Managing a Law Firm like a Business Has Risks, Panel Says

Law firms are undergoing a transformation as clients increasingly stress efficiency, better quality, and lower costs. In response, firms are becoming ever-more attuned to how they operate from a business perspective. Many law firms are investing heavily in C-suite executive leadership who implement systems to meet the ever-changing demands of their clients.

At the 2017 Fall ABA National Legal Malpractice Conference in Colorado Springs, Williard Shih of Wilentz, Goldman & Spitzer, P.A., moderated a discussion addressing the risks law firms face by operating as traditional businesses. The panel included Clinton Wesolik, national EPL product leader for management liability and financial institutions at CNA; Donald Mrozek, partner and former chair of Hinshaw & Culbertson LLP; and Elizabeth Sharrer, partner and chair of Holland & Hart LLP’s management committee.

These experts discussed the difficulties that arise when you marry the legal profession with corporate infrastructure. The take-away from their discussion: while law firms can and should be run like other businesses in many respects, they cannot forget what sets law firms apart from other enterprises - the ability to institutionally evaluate, foresee, and manage risk through the lawyer’s lens. As firms engage business strategists, consultants, and corporate partners, lawyers must oversee their vendors and partners. This is so the firms remain cognizant of, and responsible for, the most important enterprise management issues they face relating to employment practices, attorney compensation, client intake processes, and enforcing best practices through peer review.

Employment Practices Risks in Law Firms

Employment-related claims against law firms are on the rise, especially in the area of gender discrimination. For EPL carriers, law firms can be a challenging class of business to underwrite. As Clinton Wesolik reported, the EEOC has identified several factors that make law firms particularly susceptible to claims: vast power disparities between supervisors and subordinates, wide ranging levels of income, and the presence of high-value employees like rainmakers and high-end revenue generators.

Wesolik noted that the law firm operating environment lends itself to one-on-one interactions between employees—or between employees and owners—with significantly different levels of power and authority, which can lead to unfavorable fact patterns with high exposure. Power disparities and legacy cultural issues between partners and associates, or professionals and support staff, may lead to cases involving allegations of long periods of harassment or discrimination before a complaint is either made or investigated. This tends to increase exposure for the law firms and their EPL carriers.
In addition to the risks associated with the power disparity, most law firms operate on a business model that rewards those who generate clients and income to the firm. So, when a subordinate employee alleges harassment or discrimination by one of those rainmakers, the law firm may be tempted to protect the bottom line and minimize or ignore the employee’s complaints. High-exposure discrimination, harassment, and retaliation claims often arise from a law firm’s failure to address complaints against attorneys who generate large amounts of revenue.
A claim against a law firm typically brings greater exposure than claims against other enterprises. Wesolik explained that lawyers, by virtue of their profession, are charged by jurors with a higher knowledge of employment laws. Any deviation from the highest standards of human resources policies and procedures and professionalism enhances the potential risk for EPL claims. Law firms may present as a defendant composed of highly compensated individuals who are deemed by jurors to know better than to engage in the alleged illegal and wrongful employment practices. This perception increases the exposure for adverse verdicts with high damage awards.

Partner Compensation Systems

The discussion next turned to Donald Mrozek, who currently chairs his firm’s Consultants & Coaches for the Profession^TM Practice. Mr. Mrozek said that an intentional and multifaceted compensation structure will reduce law firms risks.

As demand for legal services remains flat, while clients’ demand for alternative billing practices grows, the law firm’s compensation structure is a key inflection point for profitability. However, a firm’s partner compensation system is also a critical component of its culture. Mrozek said that major institutional changes to compensation system will drastically change firm culture often in unanticipated ways. He said firm leaders need to be intentional and analytic in their approach, should make changes in a transparent way, and should ensure the partnership buys into the process well prior to enactment. Mrozek cautioned against top-down pronunciation of systemic changes.

Recent studies have shown that the top 50 law firms in the country are doing exceptionally well; however, the remainder have had stagnant growth, particularly in the area of profits per partner. What has happened to compensation systems with this stagnation?

Citing recent articles including Nell Gluckman’s piece in the March 2017 issue of The American Lawyer, Mrozek noted that because of financial pressures, firms have been condensing the time for consideration (as little as one year) for compensation review and placing less emphasis on—or eliminating altogether—considerations regarding attorneys’ contributions to firm culture (such mentoring, commitment to firm strategy, and enhancing firm culture). Mrozek said firms that prioritize short-term financial performance over long-term are mistaken. By placing the greatest value on immediate objective deliverables, firms are incentivizing lawyers to hoard work, even though the client might be best served by having someone else handle the work. In addition, lawyers are metrically encouraged to perform work beneath their expertise to increase their individual performance. Mrozek said that firm leaders have an obligation to correct this trend.

In short, Mrozek recommended that leaders enact transparent and measurable benchmarks that balance objective metrics with attorneys’ contributions to the firm as a whole over time. He notes that while firms should evaluate compensation models from a business perspective given the current economic climate, firms should not to let traditional, antiquated models run their culture; firms should remain focused on long term objectives as well.

Client Intake Systems and Peer Review

Next to speak was Elizabeth Sharrer, who analyzed the benefits of an automated and dynamic client management system and continued participation in peer review to reduce risks faced by law firms.

First, Sharrer detailed the benefits of a good client process, which is a firm’s most effective risk management tool—statistically, the largest claims against law firms often involve significant failures at the intake stage. Lawyers are under tremendous pressure to bring in business, and firm management is under pressure to ensure its conflict systems adequately screen new clients and matters to reduce risk. The minefields are many, and institutional clients have added to an already-complex system with detailed guidelines for outside counsel.

In this environment, Sharrer said, firms must institutionalize systems that allow for effective screening in a format that is efficient and expedient. Firms must balance attorneys’ desire to speed up to the process to deliver timely service against the need to have a stable engagement from the outset.

Sharrer’s firm customized its client intake system based on her firm’s multiple practice areas. The firm opted for an online system that allowed flexibility and customization for each practice group. The system triggers each reviewer required including practice group leaders, loss prevention specialists, and administrative partners. Each reviewer is then able to participate in real time to ensure the firm can advise the intake lawyer with minimal delay.

In addition to minimizing risk through a dynamic intake process, peer review and attorney supervision are also important, Sharrer said. There is an assumption in the practice of law that peer review is the traditional training process for young attorneys. However, at some point in most lawyers’ careers, the training wheels come off and attorneys no longer have their work peer reviewed. In addition, many clients will not to pay for multiple partners working on a matter, nor for intra-office conferences.

From a risk management perspective, working closely with colleagues exposes early warning signs and reduces the risks inherent in law practice. Firms must guard against the desire to limit non-billable time against the need to expend capital for the benefit of both the client and the firm. To that end, Sharrer’s firm has instituted a partner responsibility committee, which meets with every partner in every office once a year. The committee is unique in that it does not report to management, but rather serves as a resource to identify issues within the partnership ranks and works directly with the individual lawyer to resolve the issues. Both attorneys and staff are encouraged to report information in real time relating to competency—without consequence. In addition, the Committee is supported and empowered to assist the attorney.

Takeaways

Lawyers are expected to deliver quality product in the most effective and efficient manner. Clients are discerning, relationships are shorter and the competition between firms will continue to increase. The increased demands on the practice of law require management attention now more than ever. The panelists agreed that firms that embrace transparency, connect with their talent, provide infrastructure, support, and open lines of communication will not only reduce their risk, but increase their standing in the marketplace.