Law People : Law Practice Management, Organizational and Personal Dynamics; Talent Management : Ronda Muir of Law People Management, Inc.

Further to our mention of ABSs in the  previous entry, an historic event occurred last week:  the first UK law firm, Irwin Mitchell, has declared its intention to become an Alternative Business Structure under the Legal Services Act soon to become effective, and has engaged an investment bank to help fashion a workable and attractive structure.

In preparation for becoming an ABS, the firm is restructuring into two tiers, adding a new holding company that will control Irwin Mitchell LLP, which has a strong personal injury base and will remain the main operating business. The firm's long-term strategy includes offering a series of branded products to the consumer market, such as commoditized trust and estates, real estate and victims' rights services. 

The firm is taking this current step, according to Managing Partner John Pickering, because "conversion to an ABS will broaden our access to capital and enhance our funding flexibility as we execute our strategic growth plan, while ensuring that we can continue to provide the very highest standards of service to our clients.”

The firm's offerings recall the ground-breaking Hyatt Legal Services in the US and the more recent UK equivalent--QualitySolicitors, which has recently struck a "game-changing" deal with WHSmith to open legal services kiosks offering fixed fee legal services to consumers in hundreds of retail locations.

Founded in 1977 on the heels of Jacoby & Meyers' Supreme Court decision allowing lawyers to advertise, Hyatt Legal Services ultimately morphed into a legal plan that was acquired by MetLife. Now providers to consumers, like QualitySolicitors, are able to take advantage of the internet's new, lower-cost methods of accessing potential clients, further lowering the overhead for those services, and adding to the financial heat on full-service firms trying to compete.

In the meantime, on this side of the pond, as mentioned in the prior entry, the ABA is testing the waters on reversing its ruling a decade ago prohibiting outside investors.  And North Carolina is attempting to join the District of Colombia, the only place in America where non-lawyer ownership of law firms is allowed.

While this regulatory machinery grinds along in its traditionally slow fashion, the more practical issues of the day are which firms are going to need or want outside investors and who would want to invest in law firms, even if they were invited to legally do so? 

We can look to Irwin Mitchell and the Australian firm Slater & Gordon, also a personal injury firm, for the types of practice that may well find the additional financing strategically helpful.  As to the latter question, John Wallbillich has come up with at least 5 good reasons a firm like Goldman Sachs would not be interested in a piece of law, and another 10 risk factors that BigLaw would clearly advise a client considering a similar offering to warn investors about.

Plus, there's the issue of control. In a survey of 31 UK firms (including 26 of the top 50), none of the firms were willing to consider selling more than a 25% ownership to an outsider. In contrast, when a group of private equity firms were asked the minimum percentage of a law firm they would aim to buy,  all answered 51% or more.

And it's not just a matter of control by the lawyers vs. the non-lawyers.  Some see investment by outsiders as a way for older partners to cash out or be cashed out, making way for younger partners to take a go at building the firm in a less individual rainmaker-centric way--or perhaps with a more commoditized practice.

There are already ABSs amongst us.  The question now is whether they will be giants or dwarfs in the coming legal landscape.

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The interests of money and legal ethics have a way of conflicting with each other--as is evident in a number of current developments in the legal industry.

The acceleration of the recent trend of private investors putting money into other people's lawsuits has prompted debate over what the legal status of the lending should be.  According to an article last month in the New York Times, about $100 million a year is being lent to plaintiffs to cover housing, medical care and other expenses, in nearly every case with the proceeds to be repaid only if the plaintiff wins. The cost of the loans can exceed 250% of the amount lent.

The question is whether these loans should be subject to usury limits or other state laws that protect borrowers. Some states, including Colorado and Maryland, have ruled that the lenders must comply with consumer lending laws.  A bill in Rhode Island makes clear that lawsuit lending would be subject to the same state regulations as other kinds of lending and a bill in Arkansas would ban lawsuit lending completely.

Other states, including New York, have ruled that the companies are not subject to those laws. 

In 2008, the industry's trade group, the American Legal Finance Association, claiming to take a higher road by proactively seeking a solution, undertook to settle the issue through a legislation sweep. Ohio, Maine and Nebraska have since passed laws establishing more lenient regulations for lawsuit lenders and similar bills are pending in Alabama, Arkansas, Kentucky, Indiana, Maryland, Tennessee and Nevada.  Efforts in other states, including Illinois, have so far failed.

In addition to pondering the legal status of this type of lending, courts are also becoming privy to the details of its internal workings.  The internal conflict in a failed Juridica investment in an arbitration against Romania recently became public after the claimant in that action filed a Houston federal district court racketeering complaint against Juridica, revolving around the issue of what information the funder is permitted to see without compromising attorney client privilege.  Juridica argued that it was entitled to see material relating to the plaintiff's defense in order to determine whether to continue funding the matter.  The complainant argued that  Juridica's position compromised client confidentiality and its ability to direct its own case.

While not yet a frequent problem--out of 23 cases in which Juridica has invested or committed $127 million, this is the only one requiring a write-down, according to Juridica's regulatory filings--the fact situation raises questions about whether the business model will run afoul of US ethical standards.

