Potomac Law Group is an innovative law firm that is leveraging its unique organizational structure and cloud-based technology to deliver high quality legal services to clients at a lower cost. I recently had the privilege of meeting with Potomac’s Chief Operating Officer, Marlene Laro, to discuss its business model.
Potomac Law Group’s Business Model
One of the reasons large law firms charge such high hourly rates is that their fixed costs are extremely high. A law firm begins earning profits when its billing revenue exceeds its fixed costs. Therefore, a firm with high fixed costs – such as a traditional large law firm – must charge high hourly rates. If it does not charge high hourly rates then it will not recoup its fixed costs quickly enough to earn a profit. The problem is that high hourly rates have several negative side effects. First, they limit the type of customers a law firm can serve. Second, they tend to decrease the overall demand for legal services.
Potomac’s business model is based on the simple idea that one can profitably increase the demand for high-end legal services by eliminating unnecessary infrastructure costs. By “unnecessary,” I mean, costs that do not improve the quality of legal services delivered to the client. The largest fixed costs for most firms are associate salaries and rent. Potomac’s leadership team realized that they could largely eliminate these costs without sacrificing the quality of their work product. Therefore, Potomac (1) only hires experienced well-pedigreed attorneys and (2) has minimal office space that is only used for client meetings. The majority of the time, Potomac partners work from home offices and communicate with each other via the firm’s cloud-based office management system.
This organizational structure creates a win-win-win situation for clients, partners and Potomac. The client benefits because they can access high quality legal talent at a fraction of the typical price. The individual lawyer benefits because they can reach profitability quicker and avoid the intense pressure of high billable hour requirements. Potomac benefits because the lower hourly rate expands its total addressable market. Its rates are reasonable ($325 – $350 per hour for partner level talent) so it can serve small clients that have limited budgets. But its lawyers are also incredibly smart and experienced. Many of them have 10 years or more of experience practicing at the highest levels of the profession. Therefore, Potomac can also effectively service large corporate clients.
However, this model does have its draw backs. Potomac’s lean structure prevents it from handling large-scale litigation matters that require extensive discovery and motion practice. Therefore, Potomac focuses primarily on transactional work such as Corporate Formation, Corporate Governance, M&A, Intellectual Property and Tax. But all things considered, this is a minor limitation. Especially since Potomac may eventually figure out a way to partner with e-discovery companies that could provide it with additional man-power on an as-needed basis. It is also questionable whether large groups of people will be needed to perform discovery and/or due diligence in the future. Many commentators predict that forthcoming Enterprise technology solutions will significantly decrease the amount of people needed to effectively perform these activities.
*Please note that these slides were created in late 2013 and are therefore slightly dated. Visit Potomac’s website for up to date head count and client lists.
Law Firm Distributed – The Future?
The most exciting thing about Potomac Law Group, and other firms like it ( e.g. Rimon, Conduit, Outside GC) is that they have the potential to grow substantially despite the fact that the demand for legal services is allegedly stagnant. In fact, Potomac’s growing customer base is a foil to the current consensus among large law firms that demand for legal services will be flat for the foreseeable future. It may be that the demand for legal services is growing but has been artificially limited by the organizational structure of dominant incumbent firms. Only time will tell.