Multidisciplinary Organizations (MDOs)
The Competitive Alternative
Content
1. Overview
2. Multidisciplinary Organizations and Professional Services
[1] Globalization and Localization
[2] Core Competencies and Quality
[3] Cost Effectiveness Through Technology
3. MDOs – Client Relationships and Choice
4. Multidisciplinary Organization Models
[1] Independent MDO (I-MDO)
[2] Relationship MDO (R-MDO)
5. Rules and Enforcement — Interests of the Parties
[1] Unauthorized Practice of Law by an Association
[2] Multi-Jurisdictional Practice — Unauthorized Practice by Lawyers
[3] Referral Fees
[4] Advertising Marketing Directories — Organization and Lawyers
[5] Other Issues
6. Competitive Implications
7. Summary
1. Overview
The first chapter discussed the development of multidisciplinary practices and partnerships through 2001. It did not discuss other alternatives where traditional networking organizations expand to include multiple professions. Through membership in the multidisciplinary organization (MDO), many different types of professionals are able to aggregate resources and offer true multidisciplinary services to their individual clients. The professionals are able to develop new relationships and at the same time resolve all of the ethical and regulatory issues that have been discussed throughout this treatise.
Is this possible? Let’s jump ahead to the year 2010.
Professional Services, Inc. — John Smith is an attorney in a small office in Wichita, Kansas where his practice focuses on agricultural law. He has developed a regional and a national reputation in agricultural financing. His six-attorney office has no branches but does from time to time become involved in complex transactions.[2] These transactions could put a strain on the firm’s resources if not for the fact that his firm belongs to Professional Services, Inc. (PSI), a subsidiary of Microsoft. John and his partners regularly use the PSI team members in complex litigation and commercial matters.
PSI brings together on-line many types of professionals in areas of law, accounting, technology, management consulting, financial planning, real estate, and similar areas. After an extensive interview, references are checked and the firm or professional can join the group by paying an annual fee based upon the number of professionals at the firm and a percentage of the previous year’s overhead. As a member of PSI, John gains instant access to 60,000 screened professionals from small and medium-sized professional firms across the United States and Canada. With a few clicks on his mouse, he can locate professionals, review their credentials and run a preliminary check for conflicts. After his review, he can set up a videoconference, right from his search results.
PSI is managed and controlled by Microsoft but does have advisory boards for each profession to assure compliance with ethical rules. To assure that members benefit, Microsoft spends more than 30% of the revenue on advertising PSI. This includes advertising at its websites like MSNBC and in printed publications that go to hundreds of thousands of small businesses.
World Services Group — Judy is a lawyer with a very large law firm that has offices in a number of jurisdictions. Her clients are principally large international companies. She, too, requires many different professionals to complete the complex transactions on which her firm works. Even though the ABA in 2003 finally passed a recommendation to permit multidisciplinary partnerships, which was adopted by 37 states, her firm believes it has found a better alternative in World Services Group (WSG).
WSG is an organization formed by large service firms themselves. Each member is a leader in a profession, field or jurisdiction. They include the traditional regulated professional practices such as law, accounting, and real estate, as well as computer and management consulting, insurance, banking and other financial services, investigative services, and related services. In total there are more than 40 different services offered. The members are the companies, firms or networks of firms. Each group has placed detailed information on the members and on each professional into a database. With a few clicks, each professional can choose among 100,000 professionals in 140 countries. The firm, company or network pays an annual fee. The fee covers the technology, which is also supplied by Microsoft, internal networking programs and external marketing.
As an association of independent entities, a board of directors sets general policies with which each member must comply. In addition, WSG members regularly meet based upon their overlapping interests. The multimillion-dollar marketing budget is used for joint client seminars and publications.
The members’ principal competition for projects is the Big 5. As a result of the reputations of the members, existing contacts with major clients and governments WSG has gained a reputation for having the best independent firms. In recent years, members feel that WSG has made it possible for them to acquire a disproportionate amount of work for its members.
