1 ********* How the mighty fall Attorney and author Michael Trotter talks to Lawyers Weekly about why big-firm economics go wrong By Sharon McCloskey, staff writer The national media is agog these days over the very public implosion of another high-flying law firm, New York s Dewey & LeBoeuf. At last count, at least 75 of the firm s 300 partners have departed since January. And the firm has now told the rest to start looking for new jobs, while the Manhattan district attorney s office has opened an investigation into the handling of the firm s finances by ousted chairman Steven Davis. Though uncommon, Dewey s demise is not unprecedented. Those of a certain age remember Finley Kumble, which rose from eight lawyers in 1968 to the second-largest firm in the country in Finley rocked the legal world as it signed up high-profile figures and raided other firm s superstars, some of whom earned the then-staggering sum of $1 million annually, wrote Chicago attorney and law professor Steven Harper on his blog, bellyofthebeast.com. But Finley grew too fast, assuming debt for office expansions and promising outsized paychecks to big name lateral hires. As revenues dwindled, the firm disintegrated. The firm dissolved in 1987, at a time when it still had 650 attorneys. Four years later, things likewise fell apart for Boston s Gaston & Snow, an old-line firm which also pursued an aggressive growth strategy in other cities, only to become hostage to the creditors who funded its many new offices. And in 1995, Richard Nixon s old firm Mudge Rose suffered a similar fate when a bunch of partners and associates walked out.
2 Is the plight of Dewey & Leboeuf any different? That s a question Lawyers Weekly asked Atlanta attorney Michael Trotter, who has himself lived through several law firm iterations, with stints at large firms that were the predecessors of Alston & Bird and Kilpatrick Townsend & Stockton. He is now a partner at Taylor English & Duma in Atlanta, a firm he says is an example of the new model likely to thrive going forward. Trotter has also written frequently on law firm management and economics, and is the author of Profit and the Practice of Law, which chronicled the growth and change of major business firms from 1960 to His latest book, Declining Prospects, to be released in late May, continues that chronicle through today and describes the sea change he sees sweeping through the country s largest firms. The strategy pursued by almost all of the major business practice firms over the last three decades has focused more on maximizing the profits of the firms controlling partners rather than on maximizing the value of service to clients, Trotter writes. For those firms, the news is not good: The forces of competition, rising costs and commoditization, coupled with strong corporate law departments inevitably lead to declining prospects. There s good news, though, for most firms in North and South Carolina, which tend to be smaller, more fiscally conservative, and more attuned to personal client service. They will likely survive unscathed. They ought to be pleased with where they are, Trotter says. While they may not have enjoyed the fruits of climbing up to the top of the tree, they ve also avoided the risks. The storm is going to pass by most of the North Carolina and South Carolina firms and leave them in pretty good shape. What follows is an edited transcript of Trotter s talk with Lawyers Weekly.
3 LW: In your books Profit and the Practice of Law and Declining Prospects, you chronicle the profession s changes since 1960 and make some predictions about its future. And now we re witnessing yet another large firm meltdown with Dewey & LeBoeuf in New York. But how much different really is all this? We ve had big failures before. Trotter: Well I think the key to all of this, because of Model Rule 5.6 of the Code of Professional Conduct, is that every lawyer is a perpetual, unlimited free agent. The rule, implemented through adoption by the states, says essentially that a lawyer cannot enter into an agreement with his existing firm that would restrict his practice if he left the firm. The theory is to protect the client, so that the client has the right to pick the lawyer he wants to employ regardless of where he is. But the flip side is that the lawyer is free to pick up and move at any time. Of course other factors might keep him at the firm -- if he guaranteed the firm debt, for example -- but even that practice is not as common as it used to be. LW: What do you think has gone wrong at Dewey? Trotter: I don t know anything about the situation other than what I ve read in the newspapers and so on, and that s quite a bit, but assuming that information is correct, I think Dewey is experiencing a problem that a number of what I would call the major business practice firms or the AmLaw 200 firms are facing. There s been a fundamental change in the competitiveness of the environment that has increased extraordinarily so. LW: Law firms have always been competitive, though. How is this different? Trotter: We ve got very many able lawyers