The Barustors Report
ANCILLARY LAW FIRM BUSINESSES:
A Future Trend?
Legal Marketing Association (LMA) Bay Area Program
Held at the
PRACTISING LAW INSTITUTE
San Francisco, July 27, 2001
COPYRIGHT 2001 THE COSMIDES GROUP. ALL RIGHTS RESERVED.
The assumption that lawyers make poor business people is being tested all over the country, as a growing number of law firms form ancillary businesses.
In the on-going pursuit of new revenues and markets, as well as retention of existing clients, lawyers are entering the very business arena they serve. They are creating intranets and extranets for companies, automating litigation services, offering translation services and online training, and consulting in all manner of areas, including employee benefits, M&A due diligence, management, insurance planning and recovery, finance, public affairs, environmental risk assessment and cleanup, ADR and international trade.
Size is not always a factor, as San Francisco's Pinnacle Law Group attests. The five-attorney real estate boutique has affiliated itself with Ad Valorem Solutions, a separate business that reduces commercial property owners' property taxes by challenging county tax assessments. Their clients include one of America's largest REITs.
While the ethical questions are being defined and debated in New York, Georgia, and elsewhere, law firms are asking more basic questions:
How does one recognize an ancillary opportunity?
How is it started and managed?
What does it take to succeed?
Susan Beck, senior writer for The American Lawyer, led a panel discussion on the issue at the Bay Area Legal Marketing Association's July program. On the panel were:
Scott Rechtschaffen, a shareholder at Littler Mendelson, who over-saw the creation of Employment Law Learning Technologies (ELT), an online, preventative training service for employees, managers and H.R. professionals
David Green, a Director and Head of the Fairness Opinion Practice at E&Y Capital Advisors LLC, itself an ancillary business of parent, Ernst & Young LLP
Terri Pepper Gavulic, a senior consultant with MarketForce, a division of Hildebrandt International.
Kent Zimmermann, Vice President, and General Counsel of Hubbard One.
If We Build It, Will They Come?
Recognizing ancillary opportunities starts with an understanding of clients' needs. The first question is whether clients are already buying ancillary services. For example, are they using environmental consultants, trial preparation experts, or creating intranets to manage their litigation? If so, law firms may enjoy lucrative cross sales by offering these services themselves. Zimmermann reminded law firms, "If you have access to a great technology team, whether it's an in-house group or an outside supplier, consider making their services available to your clients in a way that supplements and adds value to the legal services you're providing compliance and employee training are two areas that lend themselves to this."
Second, can the firm provide routine services more economically? Littler realized it could deliver preventative training to employees and managers at a fraction of the cost of in-person classroom training. ELT distributes Littler's expertise through online interactive training, supplemented with educational products. ELT was so successful, that by its second year of operation 40% of its business was coming from non-Littler clients. Other law firms are offering on-line incorporations and IP registration services.
Lastly, do the clients have unmet needs? Hubbard One teamed with a Big 5 accounting firm (not EY) to create an extranet that efficiently tracked and helped manage class action litigation for a major insurance carrier. On another project, Hubbard One developed an intranet-based application to allow a television network to efficiently and quickly comply with a consent decree, and then report to the court on the effectiveness of compliance.
There are secondary benefits to offering ancillary service, as well. Diversified law firms have a recruiting advantage because they offer more career paths. They also tend to offer more stimulating work environments, because they often employ bright people in broad areas of expertise, including scientists, economists, engineers, and academicians.
If They Come, Will We Make Money?
Ancillary ventures are not hobbies or side businesses. They require careful market and financial analysis, a good business and marketing plan, people, and plenty of money. Rechtschaffen and Gavulic recommend using independent advisors to evaluate the soundness of the business plan before taking the plunge.
If the venture will be tech heavy, Green and Zimmermann advise firms to tread cautiously, because of the high costs and complexities involved. Rechtschaffen seconded their advice with hard numbers: each online training program at ELT costs $100,000 - $250,000 to create, which is one reason his firm brought in outside investors. According to Zimmermann, one way to minimize the initial need for capital is to turn to outside technology providers as partners on specific projects that will develop the solution that the ancillary business will ultimately deliver to its clients.
As with all business plans, the firm must answer the long-term question first: why are we creating this venture? Is it a short-term opportunity to capture additional revenues, or does it have legs of its own? Is the business meant to reinforce the firm's brand, or can it be operated independently of the legal practice? Will the firm solely fund it, or will investors be brought in? Is the intent to keep the business connected to the firm, or to make it independent?
Marketing Considerations
If the ancillary business is being created primarily for the law firm's clients, then co-branding is in order. Conversely, if the business is viewed as an independent venture, or if it is being heavily marketed beyond the firm's client base, it should be branded separately. According to Gavulic, most law firms do not co-brand their businesses ventures, as was the case with ELT and Littler.
Another question deals with marketing management. Should the law firm's marketing people handle it, or should a separate marketing team be created? The consensus was that if the venture is not co-branding with the firm, a separate team should handle its marketing. Most inhouse legal departments have enough work on their plates, and a separate marketing team can focus single-mindedly on the venture's market and position.
Sales Teams
Ancillary businesses introduce a new category of professionals into the law firm setting: sales people. While State Bar rules prohibit the use of compensated sales people for new business development, ancillary businesses, if established as truly independent entities, do not operate under these restrictions. The group offered the following recommendations:
First, get sound legal advice from an experienced ethics attorney. The sanctity of the attorney-client relationship remains inviolable, despite the interconnection with the new venture. This is why, while law firms can form ancillary businesses with non-lawyers, non-lawyers cannot own law firms. The ethics attorney must also address the issue of disclosures to clients. The relationship between the law practice and the ancillary business, as well as delineations of legal and non-legal advice and services, must be clearly laid out for the client.
Second, decide if these reps will act as sales people or lead generators. The more complex the product or service, the more likely an attorney or tech person will have to make the close. This distinction will determine the caliber of candidates to hire, the amount of training they will receive, and their compensation.
Third, train these reps well. The firm's attorneys will be reluctant to refer their clients to the ancillary business if they worry about jeopardizing the client relationship. It is critical that sales reps understand that they are not selling the law firm's services; they are selling the services of the ancillary business only.
Lastly, with the approval of ethics counsel, offer powerful incentives for cross-referrals. Ernst & Young uses a revenue mechanism for purposes of incenting partners to refer business to its E&Y Capital Advisors subsidiary. That is, when someone in division A refers their client to division B, the revenues their client brings to division B count toward their own revenue goals. While law firms cannot share legal fees with, or offer referral fees to, non-lawyers, the reverse is not necessarily true, if there is full disclosure in compliance with State Bar ethics rules.
Success Stories
No comprehensive surveys have yet been conducted on the success rate of ancillary businesses. However, EY continues to explore new ventures. ELT has done so well, that Littler has now begun a second venture the Legal Learning Group that offers classroom-based training and training services. Littler is exploring other businesses as well, including saving clients money on legal advice by creating interactive expert systems that include an email link directly to the firm's subject matter experts.
Hubbard One continues to work with law firms on high tech ventures that allow firms to help their clients use technology to their advantage in compliance matters. They are also working on helping law firms automate the delivery of their legal and related services, in order to increase revenues beyond the billable hour.
For a sizeable list of ancillary legal businesses, see Gavulic's article, "Law Firm Ancillary Businesses", available at MarketForce's website.
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| Bay Area legal marketing consultant, John Cosmides, is principal of The Cosmides Group and director of Barustors, a State Bar-certified referral service for business and corporate clients. John can be reached at john@barustors.com or at 415-957-1330. |  |