Sunday, August 15, 2004

Baker & McKenzie Restructures Business Model

Today’s Chicago Tribune has an interesting story on the front page of the Business section on Baker & McKenzie. Baker is the largest law firm in the world (by number of lawyers; Skadden and Clifford Chance both bring in more in revenues), and is based here in Chicago.

The justification for chairman Christine Lagarde implementing a number of changes?

s more U.S. law firms have established foreign outposts, partners at Baker & McKenzie decided they had to reshape it into more of a corporate firm from what had been a loose federation of law offices in which quality of work and compensation formulas varied from country to country.

Lagarde’s decisions are surprising, given the size of the firm:

She pushed to consolidate back-office administrative functions among its nine North American offices, saving $7 million a year. Departments were reorganized around specific industries and every key corporate client was linked to a partner who can be called upon regardless of the advice needed.

Her most difficult challenge was selling a radical change in compensation for North American partners. In addition to the traditional emphasis on billable hours and seniority, the new system added subjective contributions, such as client service and professional development of young associates.

The belief is that by sharing revenues instead of an “eat what you kill” approach, the firm will transcend parochial interests and encourage attorneys to work closer together, Lagarde said. (emphasis mine)

Two years ago, I talked about Wilson Sonsini’s efforts to reshape the compensation model and the inherent differences between the British “lock step” compensation model and the American “eat what you kill” model. Today’s Trib article points out that this will be the first year that Baker relies completely on the new model, in which revenues are pooled and then divvied up according to metrics other than simply who billed which hours. It will be interesting to watch.

The theory, at least, in encouraging: that Baker (and other firms who have adopted this approach) is asking lawyers to focus on the health and strenght of the firm, rather than simply on maximizing billable revenues. Long-term, the result should be stronger client relationships (which means a more loyal client base) and a more cooperative firm in which information is more freely shared. Should that happen, one would assume the firm would be more profitable and far more successful.

Best of luck to Christine and the team at Baker. Hopefully this will be the leading indicator of where the business of law is headed. (A good first hint that the model is working? Baker’s profits per equity partner are up 29% between 2000 and 2003, to $761,000.)

1 comment:

  1. Rick -- Thanks for the link to the Baker & McKenzie story. That firm is "near and dear" to me because I worked there for one fabulous summer as a summer associate. My summer experience happened just as the economy was heating up in the late 90s and all of the big firms were competing for bodies. That meant a lot of wining, dining and Cubs games. I also met a number of great people with whom I am still in contact now.

    For better or worse, however, I was not offered a full time job after graduation. During my last year of school, virtually the entire insurance defense group (which is the group I worked with) split off and formed a new firm called Donohue, Brown, Mathewson & Smythe. The reason for their departure relates to the Tribune article -- the firm operated on an "eat what you kill" model at the time and, after deducting pro rata overhead costs, insurance defense lawyers (at $120-150/hr) could not keep pace with international business and tax lawyers (at $400+ per hour). So they left.

    I was offered a job at the spin off firm, but didn't have the guts to take it at the time. Instead, I came to an established firm here in Rockford and have been here ever since.