Keith Halleland sent a ripple through the Twin Cities legal community last February when he and four lawyers, three consultants, and five staff members abruptly left Halleland Lewis Nilan & Johnson, the Minneapolis law firm he cofounded in 1996, to establish a new business. A preeminent attorney in the health care field, Halleland says he’s fed up with standard law firm practices surrounding billing and compensation.

He’s creating a new kind of law firm, he says, one that offers clients flat fees and other alternative payment arrangements instead of billing for the time attorneys spend on a case. In addition, he promises the attorneys who join his new firm an environment where compensation is based on more than what they bill out. Many firms pay lip service to that idea, he says; his firm will act on it.

“I believe in a law firm that is connected with the community, that values building teams in connection with the client, and that is willing to reward things beyond the billable hour,” Halleland says. “I want to look at an attorney’s whole value to the firm. It’s a hard thing to do, but it can be done. That’s my life’s goal.”

Halleland Habicht, the firm he launched in late February, will focus on business law and consulting, with a strong health care practice. Partner Bill Habicht is a former managing partner and 20-year veteran of the Messerli & Kramer law firm in Minneapolis. While most of Halleland Habicht’s work will be done locally, the firm is opening an office in Madison, Wisconsin, and exploring San Francisco and other locations as well.

Lawyers leave law firms all the time, but rarely does the lead name drop from the masthead, and Halleland’s exit, while portrayed on all sides as “amicable,” brings with it some irony.

The firm he left in February was also founded as an alternative to standard law-firm ways of doing business. Halleland and colleagues formed Halleland Lewis Nilan Sipkins & Johnson 14 years ago because they were disillusioned. At the time, they described a corrosive atmosphere of greed at their former law firm, Popham Haik Schnobrich & Kaufman, which ceased to exist within months of their departure. Popham Haik lost 200 attorneys in a 20-month period before it was absorbed by the Chicago firm of Hinshaw and Culbertson in May 1997.

Nilan Johnson Lewis, as Halleland’s former firm has renamed itself, is certainly not headed in that direction. It maintains strong expertise in labor and employment law; business law; intellectual property litigation; product liability and mass tort litigation; commercial litigation; and health care. Partners Mike Nilan and Brian Johnson and President Matt Damon recently invited a visitor to see the new offices the firm moved into last year: an elegant multistory space in One Financial Plaza in downtown Minneapolis, with a private elevator, oversized reception area, and floor-to-ceiling windows that seem to indicate a seriously prosperous law firm.

“The truth is, this really isn’t a very interesting news story,” says Nilan, a nationally known commercial litigator. “We’re a firm of 55 attorneys. Keith and four attorneys left and it’s fine, and we’re trying to maintain our good relationship with them.

“This is a much more fluid legal market than it ever was before, and that happens,” Nilan adds. “There will be no material financial impact.”

Not a news story, maybe, but Halleland’s departure and aspirations do tell a story about the split—common to many firms—between business lawyers who work for strategic growth over the long haul and litigators focused on the case at hand and near-term gains.

Nilan says he understands why Halleland had to leave. “There are a lot of different ways to skin a cat, but you’ve got to have everybody skinning in the same direction.”

“A Lot Like a Marriage”

Herbert Kritzer, a University of Minnesota law professor and expert in law firm structure and management, says the divide between litigational lawyers and transactional or business lawyers is longstanding, but it wasn’t always so pronounced.

“In the really traditional, large, corporate firm, compensation was not tied specifically to what you produced,” Kritzer says. “It was seniority based.” Those firms tended to have deep-rooted practices in both business law and litigation. With partners’ income “tied broadly to the firm’s performance”—as much or more than to their own billings and performance—“it’s going to be in their interest to have that broader portfolio of work,” he adds.

Kritzer says it was pressure from clients that caused this to change, beginning in the 1970s. “There was a push in the ’70s, often from the business-side bean-counter types: the idea that large corporations would be better able to monitor their outside counsel if they insisted upon billing by the hour, with documentation as to what those hours were going into.” In essence, law firms had been able to bill for “services rendered,” he says, basing their fees both on the time they’d spent and their perception of the value they’d provided to the client. Now, to a degree, hourly billing took the value of having a deep relationship with the client out of the equation.

“What’s also happened on the client side is that clients have tended to be less geared toward ‘This is our law firm,’” Kritzer adds. “Clients in recent years have been more inclined to say ‘We’ll use this firm for X and that firm for Y.’”

Of course, there are still firms—for instance, Faegre & Benson and Dorsey & Whitney locally—that have both large corporate and litigation practices, Kritzer notes. But it’s probably harder now to build a comprehensive relationship and service all of those needs for any one client.

It’s also “tougher to do [have a well-diversified business] at a smaller firm,” he adds. An all-for-one-and-one-for-all sensibility can be missing as a result, and firms fracture over all kinds of issues: compensation, management style, the direction the business is taking, and personalities.

