Potomac Law Group: A Modern Twist on the Traditional Firm

Program on the Legal Profession, Harvard Law School November 19, 2013 1. BIGLAW: THE GOLDEN YEARS

“I’m certain I speak for the entire legal profession when I say that the fee is reasonable and just.” THE “CRAVATH” MODEL AND THE RISE OF THE BILLABLE HOUR

Key elements of the BigLaw Model

• Attract, recruit, and train top legal talent • Pyramid structure with more numerous associates handling the bulk of the client service work • Creation of a “tournament” to incentivize associates to work toward partnership • system • Partnership structure with comparatively few equity partners • Billable hour at the core, with very high hourly rates

3 DECADES OF EXTRAORDINARY SUCCESS WITH THE TRADITIONAL MODEL

Attorney headcount Gross revenues AMLAW 100 AMLAW 100, $ billions

82000 67

228% 831%

25000

7.2 1986 2008 1986 2008

Source: American Lawyer, Rise and Fall, June 1, 2012; AmLaw Daily, April 29, 2009. 4 AVERAGE ANNUAL PROFITS PER PARTNER vs. INFLATION AMLAW 100; $ Thousands

Profits double 1260 in real terms 1114 985 871 770 681 602 587 623 532 522 553 470 463 492 416 437 368 388 412 325 366

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Source: AMLAW 100 Survey (end points, middle years estimated); Bureau of Labor Statistics. 5 BUT CLIENT FRUSTRATION WITH BIGLAW FEES BUILDING

As outside legal …clients brought more … and began exploring costs skyrocketed…. work in house… ways to keep fees down

• Years of steady In-house lawyers per • Increased interest rate hikes $1 billion of revenue in alternative fee • Growing need for arrangements legal services • Resistance to - Increased paying for junior government attorneys regulation of • Refusal to pay industry 3.52 copier, research, - Greater 2.93 and other add-on litigiousness charges - Globalization • Openness to considering - Trend toward 2005 2007 alternatives to papering BigLaw

Source: Altman Weil Legal Department Benchmarking Survey, companies with annual US revenue >$5B 6 AND GROWING DISAFFECTION IN THE ATTORNEY RANKS

• Increased annual billable hour requirements

• Lengthened partner track

• Longer odds of making partner

• Introduction and proliferation of 2-tier partnerships

• Rigid work arrangements (little receptivity to flex schedules, , etc.)

• Greater lateral movement leading to less collaborative behavior

7 AT THE SAME TIME, BIG FIRMS LOCKING IN EXPENSIVE INFRASTRUCTURE FOR THE LONG-TERM

Average first-year associate (NY) $ Thousands Other expensive decisions 88% increase over the period, • Long-term (30- compared to inflation (37%), non-law • More than year) leases of firm legal (e.g., prosecutor, 40%) double the rate pricey officeof inflation space over • Maintenancethe same of 160 legacy ITperiod systems; (2.6%) 145 reluctance to • Non-law firm embrace new 125 125 125 legal jobs by technologies comparison: 85 88 • Art work(40% and other expensiveprosecutors, furnishingsetc.) • Foreign expansion

1996 1998 2000 2002 2004 2006 2008

Source: National Association for Law Placement (data for firms with more than 250 attorneys). 8 2. THE TIDE TURNS

“This is where things started getting really weird.” PROMINENT BIGLAW LAYOFFS POST-RECESSION Total attorneys and staff laid off, by firm, 2008-2011 Attorneys Staff

Dewey & LeBoeuf 382 520 902 Allen & Overy 260 357 617 White & Case 279 300 579 DLA Piper 189 382 571 Clifford Chance 256 201 457 Latham & Watkins 190 250 440 Orrick Herrington 140 235 375 Layoffs at Linklaters 206 150 356 76/100 AMLAW firms overall Baker McKenzie 127 215 342 Mayer Brown 146 184 330

Source: LawShucks.Com, 2009 Tracker. 10 NOTABLE DISSOLUTIONS 2008-2012

Firm Description Contributing factor

• Litigation, IP, Antitrust • Guaranteed minimums to giant lateral partners 1956-2011 • 700 attys; $573M rev • Large contingent fee • 17 offices worldwide case wrapped up

• General practice firm Contingent of 15 • 730 attys; $508M rev intellectual property 1890-2008 • American Lawyer Top partners defected to 20 “A-List” firm Covington & Burling

• General practice firm • Difficulty meshing firm 1909-2012 • 1,040 attys; $782M rev cultures post-merger • 26 offices worldwide • High-priced laterals

• Infrastructure projects, • Post-merger integration electrical utilities troubles 1924-2008 • 550 attys; $400M rev • Ill-timed partner • 8 offices worldwide defections

11 3. THE RISE OF THE NEW MODEL FIRMS

“We do all those old tricks electronically now.” NEW MODELS OFFER IMPROVEMENTS ON MANY DIMENSIONS

BigLaw New model firms

• Expensive Class A • Home offices space downtown Office space • Client sites • Excess capacity • Flexible office space

• Largely tied to high • Reduced hourly rates hourly rate Billing • Fixed fee, tiered billing, and • High leverage other Innovative fee structures

• Legacy IT systems • Cloud-based • Support staff required Technology • Software as a service • Slow to adapt

• High minimum billables • No/reduced billable hour • Rigid schedules Lifestyle minimum requirements • Pressures for client • Part-time/flexible schedule development options • Up-or-out culture • Telecommuting

