The nation’s largest law firms have no obligation to report their financial results to the public, however, in the today’s climate, financial transparency is becoming more and more important. Clients are asking more details today about the financial state of their law firms, and even potential hires are interested in taking a closer look.
David Goldenberg, founding partner of VLP Law Group, sat down with Inside Counsel for an exclusive interview about the importance of financial transparency both for law firms and their clients and how firms like VLP are successfully implementing this practice.
“Law firms have no obligation to report their financial results to the public and while that sounds more ominous than it is, it’s because they are private partnerships,” Goldenberg said. “Some of this information, such as profits per partner, is publicly disclosed, but these are often reported according to an industry standard rather than from actual data. For instance, several corporate law firms typically publish annual revenues and profits.”
Since there are no third-party standards, each firm may report information differently, making it hard to make industry-wide comparisons. Historically, the legal industry has looked to some of these legal outlets for financial information about the country’s largest law firms. Unless you dig in to how the survey was conducted, there can be pitfalls with relying on that information. Following the financial collapse of some large firms, more firms are reporting because clients are asking more questions about the financial state of the firms they employ and prospective hires are also looking closely at firms’ finances before making career decisions.
In today’s changing climate, according to Goldenberg, a culture of transparency is good for business. As law firms have grown in size and complexity, the contract between firm and attorney has eroded. Firms are now run more like corporations and attorneys are making a financial decision when joining a firm. Transparency helps create an atmosphere of trust throughout this process. And, clients now have power in shaping the attorney-client relationship and are asking law firms to provide more value at a reduced cost.
“Increasingly clients across the board want to see more value for what they spend on legal services,” he explained. “These shifts in the profession have prompted firms to take a hard look at how they provide legal services. This focus and value has challenged law firms to review and change their business models. Smart firms continue to embrace the changes in the legal profession, which can only increase their business development opportunities.”
Most large law firms use variable compensation - what partners earn is based on the firm’s profitability and lawyers don’t always know how much they will earn until the end of the year. In addition, many larger firms are now run by a small management group comprised of partners in management roles and the firm’s business executives. In many firms with this management structure, partners may be some of the last to know about the firm’s finances. The collapse of large law firms, the prolonged fights for clients, profits and with creditors, have had many attorneys questioning the financial transparency of their own firms.
“Partners who know and understand how their firm allocates resources will be better attorneys and help create better law firms,” he said. “When a firm’s finances are transparent, attorneys will be more able to focus on practicing law, rather than being distracted by financial issues.”
More openness when it comes to the law firm’s financial goals can encourage an important discussion, advised Goldenberg. The financial model will point out the amount of revenue needed to achieve the firm’s goals for the year and how the firm expects to achieve that revenue broken down by month.
He added, “These goals are essential to achieving desired results and it keeps everyone involved in the challenges of meeting the law firm’s goal. This sharing of information can promote better collaboration and sharing of work to keep everyone more productive and the firm on track.”