The legal vertical is already corporatized; law firms should be permitted to operate that way, too

The legal vertical is already corporatized; law firms should be permitted to operate that way, too by Mark Cohen explores a contentious topic. I congratulate Mark on his cogent arguments in favour. And I am sure all readers of Dialogue are looking forward to hearing the views of BigLaw firm leaders and the institutions of the legal profession, like bar associations and law societies.   

Mark starts by with an exhortation: It’s time to stop pretending that the $300B U.S. legal industry is anything but big business. All legal providers—including law firms– should be able to operate from a corporate structure.

Operainting in a corporate structure means they can accept institutional investment capital, share profits with ‘non-lawyers’, and grant shareholders residual equity in the firm after departure. This structure promotes a long-term view that better aligns the interests of lawyers, the firm, and clients. The present U.S. regulatory scheme does not allow law firms to be structured this way, and that is a key reason why firms have failed to innovate– even as their partnership model is showing stress cracks.  They have lost considerable market share to corporate legal departments and legal service providers, both of whom have corporate structures. The regulatory double standard is harmful to clients as well as law firms and should be reformed as it has been in the UK, Australia, and soon, in other nations.

In-house legal departments have corporate structures

In-house lawyers can share in the profits of the enterprise and acquire stock options. In fact, the long-term financial component is a key element of compensation and one of several reasons why many talented lawyers are moving from firms to corporate legal departments. The in-house corporate structure—with its short-and long- term performance metrics and rewards– promotes an alignment of interest between lawyer and client lacking in law firms. It also encourages in-house lawyers to function dually as enterprise defenders and business partners advancing enterprise interests. There’s a push-pull in the dual roles to be sure, but good lawyers find a balance. That’s no different than when a firm client exerts financial leverage on a law firm partner to push the envelope.

 The regulatory double standard

The current U.S. regulatory scheme prevents law firms to operate from a corporate structure. This adversely affects legal consumers and the profession for a spate of reasons: (1) U.S. regulations that preclude law firms from accepting outside capital, profit sharing, and liquidity events—except bankruptcy—are outdated; (2) concerns that a corporate structure would undermine the attorney-client relationship and create a unique set of ethical and financial conflicts are unfounded—those conflicts already exist; (3) a large segment of the corporate legal market already operates from corporate structures—that includes in-house legal departments and service providers that together have a nearly 50% market share; (4) the boundaries between ‘engaging in the practice of law’ –law firms– and ‘delivering legal services’ – everyone else – are blurred, overlap, and should be jettisoned provided that all legal providers—regardless of structure– are subject to the same ethics rules and code of professional conduct; (6) this is exactly how the legal market functions in the UK, Australia, and other nations that permit some form of ‘alternative business structures’; and (7) enabling law firms to operate from a corporate structure would benefit clients and the profession by promoting long-term provider continuity and sustainability lacking in the incumbent partnership model– while spurring innovation, competition, and, perhaps, a cultural reboot within firms.

The law firm partnership model had a great, long run. It’s over.

The traditional law firm partnership model has had a long, highly prosperous run. The data  indicates that’s over for all but a handful of elite, brand differentiated law firms. Those 20 or so firms are retained for high-stakes matters whose enterprise value renders them price insensitive. And while ‘bet the company’ matters—litigation, regulatory, and the big deals—account for approximately 15% of legal spend, they represent only about 1% of all matters. Translation: law’s one-percent handle the one-percent work. And all indications are they will continue to do so— at premium rates. The traditional partnership model will continue to work for those firms, but not for other undifferentiated large firms.