This is not a technical writing. There will be no exact dates and times of state law changes either historical or prospective, no bar association rule citations or even guideline quotations. No, the thoughts and opinions contained herewith are my own and based on one of my specific tasks associated with my position with our consulting firm. That task is one of always being a professional observer.
Over my 40-year professional career, I’ve observed some very disruptive business changes in the commercial banking and accounting professions. The next disruption that’s well underway is in the legal profession. Before we dig into the current law firm business evolution, it may be worthwhile to review the causes and effects of the changes in the business models of banks and accounting firms.
Banks first began the practice of larger banks gobbling up smaller, mostly community, financial institutions in the late 1970s and 1980s. Bigger, more progressive banks saw potential economies of scale in operational functions and the ability to automate transactions as new technology emerged. Interstate banking laws were also being relaxed at that time. Since those early days of bank mergers and acquisitions, a cycle has become apparent. Big bank swallows smaller bank…the combined entity functions well and grows even more…however, service to smaller customers begins to suffer and the market begs for a fix…new community bank specializing in stellar customer service emerges…and the cycle starts all over again.
Next comes the accountants, a group stereotyped as very slow to innovate and change. It is ironic that the accounting industry was somewhat quick to recognize and seize upon an opportunity. When I started my accounting/CPA career in the mid-eighties, there were eight very large accounting firms in the country that serviced mostly public companies by providing audits and tax advice. Yet they also assisted usually larger, privately owned businesses and their owners as well. I joined one of those firms, Deloitte Haskins and Sells. At DH&S, I quickly realized how impersonal the service was. Of course, we worked with people…. yet we served the public…at least in the audit arena. Audits, in the true accounting sense of the word, are intended to present financial statements/information in a uniform manner (Generally Accepted Accounting Principles: GAAP) that express the fair representation of a company’s financial position.
In any event, through mergers and acquisitions, these eight firms, known back then as the, “Big Eight,” are now down to what I call the, “Final Four.” The theory providing the push to merge was just the same as with the banks with a potentially broader service array and economies of scale (efficiency!). Yet this time there was a twist! An ethical rule change promulgated by the American Institute of Certified Public Accountants now allowed non-CPAs to be partners (owners) of these firms. What? Non-accountants owning an accounting firm? This was heresy…. for about an hour or so as the firms adjusted to management consultants and advisors without a CPA certificate providing valuable business services to clients. More service, more money! I actually love this model (if we can sell cups, let’s sell lids and straws too.) Also, as you may have guessed, there are still plenty of smaller, independent accounting firm partnerships and solos that provide services to the masses that are not public entities or large enough to pay the Final Four’s rates. Specialty and superior service will always be in the mix!
In my view, the wheels of change in the legal industry have begun turning. Just like the flywheel analogy in Jim Collins’ book Good to Great, it will turn slowly at first and require lots of effort, but soon it will be spinning on its own with only slight touches. The Washington DC and Arizona Bar Associations have now provided guidelines for ethical ownership of law firms by non-lawyers. (Isn’t it interesting how ethics change from state to state? My high school civics teacher was fond of saying “ethics is ethics.” But I guess not in these matters!)
These first few Bar association ethical rule changes will likely create a domino effect. How long will it take? There’s no way to say for sure, but it IS coming. Vista has been fortunate enough to “get behind the green curtain” of over 150 plaintiff firms in the US and Canada, and we hear the discussions and desire for more efficiency and potentially broader service offerings. The most progressive firms smell change coming and are not afraid of it. These firms are listening to the businesspeople that are creeping into the lawyer/law firm space, just as the banks and accountants did. The barrier to entrance as an owner of a business that happens to practice law is eroding before our eyes. There is even a new acronym flying around the legal industry now… ABS (Alternative Business Structures).
What does all this mean for the legal industry? For starters, it means that firms should be doing even more of what they should have been doing all along – running a law practice as a business. They should be working ON their business as much as IN their business. Being good at practicing law is not good enough to assure success anymore. Being good at practicing law is a “table stake”; it gets you in the game, but it does not assure financial success…which is a key ingredient to any viable business. Now successful marketing, efficient and effective operations in intake, case management, reporting, HR/training, accounting, and client relations are just as important, if not more so, than “being a good lawyer.” Without clients and referral sources, where will new business come from?
Will you and your firm be at the table looking for firms with which to align or on the menu of firms being eyed for consumption? Non-lawyer owned firms AND progressive lawyer owned firms will certainly be looking at ways to improve and expand services through merger and/or acquisition. As we have seen with other professional service industries, there are both pros and cons to this steamroller heading toward the law firm industry. The one thing I hope YOU won’t do is ignore what is coming.
Some questions that you may consider as you think through your firm’s current market position as either a buyer or seller are as follows:
For buyers:
For sellers:
Whether you choose to be at the table or on the menu, may that choice be an intentional one. Either spot may be right for you and your firm. So, keep your ear to the ground…steamrollers are loud, and you can hear them coming before they arrive. You may consider this article one of the first rumbles.
