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Potomac Law Group - Harvard PLP Presentation
- 1. Potomac Law Group: A Modern Twist on the Traditional Firm Program on the Legal Profession, Harvard Law School November 19, 2013
- 2. 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.”
- 3. THE “CRAVATH” MODEL AND THE RISE OF THE BILLABLE HOUR 3 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
- 4. DECADES OF EXTRAORDINARY SUCCESS WITH THE TRADITIONAL MODEL Attorney headcount AMLAW 100 228% 831% 25000 82000 1986 2008 Gross revenues AMLAW 100, $ billions 7.2 67 1986 2008 Source: American Lawyer, Rise and Fall, June 1, 2012; AmLaw Daily, April 29, 2009. 4
- 5. AVERAGE ANNUAL PROFITS PER PARTNER vs. INFLATION AMLAW 100; $ Thousands 325 368 416 470 532 602 681 770 871 985 1114 1260 366 388 412 437 463 492 522 553 587 623 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 5 Profits double in real terms Source: AMLAW 100 Survey (end points, middle years estimated); Bureau of Labor Statistics.
- 6. BUT CLIENT FRUSTRATION WITH BIGLAW FEES BUILDING As outside legal costs skyrocketed…. …clients brought more work in house… • Years of steady rate hikes • Growing need for legal services - Increased government regulation of industry - Greater litigiousness - Globalization - Trend toward papering • Increased interest in alternative fee arrangements • Resistance to paying for junior attorneys • Refusal to pay copier, research, and other add-on charges • Openness to considering alternatives to BigLaw In-house lawyers per $1 billion of revenue 2.93 3.52 2005 2007 … and began exploring ways to keep fees down Source: Altman Weil Legal Department Benchmarking Survey, companies with annual US revenue >$5B 6
- 7. 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
- 8. AT THE SAME TIME, BIG FIRMS LOCKING IN EXPENSIVE INFRASTRUCTURE FOR THE LONG-TERM Average first-year associate salary (NY) $ Thousands Other expensive 88% increase over the period, compared to inflation (37%), non-law firm legal jobs (e.g., prosecutor, 40%) 85 88 125 125 125 145 160 1996 1998 2000 2002 2004 2006 2008 decisions • Long-term (30- year) leases of pricey office space • Maintenance of legacy IT systems; reluctance to embrace new technologies • Art work and other expensive furnishings • Foreign expansion • More than double the rate of inflation over the same period (2.6%) • Non-law firm legal jobs by comparison: (40% prosecutors, etc.) Source: National Association for Law Placement (data for firms with more than 250 attorneys). 8
- 9. 2. THE TIDE TURNS “This is where things started getting really weird.”
- 10. PROMINENT BIGLAW LAYOFFS POST-RECESSION Total attorneys and staff laid off, by firm, 2008-2011 382 260 279 189 256 190 140 206 127 146 520 357 300 382 201 250 235 150 215 184 902 617 579 571 457 440 375 356 342 330 Dewey & LeBoeuf Allen & Overy White & Case DLA Piper Clifford Chance Latham & Watkins Orrick Herrington Linklaters Baker McKenzie Mayer Brown Staff 10 Attorneys Source: LawShucks.Com, 2009 Layoff Tracker. Layoffs at 76/100 AMLAW firms overall
- 11. NOTABLE DISSOLUTIONS 2008-2012 Firm Description Contributing factor • Guaranteed minimums to lateral partners • Large contingent fee case wrapped up • Litigation, IP, Antitrust giant • 700 attys; $573M rev • 17 offices worldwide • Difficulty meshing firm cultures post-merger • High-priced laterals • General practice firm • 1,040 attys; $782M rev • 26 offices worldwide • Post-merger integration troubles • Ill-timed partner defections • Infrastructure projects, electrical utilities • 550 attys; $400M rev • 8 offices worldwide Contingent of 15 intellectual property partners defected to Covington & Burling • General practice firm • 730 attys; $508M rev • American Lawyer Top 20 “A-List” firm 1956-2011 1890-2008 1909-2012 1924-2008 11
- 12. 3. THE RISE OF THE NEW MODEL FIRMS “We do all those old tricks electronically now.”
