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Danger in being part of the BigLaw establishment

30 July, 2013

. Law. Strategy

Last week the Editor-in-Chief of The American Lawyer – the world’s most influential legal services trade magazine – demonstrated the danger inherent in the BigLaw establishment. Robin Sparkman wrote a piece with an innocent enough sounding headline: Don’t Bury Big Law Just Yet.

To argue BigLaw is “alive, well, and rich” she drew on The American Lawyer’s famous league tables of lag indicators, i.e. financial performance. And while she did acknowledge that BigLaw has “plenty of problems” citing “failure to retain women and minorities, unfunded pensions, lack of alternative ways to bill clients … overcapacity … and adapting to clients’ shifting needs” she made scant reference to lead indicators.

Relying on lag indicators (historical financials) is akin to driving in forward gear by looking only in the rear view mirror.

I weighed into the debate the next day with this tweet: “Dear @RobinSparkman, with respect, financials are not lead indicators | Why #BigLaw is Alive, Well and Rich: at.law.com/rebutt“. It was part of a meme that echoed the danger in being trapped in the BigLaw paradigm. The intellectual leader of BigLaw’s leading (well, at least largest) business-related publication makes a statement selectively using its own data. And self-belief is reinforced.

I was relieved when Adam Smith Esq joined the debate with an immaculate a dissection of the data thus: “There seems to have been a spasm an unusual concentration of articles recently advancing the theory (I generalize) that all is well in BigLaw” in his post CAGR for Dummies (CAGR is short for compound average growth rate). You should read the whole analysis and commentary, but here’s a taste:

“Actual CAGR of AmLaw 100 revenue (is) 2.63%. As expected and predicted, starting one year earlier makes the picture even uglier. Now, rather than needing to have grown their revenue 23% more than they did (2009—2013), firms would have needed to have grown their revenue 69% more than they did simply to “stay even” over the 2008—2013 period. If this is resilience and growth, then I should have been a professional athlete; I could count on the bar being lowered every year and still be able to set annual records at the new diminished height.”

Folly of rewarding A, while hoping for B

Those working in market research, business schools and executives who base their decisions on evidence often quote Steven Kerr’s famous 1975 article ‘On the folly of rewarding A, while hoping for B’. My more complete application of this ‘folly’ to league tables like the AmLaw100 is published here, but this extract suffices to make my point:

“…I was reminded of the many truths in Kerr’s observations when reading yet another crop of law firm statistics, this time from the UK… In the USA AmLaw does it. In Australia the Australian Financial Review and BRW do it. And to be fair, in other professions Accountancy Age, Engineering News Record and our own Beaton450 also do it. ‘It’ is a focus – in some cases approaching it seems an obsession – on size, where size is measured by revenue and head count. I recognise all these tables, including our own, publish other valuable information and it’s not my intention to criticise league tables per se, rather to alert readers to the dangers of over-emphasising the significance of size in the management of firms.”

Rely on lead, not lag, indicators

Michael Porter of Harvard Business School made the concept of structural analysis, and understanding substitutes in particular, accessible to managers about 30 years ago in his first famous book on Competitive Strategy. Structural analysis is a robust source of lead indicators – pointers to the future landscape.

Substitutes offer clients the choice of how to solve a problem. It becomes a choice between conventional service providers and new ways of sourcing a solution. Examples abound. Just think what Amazon did to the local book store. Or digital cameras to Kodak. The roll-call of the venerable departed goes on. The main challenge of substitutes is the ceiling on the price a market and law firms in the market can sustain. As clients switch to the substitutes the viability of incumbents declines.

Many incumbents consolidate (wrongly believing bigger is better), or withdraw (effectively surrendering by merging into another firm) or collapse (30 of the 100 largest law firms in the UK are reported to be financial difficulties), unless they too can adopt the technologies of the substitutes. A handful are trying, but none have yet shown they can do so successfully.

So the really big question is this. To what extent do substitutes threaten conventional BigLaw firms (rather than just small and ‘high street’ firms)? The evidence is accumulating by the day; here is some.

Firstly, in the post GFC era clients of all kinds – corporates, SMEs, governments, consumers – are pushing for more value from their providers. Beaton’s research shows in law firms, and all professional services, this means either price down or delivery of more benefits. Or both. This is very fertile ground for substitutes that can operate at or below the break-even point of the incumbents.

Second, substitutes are often backed by external capital in much larger quantities than any firm is willing and/or able to call from its partners or borrow.

Third, substitutes can take risks that the conservative culture of professional partnership will not contemplate. This is the essence of the Innovator’s Dilemma about which I have previously written.

Fourth, at least in some service lines, technology like that provided by Clearspire is becoming a substitute for labour.

Here are some the legal service substitutes now actively threatening BigLaw:

AdventBalance, a law firm in Australia providing fixed fee high-end services to corporates modelled in part on Axiom Law, now in the AmLaw100 league table and growing at 30 per cent per year. In Canada Conduit Law is the challenge to the BigLaw establishment.

Riverview Law providing innovative legal and related services to SMEs and corporates in the UK (and New York for English law).

Axiom et al are not part of the BigLaw establishment

Now back to Adam Smith Esq’s 2.63% CAGR point.

Axiom Law is only 10 years old – and it is growing at what I calculate must be close to 30% CAGR. One might say “it’s easy to grow at 30% compound off a small base”. True. But Axiom Law is no longer small. Axiom Law is rapidly closing in on what must be close to an AmLaw50 firm. I don’t know for sure – because the BigLaw establishment does not recognise Axiom Law. It’s not covered in the AmLaw league tables.

I concede Axiom Law is not totally ignored by The American Lawyer. A search of the site reveals 12 mentions since 2006 whereas BigLaw firms in the top 100 each received literally 100s of mentions in the same period.

Watch this July 18, 2013 interview with Mark Harris, the founder of Axiom Law to understand why there’s danger in being part of the BigLaw establishment.

One Response to Danger in being part of the BigLaw establishment

Peter Carayiannis says: 31 July, 2013 at 10:05 am

It’s kind of you to consider us in the same light as Riverview and Axiom. Conduit Law is a recent addition to what we believe is a global change to the business of law. For the most part, Canadian BigLaw has chosen not to be part of the dialogue, perhaps because Canadian industry skirted the GFC of 2008 or perhaps because the overwhelming majority of practicing lawyers in Canada are not aware of the progressive and innovative developments in the US, UK and Australia. However, what we are seeing is that Canadian corporate clients are part of the conversation, they are aware of changes elsewhere and they are insisting on change. Conduit Law plans to be part of the change.

Peter Carayiannis
Conduit Law
Canada

Reply

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