Practice Tips
Multidisciplinary Practice: What Will
It Mean
for the Smaller Firm?
Incursions into the legal market by nonlawyers and business
service firms will continue. Here are some strategies small and
mid-sized firms could use to compete with the "one-stop
shopping" these nontraditional competitors offer to clients
of legal and other professional services.
By Norman Clark
The report and recommendations of the American
Bar Association's Commission on Multidisciplinary Practice
have sparked a debate in the American legal profession unlike
any since the abolition of the ban on lawyer advertising. In
August 1999 the ABA House of Delegates considered and voted against
the commission's recommendation to eliminate the Rule 5.4
prohibition against nonlawyer ownership of law firms, saying,
in effect, the issue requires more study. And the battle is likely
to rage on, as state bar associations and legislatures debate
the issues surrounding multidisciplinary practice.
Technically,
a multidisciplinary practice (MDP) is an organization owned wholly
or in part by nonlawyers that provides legal services directly
to the public through owner or employee lawyers. In practice,
MDPs also include otherwise independent law firms owned only
by lawyers which practice in close cooperation with professional
service firms owned exclusively or partly by nonlawyers, usually
under a contractual arrangement. The MDP issue generally is considered
in the context of Big Five accounting firms entering law practice
as a new service area.
Not all the battle lines have been drawn, but the report has
drawn and is drawing heavy fire from large law firms, who see
a competitive threat from the prospect of law firms being owned
by the global accounting firms and financial service companies.
Many smaller firms and solo practitioners, however, see distinct
opportunities in MDPs.
Regardless of the ultimate resolution of the debate, incursions
into the legal market by nonlawyers and business service firms
outside the legal profession will continue. Many business clients
are attracted to the "one-stop shopping" that these
nontraditional competitors offer. [Editor's Note:
Please also see "Multidisciplinary
Practices: Service Package of the Future?" in the April
1999 WL.]
Small and mid-sized firms need to start now to consider how
they will respond to continued - and possibly even greater
- incursions into the legal market. This trend is not going
to reverse. If MDPs enter the American legal market, the new
competitive dynamics they could introduce could aggravate existing
vulnerabilities of smaller firms. In short, strategic planning
is no longer advantageous; it has become essential.
Today's vulnerabilities and challenges
Small and mid-sized are relative terms. In large metropolitan
areas, a firm of 50 lawyers might be considered small. In a smaller
market, the same firm might be the biggest in town. For purposes
of this discussion, a small firm is one with fewer than 40 lawyers.
A mid-sized firm has 40 to 75 lawyers, but many of the vulnerabilities
of these firms also apply to some firms with as many as 150 lawyers.
The consolidation and shakeout of the American legal market
has hit small and mid-sized firms particularly hard. Two types
of small and mid-sized firms have been shown to be at competitive
risk:
- Full-service firms. A small or mid-sized firm that
tries to be "full service" can quickly find its expertise
spread too thin. Although competent in many areas of the law,
it stands out in none. It gives prospective clients few reasons
to select them.
- One-city law firms. Geographic expansion is one of
the most important characteristics of a mature market. The client
bases of many small and mid-sized firms are being assaulted by
larger statewide, regional, or national firms that move into
town. Sometimes the new firm merely opens a branch office. More
frequently, the incursion is achieved by merger. A small or mid-sized
firm that is unwilling to consider expanding its geographic reach
will find it hard to react to and compensate for new competitors
in their market.
Increased competition presents small and mid-sized firms with
serious challenges. Here are some of the challenges that Altman
Weil's small and mid-sized clients most frequently mention:
- increased difficulty getting and keeping institutional clients;
- loss of long-term clients to larger, aggressive law firms;
- loss of long-term clients who merge or are acquired;
- demands from some clients that the firm take on additional
work;
- growing price sensitivity in some practice areas; and
- difficulty recruiting and keeping high-quality associates,
paralegals, and support staff.
The MDP impact
Each of these vulnerabilities and challenges will continue
into the new century, with or without MDPs. If the Big Five accounting
firms, financial services companies, and insurance companies
directly enter the American legal market, their presence will
raise the competition to a new level. Today's vulnerabilities
could be aggravated into potentially fatal strategic and business
weaknesses.
If a small or mid-sized firm has trouble building and keeping
an institutional client base today, it will be even more difficult
with MDPs in the legal market. If larger firms are already aggressively
moving into small-firm markets, the MDPs will be even more formidable
competitors, with their worldwide brand name recognition, established
client base, and marketing resources.
The legal market is already tough enough for many small and
mid-sized firms. MDPs will make it even tougher.
To do nothing is fatal
Many small and mid-sized firms are asking, "Must we get
larger to remain competitive? If we don't merge now, will
we be left behind?"