- 13. NEW MODELS OFFER IMPROVEMENTS ON MANY DIMENSIONS BigLaw New model firms • Cloud-based Office space Billing Technology • Software as a service Lifestyle • Expensive Class A space downtown • Excess capacity • Legacy IT systems • Support staff required • Slow to adapt • Home offices • Client sites • Flexible office space • Largely tied to high hourly rate • High leverage • High minimum billables • Rigid schedules • Pressures for client development • Up-or-out culture • Reduced hourly rates • Fixed fee, tiered billing, and other Innovative fee structures • No/reduced billable hour minimum requirements • Part-time/flexible schedule options • Telecommuting 13
- 14. RISE OF THE NEW MODELS New model law firms High end legal staffing Legal process outsourcers 14 Type of work Routine Medium Sophisticated complexity Segment
- 15. PLG AT A GLANCE Model Attorneys Client base Practice areas • New model law firm focused on the cost-effective delivery of high-end legal services to corporate clients • Launched in March 2011 with 10 attorneys • 40+ today, drawn from the nation’s top firms and in-house departments • Average tenure of 15 years, with a minimum of 8 • Launched with 2 small local clients • Today national base of public and private companies and institutions • Full service, with an emphasis on transactional work 15
- 16. THE PLG MODEL: EFFICIENT DELIVERY OF LEGAL ADVICE 600 20 205 Note: Figures approximate and in current dollars. 15 40 20 300 Bill rate at Sidley Reduced cost of space and furnishings Reduced partner leverage Elimination of summer program, etc. No junior associates to train Lower pay Bill rate at PLG Example attorney: Luisa Caro, formerly 7th year at Sidley Austin Hourly bill rate ($) 16
- 17. WHO COMES TO PLG? COMMON ATTORNEY PROFILES Attorney entrepreneur Big firm escapee Balance seeker Semi-retired • Novel ideas for developing business that don’t fit into BigLaw mold • May be interested in nurturing a business, sometimes legal-related, on the side • Enjoys the practice of law, but not the big firm environment; enjoys being associated with an upstart • Doesn’t want to sacrifice outside interests to the practice of law • 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 taken a buy-out years later post-merger 17
- 18. 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
- 19. 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
- 20. 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
- 21. PLG MARKET RECEPTION SINCE LAUNCH Clients signed inception-to-date, at quarter end 2 8 10 18 28 39 52 65 79 94 110 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 Notable clients 21
- 22. 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
- 23. APPENDIX
- 24. RISE OF THE NEW MODEL FIRMS 24 Complexity of work Degree of virtual-ness H H L L Entrepreneurial attorneys finding 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
- 25. BUT BENEATH THE SURFACE, UNSETTLING TRENDS DEVELOPING BY 2007 Ballooning costs Declining loyalty Growth in in-house depts Greater scrutiny of legal spend • Expensive, long-term office leases • Expensive installed infrastructure (e.g., associate salaries, summer programs) • Slow adoption of new technologies • Partner defections, portable books; all spurred on by PPP rankings • War for talent, increased guaranteed minimums to laterals • In-house departments growing steadily in head count, prestige • More legal work captured internally • Legal depts run more like a business, with greater focus on cost, value • More work bid out, etc. BigLaw ill-prepared to comfortably weather a significant economic downturn 25 Rigid work structures • Firms slow/unable to embrace flexible schedules, telecommuting, part-time
- 26. CHANGING WINDS IN THE LEGAL INDUSTRY CREATE FAVORABLE CONDITIONS FOR NEW DELIVERY MODELS Ready availability of legal talent Commercial-ization of the legal profession Increasing client dissatisfaction with rising legal fees Advances in technology (telecom, file sharing, internet, etc.) Pressure on the traditional law firm model; opportunity for new entrants 26
- 27. REPORTED LAYOFFS AT AMLAW TOP 10 IN 2009 Total attorneys and staff laid off, by firm 80 120 190 0 89 209 75 80 16 0 203 250 140 200 80 122 90 80 323 440 229 409 155 202 106 Skadden Arps Baker McKenzie Latham & Watkins Jones Day Sidley Austin White & Case Kirkland & Ellis Mayer Brown Weil Gotshal Greenberg Traurig Staff 27 Attorneys AMLAW 100 Rank #1 #2 #3 #4 #5 #6 #7 #8 #9 #10
- 28. FULL SERVICE OFFERING, WITH A TRANSACTIONAL EMPHASIS No. of attorneys, by subject area 4 5 4 4 6 3 2 3 2 10 Litigation Government Contracts Patent Corporate Contracts/Licensing Tax Real estate Trademark Labor & Employment Other Most active areas 28
- 29. AVERAGE FIRST YEAR ASSOCIATE SALARY, AMLAW 100 $ Thousands 85 87.5 125 125 125 145 160 160 75 82.5 125 125 125 135 160 145 72.5 80 114 120 120 135 160 145 1996 1998 2000 2002 2004 2006 2008 2010 New York Los Angeles Washington DC 29 6% annual growth