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Is Change on the Horizon?

By Kari Santos | Aug. 2, 2014

Law Office Management

Aug. 2, 2014

Is Change on the Horizon?

Managing partners across California speak about hiring, management, and the challenges they see on the horizon for law firms.

If law firms don't evolve, they're not going to be institutions that the next generation of lawyers wants to go to and build," says Kathryn J. Fritz, managing partner of Fenwick & West in San Francisco.

But most firms we spoke with are not making fundamental changes. At the end of law firms' three-decade infatuation with growth, caution may be the natural reaction; it's certainly a basic trait of the profession. Indeed, most of more than a dozen California-based managing partners we interviewed are responding to shifts in the competitive landscape, rather than leading new trends.

"The biggest change under way now is trying to get to the issue of profitability," says Mickey Mayerson, deputy chairman at Loeb & Loeb in Los Angeles. "It used to be that firms compensated [based] on the gross. Today, there has to be a much greater emphasis on the bottom line."

Some firm leaders are glad to seek ways to reward efficiency and effort instead of hours worked. Others remain uncomfortable with alternative fees and new compensation structures. And several tout measures that offer staffers and lawyers more flexible work schedules.

All are clear that plenty more change is going to be necessary.

"We need to be comfortable with doing things differently," says Fritz. "It's really all of a piece."

Many forces are buffeting firms.

"You're looking at the consolidation of an industry," says Paul D. Allen, a partner in San Francisco with recruiting firm Major, Lindsey & Africa. "So it's strategic in that firms are racing to attract talent in the practice areas that are the most profitable. The other firms that are not able to compete for that talent are going to be relegated to more commoditized work, or they're not going to be able to compete and they'll disappear."

Competition among firms is increasing for numerous reasons: Businesses with beefier in-house legal teams no longer hire as much outside help; alternative providers are taking some of firms' traditional market share; and firms are stealing business from one another.

"The primary force that's reshaping our business is competition: There's not enough work and too many lawyers," says managing partner Greg Nitzkowski at Paul Hastings in Los Angeles. And the old solution of adding more practitioners and markets may not make sense, even though he says the firm is frequently approached to merge. "It's not that difficult to get a lot bigger, but it's extremely difficult to get more successful and more relevant."

Here are the highlights of how managers at firms of all sizes and specialties across the Golden State view their world in 2014.

Hiring and Compensation
It's still a tough market for recent law school grads. Though the hiring of first-years is tentatively reviving, Nitzkowski says clients tell him "all the time" that they're no longer interested in funding the training of junior lawyers; they aren't "tolerating law firms operating the way they have for 20, 25 years." Loeb & Loeb, which hasn't hired a first-year lawyer in years, plans to hire two in Los Angeles and two in New York in 2015. Several leaders call out specializations that have higher fees and growth rates, but all say general-practice hiring won't ever return to prerecession levels. SunMi Kim, who oversees placement across most of southern California for the staffing firm Robert Half Legal, says demand for experienced, specialized lawyers and paralegals was the biggest contributor to an increase in hiring the first half of this year.

Fritz and many other leaders volunteered that all firms need to improve their diversity, for business reasons as much as any other. Several say clients are pushing harder than ever to hire lawyers who can empathize with their diverse customer bases.

"We need to catch up as an industry with the rest of the economy," says Mayerson.

Others see an even simpler impetus.

"Corporations that have more diversity do better," says Janice Brown, founder and leader of Brown Law Group in San Diego. "So why is law different? It's not."

Steven J. Nataupsky, managing partner at Knobbe, Martens, Olson & Bear in Irvine, says his firm's compensation structure makes it both more competitive with other firms and more congenial internally. Salaries there are largely based on seniority, rather than on the number of clients a lawyer brings in or the volume of business he or she generates. "We don't often hire lateral attorneys because they typically come in from formula-based systems: 'I brought in more clients so I should get paid more.' " Not only can that foster resentment, but it rewards duplication of effort in business development.

At Sheppard, Mullin, Richter & Hampton, San Diego-based executive committee chairman Guy N. Halgren says the firm's partnership stands out for operating on a human scale despite its size. "Sometimes, it means we move deliberately. If we want to open a new office, sometimes we talk about that maybe for a couple years. [But] once we get to a decision, we can move quickly because everybody's behind it."

