Practicing Law in the 21st Century Requires Affiliation

Highlights

  • What is required by clients is instant access to information and established relationships everywhere on earth. If law firms cannot quickly provide the information, other professions will.
  • The traditional approach to developing a practice is individual networking with other lawyers or members of other professions. Attorneys make as many contacts as possible. But a system based solely on contacts is inefficient because it is purely ad hoc. Who you sit next to at lunch becomes a contact. It may take a lot of lunches and dinners to have a comprehensive list of contacts in over 100 jurisdictions.
  • The political and socio-economic changes which have swept the business world necessitate a rethinking of the legal services distribution system. Firms must think beyond the individual attorney and firm levels, as well as beyond specific regions of the world like North America and Europe. Their ad hoc and chance relationships and short-term planning may have been adequate in decades past, but are no longer so in a borderless world.

 

Meeting Demands in a 21st Century World

The legal profession is undergoing substantial introspection, largely as a result of new political and economic world orders. More and more firms are asking how they can best meet their clients' needs in this new world order. What many have found is that traditional structures need to be supplemented internally and externally to effectively meet clients' expanding needs.

Many law firms have concluded that providing clients with what they expect and need is more important than the particular means by which the services are ultimately achieved. They have found that what is increasingly required is access to resources and, in particular, information.

Broadening the scope of services they can provide through multi-disciplinary businesses, or collaborating and sharing non-confidential information with other firms in a network system, can be viable alternatives for meeting clients' expectations. Clubs, associations of independent laws, affiliations, alliances and multi-disciplinary practices are such alternatives.

New paradigms for doing business typically evolve from existing structures. For instance, the globalization of the legal and accounting professions demonstrate how this can come about.

In response to certain securities regulations, U.S. companies required worldwide auditing and accounting services. In the 1960s, accounting firms accelerated networking to better provide these services. Lack of stringent external rules governing their practices facilitated this process. Once established, the accounting firms expanded to become more multi-disciplinary and, in fact, now practice law in many countries.

Conversely, law firms until recently have primarily focused on a jurisdiction, a type of transaction or a region, because the practice of law requires local expertise. Apart from regulations which limit geographic and practice expansions, clients also feel that being well established in a jurisdiction is important for representation. These market and psychological barriers are difficult to overcome for firms seeking to expand beyond their traditional location or areas of practice.

The outcome is that, for most law firms, globalization has meant focusing on the economic and political centers of the world, such as New York, London, Brussels, Washington, D.C., etc. Until recently, jurisdictions outside of the mainstream of international commerce were not viewed as important. Relationships between jurisdictions remained largely ad hoc. If it was necessary to find a firm in Tennessee, directories were available. Firms did not appreciate that global relationships meant more than international relationships, i.e. operating in the economic centers. These attitudes have changed, as a result of some of these key factors:

  • Decentralization: In the 1980s, business become more decentralized because of improvements in technology and transportation. With a fax machine, telephone and computer, business, including law, can be conducted anywhere.
  • Global opportunities: By 1990, a global economy redefined all jurisdictions as being of equal importance. Cost and stability issues define relative markets. Businesses recognize that opportunities can be found in all regions of the world.
  • Distribution networks: There is an increasingly complexity of distribution systems for goods and services which are now packaged in multiple jurisdictions. Potential opportunities are defined by the network's effectiveness and efficiency in distributing materials, labor, services and finished products.
  • Regionalism: NAFTA, the EU, and other trading blocks require that businesses define a specific strategy for each region of the world. For example, in the future, Michigan may have more in common economically with Ontario, because of NAFTA, than with Florida, whose interests are directed toward South America.
  • Consumer loyalty: Consumers and clients have concluded that quality and price must be judged independently of brand names or existing relationships. Clients expect new and better services to be provided, and the source of the improvements is not as important as the services themselves.

 

Opportunities for geographic and practice expansion and linking in response to these factors, however, have been tempered by short- and long-term considerations. For example, firms have recognized that their clients want new services. But firms have also recognized that they do not have enough clients to sustain stand-alone operations in 100 countries. Likewise, continually bringing in outside expertise has high economic and quality costs.Most firms develop short-term strategies for the needs of specific clients and therefore may lack the flexibility and openness to capitalize on business opportunities arising from unexpected sources.

