Law Office Economics and Management

Law office economics includes all organizational aspects from moving an office to dissolving a partnership. It covers areas individual bounds of authority, functional arrangements, operational methods and what not.

It is simpler to move offices, especially for a one-lawyer practice, than to enter into and then dissolve a partnership. If problems arise during the "engagement" period with one or several of the prospective partners, the composition of the new firm can be altered at much lower cost and embarrassment than would be the case if an announcement of a merger had been made. Once the trial period is over, announcement can be sent, and further developments along the path to full and true partnership can follow.
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Little formal organization exists, as a rule, among space-sharing groups. However, one of the participating lawyers is generally designated as office manager and will have charge of such matters as, for example, joint facilities, a receptionist, the library, and landlord relations. Where joint bank accounts are used, this individual will often be the disbursing agent. In addition to the attorney designated as office manager, a larger space-sharing group may have an informal leader who arranges for recruiting of additional would-be associates. Rarely will these office arrangements be formalized. Individual bounds of authority may not be clearly set forth or recognized.

True Group Practice Organization

In small firms, informality is often the rule. The partners may make a series of decisions regarding many aspects of their practice without a great deal of overall planning. There are few employees; hence personnel policies can be flexible.

Toward clients, there is a close relationship that may simplify billing and general client relations. Because of the small size of the organization, the partners may know their own financial situation quite well without formal reports or much discussion. Firm meetings may be casually held at breakfast or lunch. Often all of the partners, and sometimes the associates, participate actively in management questions, and may do it quite efficiently.

This method of operation may be called the "committee of the whole" style of management. Within the "committee of the whole," each partner often knows the limits of his authority. For example, partners may know that they can order furniture for their offices on their own initiative, but that they must agree on the purchase of furniture to be ordered for jointly used space such as the library, or before changing from one type of word processing equipment to another.

This type of informality becomes increasingly more difficult and complex as a firm grows beyond the three- or four-lawyer stage. Communication becomes difficult and the amount of lawyer time involved in discussion becomes costly.
Effective management requires the delegation of authority and responsibility. As a generalization, those firms in which a large number of partners remain fiercely independent also remain largely unmanaged. Unmanaged firms tend to be ineffective, expensive for their clients, and less financially rewarding for the partners.

The internal structure of a more formal group practice may be divided into three distinct types with many minor variations in each. These may be classified as the strong senior partner type, the committee system, and the pseudo-corporate structure.

The Strong Senior Partner: Quite often, a law firm will evolve through a number of the foregoing organizational and management modes as it matures. Many larger firms had their start in one of three ways: a capable sole practitioner added associates who later become partners; a group of lawyers joined to form a new firm; a group broke away from an existing firm to form a new entity.

The first situation may give rise to the strong senior partner form of organization. The former sole proprietor, turned senior partner, may for years be the primary business-generating force of the firm. He may unconsciously regard other partners as mere employees and retain all basic authority in his hands.

Many small firms, and a few very large ones, prosper under strong, authoritarian leadership. The most successful strong senior partners, however, temper their authority with extensive advance consultation with other partners.

Where senior partners are wise and concerned about the survival of the firm beyond their years in practice, they may gradually delegate a number of management functions to younger partners while retaining ultimate authority for major decisions. Other strong senior partners have been known to abdicate strong authority altogether and to subject themselves to the decision-making authority of the group.

Still other senior partners retain and may even increase their authority until the day they die, refusing any meaningful sharing of authority with others. Quite often this kind of firm becomes the training ground for other growing legal organizations.

Successful strong senior partners are rare. They are individuals who not only command respect without demanding it but also who can successfully delegate day-to-day decisions to others while retaining meaningful control themselves. Like any good politician, they sell an idea to all of the key persons involved before they announce a decision. Above all, they maintain a reputation for fairness and accessibility.

Some strong senior partners are less than successful. These are individuals who often are responsible for bringing in much of the firm's business, and who use this lever to gain dominance over their partners. Morale problems abound in their firms.

The most important danger in the strong senior partner style of management is the void created when the senior partner retires from office, for whatever cause. A period of "drift" often follows because no leadership succession is trained or recognized by others in the firm. Sometimes a few of the remaining partners will campaign to become the authority figure without, however, having the advantage of the retiree's experience or status. In many firms an abdication of management develops, since none of the partners desires to reduce work as a lawyer to assume the unknown problems of management.

In one case of the writers' acquaintance, such management drift developed in a middle-sized firm and lasted for three years, during which time the firm's economic fortunes steadily declined. The decline was not caused by client losses but simply by lack of management and coordination. A move to the corporate form of practice forced this firm to examine its structure and created for it a new style of management which enabled it to recover.