While PSI and WSG are fictional, the building blocks for such organizations are already in the market place.[3] These services include matching services such as Elance.com and First Law, UK.[4] There are also associated service providers (ASPs) that permit professionals to create secure extranets with their clients.[5] Combining these functions with those of a traditional professional network would result in a multidisciplinary organization.
PSI, a highly sophisticated directory, is an example of a possible Independent Multidisciplinary Organization (I-MDO) where independent professionals pay a fee to a third party to match their needs with the expertise of other professionals. To locate one or more professionals from the database to meet their needs, consumers, both individuals and small businesses complete a form. The needs are matched with those of professionals who would like to handle the matter. The professionals are notified by email when there is a match.
WSG is the Relationship Multidisciplinary Organization (R-MDO)[6] where the service providers themselves created an association to systematically establish relationships among a number of networks, firms, companies and, most importantly, the professionals themselves. Membership is limited by the type of service and by jurisdictions depending upon the nature of the services.
The result is that all types of professional services are available through WSG. In this way each professional can easily locate and assemble a team by choosing the exact professional to meet clients’ needs from firms with whom they have a relationship. The MDO extends the concept of a professional networking, which is common in the legal profession,[7] to other service providers. Combining the traditional functions of professional networking organizations (publications, meetings, committees, etc.) with databases of professionals allows for the instant creation of multidisciplinary teams. The MDO is more than an association; it is an entity whose objective is to assist members in acquiring and retaining clients.
2. MDOs and Professional Services
The first chapter discussed several trends that accelerated the creation of the Big 5: globalization, core competency convergence and increases in efficiencies resulting from technology. The MDO must be placed in context as to provide a contrast between it and the Big 5 consulting firms.
The reasoning might seem circular that professional services are created out of the demand for the services.[8] Demand is largely external, although new services themselves sometimes create the demand for those services. Assuming there is a demand, the primary competitive issue for professionals is how they can locate clients who want or need their services. When competition is high, as is the case in the service markets today, the cost of client acquisition becomes more important. Law firms, which spent little for marketing in the past, have extensive and growing marketing departments. That said, law firms, no matter what their size, cannot match the Big 5’s marketing budgets that together exceed $100 million.[9]
Service providers are now expanding geographically as never before. Their objective is to locate geographical and topical markets that have not been fully penetrated. One of the primary benefits to professionals in the Big 5, as one-stop shops, is that they reduce the cost of new market penetration through the cross-selling of new services by professionals who are already in the market-place. This leverage is not available to independent firms, which must undertake significant costs in order to expand into new markets. It is also not available in most law firm networks because few law firms have an interest in assisting a fellow law firm member, which could become a competing law firm, enter their market. However in the case of an MDO, non-competing professionals can create new joint services using each other’s services.
The MDO, by combining traditional networks with new technology, creates a way to penetrate existing and future markets.[10] It does so by creating a high level of resource transparency between independent networks, companies and businesses so each has the resources of the other available in all markets. They can provide access to professionals everywhere for every service as well as create new services. Ultimately, the scope of the services could extend beyond that offered by the Big 5.
Once contact is made among the professionals, a peer-to-peer relationship can be developed independent of the central network. [11] All this is done without the overhead of a large centrally located bureaucratic organization. Resources can then be spent to cross-market services while internal control shifts to each unit of the MDO and focuses on its own core competencies.
Access to the MDO can be extended to the public or the corporate client if the organization would like to further broaden the referral base. The gatekeeper is no longer required. The corporate client can create peer-to-peer relationships outside of the system with selected professionals. The result is that the centralized MDP loses some of its advantages and the members of the MDO receive additional referrals. [12]
While the Big 5 will maintain their considerable advantages of common quality and responsiveness standards, MDOs can create structures to challenge these advantages.
[1]—Globalization and Localization
Clients’ needs for services are unique. There are no two businesses that have the same needs at the same time in the same locations. The Big 5 seeks to solve this problem by bringing resources in-house to offer all services to businesses everywhere. The MDO seeks a solution by combining existing networks and service providers into a common organization. Each has the common objective of being global as well as local at the same time.
