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.
87 Responses to The rise and rise of the NewLaw business model
Thanks for your post. Personally I think you underestimate the strength and resilience of BigLaw and overstate the competitiveness of NewLaw.
My view is based on 6 factors:
1. Semi-variable cost structure
2. Deal-driven profit – cyclical not structural
3. Globalisation – net impact is low for most
4. Labour arbitrage
5. Fixed pricing and efficiency dividend open to all
6. Reap and sow.
1. Semi-variable cost structures
Law firms are not like manufacturing, retail, airline or mining businesses which have huge fixed costs. Labour costs typically are around 60% of costs and occupancy 20%. The evidence points to firms being able to scale its workforce up and down with more flexibility than one would traditionally think. While there’re some pain, it appears many well-run firms, when needed, are very happy to let redundant people go, de-equitise partners, stop recruiting grads and radically reduce support staff. Similarly, there’s been a revolution in workplace design resulting in much more flexible occupancy arrangements. There is little to stop BigLaw can adopting ‘accordion’ human capital models, and there’s growing evidence that many are, quite successfully.
The latest AFR figures show PPP around $1+ million plus for the top 10 law firms. With relatively flat revenue this must have come primarily from cost reduction.
2. Deal-driven profit – cyclical not structural
Last week’s AFR published a fascinating chart which showed that the number of $10B+ global M&A deals in 2010, 2011 and 2012 combined was less than 2007 alone. This segment of the market drives supernormal profits of the larger BigLaw law firms. I think it would be better to wait and see the impact an increased M&A deal flow on the legal market before calling the end of BigLaw. Frankly I can’t see many clients trusting Axiom and lookalikes with their $10B+ cross-border deals. I think you’re drawing structural conclusion from a cyclical change.
Save for Deacons and Phillips Fox, I’d assert that the net impact of all globalisation activity on Australian law firms has been net neutral. While they may have access to more cross-border deals, global clients and better support people, the costs of being part of an international firm are significantly higher than running a purely domestic operation.
A lot of newly global firms operating on discrete profit sharing models, have by and large the same people, processes and clients. All fleeting benefits accruing have been neutralised by competitors matching their strategy.
4. Labour arbitrage
Much has been made of the cost differential between Australian and Indian law firms, and the growth of the off-shore LPO market. Mumbai rents are now twice as high than CBD Sydney or Perth. Top talent in India is becoming scarcer and more expensive. All evidence points to cost differential gap narrowing rapidly.
5. Fixed pricing and efficiency dividend open to all
You imply that fixed price, capped fee or hard estimate pricing are the privy of NewLaw. Fixed fee pricing has been part of BigLaw for many many years. It’s just one of many pricing structures they offer their clients. Many BigLaw firms are investing in legal project management and process reengineering. There is very little evidence to assume AFAs will bring down BigLaw, especially that they can play equally in this space, and, in fact, offer clients more choice.
6. Reap and sow
It seems to me that notwithstanding their ownership structures, the evidence points to some BigLaw firms being willing to invest, to innovate, to sow as well as reap. If partnerships only cared about short-term cash profits then no firm would have invested in things yielding a long-term return eg IT infrastructure or their brands or new products/services or capability building or… it goes on. This is clearly not the case!
Thank you for this piece George. What you write resonates with my sense of business and societal change being driven by communications and IT. Although I have been practising as a barrister for the past 20 years I spent my first 20 years as an employee working for US and UK multinationals in marketing and business development.
It is fascinating to see some sectors in turmoil. For example, I have done work over the past few years in retail leasing disputes and training. So many big firms are reeling from the change in their margins. And with NSW farmers and producers in horticulture who are searching for ways to get back into the game.
But the Australian lawyers I talk with seem too unconcerned, aware of “overseas changes” but not unduly worried about continuing to do what they have always been doing. I think that is a mistake, things are changing, maybe slowly now but inevitably
Joel and Derek, this is the first our blog has received two comments within hours of publishing a post! Thank you both.
Joel, we will have to agree to disagree. I respectfully suggest you read ‘Why Consulting Was Immune for So Long’ the Christensen HBR piece which I cite. Incumbents–and especially partnerships addicted to drawing full profits out of the business every year–are between a rock and a hard place. Their investments are in sustaining, not disrupting, technologies. Put another way, they are simply keeping up with the Jones.
Derek, your pioneering efforts to innovate the services of the Bar are really worth watching. It’s noteworthy you, like Harris, Jagger and others of the law, are able to look from the outside in and effect disruptive change from which clients will benefit.
I’ve just across this great post in the American Bar Association Journal. Titled ‘Who is eating law firms’ lunch’ it’s a must read whether you are a NewLaw believer or not: http://www.abajournal.com/magazine/article/whos_eating_law_firms_lunch/?utm_source=maestro&sc_cid=130925BE&utm_campaign=weekly_email&utm_medium=email.
I can add Novus to my growing list of NewLaw exemplars!
Thanks for your post.
I agree with Joel that the strength and resilience of BigLaw should not be underestimated. Their head start is considerable.
From my recent discussions with the leaders of some of these firms in Australia, it is clear to me that they understand the issues that you raise in your post and are moving to address them. This was not necessarily the case even 12 months ago.
For me though, the main impediment remains the ownership structure. Their leadership may see the need to retain profits, raise capital, establish new business lines and restructure but convincing large groups of partners with a short term focus is problematic. At best it slows the process down, at worst it stops innovation dead.