There is no universal answer. Each firm must examine its own
client base, its practice areas, its market, and its internal
culture in order to chart the right strategic course. As already
noted, some small and mid-sized firms may have to grow in order
to keep key clients. Others may be forced, by local market conditions,
to expand geographically. The quick growth and access to new
markets and new clients that a merger can provide may be the
best course for many small and mid-sized firms. For others, limited
but targeted organic growth may be the best strategic decision,
but it will require careful planning, commitment, and agility.
One thing is clear, however. To do nothing will be fatal.
Essential strategies for small and mid-sized firms
What will a small or mid-sized firm need to do in order to
survive in what is likely to become an even more competitive
legal market? How can it compete against the MDPs? Here is how
some small and mid-sized firms are already planning for the MDP
incursion.
Get closer to the client than ever before. Corporate
clients consistently tell Altman Weil Inc. that one of the most
important factors in selecting outside counsel is knowledge of
the client's business. Small and mid-sized firms will need
to demonstrate a thorough and more sophisticated understanding
of client business needs and objectives. The accounting firms
will market their knowledge of the client's business from
an accounting or business consulting perspective. To compete
against them, law firms will need to differentiate themselves
in terms of superior understanding of the legal issues affecting
the business, as well as their strategic implications.
Small and mid-sized firms will have to give their institutional
clients, in particular, sound reasons not to switch to their
accounting firm for legal services. "Partnering" will
have to become a day-to-day reality, not just a slogan.
Pay attention to business basics. When MDPs enter the
American market, the first casualties will be the law firms whose
partners disdain the notion of the practice of law being a business.
Many small and mid-sized law firms already operate on slender
margins. Most have less tolerance for loss - whether loss
of profit on a matter or loss of a client. Attention to the basic
forces that drive profitability - rates, productivity, realization,
cost control, associate and staff compensation, and leverage
- will be more important than ever before.
Invest heavily in associates. "We know that associate
leverage is important, but we can't recruit or keep them."
Associate retention and development have become important issues
for every law firm, but especially for small and mid-sized firms,
which tend to have the lowest associate-to-partner ratios. This
situation is made worse when associates have "paid their
dues" and are ready for admission to partnership. By contract,
the Big Five professional services firms tend to be very well-leveraged.
This allows them to cut prices in order to gain market share,
and still make a profit.
As they compete against new providers of legal services, small
and mid-sized law firms will need to invest more heavily in associate
retention and development. Professional development will need
to go beyond professional mentoring and learning legal skills.
Associates also will need to learn how to develop clients, market
themselves and others of the firm, and write and execute individual
business and marketing plans. Delegation of legal work to associates
will no longer be just a profitability strategy. It will become
a survival skill.
Agility. One of the Big Five firms recently ran an
advertisement that shows an elephant walking a tightrope. The
caption reads, "Agility, not size, is important."
The recent history of the U.S. legal profession has been one
paradigm shift after another: advertising, computers, the growth
of mega-firms, and a global legal market. The incursion of MDPs
could very well be the next shift. Small and mid-sized firms
have to set a strategic course, but at the same time, they must
be willing and able to make course corrections as new challenges
and opportunities arise. "If it ain't broke, don't
fix it" is bad advice for the new legal market. Instead,
small and mid-sized firms must be willing to adapt, change, and
innovate in order to continue to meet the rapidly changing needs
and expectations of their clients.
Norman K. Clark is a principal in
Altman Weil Inc. He works with law firms and corporate and legal
departments to improve profitability and productivity. His professional
background is as a trial attorney, trial judge, law professor,
and legal services manager. Reprinted with permission of Altman
Weil Inc. |
Some small and mid-sized firms already see multidisciplinary
practice as an opportunity to construct new packages of business
services and products around a legal core. It is not unimaginable
that some of the most successful MDPs in a local market may be
ones built by small and mid-sized law firms. As one small-firm
partner recently said, "We can fight back."
What's next?
It is too early to predict whether, or to what extent, the
MDP Commission's recommendations - after further study
- will be approved. Even if they ultimately are adopted
by the ABA House of Delegates, it may be several years before
the Big Five and other financial services companies enter the
legal market.
No law firm - and especially not a small or mid-sized
one - can afford to wait and see what will happen. Each
small and mid-sized firm should take advantage of this time to
develop and execute a serious, well-thought-out strategic plan.
This can't be done in a single weekend or by one or two
partners. Instead, it should be an ongoing effort that involves
everyone in the firm to some extent.
The first years of the new century will be interesting and
challenging for small and mid-sized firms. The advice of futurist
Joel Barker has special meaning for smaller firms, particularly
as they consider the potential impact of multidisciplinary practice
in the United States:
"You can and should shape your own future; because if
you don't, someone else will surely do it for you."
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