13 RISE OF THE NEW MODELS

Type of work Medium Routine Sophisticated complexity Segment

New model law firms

High end legal staffing

Legal process outsourcers

14 PLG AT A GLANCE

• New model law firm focused on the cost-effective delivery of high-end legal Model services to corporate clients • Launched in March 2011 with 10 attorneys

• 40+ today, drawn from the nation’s top Attorneys firms and in-house departments • Average tenure of 15 years, with a minimum of 8

• Launched with 2 small local clients • Today national base of public and Client base private companies and institutions

• Full service, with an emphasis on Practice transactional work areas

15 THE PLG MODEL: EFFICIENT DELIVERY OF LEGAL ADVICE

Example attorney: Luisa Caro, formerly 7th year at Sidley Austin Hourly bill rate ($)

20

205

15 40 600 20

300

Bill rate at Reduced Reduced Elimination No junior Lower pay Bill rate at Sidley cost of partner of summer associates PLG space and leverage program, to train furnishings etc.

Note: Figures approximate and in current dollars. 16 WHO COMES TO PLG? COMMON ATTORNEY PROFILES

• Novel ideas for developing business that Attorney don’t fit into BigLaw mold entrepreneur • May be interested in nurturing a business, sometimes legal-related, on the side

• Enjoys the practice of law, but not the big Big firm firm environment; enjoys being associated escapee with an upstart

• Doesn’t want to sacrifice outside interests to Balance the practice of law seeker • May want to practice on a flexible schedule

• Typically rose through the ranks at a big Semi-retired firm, went in-house at a high-level, may have taken a buy-out years later post-merger

17 PLG: GREATER OPPORTUNITY FOR ENTREPRENEURIAL ATTORNEYS

Sample attorney profile #1

• Joined Oct. 1 from Wiley Rein partnership • Happier developing business at $485/hour than $685/hour • Ability to use creative alternative fee arrangements • Greater freedom to operate, ability to work from home office

18 PLG: GREATER OPPORTUNITY FOR ENTREPRENEURIAL ATTORNEYS (CONTINUED)

Sample attorney profile #2

• Harry’s innovative health care compliance program squelched by BigLaw • Margins “too small,” and program viewed as a distraction from more profitable hourly work • Encouraged and fostered at PLG

19 PLG: GREATER OPPORTUNITY FOR ENTREPRENEURIAL ATTORNEYS (CONTINUED)

Sample attorney profile #3

• Geoff, a patent attorney, developed technology solution to aid patent litigation • Raised angel money to pursue development • Splits his time between PLG and his own business venture

20 PLG MARKET RECEPTION SINCE LAUNCH

Clients signed inception-to-date, at quarter end

110 94 79 65 52 39 28 2 18 8 10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13

Notable clients

21 CHANGING PERCEPTIONS WITHIN BIGLAW

"We all expected [work] would pick up meaningfully this year, but it clearly hasn’t. I think we've come around to the view that this is the 'new normal.' ”

-- Weil Gotshal Executive Partner Barry M. Wolf, June, 2013 APPENDIX RISE OF THE NEW MODEL FIRMS

H Entrepreneurial attorneys finding better ways to bundle and deliver high end legal services to corporate America, mostly by focusing on the cost side of the equation Degreevirtual-ness of

Big firms flat- footed, not nimble L L H Complexity of work

24 BUT BENEATH THE SURFACE, UNSETTLING TRENDS DEVELOPING BY 2007

• Expensive, long-term office leases Ballooning • Expensive installed infrastructure (e.g., costs associate , summer programs) • Slow adoption of new technologies • Partner defections, portable books; Declining all spurred on by PPP rankings loyalty • War for talent, increased BigLaw ill- guaranteed minimums to laterals prepared to • In-house departments growing comfortably Growth in in- steadily in head count, prestige weather a house depts • More legal work captured internally significant economic downturn Greater • Legal depts run more like a business, scrutiny of with greater focus on cost, value legal spend • More work bid out, etc.

• Firms slow/unable to embrace flexible Rigid work schedules, telecommuting, part-time structures

25 CHANGING WINDS IN THE LEGAL INDUSTRY CREATE FAVORABLE CONDITIONS FOR NEW DELIVERY MODELS

Increasing client dissatisfaction with rising legal fees

Advances in Pressure on the Commercial- technology traditional law firm ization of the (telecom, file model; opportunity legal profession sharing, internet, for new entrants etc.)

Ready availability of legal talent

26 REPORTED LAYOFFS AT AMLAW TOP 10 IN 2009 Total attorneys and staff laid off, by firm Attorneys Staff AMLAW 100 Rank

#1 Skadden Arps 80 80 #2 Baker McKenzie 120 203 323 #3 Latham & Watkins 190 250 440 #4 Jones Day 0 #5 Sidley Austin 89 140 229 #6 White & Case 209 200 409 #7 Kirkland & Ellis 75 80 155 #8 Mayer Brown 80 122 202 #9 Weil Gotshal 16 90 106 #10 Greenberg Traurig 0

27 FULL SERVICE OFFERING, WITH A TRANSACTIONAL EMPHASIS No. of attorneys, by subject area Most active areas

Litigation 4

Government Contracts 5

Patent 4

Corporate 4

Contracts/Licensing 6

Tax 3

Real estate 2

Trademark 3

Labor & 2

Other 10

28 AVERAGE FIRST YEAR ASSOCIATE SALARY, AMLAW 100 $ Thousands

6% annual growth

160160 160 160 145 145145 135135 125125 125125 125125 114 120 120 87.5 85 82.580 7572.5

1996 1998 2000 2002 2004 2006 2008 2010 New York Los Angeles Washington DC

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