I wonder if some firms are not considering incurring the pain and costs of incorporation? If they are not they should be.
Ken, I agree with you. No-one should underestimate the leadership of BigLaw firms. They understand the need to balance the demands from their clients to reduce costs and the demands from their partnership owners for profits. I personally don’t see this dynamic as much different from the NewLaw firms owned by institutional investors who typically invest one year and seek to maximize profits and exit just a few years later. Based on my own experience, I believe that most of BigLaw has a longer term view of the legal sector than most of NewLaw. 10 years ago or so when I started working with BigLaw firms like Clifford Chance, DLA, etc. on their legal efficiency initiatives, it was fair to say that most managing partners hadn’t yet identified the structural changes in client buying behaviors that were emerging, (though leaders at some firms like Baker & McKenzie and Orrick were far-sighted enough to do so and to do something about it). While BigLaw firms were initially slow to put together the picture of how their clients were changing the way they managed their legal budgets and spend, that gap was quickly filled by nimble entrepreneurs (like you and me!) at a handful of alternative providers . Most of the investors in those alternative providers have already sold their stakes (or are trying to sell) and overall I see a net exit of outside capital. But BigLaw hasn’t been sleeping. I am working with a number of BigLaw firms adapting to the changes in the sector. In some cases they are adopting NewLaw business model initiatives (e.g. alternative resourcing and LPO). In some cases they are simply improving efficiency, (e.g. LPM, process efficiency, automation, outsourcing or relocating support services). Despite the popular commentary to the contrary, they aren’t standing still.
[I adapted this from a comment I just made on Mike Ayotte’s Last Honest Lawyer blog: http://bit.ly/1dnoH1Q
George, fabulous discussion.
What’s not clear to me is what this technology is that is supposed to be disruptive? What new system/process/gizmo is going to replace high-level legal analysis, advice and dispute resolution. I can understand more efficient legal processes in discovery and due diligence (as per the ABA link), but to my knowledge, litigation support tools and other process improvement technologies have been used by BigLaw for years. These are mostly sustaining technologies. There are lots of examples of BigLaw partnering with LPOs to reduce costs in legal process work.
Another way to ask this question, assume King & Wood Mallesons incorporated, did an IPO and raised $500 million, what disruptive technology would it invest in to become NewLaw and return a healthy profit to investors after Principals were paid ?
If there’s no clear and easy answer to my question, then perhaps there’s no real disruption going on here and/or there’s no need for the new ownership structure and $500m.
I don’t under-estimate the resilience of BigLaw owners, i.e. partners. The stakes for them are very high. They are clever and hard-working, as we know. My back-of-envelope figuring indicates the ~2,000 equity partners in the 20 largest firms in Australia earn an average of ~$1m per year (round numbers). Of these I calculate ~1950 would not get a job practising law in-house for even half this amount. So, in a survival sense, BigLaw is not going to lie down.
But here’s the rub. Many of them, perhaps half, could earn more than they do now and more easily in their own boutique law firm. Witness the growing trend to boutiques: White, Ryan, Banki Haddock Fiora. This is back-to-the-cottage and a return to true professionalism for true advisors.
Imagine a world in which there are ten $10B firms (cf the Big4); clients have backward-integrated in property, lending, insurance and similar work types; major projects, e.g. deals and big ticket litigation are ‘Hollywood’-style productions; industry solutions in work types like trademarks and all manner of private client work are provided by private equity-backed firms; boutiques abound with leverage of 1:1 at most; crowd-sourcing via curated e-marketplaces is prevalent in all legal work types; artificial intelligence and big data analytics are growing rapidly and all back office functions are out-sourced.
This world is upon us. Examples are all around us. The future is here.
Does this scenario leave room for high quality domestic and regional firms operating as traditional partnerships? Yes, it does. Of course. BUT what will their partners be earning? Our modelling suggests the answer is a lot less than they are today, perhaps half. The quasi-monopoly rents have been competed away.
George, you did not come close to answering the question
John, if you refer to the $500m IPO question, you are right John. Please watch this space.
Melbourne University’s slogan is ‘Dream Large’. It’s good to see that as a former UM professor you’ve embrace this theme wholeheartedly.
Notwithstanding this, I simply don’t get how profits will halve. Where are these super high quality, super low cost with critical mass, credible brands, no conflicts and $$$$ professional indemnity insurance coming from to erode incumbent profitability by 50%?
Let’s take an aspirant like AdventBalance as an example. Started in 2008 with a human capital model based on Axiom, ex-top tier partners in tow, fixed pricing, a new corporate ownership, major panel appointments, a merger and enormous amount of market hype, they have, according to their website today, 37 lawyers in Australia. 37 in 5 years !!!! If this is one of your ten Global $10B they’d better get a move on…
I’m also not 100% sure about boutiques abounding and making supernormal profits. There’s clearly space for a few brain surgeons, but this market segment has a limit and these super-specialised firms are generally excluded from anything that requires significant scale, range and reach. Thinking one can unbundle Allens into its components parts and still access the same clients, deals, networks, etc. is unrealistic in my view.
By the by. you still haven’t addressed my question on what legal technology in play or on the horizon is disruptive.