The Clients' Perspective

Clients, as business persons, have always thought about capitalizing on change. As trade barriers were reduced and a common global economic infrastructure was established, clients actively sought out the best alternatives for producing goods and services for their customers and clients. They established new structures in the form of joint ventures, alliances, and partnerings to provide what their customers needed. They expect those supplying services to their companies to be able to do the same thing.

In other words, changes in the legal profession, as was the case for the accounting profession, are not driven by law firms, but by their clients. To a large degree, clients have forced firms to redefine objectives and to recognize that economic trends require shifts in the distribution network of legal services.

There are several ways in which in-house counsel, as clients, have furthered these structural changes. In-house "clients":

  • Demand sophisticated and, in many cases, limited advice;
  • Are in a position to monitor the effectiveness and efficiency of a delivery system;
  • Manage costs and responsiveness. Loyalty to a firm is secondary; and
  • Look at their corporate needs from an organic, rather than a transactional point of view. The focus is on anticipating and preventing problems before they arise.

 

Assisting the in-house clients in the new marketplace is different than in the old market. What is required is instant access to information and established relationships everywhere on earth. If law firms cannot provide the information, other professions will.The issue is to define a structure sufficient to attain these objectives and preserve the best of existing systems.

The Legal Business Becomes an "Open System"

For a long time, the legal profession was a closed system. That is, one in which lawyers delivered unique services which could not be combined with services offered by competing firms. In an open system, by contrast, goods and services are produced which are, in some degree, compatible with those produced by competitors. Open systems promote dynamic growth because they effectively use existing resources, rather than requiring each competitor to constantly reinvent the wheel.

The legal profession's once closed system was a product of relative market stability and growth. In that system, a firm sought to keep all its clients' work within the firm by hiring attorneys in specialized areas or by opening branches. Under this system, firms sometimes formed exclusive relationships with other firms in and outside of the region.This type of system maximized short-term profits, as long as all clients remained in the loop.

Under existing conditions, though, the loop has been breached as a result of new services, relative market instability, and the role of corporate counsel, who may have been satisfied with the closed system under local and regional practice conditions, but require more in the global market. For example, the beauty contest is now a regular part of practice.

In today's open, borderless world of interrelated multi-jurisdictional transactions, clients expect high quality information and advice to be quickly passed along by law firms. However, providing such information may be difficult to attain cost-effectively by relying solely on traditional structures, which focus on a location or a particular type of transaction. If the required information can only be found in distant locations or the scope of the services is beyond what is normally required, quality information may be cost-effectively unattainable or require so much time that it is of little value.

For example, a client walks in the door and needs to determine the latest developments in taxation of a Wyoming Limited Liability Corp., in 17 countries. How can you get your client this information within 24 hours? In theory, one could research the answers in the library. Unfortunately, the information would, at best, be sketchy. The chances of any individual having personal contacts in all 17 countries is remote so that, even if faxes were sent, there could be gaps.

On the other hand, if the firm belonged to an association of firms with contacts in all countries and states, faxes describing the problem to tax professionals in each country could be sent in a matter of minutes. In a day, the client would have a high quality answer. If the association has a free advice policy, the response would be provided at no cost.

Likewise, multi-disciplinary practices can offer clients better services by providing a more direct link to the information. In-house information about the client's activities and objectives is improved. Because the expert is in the firm, there is a higher level of quality control. Because the attorney can supervise the expert and more easily factor the information into his legal advice to the client, quality is increased while costs are being reduced.

Before a new organization or a multi-disciplinary business is created, it must be viewed against the background of existing organizations and service providers. To duplicate the efforts of others who can more effectively provide services is a waste of resources. Something unique must be created that offers distinct advantages to the client. This requires defining existing relationships by visualizing how the profession is currently organized and how it could be organized to take advantage of existing information and the future requirements of firms and clients.

Individual Contacts

The traditional approach to developing a practice is individual networking with other lawyers or members of other professions. Attorneys in firms and in-house make as many contacts, at meetings and in professional groups, as possible. This system was felt to be the best "structure" and is the most easily understood by general counsel.

Nevertheless, there are certain weaknesses. The obvious one is cost, even though this is hidden because it's built into the fee structure. For example, if each attorney in a firm of 100 members belongs to 3 organizations and attends 6 meetings per year, one of which is in a distant location, the cost to the firm could exceed several hundred thousand dollars per year in out-of-pocket expenses. Clients must pay this overhead.

