Law Firms Balloon

  Collection law firms are on a tear, opening new offices in a bid to boost their own profits while providing clients with more national coverage.
  Some firms are taking more bankruptcy work. Others are focusing on arbitration. Many are branching into debt purchases themselves, finding it a lucrative sideline, despite the rise in debt prices, to keep collectors busy.
  Whatever the mix, law firms poised to compete no longer are content to take files in a single jurisdiction. Firms wishing to remain viable, most insiders agree, must cover more territory, not less.
  In the last three years, for example, the big collection law firm of Wolpoff & Abramson LLP has only gotten bigger. The Rockville, Md.-based firm, which had offices in the Mid-Atlantic states, added operations in New England, New York, California, Texas, Michigan, Pennsylvania, Georgia, Minnesota and Colorado. The firm now operates in 16 states, covering most of the country's big population centers.
  Similar expansions at other retail collections firms are under way across the country. To stretch geographic coverage, firms are opening new operations, or they are purchasing existing ones.
  Most firms start their expansions inside their home state, then add offices in nearby states. But more aggressive firms are not afraid to jump to big cities regardless of their proximities.
  The firms are expanding because credit grantors and debt purchasers do not want to manage 50 different state attorney networks, say collection law firms, which handle the collection of outstanding accounts receivables and bad debt and provide legal action, if necessary. Though many attorneys forward claims outside their jurisdictions to other firms, collection results can be spotty depending on the abilities of the partner firm to collect the debt.
  Creditors also demand payment and technology systems that communicate well, along with reliable security requirements more easily met by a single firm. At the same time, expansion-minded firms are not content to share fees with the legal-network partners they previously have employed to handle work in states not covered by the firms themselves. They figure, why not keep that percentage in house?
  "Looking ahead, there will be fewer but larger firms doing collections," predicts Irwin Eskanos, president at Eskanos and Adler P.C. The Concord, Calif.-based firm added an office in Oregon last year. It plans to open offices this year in Washington and Arizona.
  As banks and other credit grantors have grown, they have sought law firms that can handle business in many states. About 15 years ago, attorney networks, which involve law firms that forward claims to one another, started to appear as a means to satisfy creditors' desires for a one-source solution. In response, big collection agencies, such as OSI and NCO Group Inc., started their own attorney networks. Attorneys often participate in more than one network.
  Law firms expanded, too. At times, pleased clients would ask successful firms to open an operation in another state to handle more work.
  "There's a real benefit (for the client) because they don't have to review 50 different firms," says Charles G. Pona, managing partner of retail collections at Weltman Weinberg & Reis Co. LPA. In the last three years, the Cleveland-based firm has opened new offices in Philadelphia, New Jersey and Chicago.
  Beyond ease of management, clients nowadays demand the latest technology-something the big firms can afford. "The manual check-remittance process is gone," notes W. Christopher Bracken III, chief executive at the law firm Mann Bracken LLC. "Clients expect money to be handled electronically and without mistakes."
  Bracken says his firm spends a "scary" amount of money on new technology, but he sees little alternative. "Clients expect law firms to have the same ability to contact people as collection agencies," he says. Atlanta-based Mann Bracken has law offices in seven states, plus the District of Columbia. The firm handles arbitration cases in all 50 states.
  Collection agency TSYS Debt Management Inc. operates the National Attorney Network, or NAN. TSYS Debt Management has an electronic interface with the 170 law firms in the network, which enables it to provide daily audits and reporting.
  "In the last two years, there is more emphasis on making sure all the processes are compliant and the data are accurate," says Charles Kinney, president and chief executive at TSYS Debt Management, based in Norcross, Ga. "Clients dictate performance."
  As such, NAN has 26 staff members managing the network, up from about 18 staffers two years ago. "It's people-intensive," Kinney says.
  The staff members not only oversee the debt inventory, but they also audit law-firm performance and conduct due diligence on new firms. They also conduct on-site visits to firms to check security measures and systems compatibility. In the years to come, Kinney expects most big creditors or debt buyers will use one of the large networks or a big law firm because client workload is reduced.
  Fee Reductions
  Another possible advantage: lower fees. When an attorney forwards a claim to an outside firm, the client typically pays a premium of 5% to 10%. "Once you involve co-counsels, then the rates go up," notes Pona, past president of the National Association of Retail Collection Attorneys.
