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."
Wisconsin Lawyer