Of course, with respect to practice ethics, the ABA can do for lawsuit investors what it is doing for laterals and for those attempting to form "alternative business structures" or ABSs, composed of non-lawyer investors--another trend barking up our tree, where conflicts of interest issues also are likely to arise. 

North Carolina already has pending a bill that would allow up to 49% non-lawyer ownership of legal practices and that addresses the conflicts issue directly--non-lawyers would be prohibited from interfering “with the exercise of professional judgment by licensed attorneys in their representation of clients,” and if there is an inconsistency or conflict between the duties to the court, to clients, and to shareholders, the duty to the court “shall prevail over all other duties,” while the duty to the client prevails over that to shareholders. Also, external shareholders controlling less than 5% of the voting stock would not be deemed relevant for a determination of conflict of interest. A problem may be that whatever success there is at the state level in regulating this sort of issue, firms with offices outside of that state will not be able to rely on this legislation.

Until these issues become a matter of settled law, lawyers will have to be on guard against the potential conflicts of interest that a financial interest by a third party in any aspect of a legal matter poses, not only in terms of whether the financial arrangement is one that is conscionable, but also whether the influence of money skews either the reality or perception of justice.

Although, we may just be flattering ourselves about how attractive we and our business is to Big Money.  In case you had your eye on Goldman Sachs, the sometimes-darling sometimes-monster of the financial investing world, you might take a look at the blogosphere discussion of why no firm of their caliber would in fact invest in Big Law.

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The words being thrown around were trust, intimacy, empathy, vulnerability, honesty, transparency, communication, emotional intelligence, teamwork, forgiveness, feedback, collaboration, connectedness, courage, relationship-building.  It would be understandable if you thought that you had walked into a marital counseling conference or some new-age event.  

In fact, the setting was Georgetown University Law Center’s March 9th conference entitled "Welcome to the Future: Trends in the Delivery of Corporate Legal Services," led by Co-Director Mitt Regan.

After presentations on survey data showing how firms attract and keep potential clients (more on this in later entries), the attributes that were identified as being most conducive to outstanding client service were those listed above that make all types of relationships good and better.  And it was acknowledged that it can take only a few individual lawyer behaviors to destroy a client's trust, and in a startlingly short time.

Jeff Emelt, GC at GE, was quoted as saying that empathy is the quality he wants in his lawyers, which is particularly important when he gets legal advice he doesn't like.  While his predecessor valued his favored lawyer for being the best listener he'd ever met. 

Susan Hackett of the ACC Value Challenge said all the metrics used by firms and clients to capture data and set and meet goals need to be discussed with a lot of transparency and vulnerability--so clients can see how firms make their profits and even what those profits are.

Lisa Damon, member of the Executive Committee at Seyfarth Shaw, was instrumental five years ago in designing and promoting a firm culture that emphasizes "standing in the shoes of the clients," relying on transparency, communication and collaboration to weld strong bonds. While only into the first year of that program, Damon says that they already have delighted clients who are more engaged in the entire client/lawyer process.

Amy Schulman, Executive Vice President and General Counsel at Pfizer, was the featured speaker, discussing the Pfizer Legal Alliance, a program in its 3rd year that limits the number of firms that Pfizer uses to 20 for the bulk of its work. Pfizer requires that the firms use another value device other than the billable hour to determine fees ("If what you use to anchor the relationship is money, you’re going to lose, because it's not motivational at some point," according to Schulman), that they help Pfizer achieve an overall 15% reduction in legal spend, and that they work cooperatively with each other, as needed, to staff and manage projects. 

Each firm has an in-house relationship partner at Pfizer and Pfizer encourages secondments and sharing associates, even recruiting at law schools together with some firms. Twice a year Pfizer grades each law firm on performance issues ranging from substantive knowledge to responsiveness to willingness to collaborate, as well as how well they take the feedback they are given. This is, of course, a challenge for most lawyers--they are often highly defensive to anything that smells of criticism.

"We learned a lot about firms," Schulman says, "by whether they welcomed the feedback or responded by saying, 'You got it wrong.'" 

According to Schulman, making the PLA work is like developing other intimate relationships--it takes hard work, vulnerability and bravery--and ultimately requires a leap of faith. "Relationship-building requires a certain kind of emotional courage and confidence."

Most speakers acknowledged that feedback from clients is necessary to improve relationships--proactively asking for and acting on client evaluations should be the starting point of sophisticated client service.  But once the feedback is received, understanding how to respond at the time and in the future requires a panoply of skills that firms must identify, develop and support from the top down.  Inculcating these skills and values into the DNA of a firm becomes geometrically more difficult as the size of the firm increases.

As J. Warren Gorrell, Co-CEO of Hogan Lovells, pointed out, there is "a lot to be learned by firms from organizational behavior theory."

There were a couple of provocative questions.  Are women lawyers more likely to have some of these skills and therefore be able to deliver better service?  And if so, why aren't they being recognized and rewarded for those abilities?

And in the end does expertise always trump empathy or any of these other touchy, feely skills?  The conclusion seemed to be that regardless of the legal arena or degree of subject matter difficulty, quality of advice is considered a given from all firms, with clients repeatedly going to the qualified law firm that provides them with the better relationship as well.

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