The rise and rise of the NewLaw business model
7 October, 2013
The rise and rise of the NewLaw business model is a sequel to Last days of the BigLaw business model. BigLaw is not about large law firms. Nor is NewLaw about new law firms. The issues are much deeper than the size or age of what are colloquially known as law firms.
When The Lawyer in London recently published a range of prognostications about the shape and fate of large law firms in 2018 how many partners in large law firms would have stopped and said to themselves “This is about my future; do I need to do something?” And for those who read the material carefully it couldn’t have been very comfortable.
Worrying as the stories in The Lawyer are, I think they miss the real point. The reality of 2018 and beyond will turn out to be a great deal worse and much more varied than The Lawyer and its well known contributors suggest. And my prognostications apply to all law firms, not just big ones.
Let’s start by recapitulating Eric Chin’s provocative post 2018: The year Axiom becomes the world’s largest legal services firm. OK, Eric shouldn’t have inferred Axiom is a ‘law firm’. Axiom doesn’t want to be known as a law firm in the traditional mould. Being likened to Davis Polk or Freehills–which Mark Harris and Ken Jagger, respectively, left to found Axiom and what is now AdventBalance–and other BigLaw firms is anathema. Quite rightly so because almost every element of Axiom’s, AdventBalance’s and others’ NewLaw business models are quite different to the business model of BigLaw.
What Eric argues is that it is conceivable that Axiom will be larger than DLA Piper or Baker & McKenzie within five years. Axiom is not interested in growth per se. As a NewLaw business model, clients are rewarding Axiom with their custom. The result is stellar growth, akin to Apple, with year-on-year growth of 30+%.
Recap of the BigLaw business model
My post Last days of the BigLaw business model explains how the BigLaw business model is built on six elements:
- Attraction and training of top legal talent,
- ‘Leveraging’ of these full-time lawyers to do the bulk of the work serving clients,
- Creation of a tournament to motivate the lawyers to strive to become equity partners (the idea of a tournament is akin to Roman gladiator contests and the subject of a seminal book),
- Tight restriction on the number of equity owners,
- Structuring as a partnership, and
- Charging high hourly rates (which is or at least until very recently has been possible because of the mystique associated with legal advice).
These elements work together to create the economics and culture of the BigLaw business model. No one is more important than another. (For a summary of the consequences of the BigLaw business model please read my previous post). The only element Axiom and other NewLaw players have in common is part of #1, the attraction of top talent.
In all other respects the NewLaw business model is different. The investors are seeking returns on capital and are separate from the producing staff, so leverage and the tournament are not present. Certainly some, even many of the staff, have a financial interest in the success of their business, but as an asset, not to maximise equity partners’ profits each year. The balance sheets of NewLaw business models are as important as the income statements.
And–most importantly–fees are fixed in NewLaw. The provider, not the client, absorbs the risks of under-estimation and poor matter management.
The rise and rise of the NewLaw business model
The NewLaw business model for professional services is now the subject of intense interest. The Schumpeter column of The Economist on September 21, 2013 addressed ‘The future of the Firm’ with the upper case ‘F’ reserved for McKinsey. Schumpeter cited an October 2013 Harvard Business review article, Consulting on the cusp of disruption, by Clayton Christensen and others. For Australian start-ups challenging parts of McKinsey’s business, have a look at Vumero and Expert 360, both following in the e-steps of the Gerson Lehrman Group, a premium virtual platform for connecting clients to experts and their insights.
As I wrote in ‘Factories’ and ‘Brain Surgeons’ last year, firms like McKinsey are “self-generators of IP and have alliances with leading academic institutions; they don’t need scale”. But crowd-based providers meet many of the same needs at lower price points. And there’s excess capacity. These are the antecedents of disruption.
Like butterflies in the Amazon, virtual and crowd-based professional services firms are starting to disrupt. They are leading the rise and rise of the NewFirm business model.
If you found this post of interest, you can find more on related topics from Bigger. Better. Both? here:
And also on the highly recommended Adam Smith Esq blog.
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