ignoring basic profit considerations in german medium sized law firms

Figure: Development of revenue per professional of the leading national law firms 8Hengeler, Gleiss Lutz, SZA), the leading UK and US law firms (global players) and the medium-sized law firms among the top 100 law firms in Germany. Data from Juve, analysis LFCC

Larger German law firms, and in 1996 there were exactly 237 with more than 9 outside associates, had little competition until the 1990s. With the advent of competition from Anglo-Saxon law firms, the situation changed radically.

This was mainly due to the very conservative policy of the chambers and the self-image of many lawyers, who did not think much of free-market instruments, as they saw them as a “degradation” of their profession. They hid their economic interests behind the claim to serve “society,” which was only partly true. The firm’s profit was seen as a result, not a goal, and partners usually earned “enough”, measured against expectations. Richter salary R 3 was used as a benchmark, even when calculating “prices” for law firms, which the BRAK still adheres to today in its sales model based on turnover, which as a law firm owner is based on this salary as appropriate. Law firms thought that they did not have to look at productivity because they could enforce their prices and otherwise the mixed calculation of the BRAGO, the predecessor of the RVG, was considered adequate. There were enough employees (baby boomers), and thus little salary leeway for newcomers to the profession. Specializations were just emerging, but only to a limited extent. Lawyers took on the mandates that came their way, usually without much distinction. Few law firms were already clearly specialized in commercial enterprises, and those that were still belong to the top of the market (albeit usually in a different dress). Professional excellence was more important than productivity, even though there were few standards of comparison, as there are today.

With the advent of competition from Anglo-Saxon law firms, the situation changed radically. Young people were asking for career perspectives, especially since the few UK and US law firms that came to Germany since the early 1990s were already paying higher salaries and had more exciting mandates. This process had taken place in a similar way in the UK market when, after the merger of these two mid-sized firms in 1988, Clifford Chance broke the longstanding cartel-like agreement among the top City of London firms on certain salary levels and radically poached good people at higher salaries.

This recipe was invasively applied to the German market in the early 2000s with the penetration of UK and US law firms; in a short period of time the market radically reorganized, starting with the partners down to the newcomers. This process was essentially over by 2005, and the German firms, which had laboriously developed into larger, supra-local units in the 1990s, were astonished when they simply could not afford these salaries, and the appeals to “culture” etc. were not successful either: after all, one works a lot everywhere: on average, a lawyer is in each firm for at least 10 hours, but productivity varies greatly: from 4 to 7 billable hours.

UK/US firms lured with higher salaries and partner gains, and the young top performers asked questions that put pressure on the older cohorts. As a result, many of the mergers between 1998 and 2003 were always crisis moments when German law firms were forced to merge, with few exceptions.

The watershed moment.
Thanigs changed with the acquisition of Chrysler by Daimler Benz in 1997, which for the first time was not carried out by the board room law firm SZA, but by Shearmann & Sterling. SZA therefore logically joined Shearman. Figures became important, and thanks to the Juve publishing house, they also became public. Modern law firm management and controlling moved into large law firms, and the optimization of certain key performance indicators was a clear goal. Recruiting agencies, which were also among the financiers of the Juve publishing house, profited from this and earned a golden nose, especially when recruiting partners.

Most large German law firms were not prepared for this: they could only merge or disintegrate. If they made mistakes, for example by starting an undue profit distribution debates, they quickly lost their top people. Thus, a few U.S. law firms unexpectedly joined a team in Germany with which they had previously only worked on a referral basis.

Of the 237 law firms that had more than 9 outside associates in 1996, only 10% were still active in the market under the same brand name by the end of 2010. A few survived, such as Hengeler Mueller, Gleiss Lutz, etc.. The others survived in very narrow niches, away from the big cities or protected by an inward-looking culture. The rest had imploded, merged or otherwise vanished. Big names like Wessing, Schürmann, Schön Nolte disappeared from the market. The merger pedigrees of international law firms in Germany are very well documented in Juve handbooks (until 2016/2017).

There were only a few exceptions such as Haarmann Hemmelrath, which had 32 offices worldwide shortly before its demise in 2004; but then broke up due to lack of management. Or Rödl & Partner, which was able to keep up with the changes due to its highly centralized structure and majority of shares in family hands.

With publications like legal 500, Chambers and Juve, the law firm market in Germany became more transparent, especially for recruiting agencies, which were almost exclusively used by UK/US law firms. These knew how to play to their competitive advantages. They talked openly about salaries and promotion opportunities. Thanks to globalization and an expansive internationalization strategy, they had large mandates from international investors pushing into Germany or accompanied German corporations abroad.

