The New Frontier for Law Firm Profitability: Ad Hoc Counsel
Until recently, temporary attorneys conjured images of lawyers sequestered together in the dingiest of dimly lit basements, perceived by some as the poor souls who couldn’t hack it in Biglaw. Those days have undoubtedly passed, and in recent years a new talent pool of elite lawyers has emerged – what we call Ad Hoc CounselTM – who leave traditional law firms to pursue a more flexible approach to practicing high-end, sophisticated law. These experienced attorneys – former “stars” at distinguished law firms – now join legal teams on a variable term basis to handle substantive work; from writing briefs or drafting deal documents, to joining trial or deal teams, to providing high-level substantive expertise.
Quite distinct from the “couldn’t hack it” misperception, ad hoc attorneys are stellar candidates who, though they could have full-time positions at major law firms, have chosen the flexibility of variable lawyering. Some make the change out of necessity, (custodial responsibilities, health reasons etc.), some out of preference (wanting a better work-life balance), and some temporarily while keeping their legal skills fresh (i.e., fathers or mothers seeking reduced work hours while their children are young).
This desire for flexibility creates an important new opportunity for law firms.
Why Engage Ad Hoc Attorneys?
- Scale To Demand: Demand is fickle, but attorney hiring is fixed and takes time. Firms traditionally had to decide whether to err on the side of being conservative (risking revenue losses) or aggressive (risking over commitment to salary expenses and possible layoffs) in responding to changes in market demand. The alternative solution of ad hoc lawyers now mitigates this risk. Experienced, vetted, and able to seamlessly parachute in, ad hoc attorneys can easily be scaled to demand, whether the market is rising or falling. And as lawyers at national and international firms well know, demand varies not just during major market shifts, but every quarter and every year based on cyclical, seasonal, and geographic fluctuations.
- Lower Fixed Costs = Higher Profitability: Ad hoc attorneys require a significantly reduced commitment of overhead than their permanent counterparts. Altman Weil pegs the cost of overhead for a permanent attorney at $178,106 per year, per lawyer. The overhead for ad hoc attorneys is negligible by comparison. When engaged through a high-end and trusted staffing company, law firms are not responsible for the ad hoc attorneys’ healthcare costs, payroll taxes, or equipment, and most firm malpractice policies cover “contractors” at no additional cost. Ad hoc attorneys also allow firms to test niche or unexplored markets and make an informed decision before deciding to permanently expand into a new practice.And because Ad Hoc Counsel are paid by the billable hour – no down time, no hours written off – they are guaranteed to generate a significant ROI with no downside risk.
- Keep The Rest of The Firm Busier. Though an initial reaction to ad hoc attorneys may be a fear of “taking work away” from other associates, the true impact is quite the opposite. Senior attorneys with partner or counsel experience are among the ad hoc attorney ranks. This means that rather than referring work away (and even when pitching for work), firms can temporarily add high-level expertise in practice areas or industries they otherwise could not service. New revenues are generated not just from the ad hoc lawyer’s time, but also from the hours the firm’s permanent lawyers spend on the engagement. This income is amortized over the firm’s fixed costs (i.e., its permanent lawyers), making the firm more profitable a whole.
The same analysis applies to blending rates. There are times when it is in a firm’s interest to service a cost-sensitive client even when it doesn’t fit within the firm’s billing structure (for example, when failure to do so could cost the firm larger engagements with this client). Adding Ad Hoc Counsel allows for a lower blended rate while still providing the level of experience needed for the matter, and generating work for other members of the firm.
When to Engage Ad Hoc Counsel?
- During a Permanent Hire Search. Once a firm decides to make a new hire, it takes up to six months to find the right person. Law firms can retain ad hoc lawyers to capture billable hours in the interim, while allowing time to find the best permanent hire – a decision that, if wrong, is enormously costly. Lateral hires are an expensive investment with a higher break-even point than homegrown attorneys, they by some estimates take two years to fully integrate, and during that same period, there is a 32% chance that they will jump to another firm. Indeed, lateral hiring decisions should not be made lightly – or in a rush.
- During a Partner Move. When partners change firms, there is a natural lag time before their associates can follow, and associates sometimes do not “tag-along”. During this interim, partners often require top-level talent to service immediate client needs. Ad Hoc Counsel provide short term staffing options that alleviate this pressure without compromising quality of work, allowing for a more seamless transition for partners and their clients.
- Maintain Leverage. When a partner to associate ratio imbalance exists either temporarily (one or more associates is on leave) or more permanently (tight lateral hiring market in a busy practice area), entire practice groups can be handcuffed. Partners may be unable to service work given time constraints, or rates become inflated with partners doing more of the work. Pressure from clients may force these rates down, but acquiescing harms the firm’s bottom line in the short term. In addition, the need to maintain output levels despite having fewer resources puts strain on the remaining attorneys. In a market where the cost of each associate departure is estimated at $400,000, the risks of attrition are very real.Ad hoc attorneys can again jump in to address this workload imbalance, and immediatelylessen both partner and associate workloads, allowing partners to source and service more matters.
- When General Counsel Demand It. As part of the larger trend by clients to require new efficiencies from their outside counsel, General Counsel now request that their matters be staffed more leanly and with Ad Hoc Counsel. These clients are loyal to their go-to partners at preferred law firms for a variety of reasons including institutional knowledge and prior working relationships. When seeking a more cost effective team, instead of moving to a different firm altogether, General Counsel can reduce their outside spend without compromising relationships with partners who engage ad hoc attorneys. In this way, billing partners accommodate their clients with a more attractive blended rate rather than losing the business. The most transparent example is when a client doesn’t want to pay to train junior associates to get up to speed on a new area of law. Even though a partner may “write off” associate time, bringing in experienced Ad Hoc Counsel allows firms to remain attractive to their clients who demand a more cost-effective and experienced staffing option.
Permanent lateral attorneys have an important place in the market. Savvy firms, however, can engage ad hoc attorneys to add flexibility, test new markets, and satisfy client demands while increasing profit margins. As workflow remains somewhat unpredictable in today’s legal market, firms will do well to hedge their bets on practice growth by strategically utilizing the talent pool of first-tier ad hoc attorneys now at their disposal.