Legal services traditionally have been local in nature. This is changing, as services are more uniform.[13] It is not uncommon for lawyers to have a national practice in a particular area of the law. The Internet makes it easier to locate attorneys with national expertise as John in the PSI example. It also makes it possible for John to market his services to a large group of potential clients.
The Big 5 have used globalization as a way to offer similar services and products developed in one market or country in other markets or countries. Beginning with accounting and auditing, which required common standards be applied, the Big 5 have applied the same principal to other services. As transactions become even more uniform, products developed in one jurisdiction can be applied in another. The result is a high return on their investment. True economies of scale can be achieved because they are at the same time global as well as local.
Using information technology, the Big 5 have the opportunity to localize and tailor services to specific clients anywhere in the world by using vast resources developed in other parts of the world. The client can then further refine the services with the local professional. Professionals, who can provide these tailored services, create a loyal client who knows that in the future all of his consulting needs can be satisfied in one place. Law and consulting firms, not part of the Big 5, can not provide these services on a uniform and global basis.
The challenge for the professional service organization lies in being able to differentiate their services. In theory, firms or companies that are members of an MDO have the advantage because they have access to greater resources that they do not have to maintain themselves. Most importantly each is already a brand associated with a type of service. On the other hand, the Big 5 have the resources to reach many more possible clients.
To provide this transparency for the services of the members, the MDO will need to create structures in which information can be shared local, globally and between the different members and with clients. The type of information would provide comparisons with the competition in each of the areas. When this is done, it will become clear that the MDO members can offer far more services then the Big 5.
Because top professional service firms must provide both local as well as global services, they have no choice but to be part of an MDO or MDP. While the Big 5 are adapting their strategies to both localization and globalization, the larger issue is whether their structures are suited for optimum performance when new technology makes a decentralized operation much more efficient and cost effective.
[2]—Core Competencies and Quality
The American Bar Association’s Commission on Multidisciplinary Practice in its final report added competency as one of the core values of the legal profession.[14] While the other core values may be what distinguish a profession from a job,[15] competence of professionals is what clients seek, perhaps above all.
The Big 5’s MDP strategy developed because complex transactions require assembling and managing teams of competent professionals to assist the client. As competencies converged or began to overlap this raised the unspoken issue that is a the heart of the multidisciplinary practice debate: Who manages the team when many issues are involved in the transaction? It is the “manager” who must make decisions on the importance of each of the services being provided to achieve the desired result. This is where the power lies and what may be really at stake in the MDP debate.
The Big 5, using their multiple services, would like to manage the entire transaction. Managing the transaction means higher fees than simply being part of the team. Perhaps this is why the Big 5 places so much emphasis on management and marketing training.[16]
Law firms and other professionals may be extremely competent in their limited areas of expertise. However, the skills that are required to reach and implement a conclusion are more managerial then professional. Since multidisciplinary partnerships are prohibited in most of the principal jurisdictions, the very real question for the legal profession is: How are lawyers going to develop these managerial skills that the client considers to be the most important element of the transaction? For the time being, law firms, because of ethical restraints or lack of skills, are unlikely to be the ones chosen to manage the transaction. This means that the Big 5 have the capacity to control the transactions regardless of the other services that may be required to complete it.
Again the MDO can assist all of its members in developing new management skills by sharing information. This can be done at meetings and in publications. Members can meet individually to form sub-groups. These new skills will make each of the members more competitive as well as more competent to provide and manage complex services for their clients.
[3]—Cost Effectiveness Through Technology
More than one third of the cost for legal services is overhead including rent, support, equipment and marketing. Technology in recent years has reduced the staff support costs and generally improved productivity.[17] The Internet, because it is accessible from any location, will even make more change in the cost structure possible,[18] as even less space and support are required and a different type of marketing is deployed.[19]
The Big 5 are already deploying the Internet to take advantage of its efficiencies. For example, they are in the process of physically restructuring their offices. In some cases this means standard-size offices for everyone while in other cases the complete elimination of offices even for the partners. Should a partner require a space, it must be booked in advance.
With technology, virtual private networks can be created by anyone. These secure communication links permit direct access from home or on the road to all information. When professionals work at home, they require less staff support. New technology also means that operations can be efficiently managed by making internal documentation easily available without the need for printing and distribution. Contacts with home office departments are possible from anywhere so that separate regional administrative centers are no longer necessary.