As a result, the market changed radically from around 1998 to 2005: German law firms ran the risk of being perceived only as training grounds for the top law firms. German law firms had to reorganize, which was then mostly achieved only from 2010 onwards. German law firms had to become more profitable in order not to be completely hooked in the salary war.

But the most important and highest-fee clients had already left: they therefore focused primarily on German legal issues and had little to report internationally.

Four market segments

In the period from 1995 to 2005, the German law firm market was divided into four market segments:

1. the corporate segment of those few large law firms that can serve these clients nationally and internationally (of the largest 100-200 law firms, approx. 50% UK and US law firms, approx. 50% German law firms)

2. the SME segment of law firms with mostly 10-25 partners, which primarily serve German SMEs, also across borders

3. the SME segment of smaller law firms, which primarily serve small and medium-sized businesses, self-employed persons and freelancers, as well as demanding private clients

4. individual attorneys and independent rae who primarily serve private clients or work as independent attorneys in larger law firms.

However, even under these changed market conditions, many law firms, especially in the mid-market segment in Germany, still cling to the idea that things can be done “differently.”

– The freedom of the legal profession, originally a fighting term against state paternalism, is now sometimes used as a slogan for internal law firm anarchy, in order to retain personal freedoms and not to assume responsibility for others or even the whole.

– Leadership of employees is neglected – that’s why no one applies anymore; and due to demographics this will not change. Good people simply leave or don’t come at all.

– Relevant metrics are almost always missing: the most prevalent software vendors don’t provide them because there is no demand. As a result, two vendors now dominate the entire market for business law firms, while the rest remain in economic deep sleep.

Underlying this is an unreflective understanding of the market: in order to be independent, it is relevant that one does not become economically dependent; in contrast, “external determination” by the equal partners is a chimera painted on the wall, devoid of reality.

Due to the lack of internal changes, the lawyers also hold on to a lawyer-secretary relationship, although fewer and fewer legal secretaries are being trained; and for these the activity appears monotonous and unattractive, so that they gladly migrate to other professions.

However, a lack of engagement with the market and one’s own competitiveness leads to declining competitiveness. The first partnerships have already decided that there will be no successors and that they are therefore “out of business,” especially in smaller towns and in rural areas. This means that, as in England, there is a risk that qualified legal advice can no longer be secured in the flat countryside. This is where legal tech has the greatest opportunities, and with it the offers of legal protection insurers for dispute resolution by their own employees in telephone centers.

What are the ways out of this dilemma?
Improving profitability must be defined as a goal in order to be able to pay more attractive salaries and profits. Accepting and understanding the business model of a service company requires understanding that ultimately time is exchanged for money. Knowledge comes in varying degrees of quality.

The management of time as a resource is central: the firm, as a service business, must continue to evolve through continuous improvement. The orientation towards competition requires the acceptance of modern management methods, even if the collegial cooperation is lived differently than in companies, simply because there are more co-owners. Standardization and increasing the efficiency of the firm, also by reorganizing the secretariat, must become the rule.

Acceptance of the business model of a medium-sized law firm also requires that responsibility for staff workload lies with the partners, not with inexperienced newcomers to the profession. Partners must provide leadership and make decisions so the firm must pay competitive salaries. Implementing metrics with the help of the right law firm software becomes a survival strategy.

Acceptance of the law firm as an information-processing service provider requires the introduction of powerful software as well as the digital file, and the retention and standardization of knowledge is central to speed and proximity to the market. This also means better support of workflows not only in forensics, but also and especially in the consulting area, starting with sample management and ending with the introduction of modern means of communication we SMS, Slack etc. i.e. modern tools of communication, which nevertheless must be partially documented in the manual file.

Specialization is a prerequisite for efficiency, no longer a goal as such. Specialization in legal issues is no longer sufficient, but industry specialization is increasingly necessary in order to be able to quickly connect to the client world.

The freedom in the mandate is not affected by this – but of course in every organization there are always limitations to one’s own behavior and the necessity to take responsibility. Even young lawyers who are hired cannot be left without guidance; the requirements of productivity must be respected just as much as timely, appreciative feedback when mistakes are made. Ethical requirements for the behavior of attorneys must also be reflected and taken into account: i.e., resignations, requesting a VA when opposing counsel is absent from the appointment or not, etc. There used to be professional guidelines that formed the framework; these were abolished by the BVerG as inadmissible for lack of a legal basis, but there are still rules and requirements for the behavior of colleagues that cannot be derived from the law alone, even if the chambers shy away from dealing with them.

Ultimately, it is a matter of understanding even a medium-sized law firm as a business enterprise whose goal is to provide clients with qualitatively appropriate and correct legal advice in exchange for money, and thus to ensure the livelihood of all employees, including the partners, so that the firm also remains attractive to new employees. And in a constantly changing competitive landscape, that simply requires looking at the profitability of the firm.