Law Firms in Transition

A debriefing on New Jersey’s legal landscape.

By Anthony Bucci, Assistant Editor On Apr 28, 2016

Like many businesses and industries today, the legal profession has been going through myriad changes. While the law field has been slowly pulling away from the effects of the Great Recession, firms are still seeing the impact from its fallout. Additionally, other factors, such as client demands, advancement in technologies and mergers and acquisitions, have been reshaping the way firms conduct business. In this article, New Jersey Business takes a look at the changes and challenges law firms have recently faced, as well as how the forecast looks for the future of the legal landscape. 

“Where we are in the industry right now is that firms are still feeling the reverberations of the recession,” says John Fanburg, managing member at Brach Eichler. “Many firms consolidated and made certain cutbacks in staffing – depending upon the practice area they were focused on and how the recession hit that particular area. Even with the cutbacks being made, law firms have to be more efficient than ever in today’s marketplace.”

The consensus among many firms is that efficiency is vital for success, especially considering that the New Jersey/New York area has a high concentration of law practices.

“I think there is tremendous pressure on law firms to be more efficient now than they have been in the past,” says Glenn Clark, managing partner at Riker Danzig. “It is one of the biggest challenges law firms are facing right now.”

How do firms become more efficient?

“It starts by managing and lowering overhead,” Clark says. “There are many costs that go into the overhead of law firms, such as insurance, marketing, recruiting, supplies, taxes, technology and more. However, perhaps some of the biggest overhead expenses are administrative, employees and rent or real estate costs.”

In terms of real estate, Clark says, “Law firms used to work under a model with big and extensive office spaces. However, that is generally not the case anymore. Mostly everything today is a one-size-fits-all model, where every office is a standard size and nothing is too extravagant. Not to say that big, extravagant offices aren’t a reality anymore. However, cutting back on things like that is one way to reduce costs.”

In managing overhead, “As a firm, you have to look at the number of non-timekeeper employees that you have, because that is where a lot of the costs are,” Brach Eichler’s Fanburg says. “With most law firms, just like most businesses, the No. 1 expense is salaries. You have to pay close attention that you are the right size for the type of work you are doing and the revenue you are generating. That is critical in this economy. But even if we didn’t experience a major recession, managing overhead correctly always makes sense when running any kind of company.”

The advancement and adoption of technologies over the course of the past 10 to 15 years has played one of the most important roles in helping law firms become more efficient.

“Technology has certainly changed the way law firms are run,” says Brian Kronick, managing partner, Genova Burns LLC. “Whether it’s from a researching or writing standpoint, or the way we communicate with clients and other colleagues, technology has and will continue to be a factor in the business models of firms.”

Take for instance, how researching for a case has changed. Fanburg says, “When I first started at Brach Eichler more than 30 years ago, we had a big in-house law library. Today, that library is approximately 25 percent of the size that it once was. That is a telling sign of the times.”

“Information is so readily available today, that it makes it easier for firms to prepare for a case,” adds George R. Talarico, partner, Locke Lord LLP. “Back in the day, you would have to physically go to a library, find the encyclopedia, search a case, write out your notes, etc. Doing trivial things of that nature was very time consuming. But now, more time can be focused on other tasks.”

Talarico says that because anyone can obtain documents and information that in the past only law firms generally had access to, clients are more informed today than they have ever been.

“Clients will call us and say, ‘I did research on a case and the decision was such and such … ,’” Talarico says. “However, it may ultimately cause problems, because clients may come up with a different conclusion than us about a particular case. We would have to explain to them why we think our interpretation and research is right, and that can create conflict. But at the end of the day, clients hire firms for their legal ability and expertise and that is what we provide.”

The impact that technology and the lagging economy has had on client demands has further paved the way for transition in the law industry.

“Technology has increased the level of expectation that clients have of their lawyers,” says Gary J. Hoagland, managing partner at Hoagland, Longo, Moran, Dunst & Doukas. “Clients expect more through the use of technology and they expect that their lawyers will be knowledgeable about available technology. With so many ways to communicate, the expectation is that lawyers will be more responsive than ever.”