and law firms more than we need. Law schools are currently producing about twice as many graduates as there are jobs available. And the quality of the students is very high probably the highest we ve ever had, which is the result of the fact that at the top level it s paying so well, it s attracted a lot of people who are interested in a profitable career. And until now it was probably something you could do with less risk and no capital. LW: Is it only competition that s driving transformation? Trotter: In the book I talk about five factors starting with the increased supply of capable lawyers and law firms. In addition to that, though, the costs of legal services have been driven to the point that companies are now focusing on how to control them. And on the other side of the table, there are some very smart, able people negotiating on behalf of the businesses. Corporate counsel knows that an awful lot of the work they give to outside lawyers is probably a commodity
4 (financial) product that a large number of law firms are capable of providing. They can bid that out and perhaps in more subtle ways place pressure on firms to reduce those costs. And of course the changes in communications technology have made it possible for attorneys in Seattle or New York to compete with lawyers in Atlanta or Charleston or Charlotte. LW: Has there been a pushback on costs? Trotter: Corporate counsel has the charge from their client companies to reduce the cost of their legal operations. I think we re going to see a return somewhat to the retainer system of the 50s and 60s. Pfizer for example has done that. They ve identified a group of law firms that they are going to use for specific things intellectual property, corporate, litigation, and so forth and they have a budget. They allocate 80 percent of that budget amongst those firms that they ve designated to be their counsel, and those firms agree to do whatever it is they need in their area of practice that s been allocated to them at a fixed price. Pfizer then holds back 20 percent of the budget, which they allocate at the end of the year based on criteria that they ve created for example, one firm may have had extra work to do, or obtained a notable result. But at the end of the year, the amount that Pfizer has spent is the amount that they budgeted for at the beginning of the year. That s the way it used to be. LW: How might these changes affect firms in North and South Carolina? Trotter: I think the major business practice firms are at the greatest risk. And we can t lose sight of the fact that about 50 percent of the lawyers in America are sole practitioners, and a total of 70 percent are in firms with fewer than 20 lawyers. The last time I checked, I think there were only a few Carolina firms in the AmLaw 200 Womble Carlyle, Nelson Mullins, Moore & Van Allen. LW: In our recent ranking of firms, we saw that some of the larger, out-of-state firms like Alston & Bird, Hunton & Williams, for example, that opened offices in North Carolina have suffered the largest drops in number of attorneys. Why do you think that is? Trotter: I think the North Carolina market historically was a lower-priced market - - lawyers didn t earn as much and they didn t charge as much, and these firms from maybe Atlanta and other places that had grown accustomed to a certain level of profitability I think were frustrated that N.C. firms were not operating at the same level of profitability.
5 LW: And yet we see other firms making the same move -- K&L Gates opening in Charleston is an example. Trotter: I think it s very misguided. You re trying to be both a major business practice firm, competing with the likes of Cravath and Sullivan Cromwell on one hand, and a local firm competing at the level of a Nelson Mullins, for example -- which has some very competent, talented lawyers and I suspect is charging at lower levels. So how do they compete? LW: Tell us about the new model firms you discuss in your book why you think they ll thrive and fill a niche. Your firm, for example, mostly hires only experienced attorneys. Trotter: Leverage has been a big factor in large firm profitability. When companies brought work, they typically wanted you to handle the entire project. And firms grew to having more associates than partners [to handle different levels of a project]. Now, corporate counsel will say I ve got a hundred lawyers on my staff, and we can do this part or that part, the document review we can farm out to someone at a much lower cost, but we want you because of your expertise and experience, maybe for strategy, or we ll draft a basic document and you ll review it for us. The effect of that is to reduce the need for leverage. A firm like ours can handle the upper level work that a client might need us to do, and we charge less to do that. So generally we re each paid for what we do. Some derisively refer to that as eating what you kill. But if you re not paid for what do you do, what are you paid for? How do you measure it? That brings politics into the legal environment. We have a more comfortable environment.
