Structuring your firm with a management services organization for success

Lawyers have increasingly been looking at ways to conduct the business side of things differently. And that makes sense. Those in the profession have been educated and trained in how to provide legal services, but many have not received similar support on how to cultivate their business and make it efficient. So they turn to those with a skill set that is better attuned to this facet of a law firm.

Of course, for a long time, lawyers have integrated people who cannot provide legal services into their practices. This has included both in-house team members and outside vendors to assist with major functions like accounting, operations, marketing, technology and growth planning. Increasingly, there has been a movement to integrate such individuals more permanently by vesting them with some ownership and control. Whereas only a few jurisdictions permit a true alternative business structure that allows nonlawyers to own the firms, there are other alternatives. One that has been gaining more momentum over the past couple of years has been the use of management services organizations (MSO).

In this model, law firms typically hold only those assets needed to provide legal services: the lawyers and the client files. They then contract, often for a long term, with an organization to provide the rest of the infrastructure. This MSO holds all the other assets: the firm name, website, facilities, equipment, nonlawyer support team members, technology and accounts. And it leases these items to the law firm while providing the services to the law firm that keep it functioning, outside of those services that the lawyers provide to the clients.

Such a structure has attracted law firms of various sizes and vintage. In addition to the promise of providing expertise and often some capital infusion, it allows the lawyers to focus on what they were trained to do, providing legal services and advice. That can be appealing to anybody from a newer lawyer who is just hanging their own shingle and is uncertain how to bring in their first clients to established firms, perhaps with principals who are looking to dial down some of their workload and are willing to sell their physical assets and contract with somebody else to provide the back office functions.

Of course, such a structure requires careful consideration. How it is constructed may play a major role in both how effective it is at meeting the lawyers' goals and whether it is consistent with their ethical obligations. With that in mind, there are a few keys we have seen to organizing a good MSO relationship.

One of the first things to consider is whether the lawyers are permitted to have independent judgment over the legal services they are providing. This concept is foundational to the services that lawyers provide. Traditionally, it has been one of the enumerated concerns whenever a nonlawyer becomes involved in the equation, such as through litigation financing.

To preserve this, lawyers must be able to freely make decisions regarding how to represent clients. An analog to this is that the lawyers should be the ultimate decision makers regarding what clients to take or refuse, how to staff a matter and what resources they will need to provide effective representation and advice.

Although an MSO will own the majority of the assets that are important to the functioning of the law firm and will assist in or even control the decision-making of most matters not directly involving clients, the lawyers remain responsible for the conduct of those in the MSO. Whereas persons who invest in an MSO may want to control as much as possible to protect their returns, lawyers must ultimately make decisions on many of these functions. Whether in the context of trust account handling, marketing or other firm functions subject to regulation, lawyers remain responsible for supervising the nonlawyers in the MSO to make sure their conduct conforms with the lawyers' responsibilities. This is the same as it would be with other vendors that a lawyer might use for these tasks. That they are bundled into a single provider with a long-term contract does not change this dynamic.

Another issue in California--and one that prevents California lawyers from having an ABS law firm--is that lawyers may not share their fees with nonlawyers. Of course, lawyers and law firms may pay for products and services using what they have earned. The importance is knowing where the line is. One effective method may be in having the amounts paid to the MSO independent of client factors. The most obvious issue would arise if the law firm made payments based on its income. But that is not the only potential structure that could implicate fee-sharing concerns. Whereas the number of clients being helped may be a reasonable way of measuring the amount of services that the MSO provides, that may risk venturing into fee-sharing.

A safer method might be tying the compensation amount due to the MSO based on the number of lawyers working at the law firm, or some other factor that would reasonably represent the volume of effort required, on top of the assets that the MSO provides to the law firm. In any case, lawyers are better positioned to demonstrate that they are not engaged in impermissible fee-sharing when they have an independent professional assess the reasonable value of the assets and services provided.

Another potential area for lawyers to consider as they enter an MSO relationship is to understand who their partner is. In most cases, these are long-term deals that may be anticipated to last for decades with severe penalties--often ones that may be significant enough to severely cripple the firm--for early termination. As such, lawyers should consider whether the MSO personnel have the experience in managing a business that will make the law firm more efficient. Consider that the legal profession is regulated differently and has unique market forces. So, there may be some higher risks in MSO who has experience in other industries or professions, but is newer to the legal services marketplace.

On that note, lawyers should also consider what happens if the MSO fails. In many instances, MSO owners are set up to assist multiple law firms, which may be operating at very different efficiencies. Because the MSO holds access to all of the firm's assets--names and trademarks, facilities, equipment, accounts, nonlawyer staff, etc.--if the MSO fails, there may be significant risks that the firm cannot survive. Lawyers should consider that possibility and determine whether there are terms that could provide protection against that happening, perhaps reverting ownership and control of critical assets upon certain triggering events that may foreshadow imminent distress for the MSO.

An MSO model for a law firm can be highly successful, providing benefits to both the lawyers in the law firm and the MSO that supports them. But it is crucial that the relationship be structured in such a way that permits not only the participants to flourish, but safeguards for the integrity of the practice of law and for contingencies that might negatively impact the long-term health of the law firm.

David Majchrzak is general counsel and a partner at Rosing Pott & Strohbehn.