Joel, a couple of points:
1. Our September 5, 2012 post addressed PEPP falling substantially: See ‘PPEP levels are doomed without re-invention’ at http://www.beatoncapital.com/2012/09/ppep-levels-are-doomed-without-re-invention/. You and other readers are most welcome to the spreadsheet behind it, simply drop a note to email@example.com. I know of at least two large BigLaw firms in Australia who have done their own modelling and concur with Beaton Capital’s prognostications; you can imagine how active they now are in re-inventing themselves!
2. AdventBalance is a private company. But, I can say this, as a ‘virtual firm’ names and faces on a website don’t necessarily represent head count. Ken Jagger, the CEO, is speaking at our November conferences in Sydney and Melbourne on Law Firms of the Future: https://beatonglobal.com/registration/files/docs/Law_Firms_of_the_Future_first-announcement.pdf. You might like to come along and hear from Ken and Mitch Kowalski from Canada, author of Avoiding Extinction. And me.
3. In the next few years the biggest drivers will be corporate ownership, PE backing, virtual workforces – and technology. See, for example, Clearspire at http://www.clearspire.com/new-model. Into the next decade AI and bigdata analytics will be having a huge impact. Read Richard Susskind for real depth on this.
4. Our calculations suggest between 2/3 to 3/4 of the revenue of large BigLaw firms, such as the ones you have named in earlier comments in this thread, is under threat from NewLaw. I completely agree that there is ‘brain surgery’ that the great minds in these firms are uniquely well positioned to apply to clients. Perhaps these represent up the rest. Of this perhaps 1/2 could be done in boutiques, i.e. breakaways. Doesn’t leave much to cover the leases and other overheads – unless firms are very nimble. Just have a look at what in less than two years Riverview Law has achieved in the UK; and they are only just starting: http://www.riverviewlaw.com/.
5. You should have a very close look at what’s happening in the so-called ‘Hollywood’ economy. Decades ago studio moguls owned everything and everybody required to make a big movie (as large BigLaw firms now do to provide big deal and litigation services). Today the studios are financiers and project managers; all the players are self-employed and contracted by the project (i.e. making the movie). NewLaw financiers and project managers are already emerging.
6. Finally, no large BigLaw firm I know has the ability or will to raise millions, let alone in an IPO. Back 10 years ago when incorporation and external investment in law firms first became possible in Australia many firms investigated this path to one-time windfall gains. As history shows, all rejected it, except Slater and Gordon. Read former Freehills partner Ken Jagger’s comment in this thread: “the main impediment remains the ownership structure. Their leadership may see the need to retain profits, raise capital, establish new business lines and restructure but convincing large groups of partners with a short term focus is problematic. At best it slows the process down, at worst it stops innovation dead.” It’s the partnership structure that’s stopping firms.
Also imagine a world where:
1. employed lawyers in traditional firms (aka the ‘fee earners’) give up the increasingly arduous tournament for partnership (or the daily grind if they weren’t in the tournament), and leave to pursue the flexible work/ life balance of viable non-law firm alternatives, including secondment, contract, and crowd-sourcing specialists, or a combination thereof
2. lawyers choose not to enter employment at traditional firms, for the same reasons
3. quality boutique lawyers compete against BigLaw firms, not only on price, but on breadth and depth of expertise, by efficiently forming opportunistic and networked alliances with other lawyers and service providers on a matter-by-matter basis.
1 and 2 are here and rising; 3 is coming and facilitated by LawyerSelect.com.au’s “job alliances”.
NewLaw is de-risking alternative legal careers, and business models. BigLaw is at risk.
Greg, like few others in Australia (at least to date) with LawyerSelect (http://www.lawyerselect.com.au/) you have recognised the opportunity to join the disruption party. Greater transparency and better matching of demand to supply are integral elements of an efficient marketplace. Congratulations on your progress.
Those solicitors who truly understand what it takes to compete in a fully open market will thrive. Those that don’t will dive.
BTW, http://www.legaldatum.com is designed to assist smaller law firms compete more successfully and profitably in this environment. LegalDatum is available to smaller law firms in Victoria and Queensland, courtesy of the respective law societies. We are waiting on other law societies to get involved.
As your former student at Melbourne Business School and a current member of the legal industry, I couldn’t agree more. Glad to have you join me in eagerly awaiting the promise of widespread disruption.
I thought readers would like to know that Paul is currently President of Axiom Law.
Great article, or rather great series of articles. I love the term “NewLaw” to describe the slew of alternative service providers that are storming unto the battlefield. I’ve just posted a new piece on my blog (buff.ly/19fh8Vv) discussing the battle going on between OldLaw and NewLaw over who will provide the majority of 21st Century legal services. While some traditional firms are trying to adapt to the new world, their current model and obscenely high overhead are putting them at a big disadvantage. Further, their lead in “brand” is rather tentative, given how fast some of the NewLaw providers like Riverview and Novus are building their own brand. Exciting times, unless you are clinging to the old ways.
Thank you Mike. Here’s yesterday’s tweet from Riverview Law: “Another great read from @grbeaton_law plus good links / comments – beatoncapital.com/2013/10/rise-r…”.
Thank you for the compliment Karl, http://www.riverviewlaw.com/.
This blog post and the related comments present thoughtful insights into the state of affairs today for the business and practice of law.
