There’s anxiety in the state bar of Texas these days. The concern isn’t that the corporate community will soon outgrow its need for lawyers. Nor is it stock market volatility or the likelihood of another bust. Since the mid-nineties, when the legal profession awoke from its slumber, a robust, diversified, technologically exploding global economy has been spewing new billables like counterfeit hundreds. Business couldn’t be better, thank you. The problem is that clients—the franchise of every law firm—aren’t so loyal anymore, and the competition for them has become fierce. “It’s definitely a client-controlled marketplace now,” says Shelby R. Rogers, the chairman of the State Bar Futures Committee. One of the first indications that times were changing, says Bob Werner, the managing partner of Austin’s Brown McCarroll and Oaks Hartline, was when longtime clients “started getting calls from other lawyers who wanted to take them to lunch and visit with them about their business. These days a law firm is just another vendor that helps clients get their product to market. They shop around, and if a firm can’t add value to their business, they often switch.”
It used to be that being good at what you did was good enough. Now all that matters is how many people know it and will pay you for the privilege of demonstrating it, so is anyone surprised that Texas lawyers are feeling a bit jumpy? After all, who knows what tomorrow holds? The borderless economy created by high tech threatens to turn State Bar regulation on its ear now that national and international megafirms with branch offices have global capabilities (as do small firms with the right technology) and now that banks and accounting and consulting firms are teaming up with lawyers to offer multidisciplinary one-stop shopping. Skeptical clients, meanwhile, are directing their in-house lawyers to scrutinize every move made by their outside lawyers and to be on the lookout for someone who can do it better, faster, and cheaper. There’s even mutiny within the ranks: Gen X associates are insisting on having lives outside the office, and partners who used to stay at firms for life now jump ship like free agents in pro sports. Perhaps the greatest indignity is the need to throw open one’s conference room doors to media specialists, marketing consultants, and communications coaches, who preach thinking out of the box and feeling a client’s pain.
You want details? Here are the five main ways the legal profession in Texas has changed in recent years.
1. The invasion of the Silicon Valley suits. What’s that dark shadow moving across the skies over Central Texas? It’s Southwest Airline’s Nerdbird, which shuttles eight times a day between San Jose, California, and Austin, the two hottest hotbeds of high-tech activity. Racking up the frequent-flier miles alongside the dot-comers are a cadre of aggressive lawyers in business-casual clothes who are on the trail of new money. It would be hard to overstate the effect that the branch offices of Silicon Valley carpetbaggers like Brobeck, Phleger, and Harrison and Wilson, Sonsini Goodrich, and Rosati have had on the state’s legal landscape. The conventional wisdom is that Texas lawyers were asleep at the wheel when the state’s tech scene exploded and have been playing catch-up ever since, while the Northern Californians were immediately in tune with the fast and loose rhythms of the risky but potentially lucrative start-ups. They were willing to discount or defer their fees—sometimes taking an equity interest instead—until the client could get his hands on some cash. And, of course, a lot of those iffy stock-for-fees swaps paid off big-time. Texas firms, on the other hand, have been traditionally skittish about the economics and the ethics of investing in their clients’ businesses. Rowland Cook, a corporate-technology attorney with Austin’s Jenkens and Gilchrist, says his firm, like many others in Texas, is just now getting aggressive in its pursuit of tech business. Still, he adds, there’s always a nagging question: “If a company is so eager to give us equity, do we really want it?”
Stephen Straus, a partner at Austin Ventures, the state’s leading venture capital firm, says that risk aversion is precisely the reason many Texas lawyers are now struggling. “With their traditional hourly fees and refusal to discount, they simply had the wrong business model for working with venture-backed start-ups,” explains Straus, who works closely with four law firms from Silicon Valley but just one from Texas. “It’s a numbers game: A firm builds a client base over five years by being willing to lose money on a lot of new businesses, knowing that only a few will ever pay off—or even pay their bills—much less be a Vignette.”
Then there’s the issue of salaries. Last December Menlo Park-based Gunderson, Dettmer, Stough, Villeneuve, Franklin, and Hachigian announced that to stanch defections from its ranks to its stock option- waving dot-com clients, it was giving its first-year associates a huge raise, to $125,000 a year, plus a $20,000 bonus. When Brobeck, Phleger likewise raised associate pay in branch offices outside of California, other Silicon Valley firms followed. Then, like dominoes, firms from New York to Texas fell in line—some meeting the Silicon Valley levels, others coming in a bit lower.
Nonetheless, the raises deeply trouble Ferd C. Meyer, Jr., the executive vice president and general counsel for Central and South West Corporation in Dallas, who says he’s sure he knows whose wallet they’ll be coming out of. “Lawyers don’t seem to be aware of the pressures on Old Economy businesses to keep costs flat,” he complains. “I frankly don’t think we’ll have much interest in absorbing these salary increases for associates, who don’t bring that much to the table anyway.”
2. Cheaper fees, please. In an effort to contain fees but still maintain quality, companies frequently audit their legal bills and distribute guidelines that put the kibosh on the Skaddenomics tricks (named for the New York white-shoe firm Skadden, Arps, Slate, Meagher, and Flom) of turning everything from the office copy and fax machines to the coffee and pastries served at client meetings into profit centers. First-class travel and fancy hotels are also no-no’s. “They say that lawyers travel in twos and threes,” says Melba Whatley, who manages a small investment company in Austin. “But not on my bill. I make it very clear: one attorney per meeting.”
