Morningstar Law Group uses new business model

Mar. 02, 2014 @ 06:23 PM

About two years ago, a group of lawyers broke away from larger firms to form their own business law practice called Morningstar Law Group. The idea was that they could lower their overhead costs, have less debt, spread management duties among all partners, employ fewer lower-level attorneys, and offer lower rates to clients.

Attorneys at the firm say their business model is now working.
The firm started with 10 partners in the summer of 2012. They came from the large firms of K&L Gates, an international law firm with more than 2,000 attorneys, according to the firm’s website, and Wombyle Carlyle Sandridge & Rice, a firm that started in Winston-Salem that has 550 attorneys, according to its website. Morningstar now has 13 partners and five associates.
Jennifer Collins, a founding partner of Morningstar who previously worked for Wombyle Carlyle, said it was a combination of forces that led to the firm’s launch. The founders wanted to lower overhead costs so they could lower their rates for customers. She said they also wanted a more flexible work environment, and less administrative managerial work.
“There was a lot of rate pressure from clients who had seen their lawyers’ rates [steadily grow and go] up and up over the course of several years, and the clients kept pushing back….” she said. “Also [there were] higher and higher demands on partners to do more, and more administrative work and higher and higher demands on all attorneys to bill more and more hours to work hard and harder instead of working smarter.”
The recent recession had led to a “whole change” in the legal market that put the client in the driver’s seat in terms of price, she said.
“The clients were really calling the shots in this recession as opposed to the other downturns [where] we lost some clients who went out of business, but the whole legal market didn’t change during the other one,” she said. “It really put the client in the driver’s seat in terms of how their transactions were structured, what they were willing to pay for them,” she added.
They had seen examples of other firms that were able to start with lower costs, she said, and it was “just a matter of putting it all together and doing it.”
“So we wanted to kind of almost start over with a lower overhead and not put so much money into office space and furniture and also have fewer associates and more partners, which keeps the payroll down,” she said.
She said they agreed to launch the business with no debt, and funded the firm’s launch themselves. She said they had been following the “horror stories and headlines” about Dewey & LeBouef, a New York-based international law firm that filed for Chapter 11 bankruptcy in 2012.
“[No] one of us, honestly, wanted to be personally liable for the debts of the firm,” she said. “The easiest way to do that is not have any.”
William Henderson, a professor of law who studies legal markets at Indiana University Mauer School of Law, said there’s a pattern of lawyers leaving larger firms to start boutique firms to try to find different ways of serving clients.
“What’s happening is that national and international law firms have higher overhead,” he said, so there’s a trend of smaller firms popping up as lawyers are able to maintain their relationships with the same client relationships but with smaller overhead.
He said it’s happening in this more competitive environment where clients are more price sensitive, and they’re seeing that “shedding the cost structure of the big firms is going to be more advantageous.”
At one time, he said it was normal for a partner in a firm to raise his or her rates annually, to “lease another floor of Class A office space in a major metro area” and to get more lawyers, and more associates to do grunt work.
“The law firms are realizing that it’s not going back to 2007, 2006 – those days are gone,” he said.
Collins said that for the most part, the attorneys took most of the clients and work that they had from their old firms, with them. She said they also haven’t increased their rates “much” since they opened. She said the outcome has been “better than expected.” She said that in terms of competition with larger firms – in her own experience, she still shares a lot of clients with her own firms, and they work together on some problems.
“We hit the ground running and all were busy from the start, which is great,” she said of Morningstar’s launch. “You can’t tell your clients you’re leaving until you’ve already announced it to your law firm. (It’s like) jumping off a cliff and hoping they’re going to follow. (It was) better than expected.”
Financial results for Morningstar were not released for publication. K&L Gates reported that operating revenue for the year ended Dec. 31 of $1.16 billion, up about 9 percent from the prior year. Net income for all equity partners was down to $319 million in 2013 from about $320 million. A spokesman for the firm declined comment for this story. Also, an attempt to reach Wombyle Carlyle for comment by deadline on Friday was unsuccessful.