Our view is that this is not about the absolute end of BigLaw. It is, however, about the ascendency of NewLaw as part of the market for legal services. We have read Mr. Christensen’s piece on consultants and agree (and, in our view, a solicitor’s practice is the functional equivalent of other types of business consultancies from the point of view of the business model’s key features). We have also read the article on Novus Law (and, are well acquainted with their business model).
The changes we are seeing in the market for legal services are being driven by clients and a demographic shift with respect to lawyers (and the related attitude changes). This forum does not allow us to go into a detailed discussion on all of the factors, but any observer of the legal markets throughout the common law nations will have no doubt seen the same trend lines. Corporate clients are no longer satisfied with the status quo, as represented by the billable hour. Not the absolute dollars that are being charged nor even the business model. We are finally openly talking about the conflict of interest inherent in the billable hour and the incentive to inefficiency that it brings to a traditional law firm.
It is true that a few traditional law firms are adopting innovative billing and project management policies. However, let’s be perfectly clear, the number of firms that fall into this category represent a minuscule sliver of the total number of firms. Traditional law firms remain tied to a billable hour (read: time and materials) framework. Corporate clients are demanding a new approach and this means re-engineering not just how we practice law but the financial relationships within the businesses that provide legal services. Law firms are tied to legacy IT systems for which they have paid dearly. Consequently they are not keen to invest in such things as cloud-based solutions. Start-up NewLaw firms are ignoring the legacy systems and moving immediately to the scalable and cost-effective IT solutions that exist in the market today and are passing along the efficiency gains (and cost savings) to their clients.
In terms of demographics, I will leave it to sociologists to explain the mindset of young professionals (Gen Y). The bottom line is that Gen Y mocks the billable hour and will not spend a career toiling on a billable hour basis. These young professionals have been told they are knowledge workers and that they can work wherever and whenever and need not be fixed to a single location. Consequently, they will work on a flexible and distributed basis and the clients are insisting that this be offered (nothing new here … this is the secondment model). The critical difference here is that BigLaw loses money on a fixed fee secondment due to the sunk costs associated with the shiny BigLaw offices in the towers. NewLaw will charge less and make money on a secondment because the related expenses are appropriate to the business opportunity.
This is not about “more for less”. This is about “different for less”. BigLaw will retain its top-of-the-pyramid work (bet the farm litigation, IPO, etc) but the work that exists within the day-to-day operations (business as usual (i.e. core legal work that repeats with a known frequency)) will not remain with the traditional law firm. Others (NewLaw? LPO? Paralegals?) will move in to do the work.
NewLaw is not a revolution that will replace the existing order. This is an evolution in the delivery of legal services that will add another solution to the market in response to client needs (and market demands). I can’t imagine a more rational and normal business development and at Conduit Law we are pleased to be part of the evolution.
@Conduit_Law (Toronto, Canada)
Peter I thought part of our email exchange today worth recording.
From: George Beaton
To: Peter Carayiannis (Conduit Law)
Subject: The Evolution of Law
Sent: Nov 1, 2013 18:15
Peter, thank you for the coverage of this post and thread in Conduit Law’s News section:The Evolution of Law. I am still hoping for a comment by a BigLaw managing partner!
On 2/11/13 11:37 AM, “firstname.lastname@example.org” wrote:
On one hand, it doesn’t surprise me that there is no (current) managing partner voice in this debate on your blog post.
On the other hand, what are these managing partners thinking? Do they have some secret weapon we don’t understand or are they fiddling as Rome burns. It’s quite surprising.
Editor’s note: See also Comment 4 from Ken Jagger recording his discussions with Australian managing partners that indicate (some) awareness of and response to the challenges.
On 2/11/13 11:40 AM, “George Beaton” wrote:
The only explanation I have comes from Richard Susskind who, is his inimitable way, wrote in response to my making a similar lament to him: “It was ever thus. Managing partners are always slow to respond online.”
I think it may be part of their collective psyche to preserve the mystique of law firms.
Editor’s note: See also Comment 26 from Richard Susskind who, reporting from a conference of BigLaw firm leaders in New York, wrote: “They did not speak with one voice but there was a sense from two of the three (managing partners) that the disruptions that you and I discuss will not extend into the best firms who undertake the most complex work – work, that they argued, is price insensitive.”
On 2/11/13 11:59 AM, “email@example.com”:
Well, luckily for us, when it comes to such mystique, we know the Emperors have no clothes.
In Canada some of us (not the entrenched groups and not the regulators) are running hard to catch up to our common law brothers and sisters and are keenly interested in views from Australia and the UK.
Great to see this debate rolling on. There is one point of view that has been missed so far and that is from the client. I will put it bleakly – we have seen a secular shift from a seller’s market to a buyer’s market. We know it is not isolated to law, other professions have suffered this change over the last 25 years, so what that tells me is that it will not reverse. Whether the mystique of law has been blown away, whether it is because clients now know they have a true choice, whether the realisation that it is a homogeneous product in a perfect market and the oceans are turning red – the fact remains the BigLaw model is now operating in a seller’s market.
Joel’s and others’ view that it is a cyclical manifestation must be music to the ears of many partners who are suffering reduced drawings and can’t decide how to respond – other than ‘just wait, things will be okay’! On the other hand, my discussions with managing partners confirms their view that there has been a structural shift in the market, and that is manifest in the buying behaviours of their clients. Clients now have more choice, that could be a NewLaw alternative, but it could also be from the BigLaw entrants in the Australian market for example. Just look at the generalist and specialist entrants in the past year or so – they are skimming the high value work.
