Indiana Lawyer

Indiana Lawyer

Vol. 16 No. 5 May 18-31, 2005

Weathering Economic Storms

By

Elizabeth Brockett

Ever resilient, the legal community continues to adapt and reinvent itself to meet challenges brought about by external influences, including the economy.

In 1990 when Indiana Lawyer began publication, the United States was at the beginning of a recession. Since, attorneys and firms alike have weathered economic cycles that affected them, their client, and the nation, and have continued to change directions to better serve a changing world.

Depending on the type and size of practice, the economy can either help or hurt certain areas within the legal profession. Attorneys say that in the late 1980s and early 1990s, like now, practices that deal a lot with bankruptcies and foreclosures are busy, while there is less transactional work.

When the economy slumped in 2001, Indiana’s manufacturing-based economy saw the loss of corporate headquarter. However, there is a flip side because firm attorneys act as local counsel in the absence of local in-house counsel.

That wasn’t true in 1990 because there were more corporations headquartered here who had in-house counsel, said David Russell, partner and chair of the Business Services Group at Harrison & Moberly in Indianapolis. He noted the state lost “dozens and dozens” of companies and headquarters because they were acquired by out-of-state or out-of-nation firms.

Other areas of the law seem to be unaffected by economic factors.

“Litigation seems to be popular when things are good and when things are bad,” said Russell.

“We’ve been required to become very chameleon to compete in the market today,” said Robert Wagner, a founding partner of Lewis Wagner in Indianapolis, “and it is very competitive.”

Politics and governmental action, such as tort reform, affect the small firm more, said Barry Rooth, partner at Merrillville firm Theodoros & Rooth.

“We’re in many ways immune to economic downturns,” said Rooth, whose firm has three attorneys and one of counsel.

Also, more or less governmental regulation and taxation can either diminish or increase legal work, said Phil Bayt, a managing partner at Ice Miller in Indianapolis.

“A balanced firm can ride out the ups and downs of the economy,” said Russell.

Pressure to specialize

“I think there is a trend in the economy and in the legal community toward specialization,” said Russell.

Russell noted that years ago new lawyers weren’t paid much and they apprenticed themselves to learning different areas of the law. Because there wasn’t much cost involved, they could work on various projects and learn on the job.

Lawyers are always having to retool, reinvent, and re-educate themselves throughout their careers in order to remain in the profession, said Bayt.

But economic pressures, among other things, affected the profession. One such incidence was the dot-com revolution – what Bayt called a “blip.” It caused people to flee law firms to work for companies, initially for lower salaries and what then appeared to be good stock options.

But because of the specialization and the boom of e-commerce and technology, associate salaries increased on the coasts and spread through the nation. Attorneys also left law firms to work at large corporations, sometimes in the general management.

Law firms responded by paying higher salaries to keep the talent; however, law firms couldn’t compete.

“We had to quit at some point,” said Bayt. “Starting salaries haven’t come back down, but they haven’t gone up either.”

Russell remember associate compensation spiking in the mid- 1980s and again in the late 1990s – the latter in response to salaries of starting associates in Silicon Valley.

Starting salaries went up considerably in comparison to older attorneys, said Russell, who believe that may be one factor why associates are now expected to be profitable more quickly.

Russell said the danger in having associates “very specialized very soon” is they don’t get a broad overview.

Wagner agrees people are more specialized and “haven’t unfortunately, had the opportunity to experience other parts of the profession.”

Not business as usual

Whether it’s directly in response to economic factors, attorneys say law firms have gradually been operating more and more under a traditional business model.

Bayt said a traditional business has a more vertical hierarchy with a chairman of the board, president, and so forth who are employees of the business. Law firms are usually managed as a partnership or limited liability company, which traditionally have a more horizontal hierarchy.

The legal community is now seeing more of a business structure in decision-making at law firms, said Bayt.

Some business thinking that has adversely affected the profession is zero sum game, said Russell. Zero sum game, he said, is when no one can win unless another loses, like a coin toss.

“It’s a short-time horizon way to think,” he said.

If a law firm is a pie and shareholders are thinking zero sum game, greed may infect the leadership who don’t have a long-term view of the profession.

“Your share of the pie this year isn’t as important as growing the pie,” said Russell, who noted that some law firms have fallen apart and added instability to the profession since 1990.

“Attorneys think backward,” said Russell. “A great many lawyers think backward. They aren’t thinking about the future, they aren’t thinking forward. It’s hard to see the pitfalls when you’re looking back at how you’re going to split the pie.”

Legal training would be improved, he said, if the business side was taught in law schools. When people seek their MBA, they are taught how to lead and guide an organization and how to expand, among other things, said Russell. Law schools graduate good scholars who learned the law. There is very little time to learn law as a career, said Russell.

Competition, rising costs

Although the legal market has always been competitive, Bayt said it is getting more competitive. Overall, the economy is not conductive to rate increases within law firms in order to keep up with rising costs, so profit levels are smaller.

There is more client pressure now on law firms to rein in costs; larger businesses are dictating what they will pay for legal services. For instance, a corporation may give a law firm a large chunk of business but demand a discounted rate.

This, Bayt said, is becoming more prevalent because the economy isn’t growing and companies are looking for ways to control expenses.

In response, Bayt said lawyers will seek new, sophisticated services work, new issues in which attorneys can offer services and value to clients. By adding value to clients, you can command rates that make sense because of the profitability structure.

Russell also believes the market is more competitive now, but partly because a law degree has almost become a kind of generalist degree for people who want an advanced degree but don’t know what they want to do.

“Competition takes some of the gentlemanly veneer off the profession,” said Russell.

And while technology has increased efficiency, it also adds costs with more infrastructure and needed staff. Years ago, there were no computers; now there’s a computer on every desk, noted Russell.

Rooth remembers buying an IBM computer in about 1990 with a minute amount of memory for $5,000 a workstation. It’s now less expensive to outfit a workstation with needed hardware.

Litigation also has become more technology driven so costs have increased. Rooth noted advancing technology – the latest, more sophisticated equipment- costs more.

“You can no longer draw on a chalkboard,” said Rooth.

New Marketing

Another area in which the economy may have forced change is the trend for firms to market more effectively at the proactive group level, which many see as a plus for client and firms.

“That’s something we’re working on. I don’t think practice group management and practice group marketing is going to be faddish,” said Jerry Abramowitz, administrator at Cohen & Malad.

Abramowitz noted that in large firms, these groups may be almost like a division, but not as much in mid-size and smaller firms because some people may work in more than one practice group.

Russell agrees there is a pattern in law and business to put together groups of people who compliment each others’ strengths.

He said this is good for the public because it helps avoid confusion by telling people what type of work practice groups offer.

Tom Lantz, managing partner at Montgomery Elsner & Pardieck in Seymore said this firm hasn’t specialize because of the economic downturn but because eof the ability yto offer different services,. In some areas, such as personal injury where it’s very competitive, client are a one-shot deal and the economy doesn’t affect that.

Russell noted that large firms in Indiana are now trying to be more regional, where regional firms try to become national. One way Harrison & Moberly – a full-services firm of 30 attorneys – is competing in the new global economy is through the International Lawyers Network. ILN is an association of 85 full-service law firms with more than 4,500 lawyers worldwide that provide business clients with legal services in 61 Countries.

“We’re active in that network. It’s a great strength for a smaller firm, and it’s helped by a shrinking globe,” said Russell.

Indiana firms, said Russell, are restructuring and adapting to the changing Indiana economy.