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The nonlawyer arm of Littler Mendelson P.C. is rapidly becoming the firm’s largest revenue source by far. Employment Law Training Inc. (ELT), a half-owned subsidiary founded in 1998, which uses firm lawyers to give office seminars on employment law, now generates $200,000 a month in billings to San Francisco-based Littler. That’s just the beginning. It’s projected to produce about $1 million in revenue a month within a year and to keep growing beyond that. With that sort of outlook, says David Durham, a Littler executive committee member and managing director of allied businesses, it’s “more likely than not” that ELT will go public. Sounds impressive, but it’s hardly the only success that law firms have had with side businesses, despite the supposed ethical restrictions on multidisciplinary practices (MDPs). A survey by The National Law Journal of the country’s largest law firms shows a thriving business in nonfirm businesses. Take Philadelphia’s Duane, Morris & Heckscher L.L.P., whose 30 nonlawyer professionals do everything from registering corporations in Delaware to registering trademarks in Alicante, Spain. It generated close to $5 million and 5% of firm revenues last year, according to CEO Sheldon Bonovitz. The goal is for nonlawyers to generate 20% of revenues within five years. Says Bonovitz, “That’s serious money.” These are only the two most ambitious of the dozens of allied businesses mushrooming within the law firm world in a way that undercuts the relevance of this summer’s American Bar Association debate over MDPs outside the law firm world. “We don’t have to wait” for the outcome of the debate, explains Durham of the damn-the-torpedoes approach. “Law firms can own all kinds of businesses,” he says. “There are no real barriers. We want to position ourselves to compete in the 21st century. We don’t want to be a serf in the battle with the Big Five accounting firms.” Robert MacCrate, a former ABA president, led the drafting of an April MDP report by the New York State Bar, which opposed mixed practices controlled by nonlawyers but sanctioned the sort of mixed practices the NLJ survey uncovered — that is, those controlled by lawyers. “I think there’s a growing recognition that we’ve had MDP all along,” says MacCrate. “We can already provide anything a client wants. We don’t have to go to setting up some new kind of beast.” Martin Garcia, who chairs the MDP/ancillary practice committee of the Florida State Bar, sees it differently. He submitted another April report with an unequivocal critique of mixed practices. “MDP is an attempt to enhance lawyers’ economic situation at the expense of clients,” he says. “There’s no reason to bundle services except the profit motive.” Garcia, of Tampa, Fla., is of counsel to Hill, Ward & Henderson and an investment manager at Pine Hill Capital Partners. “I’ve been a trial lawyer and a businessman, but I’ve never mixed the two,” he says. “I’ve never tried to take advantage of my client base.” Although ethical rules vary by state, mixed practices controlled by lawyers are generally permitted as long as lawyers police conflicts, disclose their interests and observe limits on marketing. A key reason this happened is that a version of Model Rule 5.7 was adopted in 1991 by the ABA House of Delegates that would have sharply restricted allied businesses, but it was never followed and was replaced in 1994 with a permissive rule. Now it appears that the ABA is headed toward another zig to offset its last ethical zag. But Geoffrey Hazard, an ethicist at the University of Pennsylvania, warns against any ABA adoption of a broad definition of “the practice of law” this summer — one reform possibility. That, he says, could be construed to cover nonlawyer services within law firms. TOO LATE No matter, says Joel Henning, senior vice president and general counsel at Hildebrandt International, the law firm consultancy. He believes that market forces will prevail: “The bar associations are a sideshow. MDP is here.” Market forces have created a dizzying range of ancillary practices, as the NLJ survey shows. For example, Holland & Knight L.L.P. fields 17 private investigators — including former agents of the Internal Revenue Service, the Drug Enforcement Administration, the FBI and the General Accounting Office — in 12 cities. Howrey Simon Arnold & White L.L.P., possibly the national leader in the number of nonlegal professionals, backs up its antitrust lawyers with economists to analyze competitive dynamics and accountants to calculate damages. McGuire, Woods, Battle & Boothe L.L.P. employs real estate experts and lobbyists who specialize in corporate relocation. Boston’s Hale and Dorr L.L.P. last year formed a subsidiary called The HR Dept. to fill all the needs of tech start-up clients who lack things like payroll, benefits and employee handbook services, not to mention real-world office experience. Perhaps most improbably, Detroit’s Dickinson Wright P.L.L.C. and North Carolina’s Womble Carlyle Sandridge & Rice P.L.L.C. have dumfounded techies across the nation by building thriving office technology consultancies within their respective law firms. The common thread is response to client demand, say big-firm lawyers. Michael Harnish, chief information officer at Dickinson and chief executive officer at Technology