So how will BigLaw evolve from dominating a seller’s market to being subject to a buyer’s market? I suggest that gross margins and partners’ drawings will fall as investment in differentiation increases and fee rates to fall under the pump, whether through the increased use of lower and fixed price arrangements or just by simple price-down pressure relative to the cost of clients’ alternatives.
BigLaw will not go away, but as a pervasive species it must be under threat. Some firms will survive, but most will evolve.
A few more observations from your northern Commonwealth cousins:
1. I don’t think anyone is seriously asserting that demand for high-quality, high-stakes legal service will collapse, and that large full-service firms will go with it. If anything, I expect that demand will grow — correct me if I’m wrong, but I don’t think demand for legal services has ever shrunk or even plateaued on a year-over-year basis since we started measuring it.
But it’s important that we understand this: demand for legal services is not the same thing as demand for lawyers in law firms. The flatlining or decline in law firm profits sharply contrasts with the continuous growth of all the NewLaw firms we’ve been discussing. Growth is not dead — it’s just changed addresses. Law firms are suffering not from a drop in demand, but from a drop in demand for what they sell, at the price they sell it, in the way that they create and deliver it.
2. Joel has pointed out, rightly enough, that the top BigLaw firms are doing more than fine, and that many BigLaw firms see what’s happening and are taking steps to address it. Two points here.
First, the elite members of BigLaw, as is the case with the elite members of any group, will ultimately be fine. If I were a member of an AmLaw 10 firm, I would obviously be very interested in what’s happening to the market, but I wouldn’t be panicked: my firm’s brand is more than strong enough to survive the current crisis and, more importantly, survive the gradual but inevitable process of change that’s coming our way.
But if I were in a firm from AmLaw 11-200, I would be concerned, and as I go down that list, my concern would edge into panic. These firms are like houses of cards, impressive to look at from the outside but extremely vulnerable and structurally unsound at their core. They may survive the crisis — most are stumbling through alright — but I don’t see them surviving the change process that’s to come. More on that in a moment.
Second, it’s one thing to say law firms are aware of their challenges; it’s entirely another to say that they can actually do something to address them. I’ve written about why lawyers can’t innovate (http://lawlks.ca/3917), and for all the talk about change in law firms, very few existing firms have actually changed the way they do business, the way they create, carry out, deliver and price their services. Among large North American firms, I can name Littler and Seyfarth, and that’s it.
Some firms implement LPM, but in hardly any firm is LPM close to being standard operating procedure across every or even most departments. Technology is utilized to organize information, but not to carry out otherwise billable tasks. No existing law firm makes fixed-fee pricing their default method, and those firms that do sell flat-fee services on some files cannot guarantee they’re turning a profit on same. 90% of law firms are 90% identical today, in terms of how they run their businesses, as they were 20 years ago.
3. The challenge facing law firms, as I said before, is not surviving this crisis: most firms have enough size, momentum and market share to run this gauntlet, although they will certainly be damaged in the process. The real challenge lies in recognizing that a new environment for the purchase and sale of legal services is rapidly developing, meaning that the old ways of doing business no longer interest the market and that new ways of doing business will be required. Most law firms have at least the five following challenges lying between them and that goal:
- The fundamental supremacy, in cultural terms, of the individual lawyer over the firm (rather than the reverse, as in, say, accounting firms).
- The focus on full-time lawyer effort as the dominant source of productivity and revenue (rather than on systems, technology, and those who are not lawyers).
- The near-complete lack of comprehensive business intelligence about the firm’s inventory, costs of delivering service, true productivity (rather than “hours billed,” which is a ludicrous metric), and true profitability of files, clients, and the firm in general.
- The compensation principle that lawyers are to be rewarded almost 100% on the basis of business originated and time billed to client files (rather than, say, management, training, client relations, publishing, marketing, community work, etc.), and that such compensation is to be paid out by draining annual profits in full every year.
- The near-complete absence of succession planning and its antecedent, true partner development and mentoring (this is what will end up killing most firms: they will die with the passing of their most important rainmakers who have never considered it to be in their interests to share relationships with key clients).
Most firms would struggle mightily to change any one of these states of affairs; in reality, they need to solve all five of them. My fundamental concern is that even if a firm turned itself, with all effort and goodwill, to this challenge, it would still be beyond most firms to accomplish, because the five elements I listed above aren’t just “features” of the firm — they’re inherent characteristics, sunk deep into the firm’s originating baseline DNA.
So, to make a long story short (too late), I share George’s real concern for the medium-term future of many law firms. Like I said, I don’t think it’s necessarily this current downturn that’s the major issue; it’s that this downturn is effecting and ushering in a new set of market conditions that make the environment essentially unsuitable for the traditional law firm business model, and that most firms lack the wherewithal to adjust to the new environment without tearing themselves apart in the process.
I’d like to channel my inner Aussie and say, “Spot On, Mate,” for your excellent analysis, Jordan. I’m hoping you will publish this as a standalone article.