Saving and Investing A Roadmap To Your Financial Security Through Saving and Investing Information is an investor s best tool A ROADMAP TO YOUR JOURNEY TO FINANCIAL SECURITY 1 2 SAVING AND INVESTING Dear
How to Win Your Injury Case By Brian Beckcom Table of Contents Disclaimer What It Means to Win (or Lose) Your Case How to Get the Most Out of This Book The Ten Most- Asked Questions Ten Questions People
Advanced Annuity Selling Strategies By Douglas M. Warren, CLU Clients are sold on placing billions of dollars into annuities each year. $250,000 or more in annuity commissions are paid to annuity sellers
A Simpler Plan for Start-ups Business advisors, experienced entrepreneurs, bankers, and investors generally agree that you should develop a business plan before you start a business. A plan can help you
THE TRUTH ABOUT CHOOSING THE RIGHT ATTORNEY (AND WHY IT MAKES A DIFFERENCE) DALE WILLIAMS A JURY CONSISTS OF TWELVE PERSONS CHOSEN TO DECIDE WHO HAS THE BETTER LAWYER. ROBERT FROST Y CE) If you are suddenly
9 Common Mistakes That Can Destroy Your Workers Compensation Claim And How to Avoid Making Them By Frank M. Eidson Copyright 2013 by PILMMA Publishing All rights reserved. No part of this book may be used
Are Financing Outs Back In? Speeding Up Bankruptcies Earnings Guidance Conundrum The insider s guide to investment banking and capital markets C O R P O R A T E E D I T I O N July 30, 2007/$25/www.iddmagazine.com
Wednesday 3 December 2014 - Legislative Council - Government Businesses Scrutiny Committee B - Motor Accidents Insurance Board LEGISLATIVE COUNCIL GOVERNMENT BUSINESSES SCRUTINY COMMITTEE B Wednesday 3
Time Matters for the PI Attorney 6/14/2006 Robert Gray GrayLint Enterprises, Inc. Personal Injury Case Management...1 Time Matters Things You Might Like...2 Time Matters Things You Might Not Like...3 Other
MOST DIFFICULT INTERVIEW QUESTIONS When preparing for an interview, go through the following list of questions and write down appropriate responses. Don t memorize your answers; review them for content
Genie The core mission of the Finance Institute ( TFI ) is lead generation to the Alternative Finance Industry. TFI delivers on this mission by quickly educating, guiding and supporting an elite consultant
Clinical Trials: What You Need to Know Clinical trials are studies in which people volunteer to test new drugs or devices. Doctors use clinical trials to learn whether a new treatment works and is safe
Is Connectivity A Human Right? For almost ten years, Facebook has been on a mission to make the world more open and connected. For us, that means the entire world not just the richest, most developed countries.
Saving and Investing for Students OFFICE of INVESTOR EDUCATION and ADVOCACY Information is an investor s best tool U.S. SECURITIES AND EXCHANGE COMMISSION 1 2 SAVING AND INVESTING Dear Student While money
Business Succession Planning Guide NOTE: This book provides only a basic overview on the subject of succession planning and the publisher makes no warranties as to the accuracy of information as it relates
Disability Resource Group, Inc. Disability Insurance Marketing Guide Personal and Business Markets For producer use only Not for use with the general public. Table of Contents Disability Income Insurance
Managing Partner s Guide How To Market A Boutique Personal Injury Law Firm Using My Unique Method Of Education-Based Marketing by Trey Ryder Lawyer Marketing Specialist Inside You ll Discover The Fatal
Contingent Commitments Bringing Part-Time Faculty Into Focus A SPECIAL REPORT from the Center for Community College Student Engagement Acknowledgments Our gratitude is unconditional. For their incalculable
International School of Management DBA Paper Submission: International Taxation A Great International Tax Structure Taken Too Far?: The Case of the Valeant Biovail Merger Brian Crombie DBA Candidate December
4-HOUR ANNUITY TRAINING SECOND EDITION 4 Credit Hours, Approved For Life Insurance Licensees California Approved Course License Number 290774 All Life agents who sell annuities in California must complete
A free ebook on Factoring and Invoice Discounting IC Business Solutions for the Very Best In Corporate Services Midlands: Alpha House, Tipton Street, Sedgley, DY3 1HE London: 23 Grosvenor Gardens, London,
Small Business Success Podcast: ALTERNATIVE FINANCING The SCORE Small Business Success Podcast features interviews with the best and brightest in the world of small business, covering topics such as business
BEFORE YOU HIRE A PERSONAL INJURY LAWYER READ THIS EVERYTHING YOU SHOULD KNOW BEFORE HIRING A PERSONAL INJURY LAWYER IS EXPLAINED IN THIS BOOK Hiring a lawyer is one of the most important decisions you
Variable Annuities: The Truth Revealed at Last! Fees, penalties, and contractual limitations you may not know about that could cost you money 1100521-2 Disclaimer - This report is meant to provide general
COLORADO INJURY LAW A Reference for Accident Victims by Michael R. O Connell, Esq Speaker Media Press Colorado Injury Law: A Reference for Accident Victims Copyright 2009 by Speaker Media & Marketing Derivative
Rob Davis Everyone wants a good process. Our businesses would be more profitable if we had them. But do we know what a good process is? Would we recognized one if we saw it? And how do we ensure we can
THE ECONOMICS OF EMPLOYEE BENEFITS Darren Lubotsky Department of Economics and Institute of Labor and Industrial Relations University of Illinois at Urbana-Champaign August 2004 Chapter prepared for Employee