Also, a system based solely on contacts is inefficient because it is purely ad hoc. Who you sit next to at lunch becomes a contact. It may take a lot of lunches and dinners to have a comprehensive list of contacts in over 100 jurisdictions. After all, the maximum number of contacts per day will probably not exceed 5 and, given the random nature of contacts, to develop a beneficial relationship with the other members of the organization will take a minimum of 5 years. Firms have not fully realized that the costs of this type of "marketing" can outweigh the benefits.

Law Firms

Law firms are simply an outgrowth of the need for economies of scale and requirements to provide clients a range of services. The law firm is a network of professional contacts and information. Each partner and associate, and all of their clients and contacts, are part of the network. The network expands as the firm opens branch offices and creates additional relationships. The firm is composed of functions (management, accounting,marketing, etc.), business units (substantive areas of practice), geographical relationships (branches and external relationships), and clients. To some extent, the same divisions exist in a law firm association.

The greatest strengths of firms located in one jurisdiction or region are established internal and external relationships and defined purposes. These lead to quality representation because information is easily accessible. In addition, large firms enjoy significant name identification in their home jurisdictions, which results in a large market share.

These same strengths may become weaknesses in a worldwide environment. Assume, for example, that a 100-year old firm with 100 attorneys and 1 percent local market share expands to 240 offices in 110 jurisdictions. What would happen? First, internal relationships become costly to maintain because the lawyers have little in common. Externally, the firm's branch offices are not part of the social and political fabric of the jurisdiction in which each operates. Also, quality can become costly and difficult to monitor from a central location.

While lawyers or firms may generally be hired for their expertise on local law, clients now demand that this expertise be combined with national, international or global information. Legal practice now requires complete access to all jurisdictions in the world. When the "Big Six" accounting firms are contrasted with law firms, the lack of the latter's internationalization is clearly apparent. Even the largest firm's 5 to 10 branch offices in other countries are not comparable to the depth of services provided by the accounting firms' 200 offices in 75 or more countries.

Clubs, firm associations, alliances and associations of independent firms can alleviate the pressures brought on by expansion of traditional forms because the firms gain access to all jurisdictions through other members without the costs.

From a multi-disciplinary point of view, law firms which only practice law may not be able to meet their clients' expectations. The consultants, who are not lawyers, may not know the clients' business and may, therefore, not recognize the opportunities or identify the problems. Likewise, firms which contract out for other services must charge their clients additional fees.

The fact is that other professions, such as the accounting firms, can offer different services; in some places they have demonstrated that they are in a better position to meet the clients' expectations.

Establishing an Association or Multi-disciplinary Practice

There are five important questions for any legal organization to consider at the outset when considering setting up an association or multi-disciplinary practice. These include:

1) How formal is the organization or practice area? What is its specific purpose(s)? How should it be structured? Should it be incorporated? Who will be in charge?

2) What does the organization do, or why should the firms be interested in multi-disciplinary practices? Does the organization practice law? Does it collect information, publish materials, facilitate meetings?

3) What is the firms' role in the organization? Do the members undertake projects individually? Who are the members, firms and attorneys? How do the members gain access to the organization? What do they do with the information? What are the relationships of the firms' lawyers to non-lawyers? Do non-lawyers share in legal fees?

4) What role do the individual attorneys play in the multi-disciplinary practice or in the firms' association?

5) What are the attorneys' relationships to the multi-disciplinary group? What are the firm members' relationships to the other firms: exclusive, semi-exclusive or non-exclusive? Are the firms independent or actually affiliated?

The political and socio-economic changes which have swept the business world necessitate a rethinking of the legal services distribution system. Firms must think beyond the individual attorney and firm levels, as well as beyond specific regions of the world like North America and Europe. Their ad hoc and chance relationships and short-term planning may have been adequate in the 1980s, but are no longer so in a borderless world.

Establishing over 200 offices is not a realistic alternative for any firm. What is required is long-term planning focusing on the clients' immediate and future need for high quality, cost-effective information. Alternative structures, such as law firm associations, networks, clubs and multidisciplinary practices which do not practice law,can help firms obtain the information they need to provide clients in today's global economy.