“A law firm is a lot like a marriage,” Kritzer concludes. “You can have divorces. Sometimes they are friendly; sometimes not.”

“We Haven’t Changed a Word”

In the case of Halleland Lewis Nilan & Johnson, it looked to outsiders like a strong marriage, but one built from the ashes of an earlier, ugly divorce. About 20 of the firm’s attorneys, including Keith Halleland and all of his other partners on the masthead, had left Popham Haik together in 1996 under terrifically acrimonious circumstances.

Popham Haik had grown from 29 lawyers in 1979 to almost 200 by 1990. Rapid expansion left the firm without a strong culture, a shared sense of values that could sustain it. All that bound its attorneys together was billing clients and making money—“a watery fiscal adhesive,” as one lawyer described it at the time. Then Popham Haik experienced a downturn in business and some members of the firm quickly departed for jobs elsewhere, further destabilizing the situation.

When the most senior partners voted themselves early bonuses in the midst of this turmoil, it spurred Halleland, Nilan, Johnson, Thomas Sipkins, Don Lewis, and other Popham Haik attorneys to think about leaving and starting their own firm. Management got wind of the idea, fired most of them (Lewis resigned), and attacked them in the media. It was nasty and reflected badly on Popham Haik.

Halleland and the others were recruited by major Twin Cities firms. Instead, they formed Halleland Lewis Nilan Sipkins & Johnson, certain they could create a better culture than the fractious, money-driven one they had left behind.

Partner Brian Johnson remembers a retreat that the fledging firm held at Izaty’s Resort in Mille Lacs in 1997, several months after the new firm was formed: “We spent four days talking about nothing except the core values of the firm—I still have my notes on that. It was followed by many, many more meetings, and out of those we drafted our core values, and we haven’t changed a word.”

Egalitarianism ruled. “We’re built around clients—most law firms are mainly built around lawyers,” Damon says. “That’s why we all have the same size offices and functional work spaces, and why there’s no artwork. We don’t see how it advances the client’s work.” Women played a major role as well, and would go on to make up more than half the attorneys at the firm, still unusual today.

But within the first few years, masthead partner Thomas Sipkins departed and later became a judge. More recently, Don Lewis left to become dean of the Hamline University School of Law in July 2008; he remains of counsel to Nilan Johnson Lewis. Of the 28 attorneys who originally started the firm, only half remain.

“I don’t think there’s too much turnover,” Damon says. “It doesn’t mean it’s not an issue—we’re always trying to improve our retention rate.” He adds, “One of the things we came away with from Popham was a real feeling that people should be able to leave when they want to leave. We need to be true to ourselves, and so we wish them luck.”

Eat What You Kill

Halleland remembers his first start-up differently. “When we formed the firm, it was under very stressful circumstances. What united us was that we were all Popham refugees. We didn’t have the luxury of time to create and build a consensus from the beginning as to the type of law firm we wanted,” he says.

As the firm grew, “the majority of the leadership of Halleland Lewis were trial lawyers who billed lots of hours. Over time, the natural ‘creep’ was to return to measuring billable hours as the primary way of measuring value to the firm.”

Halleland says he was dismayed by the growing dominance in the firm of a compensation system used pervasively across the profession. It goes by the feral nickname “eat what you kill.”

Says Halleland, “There’s nothing wrong with an ‘eat what you kill’ system if that’s what you want. I don’t consider that to be a model that really fits for a health care and business-oriented practice, and I think it’s demeaning to people.” The incentive in such a system, both Kritzer and Halleland say, can be to “hoard” work that should be done by others in the firm who have greater expertise in the subject matter or a lower billing rate.

“In other words,” Halleland says, the goal becomes “to bill the most hours, regardless of whether that is really good for the client or good for the firm.”

He adds, “When the race is toward getting the most billable hours, it’s really hard to have a strategic goal beyond that. And that’s not the end game for me. I realized that I had to leave to be able to achieve my vision.”

Damon is perplexed by Halleland’s remarks. “Our core values and compensation practices have remained the same since we started the firm in 1996 and, frankly, it would be hard to imagine an approach to compensation that is less ‘eat what you kill.’” Damon cites “profitability, revenue generation, bar leadership, promotional success, community activity, and participation in management” as the primary factors used to assess a lawyer’s contribution to the firm. “We place a heavy emphasis on maintaining our expertise through active performance of client work,” he says, “because that’s what clients value most.”

Halleland’s former colleagues disagree with his description of their firm’s compensation system, but there’s no doubt in their minds, either, that he had to leave.

Nilan says, “I think it comes down to whether attorneys feel that the firm is valuing their contribution sufficiently, and whether they’re buying into the values of the firm. Compensation is part of that, but I don’t think it’s everything. I think over time, Keith’s approach did start to change, and I don’t think he brought the firm along to what his view was as much as he would have liked.”