Consulting Partners L.L.C., explains the origin of his allied business. General counsel of clients kept looking over his shoulder at Dickinson’s custom-designed software and saying, “I want that.” “Do you mean our legal services?” he would ask. “No, no, I want that,” they would say, pointing at the screen. Evidently, not all allied businesses fill a market need — or at least not for long. A survey of mixed practices within the nation’s 250 largest law firms was last conducted by the NLJ in 1992. Of the 20 ancillary groups listed in 1992 that the NLJ was able to trace forward, 13 (or 65%) have disappeared. CenturyPacific L.P. is the only one of Davis Wright Tremaine L.L.P.’s four 1992 allied businesses to survive. Steven Wood, general partner and managing director, credits his unit’s survival to four factors: a strong parallel practice group (in his case, real estate); the confidence of lawyers in the firm; a structure that permits autonomy; and profitability. In 1992, Mike Smith and Doral Cooper were both trade consultants within law firms — Smith at Steptoe & Johnson L.L.P. and Cooper at Crowell & Moring L.L.P. Smith, now at an independent consultancy, was one of many nonlawyer professionals in Washington, D.C., who fell prey to the early-’90s legal recession. “There was a hiatus in trade cases,” recalls Smith. “Increasingly, lawyers who didn’t have anything to do started taking away the work I was hired to do.” Cooper credits her ability to build a strong practice within Crowell to teamwork and friendship. “Here, the personalities have clicked,” she says. HARD TO MANAGE The neatest explanation for the winnowing of the 1992 allied businesses comes from Hildebrandt’s Henning. “In 1992,” he argues, “most lawyers could not manage legal practice, so it should be no surprise they couldn’t handle ancillary practice.” A similar look back will probably be necessary in a decade, to see how smart firms were about the sort of ancillary businesses they have set up in recent years. But at least until the next recession strikes, managing partners and principals will sing their nonlawyers’ praises. For example, a big advantage of a subsidiary, says Littler’s Durham, is the freedom to raise capital. Thus, the investment bank Lazard Fr�res was able to invest $15 million in ELT, in return for roughly half its equity. Cesar Alvarez, CEO of Greenberg Traurig P.A., sees well-chosen ancillary practices as one way to boost profits without squeezing more billable hours out of the day. Many sources cite the opportunities to cross-sell, and to bind clients to the firm. The most vivid example is Dickinson Wright, whose technology products electronically tie clients to the firm. Harnish says that his programs forge emotional bonds, too. “Clients sometimes come to us and say, ‘The quality of your legal work is on par, but the technology you have to deliver those services is far and away superior.’ “ Many nonlawyers say that lawyers can’t deliver their services as well as they can. Jim Ring, a former senior FBI official who has practiced at Boston’s Choate, Hall & Stewart for a decade, says that lawyers, aside from making lousy witnesses, do inadequate investigation and don’t know how to supervise outside private investigators. Ruth Liebermann, of Hale and Dorr’s HR Dept., says similar things about personnel experts. “Historically, we have thrown associates at these situations, even though we knew that the associates feel bored and out of their league, while an HR specialist would do the job better and more cost-effectively.” As for trade consulting, Cooper says that lawyers are counterproductive in parts of the world, such as Asia, where lawyers are rare and business is done on a handshake. The firms at the bleeding edge of mixed practice constantly search for new ideas. “We view the law firm as the incubator of business models,” says Littler’s Durham. Possible babies in Littler’s future include a human resources audit firm, an HR outsourcing firm and a firm that would supply content for employment dot-coms. Thomas Dyer, CEO of Holland & Knight Consulting, believes, like his law firm, that it’s difficult to grow one professional at a time. He foresees a series of small acquisitions of nonlawyer practices and partnerships with larger consultancies. On the shopping list: computer forensic firms, valuation firms, ADR firms, international investigation shops and info-tech consultancies. Holland & Knight is also considering spinning off PENMD.com, a practice enhancement network for health care professionals — a business that began with the idea of an H&K partner and was brought to fruition by H&K Consulting. Duane Morris just created a new public affairs group. It foresees a forensic damage analyst group — and a Latin American public finance group. The seed for the Latin American public finance group was sown in a recent interview by Duane’s Bonovitz of a lawyer on the lateral job market. As part of his practice, the lawyer helps emerging-market countries in Latin America create public finance authorities. “I asked how he gets assignments, and he said, ‘Often from consultants.’ I asked, ‘Why can’t we form our own consulting company?’ He loved it. He said that’s great.” He was hired. Summer intern Eric Adler and Research Editor Shannon Holman aided in the research for this story.

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