MDOs can create the same reduction of overheads even though the member organizations are independent. The Internet can be used to bring the sum total of all the resources of the individual parts of the MDO to each individual professional. For example, office space can be scheduled in remote locations through the network.[20] Assistance can be provided when professionals travel through a free-advice policy.
Marketing is one area where legal networks have not taken full advantage of their power. Using a database can make marketing very low cost since it creates the opportunity to share information with clients and non-clients based upon self-defined interests. Much of the marketing of the future will be matching interests of clients to those areas in which the firms have expertise. Demand for new services is created by demand for old services.
A major concern of lawyers is that they do not have the same daily contact with clients as the Big 5.[21] If members know how to use information, cost efficient opportunities are easily created for the professionals and entities to market directly to clients. Information can be shared to cross-sell services or create bundled services.
The MDO reduces costs for services while it increases the return to the professional providing the service. The costs are reduced by the elimination of distribution inefficiencies.[22] Professionals deal directly with each other in real time and with their clients. The resources available for each unit are the total resources in the virtual network as a whole rather then the limited resources at the individual member firms. Those resources can efficiently be deployed where and when they are needed.
3. MDOs v. Big 5 – Client Relationships and Choices
The heart of the MDP debate is creating relationships with clients so that they are attracted to the one-stop shop. Clients want the opportunity to choose. The Big 5 and the MDO members have similar but different perspectives on these objectives.
The Big 5 are seeking to maintain and consolidate their global lead in the professional services market by creating relationships with existing and potential clients.[23] Increasingly technology is being used. While bar and other professional associations have made good use of technology to channel communications to and from the organization, few associations use it to foster relationships among members themselves. Peer-to-peer networking is still an untapped opportunity for almost all professionals outside of the Big 5. At present most of the networking is done at meetings rather than on-line.
In the same way the Big 5 create teams internally and develop relationships[24], independent professionals and organizations could create competitive, if not better, alternatives for multidisciplinary services. A group of independent firms can likewise increase the level of internal contact among professionals in different fields. For example, environmental lawyers would have the opportunity to network with environmental consultants, engineers and others who have common interests. When information is collected, it can also be shared with clients of all of the members[25]. In short, building these relationships makes it possible for the MDO to take multidisciplinary practice to its logical conclusion. It permits professional service providers the opportunity to focus on one or several core competencies but at the same time have access to all services.
This model contrasts significantly with the existing Big 5 strategy to bring all services in-house. Even while some of the Big 5 are reorganizing to create separate entities for accounting/auditing and their consulting practices, their model remains the management of large numbers of professionals operating under a single brand name. The strategy is the same for large multinational law firms that have become MDPs that generally elect to retain their other professional services in-house.[26] The MDO also permits establishing a secondary name brand that can be used by the member firms but without the ethical constraints discussed throughout this treatise.
One-stop shopping is about choice. Ironically, at the same time the Big 5 are explaining the benefits of the one-stop shopping, the in-house MDP model may actually be undermining the very purpose of expanding choices to clients. The reason is that the only services that are available are from the professionals in the MDP itself. If a grocery store only offered its own brand names, it would not be a one-stop shop since its capacity to offer products is limited. The same limitation applies to the Big 5.
The MDO, where each member individually focuses their practices and services on a few competencies, can offer the public and businesses even greater choices at a reduced cost. The MDO model is likely to be very competitive since it would permit a greater amount of tailoring of the services to meet the exact needs of the client by offering an expanded palette of choices. Growth of the available services would be unlimited since each professional entity manages itself. New services can be readily added to further increase choice.
The MDO can go beyond the Big 5 model by creating opportunities for clients to become a de facto part of the system.[27] While the existing MDPs’ one-stop shopping is based upon the professional gatekeeper at the MDP who selects other professionals, why is this necessary? The MDO retains the gatekeeper professional but it could empower the corporate client to shop directly for services that are contained in the MDO. The client becomes almost an associate member. This latter opportunity is likely to have great appeal to the in-house corporate counsel who wants to select the best professionals from among a range of professionals who have already been screened by a reputable organization.
