General Electric’s announcement last week that it plans to sell GE Capital, its finance arm, provided an opportunity to reflect on the banking industry’s declining profit margins.
But what if any lesson can law firms draw from GE Capital ?
Consultant Bruce MacEwen, president of Adam Smith, Esq, asked that question, and he concluded every law firm should take a hard look at its own profits and evaluate which practice groups are performing.
MacEwan, however, tempered his remarks with one caveat: Law firms are partnerships, and so shedding a group of underperforming lawyers isn’t always easy or possible. We caught up with him on the phone and asked for more clarity about the lessons law firms can draw from the sale of GE Capital.
Big Law Business : Are there any specific industry sectors that are underperforming at law firms? Or were you thinking about broader categories such as litigation?
MacEwen: I think you hit the nail on the head with litigation. Overall, I think demand for litigation is going to decrease, and probably continue decreasing for as far as the eye can see. Clients hate it. It’s basically a zero sum game with a big fat cost to the client. A lot of corporations see that and they’re asking, ‘Do we have to sue?’ Maybe not. You don’t have to pursue total war and scorched earth policy. I think corporations are just going to continue finding other ways to resolve disputes besides the classic litigation and arbitration forums. I think there’ll be even more mediation.
Big Law Business: That all makes sense, but have any law firms already eliminated or reduced their litigation departments?
MacEwen: I don’t think they’re going to have a choice. I’ve only seen it anecdotally at a few law firms that have let some people go or not hired some people. I don’t see a broader industry-wide recognition of this. But if you just look at realization rates, in other words what the law firm actually collects for every dollar that it bills, litigation is way lower than transactional. If you look at transactional, realization is about 90 percent. In comparison, litigation is about 80 percent.
Big Law Business: Are there any particular practice areas where this is more pronounced?
MacEwen: I think that employment law has become completely commoditized. I just don’t see any value there. I think that any law firm, unless that’s the only thing they do, should probably get out of that.
And if you want to talk about GE Capital, big bank lending work for law firms is substantially less attractive than it used to be. GE is thinking it’s harder to make money than it used to be. Representing the big banks in traditional lending work is going to be a smaller and smaller business for law firms.
Big Law Business:How should law firms enact some of these changes?
MacEwen: That’s sort of my whole point when I quote [GE CEO] Jeffrey Immelt saying, ‘We’re not sentimental about this.’ Well, it’s not so simple for law firms. It’s just really hard because of the whole partnership model. The people who are going to be let go have a vote. They elect the managing committee or partner, presumably, and it’s just not a command and control situation. I think the increasingly challenging economic realities of the world are going to cause law firms to be run more like businesses, and I think people who are not pulling their weight are going to object to dead weight.
I think it’s going to give managing partners more authority, more power. I think it has to. It is going to become more of a command and control world in the largest law firms. And if someone doesn’t like it, it’s still a free country, they can just leave. But I think that’s going to increasingly be part of the social compact inside these firms.