I’d also like to point out a new article in the HBR (Dina Wang and Firoz Dattu) that states that 74% of GCs now willing to use “non-pedigreed” firms for “high stakes” work and that such work can generally be done for 30-60% savings | http://bit.ly/19tfjEo
The news from the battlefield is beginning to trickle in, and NewLaw is notching up wins. Legal Week just reported that BLP’s 2012/13 PEPP is down 40%, while its Lawyers on Demand service is up 28%. (via @Conduit_Law). The ABA article Dr. Beaton mentions, discusses how Novus is delivering work at higher quality than BigLaw associates at 10-30% overall case savings. How does BigLaw compete against better quality work at significantly lower prices?
Some of the Twitter traffic around the rises of NewLaw debate:
Fantastic discussion in comments: The rise and rise of the NewLaw business model by @grbeaton_law bit.ly/16CczpS #postBigLaw
RT @ronfriedmann: Not So Fast #3Geeks bit.ly/GTkjJz || BigLaw will see change but not very fast. Railroad ‘revolution’ took 50 yrs
Part agree. No internet in 1800s. @gnawledge: @ronfriedmann #3Geeks bit.ly/GTkjJz || BigLaw will see change but not very fast
George – thanks for initiating this great discussion.
We place too much emphasis on business models and not enough on how lawyers actually practice. Jordan gets to the latter in his point that 90% of what 90% of law firms do today is the same as it ever was. And that’s generous.
Shortly after I began blogging in 2003 I wrote some posts about the need to examine HOW lawyers practice. With legal project management and process mapping, we now see some change. Uptake is, however, slow and requires hand-to-hand combat.
It is not clear to me how many NewLaw organizations actually practice law (or provide “legal support”) differently than lawyers and other professionals have always operated. I know of only two organizations – Seyfarth and Novus Law – that have publicly shared details of HOW they work differently.
Irrespective of business model, lower cost and higher value is possible only by changing the way lawyers and other professionals do their work. And efficiency is only one element. Bigger savings likely lie in doing less law. This means making better risk-adjusted decisions about how much to invest in legal services. We talk too much about who does the work and how efficiently. We need to focus more on whether we actually need to do all that work. NewLaw is better equipped to think about that question but I am not sure NewLaw is doing so much better on that than OldLaw
Ron you make a really important point about behaviour.
Generations of successful practitioners have passed on their practice habits through what remains essentially an apprenticeship system. I agree that changing HOW (your emphasis) lawyers work is one of the major challenges for all BigLaw firms. The intricate cultural web within which these practitioners work has to be dismantled and new ways created.
And to do this, amongst others, the impediments of the partnership structure must be overcome, as Ken Jagger points out in Comment #4 in this thread.
Thank you for injecting an important fresh angle
Ron, you make an important point. I regularly ask other new law providers how they operate, with sometimes patchy responses. Let me try to illustrate how we do it at radiant.law, where we believe in building the right incentives to drive change:
1. We price transactions on a fixed price basis with no timing assumptions, so we take on the risk of overrun and funnily enough have developed all sorts of methods to manage this risk, often revolving around when to inject resources during the project life cycle.
2. From the start we went straight to an LPO provider for all junior legal resources, with no onshore competition from junior associates. This means that we have actually followed through in re-engineering processes rather than just falling back on the hand-waiving delegation common to onshore departments.
3. By building a network of on-tap software developers leveraging open source and cloud technology, we have made it possible to look at more problems to see if they are capable of technical solution and carry out quick experiments. Failure is cheap and fast, but sometimes it works!
We couldn’t do this at the traditional law firms that we came from – so I would argue that the business model is important, even if not everyone is taking advantage of the opportunities.
Alex, fascinating first hand account of innovation in action. Thank you for sharing your experience and insights.
What a great one-stop view of the BigLaw vs NewLaw debate!
Echoing some other commenters, I don’t see this one model triumphing over the next decade and probably beyond.
There is massive potential from distributed professional services models, yet there are significant constraints as well.
Some clients will absolutely shift to best-of-breed, highly efficient crowd-based models, others will prefer the comfort and ease of integrated relationships and services and be prepared to pay more as a result.
The foundations have now been laid for a significant acceleration of new legal services models. However while the impact could be severe on some legal firms and sectors, the erosion *may* be muted for the more resilient firms.
Which of course still leads us to observe big differences in how well firms are building resilience to a significantly different competitive landscape.
Ross, thank you for this contribution.
I hear your view on the constraints. My guess is the clients will set the pace. There’s a delicate balance between client demand for NewLaw’s various value propositions and BigLaw’s capacity to innovate.
The end-game winner will be segmentation, as you suggest.
George, interesting your mention of the ability for BigLaw lawyers to do better financially by opening their own boutiques. Do you see this happening in significant measure in AUS/Asia pacific market? Do you believe hyper-specialist boutiques in very rarefied niches can compete head-to-head with BigLaw niche practices? Scalability on large matters is a challenge. Attracting business also a challenge but that’s where the boutiques can beat BigLaw.
John, in a word, ‘Yes’ break-away boutiques in Australia and New Zealand are performing extremely well where they focus on an area of specialisation, either client industry, e.g. health, hotels, or service line, e.g. IP, employment law.
Eric Chin, one of our senior analysts, is just completing an analysis of this trend, so watch this blog!
Regards to you and the Asia Law Portal: http://www.asialawportal.com/
I have not caught up with this thread for a few days. It really seems to have hit a vein, possibly even an artery!
One thing that hasn’t got much airplay is the client – their nature, their needs and how they are being met.