While the Big 5 may have ethical and regulatory issues, they are well organized. On the other hand, the MDO will face organization and structural issues when they are created. To achieve their objectives, standards and rules must be adopted by the MDO to apply to all the members when working with clients. Since the MDO professional team will be judged on the same performance standards as an in-house MDP, these standards are going to require significant amounts of work. New skills will need to be developed as the professional roles converge with that of managerial roles.
4. MDO Models
In the beginning of this chapter, the two hypothetical examples were introduced and have been referred to in a number of places. Before evaluating the ethical issues, additional detail on the models would be useful. They are the I-MDO and the R-MDO.
[1]—An Independent MDO (I-MDO)
There are already a number of virtual MDO’s that are interested in providing consumers access to professionals.[28] The user simply enters some basic information about the issue, which is then matched with a lawyer, architect, accountant or other professional. In addition, there are a number of services that provide real time answers to questions from experts, including lawyers.[29] At present, on-line services do not attempt to match professionals to professionals, though the professionals themselves can do this through the services. The services charge the lawyers a monthly fee. The payment of a fee for possible referrals raises a number of issues, though if done correctly, they can be resolved.[30]
The I-MDO is essentially the same as a directory with the added feature that the members must have a certain reputation for quality. The members must also trust that the criteria for selection have been objective. Without these common standards, developing relationships among members will not occur.
Several ethical issues are discussed in the next section.
[2]—Relationship MDP (R-MDO)
A more sophisticated concept is the relationship model where a group of independent professional service providers themselves create a permanent entity to act as the intermediary between them, i.e. a relationship multidisciplinary organization. Even though the MDO is easy to conceive, the American Bar Association Commission on Multidisciplinary Practices did not mention or discuss it.[31]
Today there are many networks of professional firms in a single profession that provide access to resources at the other member firms. While the firms are independent, they cooperate to provide services to clients. In some cases, these networks function semi-autonomously. In others, they provide back-office services to the members.[32] The R-MDO, because it contains more members, could provide, as necessary, a similar range of services that the home offices of the Big 5 provide their other offices.
The real benefit is economic since professional service firms require managing large numbers of people. There is a disproportionate increase in the bureaucracy as the number of locations increase. The fundamental benefit of membership in the MDO is that the client receives the services but the member firms are not confronted with the daunting task of managing large numbers of professionals in remote jurisdictions. They do not have to harmonize salaries and benefits among the professionals since each member does this independently.
The R-MDO model takes the American Bar Association’s ad hoc model, which is based upon individual networking, four steps further:
Once the R-MDO is created, the fundamental question is whether it can meet client needs. This very issue was discussed in Cryus Freidheim, The Trillion Dollar Enterprise, (Perseus Books, 1998). Freidheim, vice chairman of Booz-Allen Hamilton, sets out the same elements discussed in this chapter — globalization, standards and localization — as characteristics that will determine the success of any business the new economy.
He defines “global” to mean that businesses must serve and have access to clients around the world, understand customers, meet and anticipate their needs, obtain resources as well as develop market information. In the professional services market, only the Big 5 have already accomplished this as a result of their accounting and auditing practices. Law firms, notwithstanding the number of offices, are a long way from this global coverage.
To be successful, an organization must be able to set world standards. They must show leadership and innovation, provide value and performance, and have processes, people and capacities that define these world standards. Many of the large law firms such as Baker & McKenzie and Clifford Chance, are far along on meeting these definitions. An MDO consisting of the leading firms would have the advantage, since the highest standards are part of the selection criteria.
Lastly to be global the organization must be local everywhere. Freidheim defines “local” as understanding local customer’ markets, having a national image, local workforce and local operations. While the largest firms may have 50 or more branches, many are not local in that they have few local professionals.[34] Some may argue that localization is not required when advice is being provided for global companies. However, because lawyers deal with governments, understanding local conditions may be difficult unless the firms are clearly local.