The hourly rate is still the profession’s mainstay and unlikely to disappear anytime soon, but it’s under siege. Given the climate of competitiveness, it’s not surprising that alternative billing strategies are evolving—especially in the area of big commercial litigation, where smaller boutique firms are changing the way lawsuits are paid for. A company with big-ticket legal work—say, defending or bringing a major lawsuit or planning an IPO—often conducts a “beauty contest” and interviews a short list of firms. David Beck, who spent 25 years as a litigator at Houston’s Fulbright and Jaworski before starting his own boutique, Beck, Redden, and Secrest, in 1992, says few of the contestants he competes against for business are big firms. Stephen Susman, of the Houston boutique Susman Godfrey, says that’s because clients are more likely to get a “creative” fee arrangement from the smaller firms: such as sliding contingency fees of 10 percent to 50 percent for plaintiffs and flexible, risk-sharing incentive fees for defendants.
3. Net or not? Even as Texas lawyers try to take a bite out of the New Economy, the specter of the havoc high tech will wreak on their livelihood produces Orwellian tremors. It doesn’t help that the State Bar’s 1999 Futures Report ominously warned of a “big bang” in which a lawyer’s life could be upended “irreversibly by sudden, unanticipated change.” List your core assumptions, the report advises, “and then imagine that they are no longer true.” Never early adopters, legal Luddites need look no further than at technology’s impact on the banking and travel industries to get nervous about what’s around the bend. The upside to tech is the enticing vision of a law office so wired that voice-recognition systems eliminate the need for support staff, and telecommuting solo practitioners, armed with cell phones and modems, are able to compete with the big guys, consummating deals halfway across the globe while sitting in their hotel swimming pools—with no one the wiser. The downside is the now-clichéd notion that soon all companies must use all of the legal technology or they won’t be companies at all, which, if true, is not good news for a notoriously inefficient, information-intensive profession. After all, if your goal is to “partner” with your clients, your technology had better be compatible with theirs—so lose the MS-DOS.
Scott M. Kline, a partner with Dallas-based Hughes and Luce’s technology group, thinks that it will be a while before Texas lawyers go truly high-tech. Many are understandably loath to divert partner-bound profits to pay for obsolescence-bound technologies that clients demand but refuse to subsidize. “In the short term, many lawyers don’t see that kind of efficiency to be in their best interests,” says Jon Dyck, an attorney who left Baker, Botts in 1999 to found eLaw.com, an Austin start-up that provides legal analysis and other services for practicing lawyers.
Beyond the state-of-the-art tech challenge, there’s the lurking menace of online vendors who threaten to reduce clients’ reliance on outside counsel by “unbundling” legal services at considerable savings. Why pay your law firm $20,000 for some overpaid, underexperienced associate’s legal research when, for $5,000, you could have your question answered authoritatively by a Columbia University law professor? Tech consultants predict that many legal services will soon be offered via an e-commerce model, packaging them as a more reasonably priced product and offering a customer-service component as an added benefit. Charles Matthews, the general counsel of Irving-based ExxonMobil, says he hasn’t patronized any of the online vendors yet but is “definitely interested in learning more about them.” Not a good sign.
4. MDPs ASAP. Topic A at bars and bar associations alike is the dawning of the age of the multidisciplinary practice (MDP) in which, under one roof and shingle, lawyers partner with other professionals—CPAs, venture capitalists, real estate developers, and so on—to offer clients a full array of services. As franchise threateners go, this one is causing a lot of insomnia. Even though national and state bars have prohibitions on lawyers’ splitting fees with non-lawyers, most expect they will be lifted eventually. The synergy of this kind of one-stop shopping would appeal to purchasers of legal services across the board, says John Dzienkowski, a professor of law at the University of Texas at Austin, making access to them less onerous for mom-and-pop businesses, the elderly, and other cash-poor clients. “What the profession is anxious about here is the prospect of losing control of how legal services are delivered,” Dzienkowski explains.
5. To marketing we go. “Only fifteen years ago,” recalls Austin attorney David Wright, “‘business development’ was someone handing you fifty dollars and telling you to go buy a client lunch.” Today most firms with more than fifty lawyers have an in-house marketing director, often with a six-figure salary and a staff; others hire consultants on a contract basis, says Dallas-based strategic marketing consultant Deborah McMurray, who recalls how Big D was a lonely place for a legal marketing director as recently as 1987, when she held that position at the now-defunct law firm of Johnson and Swanson. A sharp marketing director will design a written plan for milking all resources in the name of gaining market share, from grouping the troops into strategic client service teams that sign new clients and comfort old ones to making sure that the firm’s charitable contributions and activities are directed at recipients near and dear to both prospective and cherished clients’ hearts. An “out-there” firm might use an edgy Web site and targeted advertising buys as part of a positioning and branding strategy. “Most big firms don’t realize that ‘full service’ is a deadly term in today’s market—it lacks focus,” McMurray explains. “A firm has to identify what it is uniquely good at, what differentiates it in the marketplace, and then go after that market position.”
The key is to be more client-focused than “they” are, says Bill Flannery, a silver-tongued former IBM employee who founded the WJF Institute in Austin to teach the fine points of rainmaking to more than six thousand “droughtmakers” worldwide. Flannery believes that if you’re a lawyer today, you have to teach your clients what their legal needs are. Perhaps a start-up needs to “borrow” one of your associates at your cost. And don’t even think about attending a “beauty contest” until you’ve been coached and videotaped by a communications specialist.
Central and South West’s Meyer is a frequent target of law firm marketing. “It comes in every form imaginable—some of it not very subtle, some extremely subtle and very well-done, some plain crude,” he says, adding that “ninety percent of lawyers aren’t worth a damn as marketers; they’re too obvious or forceful. Personally, I think most of the money being spent on marketing consultants is a waste.”
But it is being spent. The only issues, says Cook of Jenkens and Gilchrist, are “when, where, and how.”