All the Beaton data I’ve seen over the past 10 years (George please update me if I’m wrong) points to Australian clients rating their legal providers around 8 out of 10 on overall performance. This is the highest of all the professions by a statistically significant margin. Even on value for money, notwithstanding the predominance of the billable hour, law firms average around 7.5 out of 10.
By and large, THE DATA suggests BigLaw are doing a great job in serving their clients needs and providing good value. I’m not saying there’s no room to get better, but new entrants better beware: the market is being well served by some pretty accomplished providers.
The second aspect that should be recognised that many clients of BigLaw are lawyers themselves. While you may berate incumbents for lack of innovation, many of their in-house colleagues are of the same breed. Larry Richards, formerly of Altman Weill, published some fascinating data on the personality of lawyers (http://www.managingpartnerforum.org/tasks/sites/mpf/assets/image/MPF%20-%20WEBSITE%20-%20ARTICLE%20-%20Herding%20Cats%20-%20Richards1.pdf). Using a Caliper Profile personality test, Richards’ research showed lawyers had “Scepticism” at 90 while the general public were at 50. Lawyers, both in-house and out-house, are in the main conservative and risk averse. If one accepts this then my thesis is that the NewLaw diffusion curve is going to be a lot longer than one might initially think. Clearly, there are some early adopters on the client side, but my observation is that it’s still slow going. One illustration of this is recent Hildebrandt data that shows AFA growth being flat despite all the hype (http://hildebrandtblog.com/2013/10/10/flat-afa-growth-rates-may-not-tell-whole-story/.
Warren points out we’re in a buyers market. Well of course we are. In fact, we’ve been in one since 2008. Yet despite five years of benign market conditions, we’re still seeing the top end of BigLaw delivering $1m+ profits to its equity holders. On top of this, about two-thirds of these firms have had to deal with major merger and integration distractions.
There’s nothing that been written in this thread that changes my opening line: “I think you underestimate the strength and resilience of BigLaw and overstate the competitiveness of NewLaw”.
Joel, you are correct about what the Beaton Benchmarks data show: BigLaw firms perform superbly.
It’s a race between BigLaw’s capacity to adapt (re-invent) and clients’ appetite for NewLaw’s various value propositions.
I believe the outcome is too early to call, but as you know from Charles Handy’s s-curve and as I argue in the next Comment, the time to act is before NewLaw takes hold. Several commentators suggest BigLaw is struggling to recognise, let alone respond to the threat.
Two days ago I invited 25 BigLaw current and former managing partners from the USA, Canada, Australia, SEA and New Zealand to comment on this thread. Let’s see.
Much of the debate in this thread hinges on the extent to which the NewLaw phenomenon is in fact a disruption of the BigLaw-based industry. (Remember at all times we are discussing business models, not size of firms. For a refresher on the BigLaw business model please refer here.)
Not unsurprisingly, when we seek to find why disruption is happening or may be happening, we tend to look for individual pioneers – Henry Ford and Steve Jobs for example. In other words we may think of Mark Harris, founder of Axiom Law, as a disruptor. But disruption in the sense we are discussing has little to do with brilliant (and perhaps lucky?) individuals. It is primarily a function of networks. If we are to understand disruption, it is how networks form and operate we need to grasp.
‘Epidemic’ change occurs when work-a-day clients act in unison, hence the use of my “butterfly in the Amazon” reference and graphic in the post that sparked off this debate.
As every good business school student (at least of mine, thank you Paul Carr, President of Axiom Law!) knows Solomon Asch’s 1950 pioneering research and the 1960’s work of Everett Rogers showed human beings have a tendency to follow the herd in particular ways. Readers will recognise the idea of the innovation diffusion curve in which Innovators are followed by Early Adopters who is turn are followed by the Early Majority, etc. Each of these descriptors refers to progressively larger groups of individual buyers and users of the product in question being influenced by those who went before them in trialling the product.
Influence in this sense (i.e. causing an innovation–NewLaw ideas–to diffuse) is a function of an idea taking hold among those who are most receptive to it and, as they increase in numbers, more follow and join in use of the product. In other words, the innovation tends to build on itself. This is the network effect in action.
Innovators and early adopters do not, as individual buyers and users of NewLaw in our case, possess any special qualities. They just need to be interested in learning if their organisations can receive better value from NewLaw than they currently do from BigLaw and prepared to try. To the extent they do, they influence others; and the momentum builds. The innovation diffuses.
What determines whether NewLaw in its many manifestations catches on is less about who the Innovators and Early Adopters are, and more about those to whom they are connected. These individuals have higher levels of resistance to the innovation; they are more risk-averse. In other words, Innovators and Early Adopters take the risk and once the superior value of the ‘product’ is proven, it enters the Early Majority phase. And the chances are it will then go viral in modern parlance. If it doesn’t get traction at this point, it’s game over and the innovation dies away.
So where is NewLaw in the innovation diffusion curve? My assessment, based on analysis of various indicia*, is that NewLaw is still in the first part of the early adopter phase of the innovation diffusion curve. Last week 3 Geeks and a Law Blog pointed out the railroad revolution in the USA took 50 years to fully disrupt. Author Toby Brown went on to infer BigLaw may have plenty of time to adjust. I disagree. What’s different with NewLaw and our era is digital technology which has made us all much more connected and drastically shortened product life cycles. What took decades previously now takes years, years months, and so on.