Several firm leaders - including Richard Waxman, managing partner at Wendel Rosen Black & Dean in Oakland - say offering lawyers enough flexibility that they can enjoy meaningful personal lives is key to their firms' culture and helps the firms cope with change and competition.

"It's not just about compensation anymore," says Kim at Robert Half Legal. She says firms are enhancing perks, including gym memberships and dry cleaning services, in the hope of retaining experienced new hires. "Flexible work schedules and remote working are things that lots of associates [value]."

Partners too, it turns out.

"We work to live at Hanson Bridgett. That doesn't mean we don't work hard. [But] I've got kids and I wanted to coach their teams, and I do," says San Francisco-based managing partner Andrew G. Giacomini, whose father, former Marin County Supervisor Gary T. Giacomini, also is a partner at Hanson Bridgett. "What do we give up for that? We make less money, but we still make enough."

Other managers also advocated a recasting of law firm life.

"The less fear you have about who you are and what you're practicing, the better you will be as a lawyer," says Brown, a former tax lawyer with the U.S. Department of Justice. "In a lot of firm environments, fear is used as a motivator. It burns you out."

Managing partner Johanna Calabria says Durie Tangri formed in San Francisco in 2009 with the express idea of having a culture that celebrates intellectual curiosity, freedom of expression, and the investments of time and effort that all its attorneys put in. "When we started the firm, we all had the great and perhaps naïve idea of staying small and all of us sitting around a table and eating meals together, forever and for always," she says. "But the reality is the firm needs to allow for some growth."

It turned out to be more of a metaphor. But a feeling of collegiality is central at Durie Tangri, Calabria says, starting with the weekly all-firm huddle. The result is that instead of competing with one another for work or worrying constantly about revenue, Durie Tangri lawyers can concentrate on client service and legal issues. She listed that restored focus on professionalism among the primary challenges facing all firms.

Fees and Compensation
Alternative billing methods - including flat fees, fee caps, contingency arrangements, and more - have been well established for years. In 2012, California Lawyer found, 46 of the 50 firms with the largest presence in the state were offering alternative billing, and most of the firm leaders interviewed this year said clients prefer it. Calabria even said a carefully considered alternative billing agreement works well for both clients and the firm, compared with relying on a straight calculation of billable hours.

But many firms are tentative about hopping on board.

David L. Osias, managing partner at Allen Matkins Leck Gamble Mallory & Natsis in San Diego, says most of his firm's clients remain satisfied with time-based billing, in part because they find it easier to process. "Internally, we are always improving how we manage to budget, tracking profitability and managing contributions to the bottom line beyond looking at billable hours." He says alternative fees still produce less than 25 percent of the firm's revenue. "We learn from each one. ... But it takes less management energy to do it the traditional way."

James C. Romo at Atkinson, Andelson, Loya, Ruud & Romo in Cerritos says he's hesitant to try flat rates or alternative billing methods: "If we were in a different situation and not seeing work come in the door, then we'd have to change, but we're not having that problem."

On the Horizon
Hurdles loom for all types of business firms. The most common one leaders cited was the need to find ways to continue cutting costs and increasing efficiency. At bigger firms, Nitzkowski says, there's also significant pressure from the most productive partners for higher pay and more recognition earlier in their careers.

Midsize firms also feel pressure from consultants horning in on what used to be considered legal work, says Romo. Human resources advisers, for example, are counseling at lower cost on matters such as handling thorny personnel matters or preventing litigation.

"Why that wasn't happening before, I'm not sure," says Romo. "But with the economy as it is and companies having to cut back on the use of attorneys, many clients have found other ways to handle certain types of situations."

Similarly, Giacomini sees major competition from the proliferation of start-ups that can perform legal services "better, faster, and cheaper." At Hanson Bridgett, he's looking to bring pricing in line with outcomes, de-emphasize profits per partner, enhance client service, and - somehow - stop the industry from "turning its back on training."

In fact, several of the firm leaders interviewed say succession and "restocking" their ranks are significant challenges on the horizon for firms of all sizes.

"It used to be, when I was a younger attorney, nobody seemed to do succession planning for smaller firms," says Melinda Garcia, managing partner at the four-lawyer employment shop Garcia & Gurney in Pleasanton. "When a lawyer died, you'd see all these other lawyers at their funeral, and that's how the book of business was split up. [Now] more people are thinking about it, facing it, planning."

Laura Impellizzeri is the news and trends editor for California Lawyer.


Kari Santos

Daily Journal Staff Writer

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