A less common but even more dangerous possibility inherent in the authoritarian leadership style of management is the mental disability of the leader. Declining faculties may come about gradually, because of age or for other reasons, and the afflicted individual may be unable to recognize his own failing competency.

Cases in Point In our years of consulting experience, we have worked with all of these situations. Although the identities of the firms have been disguised, readers may be aware of situations quite similar to those described or will certainly encounter them after entering into the practice of law.

One firm, dominant in its mid-sized community, had been founded by "Dick Jeppson." As a member of an old and well-known local family, he had been fortunate in obtaining the largest local bank as a client. He began adding other lawyers to his firm, but retained complete control over the clients and the firm for thirty years. By that time Dick Jeppson was coming to the point in life where longer vacations and shorter hours were beginning to look attractive. His firm now numbered fourteen lawyers plus a few paralegals, and he decided that it was time for a change. A consultant was employed to examine the management structure and organization of the firm.

The study indicated that Mr. Jeppson had begun to retreat from making management decisions during the previous few years but that he had used his status to prevent others in the firm assuming the authority he had begun to abdicate. There were many symptoms: turnover was heavy among associates; partners worked more hours than associates; cash flow was irregular and uncoordinated; little attention had been given to improvement of systems or adoption of modem technology; estimated billable hours worked and the actual billings were divergent.

The consultants convinced Mr. Jeppson that there were other partners in the firm who could learn to manage its day-to-day affairs. He was promoted to a less arduous responsibility as head of an executive committee, with important responsibilities in client development and profit distribution. Day-to-day management was entrusted to a group of middle-aged and younger partners, who divided the functions of general management, finance, and lawyer personnel development.

In another assignment, a large Western firm was headed by "Colonel Rare," a strong senior partner. The firm's extensive and lucrative probate practice was, indeed, of the Colonel's making. At a healthy eighty, he was still managing every one of the twenty-five other lawyers of the firm. Of these lawyers, the consultants found that seventeen reported directly to Colonel Rare for assignments and supervision. The office manager, with little authority, reported to him also. Despite his years, which were belied by his vigor, he personally maintained the principal client relationships of the firm and managed to perform a considerable amount of legal work. It was a situation which required early change if a disaster were to be avoided.

The consultants sought to identify among the other lawyers one or more individuals who were interested and capable of assuming a leadership role in the firm. None were found. Colonel Rare had inadvertently insured that such a lawyer did not stay with the firm.

The eventual results were predictable. Following Colonel Rare's sudden death at the age of 82, the firm drifted along for a number of years, losing clients to more vigorous competitors. Eventually a merger with a smaller, better-organized group of lawyers saved what remained of a lucrative practice.

Effective Direction: The strong senior partner method of management may be a very effective one when the senior partner is a capable manager, attuned to the needs of his organization and clients. It can create a very poor working environment when the senior partner is less capable, especially when the problems of age and senility begin to affect the decision-making process. The basic danger of this management style, therefore, is that the individual who heads the firm, and may totally control it, reports to no higher authority, so that what begins as a benign kingdom may end as a mad dictatorship.

The strong senior partner method of management has served many firms well. The strong senior partner who is successful in directing his firm generally follows these precepts:
 

1. He consults extensively with other partners before making important decisions, although the consultations may be informal.
2. He delegates some aspects of management to other partners, to asso-ciates, and to an administrative force, retaining only the ultimate pol-icy-making authority.
3. He accepts the responsibility for management failures rather than parceling out the blame to others.
4. He uses the services of experts to aid him in making wise decisions.
5. He introduces his partners to clients, and shifts client responsibility to younger shoulders as much as he can.
6. He gives sufficient time to the job of management.

The Committee System

A number of firms, including some large ones, rely on a committee structure for the general management of the firm. The committees may be augmented with an office administrator, who may help in the coordination of committees. In some firms, though not generally, associates may serve on certain committees.

Typically, the committees may have responsibilities for such assignments as secretarial personnel, associate recruiting, associate training, finance and accounting, office space use and layout, furnishings, library, community relations and bar associations, partnership matters, systems and procedures, and office automation.

In most structures, terms of committee membership are for limited periods, allowing a great many partners to be involved in the management of the firm. The Partnership Committee (Senior Partners' Committee, Executive Committee, etc.) or a managing partner may be responsible for coordinating all of the committees, and insuring that they function.

There are many potential problems with this type of structure. Closely related committees may duplicate efforts and, perhaps, come into conflict. For example, a library uses furniture, inviting jurisdictional conflict between the Library Committee and the Furniture Committee. Equally bad, some committees may not function at all, creating a vacuum. Attending a multiplicity of meetings requires a great deal of professional and staff time, often costly out of proportion to the matters under discussion.

