Law and Business- Perfect Guide

When you embark on hiring a lawyer, take a little time to understand the economics of law firms. There is a great deal of literature discussing how law has moved from being a profession to being a business. The transition started in the early 20th century, but really gathered steam after WWII. By the 1980’s law was fully ensconced as a business rather than a profession. Now when lawyers speak about practicing law or running a firm, you’ll often hear the term “model.” The law firm business talk has evolved to discussing the law firm practice as “professional service firm.”

Generally, there are 3 models for law firms. The first firm model relies on leverage. Big law firms use leveraging in that they hire a slew of associates, have the associates crank out work per hour to the client, pay the associates less than what is charged to the client, and pocket the difference. The bulk of the lawyer’s bill at an hourly rate that generates profits for the few partners.

The beauty about this model is it can generate profits for the “owners” while the owners do little but manage. A totally different model in law is the specialization model. Usually specialized legal services results in smaller firms. The lawyers offering specialized legal services charge a premium because the knowledge and work product is specialized. You need to remember that specialization requires a fair amount of previous study and experience and ability in order to rise to the top where higher rates can be charged.

Some firms manage to embrace both the leveraged and customized models. Law firms often try to use both the leveraged model and specialized model – some do so with success, while other firms don’t do so well. This way the senior lawyers profit from the leveraging as well as charging premium rates. The final broad model is where lawyers’ fees are earned by contingency. The contingency simply means a lawyer earns a percentage of the amount obtained for clients.

A common practice area that uses the contingency model is car accident law. Is any model better than the others? Not really, all work quite well when done well. It’s interesting that some firms integrate the models. It’s important to note that some large firms will also use the contingency model in some cases. If you’re looking for a lawyer, it’s important to learn about the lawyers in your area. Part of learning about the lawyers you’re looking to hire includes understanding the economics of a law firm.