The Nature of the (Law) Firm

23 April 2008 at 11:47 pm Peter G. Klein 7 comments

| Peter Klein |

Gordon Smith shared an interesting report on a recent Georgetown conference, “The Future of the Global Law Firm.” Apparently there is a healthy literature in legal scholarship examining the boundaries and internal organization of law firms. Writes Gordon:

The participants seem to have reached a few points of consensus. First, the legal profession has changed dramatically in the past two decades and it remains under significant stress, meaning that more change is on the way. Second, the rules that constrain change (e.g., prohibition of non-lawyer ownership, rules relating to conflicts, non-competition rules) should be changed sooner rather than later. Third, the traditional legal form (partnership) is largely irrelevant to the current practice of law, even if law firms want to create an organizational structure that encourages the collegiality of a traditional partnership. Fourth, the law firms that will succeed in the future are those that get the organizational structure right.

In a follow-up email, Gordon explains that the organizational features being challenged include the partnership model, the up-or-out “Cravath system,” and the outsourcing of routine services (e.g., electronic discovery) to places like India. Gordon recommends Laura Empson’s Managing the Modern Law Firm for an overview of the issues. I said I thought there was some work by economists and management scholars on the economic organization of the law firm (and professional services firms more generally), but couldn’t come up with much, aside from a series of interesting papers by Luis Garicano and Thomas Hubbard (here, here, and here). Any suggestions from our readers? Is the persistence of the partnership form, for example, mainly the result of arcane professional-ethics rules or is there an underlying efficiency rationale? If consulting firms can have IPOs, why not law firms?

Entry filed under: - Klein -, Corporate Governance, Law and Economics, Management Theory, Theory of the Firm.

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7 Comments Add your own

1. Chris | 24 April 2008 at 9:06 am

“Managing the Professional Services Firm” (http://www.amazon.com/Managing-Professional-Service-David-Maister/dp/0684834316) is an absolute must read to understand the basic concepts for running a firm of any nature. It explains basic and semi-advanced concepts of organizational structure, leverage, and other aspests of a firm’s makeup.
2. nl | 24 April 2008 at 3:24 pm

There’s some stuff in org econ theory on why the partnership form – Rebitzer and Taylor JOLE 07, Bar-Isaac RAND 08, Levin and Tadelis QJE 2005.
George Baker has a law review article with Rachel Parkin reporting on some empirical work on the legal profession.
3. nl | 24 April 2008 at 3:35 pm

you might also want to look at Andrew von Nordenflycht’s work
4. Warren Miller | 26 April 2008 at 11:32 pm

Peter, I believe that law firms can’t do IPOs for the same reason that CPA firms can’t: statutes that restrict who can own an equity interest in such firms. There are no such statutes for consulting firms.

To my knowledge, there has been but one attempt to circumvent the CPA-firm restriction: Century Business Services, Inc., now CBIZ Inc. It’s had a rocky, up-and-down existence. CBIZ offers every service a typical CPA firm does, except “assurance services” (audits and reviews). For those, it has an affiliate that, on its website, CBIZ goes to some lengths to emphasize is owned by CPAs and is a separate legal entity. Link: http://www.cbiz.com/page.asp?pid=3104. So I guess CBIZ is, in reality, a consulting firm with a CPA-firm sibling.
5. Peter Klein | 27 April 2008 at 3:02 pm

Warren, yes, that’s what I understand from conversations with Gordon. What I meant was why shouldn’t they be allowed to? Is there an efficiency reason for restricting non-employee ownership?
6. Michael F. Martin | 10 July 2008 at 10:18 am

The ethical rules were never in place for any good reasons to begin with:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1148431

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7. Sam MacAulay | 25 July 2008 at 1:02 am

Interesting post Peter. I thought you folks might be interested to see an empirical example of this in practise. A law firm down here in Australia was apparently the first in the world to launch an IPO last year: http://www.theaustralian.news.com.au/story/0,20867,21768059-643,00.html