“Client demands have definitely been increasing,” Brach Eichler’s Fanburg adds. “On one hand, technology assists with communication. However, law firms are now in the 24/7 business. Clients will call, text, e-mail all the time – morning, noon, night and weekends. There is no such thing as a vacation where you can completely disconnect. However, we are in the service industry, so law firms always need to be responsive to clients’ needs.”

“The economy has made clients more cost-conscious than in past years,” Hoagland says. “There is more emphasis on billing efficiencies and alternative billing arrangements, although traditional hourly billing is still the norm.”

Riker’s Clark adds that there is downwards pressure on law firm rates. “Alternative fee arrangements are becoming much more commonplace today and some clients ask you to take more risks,” he says. “They want to pay at a reduced hourly rate, but if you are successful, this will provide a bigger reward at the end.”

The merging of law firms has become more of a reality, especially in the handful of years following the Great Recession. Locke Lord’s Talarico, whose firm has recently expanded its operations due to a merger, says those unions have stemmed from the quality of the economy and the pace of technology.

“Law firms that go through mergers today can be much more integrated, so it can make more sense from a logistics standpoint,” he says. “We have offices all over the country and around the world that work together in ways we could have never imagined 10 years ago. Today, you can have a meeting with partners from every office, anywhere in the world in a ‘virtual office’ just like you would face-to-face.”

“Law firms are like many other businesses and often go through major transitions; be they mergers or spinoffs,” says Tim King, partner at accounting firm Bederson LLP. There are many factors that firms need to consider when experiencing a merger.

“In times of transition, it is extremely important to pay extra attention to internal controls,” King says for example. “For some firms going through financial hardship, the accounting department may be significantly reduced and many of the important controls not monitored. Another example of the danger of having insufficient internal accounting personnel includes a circumstance that resulted in a firm’s payroll and payroll taxes being all but completely left to the outside payroll service with no internal review.”

It is also important to note that when merging, both firms should have a similar way of conducting business for it to make sense for both parties. “For example; if a small firm merges into a larger firm, at year end, the small firm may agree to pay out the excess profits in various ways, including some level of subjective scoring,” says Charles Persing, partner at Bederson. “The new firm may pay compensation solely based on productivity, marketing, ownership or a combination of each and ignore the sweat equity from the small firm.”

Other challenges that have been significant in conducting business in the law field today have been increasing competition, the affordability of legal services and the number of individuals who are attending and graduating with law degrees.

“Because the landscape is more competitive today than ever, firms need to do more with less, while adapting to all of the changes,” Riker’s Clark says. “It used to be that clients would have one lawyer and/or firm represent them for life, but that is not the case anymore. Clients are constantly comparing rates and services before they choose who will represent them.”

Additionally, the job market is still “very tight,” according to Brach Eichler’s Fanburg. “Law school applications have been down by almost 25 percent, and what that tells me is that firms aren’t hiring new, young lawyers like they used to. Additionally, senior lawyers are staying in the field longer because of the lagging economy, and clients aren’t willing to pay the same hourly rates to have first year lawyers represent them. This will all change, however, when senior lawyers decide to retire, paving the way for more opportunities for Millennials.”

According to most in the legal landscape, the outlook for the profession is improving with each passing day.

“The bottom line is that the floor is constantly shifting in the legal business, driven by technological advances that offer greater efficiencies, but also put at risk traditional approaches to the practice of law,” says Angelo Genova, chairman of Genova Burns. “The key is that firms need to adapt to stay afloat. They need to look into their crystal ball and ask themselves, who are the clients and businesses of the future, where are they going to live and be located and what are they going to need by way of legal services?”

“The industry is healthier than it was 10 years ago, but I think law firms have to be more flexible than ever to continue servicing their clients’ needs,” Hoagland Longo’s Hoagland concludes. “Firms that do not adjust will have a much more difficult time in succeeding.”

 

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