Why Traditional Law Firms And Company Legal Functions Are Rarely Aligned

By Jeffrey Paulsen
Paulsen Law

Hypothesis:
Traditional Law Firms and Company Legal Functions are rarely aligned. 
 

Traditional Law Firm Business Model:
A “traditional law firm” means a law firm that has a highly leveraged business model that depends on annually mandated increasing billing rates as well as every lawyer, paralegal and other time-keeper to meet or exceed mandated minimum billable hour targets to cover high overhead expenses. This is the business structure used by most large law firms.

Most traditional law firms are bound by various constraints, limitations and restrictions based upon their business models which are driven by targeted profits per equity partner and minimum billable hours to achieve a bonus. These law firms have an “eat what you can kill” mentality that rewards individuals for achieving or surpassing internally generated targets as a measure of success. The internal compensation systems of these law firms do not reward lawyers for providing the most efficient legal solution alternatives available to their clients.

Traditional law firms are typically operated based upon business models dependent upon having each attorney, paralegal and legal assistant record the maximum number of billable hours possible. Compensation systems in these business models reward those attorneys that bill the maximum number of hours possible and those that collect the maximum amount of money possible based upon the hours billed by the attorney as well as other time keepers working on matters for which the attorney receives billing credit. In virtually all traditional law firms, you receive greater credit for the individual billing of hours and collections. Not for sharing your work or by selecting the best available lawyer specialist or legal resource for the client. In other words, traditional law firm business models are unchanging with no latitude. (Latitude means freedom from normal restraints, limitations and restrictions.)

Company Legal Function Business Model:
A “company legal function” means the internal company management of legal risks and legal issues faced by a company. Legal managers may utilize in-house lawyers, paralegals and legal assistants, retained outside lawyers, non-lawyer legal service providers and other individuals working on behalf of lawyers. Typically, companies will have a General Counsel or another qualified professional to oversee this critical business function.

A company’s legal function is driven by a different business model than the traditional law firm. Companies are driven by strategic business objectives and the need for each and every business area, including the legal function, to make continuous operating improvements. Compensation within company legal functions is driven by assisting the company in achieving business objectives, rewarding the protection of the company from legal liability and by providing continuous functional improvements. To achieve functional improvement, a legal manager must maintain a consistent level of high quality legal protection for the company and to do so in ways that are more cost effective each year.

Company legal managers are responsible for protecting the assets of the company, identifying and minimizing potential legal risks to the company and operating within a defined budget. In-house lawyers responsible for leading and managing legal functions not only need to understand the strategic objectives of the company, but they must also provide legal assistance to support these objectives. These legal function managers are compensated like others in the company and based upon a defined set of goals with most objectives having an expense control component. When it comes to handling a legal issue, legal managers are often faced with “make or buy” decisions utilizing in-house legal staff or retaining an outside law firm. The legal manager must select the best and most efficient legal resource available to the company in terms of quality, responsiveness and cost. In other words, company legal functions operate in a varying circle of latitude that needs to be constantly adjusted to meet the needs of the company.

Alignment/Non-Alignment:
Because of these very different business models and compensation systems, traditional law firms and company legal functions can rarely be aligned. While traditional law firms are aligned with providing good results for the company, they are not aligned with selecting the most efficient legal resources available for the client. Full alignment can never be achieved as the business models and compensation systems of traditional law firms do not reward behavior that supports making the selection of the best available lawyer specialist and most efficient legal resources for the client company.

Because of this non-alignment, “traditional law firms” leave company legal managers with minimal choices to improve their legal functions when only utilizing legal resources from traditional law firms.

Legal Industry Options:
However, businesses and legal managers now have other options to improve their legal functions. The globalization of the business world, improvements in legal related technology and software products, as well as new legal provider law firm business models offering creative and collaborative customer focused legal services, now give legal managers options to address the traditional law firm non-alignment problems. To address these non-alignment problems, legal managers should:

1. Consider legal products available including detailed electronic billing systems, software products and legal portals that will allow legal managers to design their own legal software and portals that are appropriate for their business and legal function.
2. Consider alternative legal services available including the ability to utilize high quality lawyers with lower billing rates that have chosen to leave traditional law firms and high quality lawyers that offer creative flat fee or retainer fee options not offered by traditional law firms. 
3. Consider using contract General Counsel as well as other contract lawyers and non-lawyers located both in the U.S. and overseas.  These professionals can handle legal matters that cannot be serviced cost effectively by internal company lawyers because of the cost of salary and benefits or by traditional law firms because of their unchanging model of increasing annual billing rates and mandated minimum billable hours.

Achieving Legal Latitude:
Managers who manage company legal functions need to consider all available options other than legal services offered by traditional law firms that are subject to restraints, limitations and restrictions because of an outdated business model. A new breed of lawyers, law firms and non-lawyer professionals are emerging that recognize that traditional law firm business models no longer align with the modern day needs of companies and their legal managers. Hiring lawyers and other legal service providers that are customer focused and acting solely in the best interests of the customer, including finding new and creative ways to provide high quality legal services that are also more cost effective each year, is now a possibility. 

Legal managers can now create a “LEGAL FUNCTION WITH LATITUDE.”  Legal latitude allows legal managers to use the resources available in the legal industry to find the best and most efficient legal service providers for their company’s legal function. Legal latitude provides the freedom needed to implement legal function quality and cost improvements in order to keep up with the changes and improvements occurring in business.

Jeffrey F. Paulsen has 25 years experience as a business lawyer as a Fortune 500 company Divisional General Counsel and large law firm partner. Jeff is the owner of Paulsen Law and Managing Director-Legal of Latitude Advisors in Bloomfield Hills. Contact him at 248-456-0646, www.paulsenlawfirm.com.