Five Reasons Law Firms May Not Adopt Hoteling
Even before COVID-19 kicked us out of our offices and made us realize that we could work effectively from home, law firms had for years been shedding significant amounts of office space as they became more efficient and cut back or eliminated obsolete functions.
The question now is, will the new work from home (WFH) paradigm accelerate law firms’ already shrinking office footprint, or are these organizations somehow different from other businesses and, therefore, less likely to adopt hoteling even if attorneys are spending less time in the office?
Five Characteristics of Law Firms
Before examining how law firms will ultimately change their consumption of office space as a result of the WFH trend, it is important to understand some of the unique characteristics of law firms. The following five “P’s” make law firms unique:
- People. A law firm’s “product” is its people. They still operate pretty much under the old apprenticeship models. They hire students from law schools and then invest years developing them into experts in their fields. As these professionals progress through their careers, their value increases, thereby enabling them to bill out at higher rates and generate more revenues for the firm.
Critical to this evolution are: (1) The mentoring that comes from working closely with more senior professionals, and (2) The learning by osmosis that, as Lin Manuel Miranda might say, comes just by being in “the room where it happened.”
- Peers. While every law firm has its relative strengths and weaknesses, to many potential employees and clients, these organizations are viewed as providing generally the same benefits as their similarly sized competitors. That means attorneys are keenly aware of what their peer firms are doing at all times.
Because competition for talent and clients is fierce, many law firms worry that if they deviate too far from their peer firms, it will make them less competitive and, therefore, they could lose talent or clients.
- Profits. AM Law 100 and 200 law firms are essentially public companies in that they report their profits and revenues to the American Lawyer every year. As a result, they are hyper focused on anything that impacts revenues or expenses.
But the focus on profitability isn’t limited to the country’s largest firms. A firm’s ability to attract and retain partnership talent (and to pay competitive associate salaries) is dependent on them keeping pace with their peer firms in terms of profitability. While real estate is often a law firm’s second largest line item expense, it is a distant second behind payroll and a relatively small fraction of gross revenue. For many law firms, real estate costs may represent only 5% to 7% of gross revenues depending on their market.
Thus, before deciding to take away an important amenity that is not going to save a huge amount of money, law firms need to ensure that it will not have a larger, negative impact on their revenues.
- Portability. Every day, a law firm’s assets walk out the door. What keeps them coming back? Law firms are held together by their unique culture and the important mentoring and working relationships that develop within the office over time. Thus, real estate is a major factor in holding the firm together.
- Paper. If you walk the halls of any litigation firm or department, you’ll quickly see that this profession is still a long way away from being paperless. War rooms and offices are overflowing with red wells, documents and other papers, and the attorneys who need to refer to them want them close by.
How these Five Factors Will Ultimately Impact Space Decisions
Now let’s analyze whether adopting hoteling arrangements and further shrinking their office footprints in response to the growing WFH movement makes sense for law firms in light of their unique characteristics.
1. People. Because of the relatively high starting salaries of associates in the larger and even mid-sized firms, there is more pressure than ever on firms to accelerate the training and mentoring of junior attorneys so that they can become profitable more quickly. If a new attorney is attached to the hip of a successful, senior attorney for 50 hours a week in the office, that new attorney’s career will progress at a certain pace.
However, all else being equal, if that new attorney is only in the office 25 hours a week and the senior attorney is only in the office 25 hours a week (not necessarily with full overlap), the development of that new attorney will take longer. The longer the development takes, the lower the internal rate of return on the investment. Thus, encouraging people to work remotely by eliminating dedicated seats or offices might not make a firm more competitive.
If a young attorney were considering working for two different firms: one where professionals worked remotely 40% of the time and the other where they worked remotely only 15% of the time, it would pose an interesting choice for that candidate. While the former firm may provide more opportunity for flexibility and work life balance, with fewer senior professionals around during the day, will she get the same training and mentorship that a more vibrant office would offer?
Likely Conclusion. It is likely that remote working will delay the professional development of junior attorneys and this will ultimately cost the firm more than what it will save on real estate by taking less space.