Even though the Big 5 may be well on the road to achieving each of these standards by themselves, according to Freidheim a single entity achieving the highest level of each of these standards is not possible. The only way to achieve the highest level is through cooperation with similar entities that share a common vision that he describes as the relationship enterprise. The R-MDO may in fact be the ultimate MDP because it is able to grow globally to be truly local in every jurisdiction. Beginning with the best firms and companies, it can rapidly set world standards for services.
Many ethical issues discussed in this treatise can be resolved without changing the existing rules. For example, the R-MDO could grow to represent all possible clients without conflicts of interest since those conflicts are confined to the participating entities.[35] On the other hand, there are some issues that are similar to those found in in–house controlled MDPs. For example, location is largely irrelevant; professionals will be even more tempted to advise in jurisdictions where they are not licensed.
5. Rules and Enforcement — Interests of the Parties
In the introductory part of this chapter, two hypothetical organizations, PSI and WSG, were described. How do they measure up ethically?[36]
The traditional rules that govern lawyers, accountants and other professionals are based upon concepts grounded in relationships between clients and professionals. They are not generally based upon the relationship between the client and a law firm[37] or a relationship with a directory. Using communications tools like the Internet, without separate organizations like WSG and PSI, does not create issues that have not been dealt with in other chapters.[38]
The standard issues raised in Chapter One and throughout this treatise can easily be dealt with because of the independent nature of the participating professionals, firms and companies in the MDO. MDOs, absent fee splitting, are consistent with the both the ABA and AICPA rules that regulate the individual professional since there are no changes in the professional relationships with clients. Confidentiality is maintained when there is an attorney/accountant/client relationship established because actual cases are handled separate and apart from the MDO. The MDO is consistent with the conflicts of interest rules since the entities retain their independence from each other. Fee sharing, prohibited by the ABA rules, is not an issue even if there is a central billing system because the function would be bookkeeping rather than fee sharing.
However, WSG and PSI may create other ethical concerns, such as the unlicensed practice of a profession, multi-jurisdictional practice, professional referral fees, advertising and others.
[1]—Unauthorized Practice of Law by an Association
As was set out in the opening example, John pays a fee to PSI each year in order to have access not only to the resources but also to receive referrals from other members with whom he works on cases. He also knows that 30% of the fee goes to marketing the organization to consumers and small businesses. WSG’s principal purpose is to allow Judy and leading professional firms to gain access to resources and network with other professionals, but also to market WSG as an alternative to the Big 5 MDPs. Over 50% of WSG’s budget is dedicated to internal and external marketing. Is PSI or WSG practicing law?
The purpose of the attorney prohibition on assisting others in the unauthorized practice of law is to protect the public from the consequences of incompetent legal services. Because the definition of the practice of law is unclear and varies from state to state and country-to-country, one must look to specifics to determine whether promotional activities by an entity come within the scope of law practice.
Matching services create a database where clients can post needs and be matched with lawyers who perform legal services. This could not reasonably be said to be the unauthorized practice of law.[39] Under EC 3-5, the practice of law relates to the “rendition of services for others that call for the professional judgment of a lawyer.” Professional judgment is further defined as the “educated ability to relate the general body and philosophy of law to a specific legal problem of a client.”[40] The underlying rational for the rules is the assumption that there is a client. Marketing assumes that there is no client and therefore it cannot be the unauthorized practice of law.
In the case of an on-line listing service, there are no practice of law issues since the service is not providing legal services but information, which is protected speech. Attorneys need to be sure that the information in the directory or online is in compliance with state bar regulations relating to their listings.
Online directories that are searchable by practice area means that lawyers, particularly if they specialize, may be tempted to practice outside of the jurisdictions in which they are admitted. In addition, from time to time a lawyer with a particular expertise is featured in WSG publications. If these lawyers are hired, does PSI or WSG incur liability for promoting unlicensed practice by attorneys not admitted to the bar?
While the technology aspects of these issues have not been addressed,[41] there is no reason to think that the general rule should not apply. For example, while the behavior might be frowned upon, courts have held that in disaster or mass torts that marketing by law firms from other jurisdictions is not practicing law. Even if the rule should be changed, given that the solicitation rules are enforced by the jurisdiction that admitted the attorneys, these jurisdictions may have little interest in enforcing prohibitions in another jurisdiction against an entity that merely supplies information but is not involved in the selection.[42]
Absent circumstances where the WSG or PSI becomes involved with clients directly, they would not violate the unauthorized practice of law statutes and regulations.
