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Firm Challenges Non-Lawyer Ownership In Law Firms

Jacoby & Meyers wants to raise some venture capital, and they don’t want anyone telling them they can’t raise it from non-lawyer investors.  To date, the profession – at least in the United States – has generally disagreed.

In its complaint filed on May 18, 2011 in the United States District Court for the Southern District of New York, the Firm alleges that the “out-dated” Rules of Professional Conduct “severely restrict” their ability to “raise the capital necessary to pay for improvements in technology and infrastructure.” Just like any other business that wants to scale while maintaining a high level of service, they need some funding.

Consistent with similar policies in other jurisdictions – such as in Austrailia and the UK – the suit asserts that restricting a law firm’s ability to go beyond limited, traditional methods to raise funds is harmful.  Forcing a law firm to look solely to partner contributions, re-investment of earnings, or commercial bank loans is an unreasonable restraint on a law firm’s ability to operate and best service its clients.

Philosophical and ethical complexities aside  (and there are loads) the concept of outside investment is a useful one for law firms to think about from a business perspective. It’s a question that can spawn some interesting insights into your own business practices.

If raising outside investment capital for your Firm was permitted and you wanted to do it – could you?

Raising capital from outside investors requires not only the ability to communicate genuine passion, confidence and excitement, but also a solid grasp of the core metrics and tactics that drive your operating business.  Concepts such as: identifying specific markets; growing and developing revenue streams; understanding the costs of acquiring and servicing clients; crafting unique and cost-effective marketing strategies; “scaling” operations; building effective teams; and many other skills.

These requirements are generally known and expected by entrepreneurs – particularly those in the technology world – but they may be brand new territory to many law firms.

Imagine an investor sitting down with a highly successful, hardworking, passionate attorney looking for capital to expand her practice.  After reviewing the lawyer’s stellar credentials, along with last year’s financials (historical data – everyone’s got that), the prospective investor then shifts toward a few simple “prospective investor” questions covering the following general topics:

1. Market Size; Marketing Strategy. What’s your target market, how big is it, and how are you going to reach it?

2. Revenue Forecasting. What are your revenue projections for the next 36 months? What are your revenue streams/sources? Can you show me how you logically arrived at those projections?

3. Scalability. How are you going to efficiently grow? Will you need to build a team and, if so, how will you do it?

4. Client (Customer) Acquisition Cost (CAC)/Client (Customer) Lifetime Value (CLTV). What does it typically cost you to acquire a new client? On average, what’s a new client worth to your Firm?

5. Retention/Churn. Other than by delivering great service (it’s assumed you’ll do that), how are you going to keep your clients? How are you going to make sure that you’re always the first call when there’s a legal question, that you’re the first name that enters the conversation when a client’s friend has a legal problem?

I suspect there may be a temptation for some lawyers to respond to at least some of these questions with some variation of “my practice doesn’t really fit into these metrics,” or “that doesn’t really apply to my practice.” In other words, provide some justification for the absence of business metrics that’s founded on the notion that everything about an individual practice is special, unique –  or to use Richard Susskind terminology – “bespoke.”

Truth is – that’s an overestimation of reality.  Most practices aren’t really comprised of hundreds of incredibly different “edge cases,” just like each process a lawyer engages in isn’t really absolutely unique, despite the uniqueness of the underlying facts. More likely, there are patterns and repetitive processes that can be analyzed through the window of traditional business metrics – despite the individual facts and circumstances of each particular matter.

In truth, many law firms are very capable of working up these kind of metrics, at least at a high level. More importantly, the process of working through these metrics and understanding them can be extremely insightful.

For example, if you find the idea of constructing a long-term revenue forecast challenging, consider why it seems so difficult and what would make it easier:

* Am I getting my invoices out on time?
* Am I setting up retainers and/or effectively screening my clients in advance to guard against slow pay/no pays?
* Am I charging for my services in a way that makes business sense? (Suffice it to say the billable hour is only one of a myriad of potential options.)
* Might I consider restructuring my relationship with clients to give me better revenue predictability while also giving my clients better cost predictability?  (A true win-win.)

Overall, the issue of non-lawyer investment in law firms is complex and will be hotly debated.    Whether it’s ultimately permitted or not, Firms can use the prospect as an opportunity to look at their own practice from the “prospective investor” angle, and perhaps gain some immediate, actionable intelligence.