  However, Pona quickly notes a creditor advantage in working with multiple firms. "The champion-challenger concept is still hot," he says. Under this model, creditors pit law firms against each other to reduce prices and improve productivity.
  Not all creditors prefer working with just one entity. Ford Motor Credit, which places its primary debt with attorneys, has operated its own attorney network for 15 years. "We're very happy with it," says Richard Kamerman, attorney agency manager at Ford Motor Credit's office in Mesa, Ariz. Though the number of law firms in the network fluctuates, Kamerman figures that at any one time Ford works with about 50 to 70 firms.
  Kamerman has 15 employees who manage the law firms. Attorneys get quarterly and annual goals based on historical performance of the particular state, economic trends and competitive information. Goals are monitored, and liquidation rates are compared with those of law-firm competitors in the same state, or, in cases where no in-state competitive data are available, to those in similar states.
  Ford Motor Credit conducts audits every two years or less to gauge the law firms' financials, internal controls, customer service and performance versus goals. The company rates compliance, too.
  "The law-firm fee is higher or lower based on how they perform," says Kamerman.
  Attorney general complaints and excessive counter claims affect the fee. "They get a higher percentage if they collect clean and they collect more," Kamerman adds. The bottom line: "We get better pricing. We avoid payment to a network, and having our own staff is cheaper than having to pay a fee to a network," he says. "We feel there is no need for a middleman."
  But Kamerman does work with big firms. "The size of the firm is not a deciding factor," he says. However, Kamerman notes, the firm must be large enough to handle Ford systems, though small firms have shown they can handle the requirements.
  Kamerman disputes whether firms with national, or regional, reach offer better results. "Success in one state does not necessarily translate to another," he says.
  When law firms open new offices, Kamerman says he often gets a phone call asking for business. "If I'm happy with a firm doing a good job in California and they open an office in Washington, I wouldn't necessarily think that would make them good in Washington," he says. "Lawyers who know the (local) courts and the system have a bit of an edge."
  Firm Control
  As such, Kamerman will not hire a firm without an office in the state where the claim is being filed. He does not use firms that forward claims to other attorneys, either.
  "We do not want someone else choosing our attorneys, putting us in a position where we have to defend an appeal for a firm we have no contract with or have not managed," Kamerman says.
  Law firms in expansion mode understand the need to maintain control to garner results. "We open our own offices. We don't grow by acquisition," says Ira Leibsker, partner at Blatt Hasenmiller Leibsker Moore LLC. "We don't buy someone else's problems."
  The Chicago-based firm also has offices in downstate Bloomington, Ill., and in Indianapolis, Detroit and Arizona. "We create our own culture," adds Leibsker, who is president of the National Association of Retail Collection Attorneys.
  Weltman Weinberg & Reis recently opened three new offices. "Our model has always been to find an attorney on our staff willing to be transplanted to a different state, says managing partner Pona. "Typically we do not buy a firm."
  Weltman broke with tradition when it bought the Chicago firm Feingold & Levy. (At the time, Weltman already had an office in the Chicago suburbs.) "Feingold offered us established collectors and a downtown location," Pona notes.
  In recent expansions, Mann Bracken acquired an existing practice in Washington, D.C. But the firm opened its own offices in Charlotte, N.C., and Nashville, Tenn. "We conduct our own training and put in our own systems," says Bracken.
  Wolpoff & Abramson usually opens its own office, though it sometimes buys one instead. Managing partner Abramson says the biggest challenge is coordinating the different operating procedures of the various court systems.
  "Everything is at the county or town level," he says. "It's a significant challenge."
  As a result, the firm makes a significant investment in technology, personnel and training. Abramson estimates it costs about $3 million per state to open a new office. "Expansion comes down to a financial commitment," he says.
  Many expanding law firms have jumped into the debt-buying business themselves. Prohibited from purchasing their own debt, firms are setting up separate companies to purchase and collect it.
  Eskanos and Adler, for instance, buys debt through its affiliate, Concord, Calif.-based Alliance Credit Services Inc. "Our target for this year is to purchase $100 million," says Eskanos.
  Last year, Eskanos says, Alliance purchased debt valued at about $50 million, mostly credit card receivables. "The debt has gotten expensive, but we have continued to purchase it," he notes, adding that Alliance has a contract to purchase debt from certain issuers each month.
  Eskanos rewards long-time nonattorney employees with ownership shares of Alliance, a practice not allowed with law firm profits.
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