Decisions may be very difficult to reach. While the Library and Furniture Committees debate as in the foregoing illustration, library users might work under adverse conditions. The cost of decision-making with regard to purchasing a certain table might be more than the cost of the table itself. The hiring of a promising associate could be delayed too long, making the decision academic once the potential employee had accepted other work.

As an evolutionary step in the development of law firms, the committee system has, at times, been a desirable necessity. This is especially true when a firm had been dominated by a strong senior partner who retired or died. In this situation, the remaining partners, now on their own, often have not established secondary leadership patterns, and the result is committee management. The sharing of responsibility through committee participation may permit partners to experiment with management and may bring to the front one or two naturally talented managers on whom the other partners can rely later.

Case in Point: One firm with more than one hundred lawyers describes its organization as follows:

The firm annually elects an Administrative Committee consisting of a chairman, five department heads, and a number of rotating members.

The number of rotating members of the Administrative Committee is determined from year to year, but in recent years has been five. The chairman and department heads may, and normally do, succeed themselves. The rotating members may not, but they are eligible for re-election after the lapse of one year.

The Administrative Committee annually designates several standing committees which have responsibility for decisions and recommendations in certain areas, such as lawyer personnel hiring, lawyer personnel assignment and training, non-lawyer personnel, finance and bookkeeping, and the development and use of office space and office equipment. From time to time, as required, ad hoc committees are established. Whenever it is appropriate, associates are appointed to membership on these committees. For example, the Lawyer Personnel Hiring Committee includes associates, and some of these may be attorneys with only a few years' experience. That committee determines which law students shall receive offers of permanent or summer employment, subject to consultation with the Administrative Committee. In the appointment of any standing committee, consideration is given both to the importance of continuity of experience and to the desire for involving qualified and interested partners and associates in the administration of the firm.

With respect to certain fundamental matters of firm policy, the authority is totally reserved by the firm in the sense that the Administrative Committee is not expected to, and does not, undertake to initiate recommendations. These are the matter of admissions to partnership and the determination of the relative profit percentages of the percentage partners. In other areas of fundamental importance the firm must give express approval to the action to be taken. These areas are defined generally or specifically from time to time as questions are presented. To the extent that they are expressly defined, they are spelled out in the manual distributed to all lawyers or in the minutes of firm and Administrative Committee meetings, which are regularly kept and reported to all partners.

Proposals for admission to partnership originate in firm meetings following the annual firm evaluation of all associates.

Percentage participation is reviewed every three years. The recommendations on that subject are made by a "Point Committee" elected by the firm. The chairman of the Administrative Committee and the department heads are not entitled to membership on that committee by reason of holding those offices but normally are among those elected. The number of members of the Point Committee is determined at the time of the election. It usually has included ten or twelve partners. Meetings of that committee produce a recommendation as to the distribution among individual partners of the profits of the firm for the next three years. These recommendations are "published" with an opportunity for any partner to question them, and finally are approved or may be modified by the firm as a whole.

The Quasi-Corporate Form

The quasi-corporate form of law firm organization emulates the common form of business organization.

The shareholders' and directors' functions may be combined or shared by the partnership in full meeting and a committee of partners designated as an Executive Committee or a Senior Partners Committee. These two entities, the partnership in joint session and the Executive Committee, apportion between them the basic policy-making powers of the firm. This includes such matters as the admission or expulsion of partners, the merger of practices, the compensation of partners, major expenditures of funds or allocations of resources, and similar basic matters of the firm's policies.

Day-to-day business management is generally left to one or a few partners who correspond to corporate officers. These may include an individual designated as the managing partner who may operate at the same or a higher level than other partners, and individuals with specific responsibilities for such matters as finance, library, associates, and the like. The precise division of functions and number of persons involved is dependent, of course, upon the size of the operation and the people available.

An administrative manager may report, in turn, to the managing partner, or may report directly to the Executive Committee. Figure 2-1 illustrates a typical quasi-corporate operational form. The variations on this plan are many and depend greatly upon the number of lawyers, whether the firm has one or more offices, whether the firm is highly specialized or functions in many legal fields, and the like.

A firm will have, in addition to this general management structure, a structure for the performance of legal work which co-exists with the general management structure. In large firms a departmentalized form is common. Departments may be organized along the lines of legal specialization or they may be organized around the work of specific clients. In some firms, both types of departments co-exist.

In small firms, on the other hand, each partner often functions as a miniature department, having responsibility for his own clients and billings, and for the supervision of associates who work with him on specific matters.
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