Potomac Law Group: A Modern Twist on the Traditional Firm Program on the Legal Profession, Harvard Law School November 19, 2013
1. BIGLAW: THE GOLDEN YEARS “I’m certain I speak for the entire legal profession when I say that the fee is reasonable and just.”
THE “CRAVATH” MODEL AND THE RISE OF THE BILLABLE HOUR Key elements of the BigLaw Model • Attract, recruit, and train top legal talent • Pyramid structure with more numerous associates handling the bulk of the client service work • Creation of a “tournament” to incentivize associates to work toward partnership • Apprenticeship system • Partnership structure with comparatively few equity partners • Billable hour at the core, with very high hourly rates 3
DECADES OF EXTRAORDINARY SUCCESS WITH THE TRADITIONAL MODEL Attorney headcount Gross revenues AMLAW 100 AMLAW 100, $ billions 67 82000 ¡ ¡ ¡ ¡ 228% 831% 25000 7.2 1986 2008 1986 2008 Source: American Lawyer, Rise and Fall , June 1, 2012; AmLaw Daily, April 29, 2009. 4
AVERAGE ANNUAL PROFITS PER PARTNER vs. INFLATION AMLAW 100; $ Thousands 1260 Profits double in real terms 1114 985 871 770 681 623 602 587 553 532 522 492 470 463 437 416 412 388 368 366 325 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Source: AMLAW 100 Survey (end points, middle years estimated); Bureau of Labor Statistics. 5
BUT CLIENT FRUSTRATION WITH BIGLAW FEES BUILDING As outside legal … clients brought more … and began exploring costs skyrocketed … . work in house … ways to keep fees down • Years of steady In-house lawyers per • Increased interest rate hikes $1 billion of revenue in alternative fee arrangements • Growing need for legal services • Resistance to paying for junior - Increased attorneys government regulation of • Refusal to pay industry copier, research, 3.52 and other add-on 2.93 - Greater charges litigiousness • Openness to - Globalization considering - Trend toward alternatives to 2005 2007 papering BigLaw 6 Source: Altman Weil Legal Department Benchmarking Survey, companies with annual US revenue >$5B
AND GROWING DISAFFECTION IN THE ATTORNEY RANKS • Increased annual billable hour requirements • Lengthened partner track • Longer odds of making partner • Introduction and proliferation of 2-tier partnerships • Rigid work schedule arrangements (little receptivity to flex schedules, telecommuting, etc.) • Greater lateral movement leading to less collaborative behavior 7
AT THE SAME TIME, BIG FIRMS LOCKING IN EXPENSIVE INFRASTRUCTURE FOR THE LONG-TERM Average first-year associate salary (NY) $ Thousands Other expensive decisions 88% increase over the period, • Long-term (30- • More than compared to inflation (37%), non-law year) leases of double the rate firm legal jobs (e.g., prosecutor, 40%) pricey office space of inflation over the same • Maintenance of period (2.6%) legacy IT systems; 160 145 reluctance to • Non-law firm embrace new 125 125 125 legal jobs by technologies comparison: • Art work and other 88 85 (40% expensive prosecutors, furnishings etc.) • Foreign expansion 1996 1998 2000 2002 2004 2006 2008 Source: National Association for Law Placement (data for firms with more than 250 attorneys). 8
2. THE TIDE TURNS “This is where things started getting really weird.”
PROMINENT BIGLAW LAYOFFS POST-RECESSION Total attorneys and staff laid off, by firm, 2008-2011 Attorneys Staff Dewey & LeBoeuf 382 520 902 Allen & Overy 260 357 617 White & Case 279 300 579 DLA Piper 189 382 571 Clifford Chance 256 201 457 Latham & Watkins 190 250 440 Orrick Herrington 140 235 375 Layoffs at Linklaters 206 150 356 76/100 AMLAW firms overall Baker McKenzie 127 215 342 Mayer Brown 146 184 330 Source: LawShucks.Com, 2009 Layoff Tracker. 10
NOTABLE DISSOLUTIONS 2008-2012 Firm Description Contributing factor • Litigation, IP, Antitrust • Guaranteed minimums to giant lateral partners • 700 attys; $573M rev • Large contingent fee 1956-2011 • 17 offices worldwide case wrapped up • General practice firm Contingent of 15 • 730 attys; $508M rev intellectual property 1890-2008 • American Lawyer Top partners defected to 20 “A-List” firm Covington & Burling • General practice firm • Difficulty meshing firm • 1,040 attys; $782M rev cultures post-merger 1909-2012 • 26 offices worldwide • High-priced laterals • Infrastructure projects, • Post-merger integration electrical utilities troubles 1924-2008 • 550 attys; $400M rev • Ill-timed partner • 8 offices worldwide defections 11