[2]—Multi-Jurisdictional Practice[43] — Unauthorized Practice by Lawyers[44]
John is admitted only in Kansas but spends at least 30% of his billable hours traveling to other jurisdictions or advising on the law of other jurisdictions. This is particularly the case in several states that have patterned their agriculture laws after Kansas. He also represents a number of clients before various boards and commissions, in particular, the Agricultural Department. Approximately 30% of his work comes from PSI in which he is listed as an expert in these areas.
John is regulated by the Kansas Bar Association because: (1) the state or local association has a vested interest in protecting the public; (2) local rules or conditions may be unique; (3) the local professional association may want to protect itself from outside professionals to assure a level or quality or professionalism; and (4) some local professionals would like to limit competition in the jurisdiction.
Kansas’s rule 5.5(a) states that a lawyer must not practice law in a jurisdiction where doing so would violate regulations of the profession in that jurisdiction. When John does practice in other jurisdictions, Kansas could penalize John for his practice. These rules would seem to be in opposition to both clients’ interests (to have the best possible legal representation) and the objective of multidisciplinary practices (to use the best professional for the job). John is open to sanctions both in the state in which he is practicing without a license and in Kansas. However, the bar has tended to ignore unauthorized practice of law by attorneys from other jurisdictions, particularly corporate counsel,[45] absent some egregious circumstances.[46]
[3]—Referral Fees[47]
Referral fees for work are suspect and viewed as unprofessional. In the case of the medical field, they can be illegal.[48] While the rules are very strict in the medical field, attorney rules have substantially changed to permit advertising. The restrictions seem to be aimed at referral fees that are outright solicitation or are fee splitting.
Referral fees are permitted when they are reasonable and not related to a particular transaction or matter.[49] For example, firms lending funds to other firms and accepting referrals as payment and payment of a bonus for each referral by an employee are prohibited. The service provider, such as PSI, cannot charge a transactional fee for each referral but it can charge a percentage of the overall transaction. If the amount is excessive, the fee may be suspect.
PSI offers the possibility of referrals both from the public and from other professionals. WSG offers professionals the opportunities to get to know others, share information and, in particular, place information about them in the database. Each receives a fee. Are these referral fees prohibited by bar regulations?
In Alabama State Bar Association v R.W. Lynch,[50] the court dealt with facts similar to PSI. In that case a number of independent attorneys created a commercial for legal services. When clients called a telephone number, they were referred to the attorneys who had paid for the ad. This was held not to be a referral service, but permissible advertising. Since payments are not based upon the number or size of the referrals, John’s participation in PSI should pose no referral ethical issues.
WSG is different in that it is more of a networking organization. Attorneys can participate in a networking group provided that the membership fee is fixed and not based upon work generated, the referral function is not the sole purpose, the lawyer does not accept clients based upon referrals from other members, lawyers do not solicit members and the lawyer does not set up a booth at the networking convention.[51] In short, as an organization whose objective is promoting professional activities, WSG should not violate the ban on payments for referrals and would not be involved in fee splitting.
[4]—Advertising Marketing Directories — Organization and Lawyers
John joined PSI not only because of the resources that PSI makes available but he knows that PSI/Microsoft, in order to retain members, must spend considerable amounts on advertising to “guarantee referrals.” Judy’s firm pays indirectly a portion of the advertising for WSG whose budget is $5 million. What rules, if any, apply to PSI, WSG and their members related to advertising?
Each profession has their rules of permitted advertising.[52] To be viable, PSI, the service provider, must attract a large number of consumers of services. This requires a concerted marketing effort. While in the United States attorneys now have fairly liberal advertising privileges, lawyers in many other jurisdictions are prohibited from marketing.[53] The professionals could be responsible for the advertising of the service provider.
