrison Hecker with Min-neapolis-based Leonard Street Deinard, two of the biggest full-service law firms in the Midwest. When the deal to create Stinson Leonard Street was announced last fall, Stinson was already the fourth-largest firm in Kansas City, based on its staff of roughly 170 lawyers here.
At about the same time, at the other end of the firm-size spectrum, two Leawood based plaintiff’s firms merged to produce Bartimus, Frickleton, Robertson & Goza, topping out with a staff of 15 lawyers.

“If someone had told me in 2001 that I would be at a firm with 15 lawyers in three offices, I would have thought they were on some kind of medication,” says Jim Bartimus, the man with his name on the letterhead.

“I never envisioned this—never.”

Not only was the merger of Bartimus, Frickleton, Robertson and Gorny with Goza & Hunnold a good structural fit, he cracked, “we didn’t even have to change the (monogramed) towels.” Now THAT’s a strategic merger.

What’s happened in each of those two cases reflects a trend sweeping across Legal America: Firms are seeking out—and forming unions with—compatible firms that either enhance and expand one’s reach in certain practice areas as boutique firms, or add new service lines within firms that already boast the ability to handle a full range of services.

Two imperatives, legal executives say, determine the success of moves like those, and it’s hard to determine which is more significant. Client service is the overall driver—if an alliance doesn’t enhance a firm’s ability to deliver faster, better, most cost-efficient legal services, it might not make sense. But equally important is forming a union with a company that shares cultural values—a conflict at that level can prove disastrous operationally.

“You can’t overstate the importance of that,” said Mark Bluhm, managing partner at Lathrop & Gage. Nearly two decades have passed since Lathrop & Norquist merged with Gage & Tucker to form Lathrop & Gage in 1996, but a key piece in creating what is now the third-largest firm in the Kansas City area was the cultural fit, he said.

“When we merged, the two firms were about the same size,” Bluhm said. “Developing a culture with the merger and the people involved is quite a challenge, but this truly was a situation where one plus one equaled four, or six, or eight.”

The firm, like other large Kansas City firms that have formed alliances in other cities, relied on uniquely Midwestern qualities to create a functional culture, he said.

“When you add offices in other cities, with groups not so small, now you have 11 offices in four time zones coast to coast,” Bluhm said. “So maintaining the same level of collegiality and culture and the sense of teamwork and delivering the highest-quality legal services requires a significant amount of client attention.”

Mark Hinderks, managing partner for Stinson’s Kansas City operations, said future growth could come from the newly merged firm, but it would be strategic, as with the Leonard Street Deinard alliance.

“The question is not how much to grow, but does that growth allow us to stay true to our mission.” Hinderks said. “Recent surveys of corporate general counsels revealed that they believe in firms like ours, that are large and sophisticated enough to provide the service they need, but that provide better value and are more responsive,  and are moving legal business more than ever away from the perceived giant law firms.”

That’s paid off in recent years, a time of economic disruption for many firms, he said.

“The past few years, we’ve had our best years ever, based on this simple premise: large firm depth of practice and experience; with fundamentally Midwestern value (this is really efficiency, not just rates) and the kind of responsiveness that leads to a relationship, not just an invoice.”

Other Change Agents

The urge to merge, however, is far from the only challenge facing law firms today. Some legal-industry authors have gone so far as to suggest that the business model for firms, which has worked for hundreds of years, is about to implode. They point to the 2012 bankruptcy of Washington-based Dewey & LeBoeuf, which astonished many in the legal community, as evidence that Big Law may be the modern version of Big Dinosaur.

The problem with longstanding revenue models, critics argue, is that they create perverse incentives for lawyers to reap the personal benefits of big billings, even as those large bills chip away at a firm’s ability to satisfy clients.

Recent years also have seen:
•    Pressure on firms to abandon—or at least move away from—the billable hour as a standard for legal-services compensation. Instead, alternative-fee arrange- ments have become common practice.
•    Greater sophistication among clients, who are far less willing to maintain legacy relationships with firms and are farming out different legal needs to firms with different specializations and cost structures.
•    More services continue to crop up offering alternatives to law firm-based work, such as Web sites like LegalZoom.com, and more workflow tools like legal analytics are supplanting in-house staff.
•    The emerging field of legal-process outsourcing is moving more back-office work out of the firm itself, particularly among larger firms. But savvy leadership at smaller firms has also found ways to discard time-killing IT functions in favor of client-focused efforts.
•    Small firms are using rapid advances in IT to level the playing field with bigger firms with creation of “virtual offices” that require no costly mahogany-trimmed walls and leather furniture to impress clients.
•    Numbers of partners are being scaled back.
•    And fewer jobs are opening up for new associates. Law schools, in fact, continue to produce more degrees than law firms themselves can accommodate. As recently as 2011, an estimated 85 percent of new graduates were able to move immediately into their legal careers; just a year later, that figure had fallen precipitously, to 63 percent.

On top of all those factors are such basic HR functions as managing a multi-generational workforce—today’s is the first in U.S. history to see four distinct generations working at once with the Millennials, Gen-Xers, Baby Boomers and Traditionalists combined—helping lawyers find the right work-life balance, globalization and other factors grinding away on traditional operational models.
If there’s one threat that applies to any firm—large, small or solo practice—it’s the oversupply of lawyers nationwide, said Dan Hiatt, managing partner at Swanson Midgley.

“The number of lawyers has diluted the relationship you find existing with clients,” Hiatt said. “I don’t think clients today are as committed to the value and need for a lawyer, because we see so many coming to lawyers when they’ve got problem, as opposed to coming for counsel in advance of problem,” Hiatt said.

The billable hour continues to be under pressure as a revenue model, he said, calling it “a huge deterrent” that creates problems for clients trying to avoid legal sticker shock. “Bigger firms have ways of keeping costs down, but when you’re out there as a smaller firm and Ma and Pa Jones at their hardware store don’t like getting a big legal bill, they won’t pick up the phone; they’ll wait until the need to pick up the phone.”

Hiatt cited a television commercial he’d seen recently in New Orleans, featuring a lawyer who was offering his services in personal injury cases for a 19 percent contingency fee, as opposed to the traditional 30 to 40 percent fees. “I know the local bar down there is mad at the guy,” Hiatt said, but it’s a smart tactic for someone who pursues settlements, rather than vastly more expensive litigation.
“The threat to all firms is too many lawyers,” Hiatt said. “That’s driving down the value of what we used to be able to offer when there weren’t so many of us.”