Boutique Law Firms, Contract Attorneys, Small Law Firms

From Biglaw to Boutique: Scaling Up and Down

The major disincentive to growth in small law firms is the inability to predict future business. This uncertainty makes hiring additional associates extremely risky -- even if the immediate workload warrants it....

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I’ve written before about some of the challenges a small law firm faces when hiring employees. But more fundamental and difficult questions are why and when should a solo or small law shop expand by adding employees?

Like all businesses, most firms with excess demand for their services have a natural incentive to grow. A company is leaving money on the table if it is forced to turn away work because all of its lawyers are at full capacity with their billable work.

The incentive to grow might be tempered by concerns over preserving a valued culture. A small law firm might resist growth because it fears disrupting a favorable workplace environment. With each new associate hired, however, the reasons for not hiring the next associate get weaker.

The major disincentive to growth is the inability to predict future business. Litigation is especially fickle. A case might go to trial, and generate hundreds of hours of billable work, or suddenly be dismissed or settled. In litigation especially, sometimes the line between swamped and dead is razor thin.

This uncertainty makes hiring additional associates extremely risky — even if the immediate workload warrants it….

As many firms found out the hard way, having more associates than are warranted by the amount of billable work is not good for the bottom line. For many smaller shops, having more associates than work could be financially devastating.

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And of course when a company faces financial threat, excess headcount is the first to the chopping block. For associates, they can’t ignore the writing on the wall. Not enough work can mean getting laid off.

On the other hand, if a firm finds itself routinely swamped because it doesn’t have enough lawyers for all the work it has, then the associates pay the price for that, too. In that case, the choice becomes turning down work or insisting that the associates work more. Neither option is ideal. And at some point, every associate’s billing capacity is reached.

Facing the choice between having too much work on the one hand, and having not enough work on the other hand, it makes sense to err on the side of caution and delay further growth. It makes sense to try to avoid the potentially crippling effect of not having enough work. The result is trying to defer excess billable work rather than hiring more associates.

One problem with that approach is that new potential business may be limited by clients’ perception of your capacity to handle larger matters. A client might decline to hire you for a substantial matter if she thinks you don’t have sufficient resources. To some extent, having the capacity may stimulate the demand.

Deferring billable work also leaves money on the table. You might think that because a lawyer’s case load fluctuates so much, you can just defer performing work on a matter until other cases slow down. But in my experience, that isn’t really what happens. The reality is that, over time, some percentage of billable work that is deferred will never be performed and will never be billed.

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For example, suppose you have a case that is scheduled for mediation. You have retained an expert, but defer spending billable hours working with him until after the mediation. If the case were to settle at mediation, then those potential billable hours would be lost. But if you did the work with the expert prior to the mediation, obviously with client authorization, then those would have been hours billed. So in that case, and many others, the work deferred is work that is lost.

The optimal solution for a firm is to let it grow, and have the ability to perform appropriate billable work whenever it is warranted, but to avoid becoming committed to paying associates that might not be needed if business slows.

One solution is to employ temporary attorneys or independent contractors. That is clearly the right move in many situations, but it also has drawbacks. Temps or contract attorneys are less likely to be fully trained in the office policies, procedures, and idiosyncrasies. There used to be a stigma that contract attorneys were less capable, even to the point of generating lawsuits. But any categorical distinction between associates and contract attorneys grows less meaningful every year as the legal market evolves.

Temps and contract attorneys who are unsure of their future are unlikely to develop loyalty. In a million subtle and not-so-subtle ways, this limits the value they will provide even if they are performing the work assigned to them. It’s hard to ensure accountability when your workers are scouring the want ads looking for better or more secure opportunities.

Some clients also might be wary about having their work delegated to contract attorneys as opposed to having their work performed by “real” associates. Whatever the actual differences between contract attorneys and associates, the client-perceived differences could be significant enough to have a real effect.

Ideally, a firm will have the ability to very quickly scale up and down in terms of associate hours. The optimal firm would have “real” associates who are trained, accountable, and loyal, but who it need pay only when sufficient demand justifies their time. Some virtual models do this, but I haven’t encountered many brick and mortar outfits that can really pull it off.

It is possible, though, given the changing legal market. I’ve found excellent, well-credentialed attorneys who appreciate alternative working arrangements and hours or only want to work part time. With a lot of planning and hard work, and an open and honest hiring process, it is possible to build a stable of specialized associate attorneys who are far more than mere contract attorneys, but who also are not necessarily committed to forty- or sixty-hour workweeks. This stable of attorneys allows the firm to quickly scale up, or scale down, depending on the business demands.

There is no question that the single biggest challenge facing most firms, big and small, is generating new business. A firm’s ability to generate business is always going to be the most important factor in determining if a firm thrives or fails. But beyond that, managing the flow of whatever business is generated vis-à-vis the firm’s personnel can have a big effect not only on the firm’s bottom line, but also on all of its employees.

Tom Wallerstein lives in San Francisco and is a partner with Colt Wallerstein LLP, a Silicon Valley litigation boutique. The firm’s practice focuses on high tech trade secret, employment, and general complex-commercial litigation. He can be reached at tomwallerstein@coltwallerstein.com.

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