The first issue is whether John and Judy are advertising or whether the activities of PSI and WSG are independent of the members. In the United States advertising is permitted if it not false and misleading.[54] Thus, the issue is whether the advertising violates the rules of the lawyers in the association. In the United States, lawyers are subject to ABA Model Rule 7.2.
Rule 7.2 Advertising
(1) pay the reasonable cost for advertisement or communications permitted by this Rule;
(2) pay the usual charges of a not-for-profit lawyer referral service or legal service organizations; and
(3) pay for a law practice in accordance with Rules 1.17.
While lawyers have had very specific rules on directories, WSG is not a directory but an association. Its directory is incidental. However, if the materials from the WSG contained language to the effect that the materials were meant to comply with all applicable rules and that they were “void where prohibited,” it would have additional protections.[55]
PSI is a directory, albeit more sophisticated then most. PSI does not have activities other than the information that is made available to each member. In the case of directories, the directory publisher has no liability only the lawyer.[56] These types of issues have been dealt with by the PSI Legal Advisory Board by setting out some specific rules for listings.
While bars have rules, many of the rules are under attack. All can be complied with provided PSI and WSG recognize what must be done for compliance.
[5]—Other Issues
While there is no case law on the issue, would Judy’s and John’s firm be able to list their firms as members of WSG or PSI on the firm’s letterhead?
ABA Model Rule 7.5 requires a lawyer to avoid the implication that they practice in a partnership when this is not the case. Listing membership in an organization is not covered directly. It would appear that this would be permitted since WSG does not practice law — provided this is clearly defined. They would want to provide a description of their respective organization — to the effect “Member World Services Group – An Association of Independent Professional Firms and Businesses.” [57]
6. Competitive Implications
The professional objectives of any for-profit organization are: maintain standards of conduct; offer high-quality, cost-effective services; and compete against the other professionals, who have precisely the same interests, to make the most money. The MDO can make four profound changes on how professional service providers compete.
First, information about clients and professionals can be automatically matched through databases and further refined by the clients and professionals themselves. Professionals to find other professionals can also use the matching function. When done systematically, a multidisciplinary team for any issue, anywhere, can rapidly be formed.
Second, the professionals geometrically expand their referral base because the non-lawyer members are greater in size and are not reluctant to make referrals for fear of losing a client. In addition, the number of clients represented by the MDO is vastly larger then those represented by even the largest law firm network.
Third, professionals and clients can be matched according to their interest profiles within an organization. This expands vertically the number of participants if each group is in a different market or provides a different service. For example, large law firms are not interested in consumer type transactions that would interest smaller firms. This can be programmed into the matching function within the same MDO. Adding services is inexpensive so that firms interested in consumer practice can be added to the group without competing with large firms interested in corporate transactions. The Big 5 cannot do this because it is difficult to differentiate practice areas within the same organization.
Fourth, MDOs can provide clients access to the same database and tools that members of the relationship enterprise have at their fingertips. Since professional services, rather than the management of these services, is the profit center for professionals, delegating a portion of “management” to the client would therefore contribute to the bottom line. It would also make the client the marketing vehicle for services, which effectively increases the referral base for each professional.
The MDO radically changes the competitive equation making it possible for firms of all sizes to offer services to their individual clients. It does so at a fraction of the cost of bringing all services in-house and in a way that sets the highest standards both globally and locally.
7. Summary
While large providers of professional services must compete with the Big 5, they now have the opportunity to come together to create MDOs to jointly offer services. These relationship organizations can be rapidly created because they take advantage of existing resources that are in place. They avoid the serious bureaucratic, regulatory and ethical constraints faced by the Big 5 in particular conflicts, confidentiality and fee splitting issues that may never be resolved. These organizations have the potential of setting standards that, in many cases, may exceed those of the Big 5 if they can be done correctly. The most revolutionary aspect is that the MDO can allow corporate clients to create their own teams among service providers by permitting access to the professionals. The result is a referral potential which far exceeds that of existing networks, which are limited to one profession.
Using the PSI, firms like John’s can offer multidisciplinary services to small business and individuals. Through WSG, Judy can offer more services to compete with the largest MDP providers.
© World Services Group 2008