3. THE RISE OF THE NEW MODEL FIRMS “We do all those old tricks electronically now.”
NEW MODELS OFFER IMPROVEMENTS ON MANY DIMENSIONS BigLaw New model firms • Expensive Class A • Home offices space downtown Office space • Client sites • Excess capacity • Flexible office space • Largely tied to high • Reduced hourly rates hourly rate Billing • Fixed fee, tiered billing, and • High leverage other Innovative fee structures • Legacy IT systems • Cloud-based Technology • Support staff required • Software as a service • Slow to adapt • High minimum billables • No/reduced billable hour minimum requirements • Rigid schedules Lifestyle • Part-time/flexible schedule • Pressures for client options development • Telecommuting • Up-or-out culture 13
RISE OF THE NEW MODELS Type of work Medium Routine Sophisticated complexity Segment New model law firms High end legal staffing Legal process outsourcers 14
PLG AT A GLANCE • New model law firm focused on the cost-effective delivery of high-end legal Model services to corporate clients • Launched in March 2011 with 10 attorneys • 40+ today, drawn from the nation’s top firms and in-house departments Attorneys • Average tenure of 15 years, with a minimum of 8 • Launched with 2 small local clients • Today national base of public and Client base private companies and institutions • Full service, with an emphasis on Practice transactional work areas 15
THE PLG MODEL: EFFICIENT DELIVERY OF LEGAL ADVICE Example attorney: Luisa Caro, formerly 7 th year at Sidley Austin Hourly bill rate ($) 20 205 15 40 20 600 300 Bill rate at Reduced Reduced Elimination No junior Lower pay Bill rate at Sidley cost of partner of summer associates PLG space and leverage program, to train furnishings etc. Note: Figures approximate and in current dollars. ¡ 16
WHO COMES TO PLG? COMMON ATTORNEY PROFILES • Novel ideas for developing business that Attorney don’t fit into BigLaw mold entrepreneur • May be interested in nurturing a business, sometimes legal-related, on the side • Enjoys the practice of law, but not the big Big firm firm environment; enjoys being associated escapee with an upstart • Doesn’t want to sacrifice outside interests to Balance the practice of law seeker • May want to practice on a flexible schedule • Typically rose through the ranks at a big firm, went in-house at a high-level, may have Semi-retired taken a buy-out years later post-merger 17
PLG: GREATER OPPORTUNITY FOR ENTREPRENEURIAL ATTORNEYS Sample attorney profile #1 ¡ • Joined Oct. 1 from Wiley Rein partnership • Happier developing business at $485/hour than $685/hour • Ability to use creative alternative fee arrangements • Greater freedom to operate, ability to work from home office 18
PLG: GREATER OPPORTUNITY FOR ENTREPRENEURIAL ATTORNEYS (CONTINUED) Sample attorney profile #2 ¡ • Harry’s innovative health care compliance program squelched by BigLaw • Margins “too small,” and program viewed as a distraction from more profitable hourly work • Encouraged and fostered at PLG 19
PLG: GREATER OPPORTUNITY FOR ENTREPRENEURIAL ATTORNEYS (CONTINUED) Sample attorney profile #3 ¡ • Geoff, a patent attorney, developed technology solution to aid patent litigation • Raised angel money to pursue development • Splits his time between PLG and his own business venture 20
PLG MARKET RECEPTION SINCE LAUNCH Clients signed inception-to-date, at quarter end 110 94 79 65 52 39 28 18 2 10 8 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 Notable clients 21
CHANGING PERCEPTIONS WITHIN BIGLAW "We all expected [work] would pick up meaningfully this year, but it clearly hasn’t. I think we've come around to the view that this is the 'new normal.' ” -- Weil Gotshal Executive Partner Barry M. Wolf, June, 2013
APPENDIX
RISE OF THE NEW MODEL FIRMS H Entrepreneurial attorneys finding Degree of virtual-ness better ways to bundle and deliver high end legal services to corporate America, mostly by focusing on the cost side of the equation Big firms flat- footed, not nimble L L H Complexity of work 24
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