Halleland’s growing frustration turned into a decision to leave after he suffered a minor stroke in December. While in Seattle with clients, “I just lost my speech over dinner and ended up in the ER,” he says. “When I was recovering, I thought about what’s important in my life, and I think what’s important in my life is growing a law firm I believe in.” He now refers to it as his “stroke of clarity and luck.”

“It was incredibly hard to leave and I’m very close to many people there, and I will always take pride in helping to grow the firm and what it’s accomplished. I wish them well,” he says. “They’re going to go down their path and I’m going to go down a different path, and they’re strategically different in terms of how we look at the work. But, hey, that’s life.”

The Holy Grail

Halleland dreams of creating a law firm with a different kind of ethos. Kritzer says, “Good luck.”

“We want to be the first firm to not just talk about doing flat fees, but to really embrace it,” Halleland says. “As we talk to clients, particularly in the health care environment, people are really worried about fees and they’re tired of basically paying law firms with an open checkbook. So we want to take the risk out of it for them . . . . There has to be a profit, of course, but if you know what you’re doing, you can predict this.”

Regarding attorney compensation, he says, “Working on various nonbillable community things is very valuable in terms of building the reputation of a business, especially a law business. So we want to make sure that’s part of the compensation structure.

“It’s also hard to compensate for bringing in new business—rainmaking,” he adds, “because that’s not viewed as being as valuable as working the plow yourself. In the new firm, we want to make sure that origination, connection to the community, and connection to clients are all things that are valued.”

Are there other firms that Halleland Habicht will look to as models for compensation and billing? Halleland says no. Shareholders, some who’ve been managing partner at other firms, will rely on their own experience to figure out a structure.

If Halleland and his new firm arrive at anything like a formula, “he should patent it,” Kritzer says. There’ve been efforts “since the early ’90s, at least, to say ‘Hey, let’s get away from the billable hour,’” he says. But Kritzer has seen most firms that try alternatives abandon them.

What makes it so hard for law firms to resist a pull toward billable hours? That’s the wrong question, Kritzer says. “The question is, once they’re there, what creates the problem of moving away from the billable hour?”

“Every billing approach creates a set of incentives for the lawyer and the client,” he explains. In a fixed-fee system, for instance, a client will tend to hold onto cases that look easy to settle to avoid incurring the same high fee that would attach to a case that’s more complex. Meanwhile, the law firm, which assumed it would get a mix of easier and harder cases, will tend to get consistently tough and time-consuming work from the client. When law firms abandon alternative billing, Kritzer says, “typically, it’s that the assumptions they went into it with didn’t hold up.”

The search for the perfect billing and compensation model is “the search for the Holy Grail,” he adds.

Partner Bill Habicht projects a quiet enthusiasm about the search. “You seldom get an opportunity to assess how you do things firm-wise from A to Z. We have no template. We get to start over and design the services the way we want to provide them . . . and make sure that the values we want and the vision we want is incorporated in how we do things.”

For Halleland, the difference between starting this firm and the last one is that “we are building Halleland Habicht in a very thoughtful and deliberate way. We have buy-in from the start. And the lawyers we’ve attracted are not all from the old firm. We’ve attracted top lawyers and consultants from other firms as well”—the Dolan Company, the Center for Diagnostic Imaging, the law firm of Oberman Thompson & Segal.

In late June, Halleland Habicht has 17 attorneys and consultants. “There are lawyers at other firms who are very disillusioned with where they are and would like to belong to something in which the pressures are different and that has a different vision,” Halleland says. “So we’re attracting really, really good people.”

The new firm is on the 39th floor of City Center with a spectacular view of the new Twins stadium. The Madison office is preparing to open, with one attorney on board.

“With our expertise in health care and the new national health care reform, we’ve got a real opportunity to grow,” Halleland says. “We’re going to use our consulting practice as a way to get into some of these places, too. We don’t have to go in and hire 15 lawyers. We can do it cost effectively and create a presence. People in local communities like you to be there, it’s just basic.”

He sees at least two upsides to starting his firm now, in a weak economy. “Office space is unbelievable,” he says. “So many floors downtown are empty that we got an incredibly good deal on our space.” It’s also a good time to be offering flat fees: “We want to be aggressive about that, because we think we can do well at it and at a great benefit to our clients at a time when the economy is really biting them pretty strongly already.”

By fall, Halleland projects his new firm will have 25 lawyers and consultants combined. “Then we’ve talked about a pace of growth after that of about 10 percent a year as a reasonable rate.” To accomplish that, he says, “I’m working 10 hours a day, running in the mornings, and feeling incredibly fortunate to be doing very well. It really makes me feel good to be engaged and positive despite the stress of building a new business. It’s the kind of stress that makes me happy.”