2. Peers. Again, as law firms tend to be conservative and don’t like to stray too far from the industry standards (or at least from what their perceived peer group is doing), it can be very risky to initiate a change in space utilization that offers its professionals less than what its competitors are offering. If a lateral partner is considering two similar law firms but in one situation she will receive a nice, dedicated corner office and in the other she will not even have a dedicated seat, will she choose the former firm over the latter, all else being equal? Is it worth taking that risk given the amount of business at stake?
Likely Conclusion. Most law firms will carefully assess what their competitors are doing before they decide to take away a meaningful benefit.
3. Profit. Let us look at a hypothetical law firm example to see if the economics of hoteling make sense.
Assume XYZ Law has 40 attorneys, their average revenues per attorney are $600,000 (or $24M total) and that, with every attorney getting a dedicated office, they lease 26,000sf (i.e., 650sf/attorney x 40 attorneys). Also assume their rent is $40/sf ($1,040,000 per year).
Now let us assume that a consultant comes in and tells XYZ Law that, on average, their attorneys are only in their offices about 60% of the time resulting in a lot of wasted real estate. Instead of paying for space that isn’t fully utilized, they propose that XYZ Law convert to a hoteling concept where no one has a dedicated desk. They recommend that the firm provide unreserved offices for 70% of headcount (i.e., 28 offices), thereby ensuring that there will always be a place for someone to sit on any given day.
Further, the consultant points out to XYZ Law that, by reducing their space requirement by 30% to 18,200sf, they will lower their annual lease cost $312,000, to $728,000 per year (i.e., $40/sf x 18,200sf).
That sounds great on paper but is it really a wise business decision?
Likely Conclusion. To reduce real estate costs by $312,000 (1.3% of their $24M annual revenues), XYZ Law took away an important amenity (i.e. a dedicated office) that most of their peer firms offer their professionals. If, as a result, even just one attorney decides to leave the firm, it will have cost XYZ Law $600,000 in lost revenue—almost twice the annual rental savings.
Further, if XYZ Law planned to grow the firm by attracting lateral attorneys who are used to having their own offices, it has now made itself relatively less attractive to these candidates as compared to its peers who still offer dedicated offices. This may not be a good financial move.
4. Portability. What happens if lawyers stop coming to the office or come in a lot less frequently? Forget about the negative impact on training, mentoring and even collaboration. What will tie the attorney to his or her firm or stop him or her from jumping to a competitor?
Lateral movement of attorneys was almost unheard of until the late 1980s or early 1990s. While these moves are now much more common, many attorneys still resist recruitment efforts because of the loyalties, friendships and working relationships they have built up over time at their current firms. The more time people spend in the office, the more likely they are to form the types of bonds that will keep them at the firm. The less time they spend in the office, the less likely they are to build the connections that anchor them to their firm.
Hoteling encourages remote working. It’s one thing to accommodate the WFH movement, it’s another thing to encourage it.
Likely Conclusion. While we expect attorneys who are doing quiet, heads down work to spend more time in the future working remotely, we do not believe that their law firms will be quick to take away their dedicated offices. The cost of a dedicated seat for an attorney (in our example above, $26,000/yr.) is relatively small compared to the revenue generated by that attorney (in our example $600,000).
Hoteling won’t eliminate this $26,000/yr cost, it will only reduce it by some percentage. As a result, implementing a shared office/hoteling concept which only marginally reduces an already small expense at the risk of diminishing the professional’s ties to the firm is not going to be a great risk reward, especially if the firm’s competitors are offering something more.
5. Paper. This one is pretty easy. A litigator with a room full of depositions, interrogatories, briefs and filings cannot pick all of this up every day and move to a different room. Hoteling attorneys in certain practice groups will be impractical.
Likely Conclusion. Hoteling will need to be applied on a case by case basis to attorneys and practice groups based on their dependency on paper.
Remote working is here to stay, and it will certainly become an integral part of the law firm work paradigm going forward. However, as law firms start to contemplate how this WFH trend will impact their office footprints in the future, they should be careful not to blindly follow what other industries are doing.
The fact that many law firms are surviving the remote working arrangement that was imposed on them by the COVID-19 crisis is largely due to the strong firm cultures and relationships that were built up in the office over the many years preceding the pandemic. Any rush to drastically change things based on a short-term experiment may be costly.
This article was written by Glenn Blumenfeld of Tactix Real Estate Advisors in Philadelphia.