*Indicia include but are not limited to the types of clients who are trying – and re-using – NewLaw’s services, the growth of NewLaw firms (see for example this post positing that Axiom Law may be the largest legal services provider in the world by 2018) and the types of lawyers who work in NewLaw enterprises.
Where you end up in this debate depends on your viewpoint about the current business climate. I have three observations with apologies if these points have been made by others in the many links to other blogs and stories not all of which I have clicked through to read.
1. If you take the view that the worst of the economic downturn is behind us then all firms – large and small – have already passed through the point of maximum pressure on their business model – and are out the other side. While a few didn’t make it, the overwhelming majority did.
The services sectors in many G20 economies are largely responsible for the recovery and law firms both benefit and make their contribution here. Even law firms in Ireland and Greece are showing signs of recovery. The business environment will continue to get better for all firms. And the result will be that the pressure on them to ‘change or die’ will weaken.
2. That said, the ecology of the legal sector will never return to what it was pre-crisis. Everyone recognises that a range of new legal service providers and innovative business models are here to stay.
My impression of talking to large law firm management teams on this issue is that they that they are relatively relaxed that someone is satisfying clients’ low margin/ commodity work (e.g. insurance process claims, discovery, contract review, due diligence etc) leaving them to build value around the complex, high margin matters.
The respectable but low margin work isn’t the sort of work which large law’s high paid talent likes doing, such firms aren’t good at pricing it in conjunction with their high cost base and they haven’t always made the process technology investment to deliver it well.
I hear many who say that both these models can coexist happily.
3. There’s nothing that is happening to large legal practices that hasn’t already happened in Accountancy and Consultancy – in fact ‘big law’ is lucky to have got away with so little disruption until now.
These two disciplines have made room for a variety of providers and niche operators without the business model of incumbents collapsing. The Big 4’s business model has barely stumbled despite the deepest global recession since the 1930s. The leaders of ‘big law’ look at how remarkably resilient the Big 4 are and my guess is that they sleep a little easier at night.
James, thank you for these balanced views. Some points of reply, perhaps clarification:
1. The current green shoots to which you refer are real, and part of the economic cycle. But, and it’s a big but in my opinion, the underlying structural changes in client buying behaviour, substitute activity, breakaway new entrant activity, talent seeking alternative life-career models and price-based competition, mean the downward pressure on profitability is inexorable. As it becomes clear profit per partner will halve in the next five or so years (see point 1 in my reply to Comment 7 above) many of rainmaking partners will leave for their own boutiques and fewer top class candidates will come into equity. A negative spiral is in progress.
2. Your reference to other professions that are down this path resonates. The major difference for law lies in firms’ reluctance to diversify and build real scale. For those who are interested, the Beaton Capital blog has several research-based posts on both these methods for shock-proofing the profitability of BigLaw business model firms.
This is a challenging area in which I have a vital interest; here points which might be of interest to other readers:
1. The idea that highly skilled professionals (men, women, experts, whomevers) are on a “spot market exchange” is very sensible. Particularly for project work under, say, $100,000. And also where we connecting fragmented, difficult-to-find groups. The logic of a liquid online market exchange is irrepressible, undeniable, magical. It will 100% happen. And it won’t be academics or philosophers that will do it – it will be practical, sensible, humble business leaders who listen carefully to their audience and offer a micro-niche professional services solutions that dominate their market. 99Designs in design is an excellent example and an early winner.
2.I call this emerging mobility the concept of the “ATEAM” – the day when the best professional services teams in the world can be created instantly, anywhere, on-demand. No one marketplace or institution can fully service this need – it will be introducing the related concept of multi-homing. Get Visit Freelancer.com, ODesk.com, Fiverr.com, 99Designs.com, ProfessionalMums, SpecialistAdvisory.com, Crowd-models are great examples of build your ATeam instantly with diverse skilled talent. It’s ideal for empowering professionals to build their own A-Team – no intermediaries, no middlemen, no admin, no rubbish. We just need a global credible project management marketplace and this will readily become a real possibility…and quickly. The value-add will be in selection, configuration, alignment of goals, setting incentives, insurance and performance appraisal. I love the ATEAM concept; I could talk about it all day!
3. The concern for BigLaw is how will then know what the “Alternatives” are. The next real question is what genuine alternatives to BigLaw? What if they don’t have big offices on Collins Street? Amazon and Netflix don’t have large sexy offices in the online book and video industry! How will we know? I think there are multi-faceted possibilities, but the real killer is still not clear. And may not be clear for 5-10 years, but it will start to crystallise soon. And when it is clear, it’s will be too late for BigLaw. The disruption will have taken hold and BigLaw’s inertia is in motion (per Clayton Christenson’s seminal work on disruptive innovation). The most obvious threat is flexible working arrangements for highly-skilled but repetitive tasks. Here’s the rub: As BigLaw moves to a more flexible/lean/responsive/competitive workforce – and the quality and availability of labour increases – the danger grows. We’re back to contract theory. Is the real skill of Herbert Smith Freehills or KPMG in the management of big contracts, e.g. BHP managing mines, or is their skill the project management of the doing, e.g. digging the trenches in the mines? Big returns can be made in both, but the latter is what the Alternative will disrupt, not the former.
4. I agree with Ross Dawson that BigLaw will always exist. And it’s important it always does, especially for large, complex and transformative projects. But when crowd-models can access risk-lowering profiles to make them genuine economic and legal substitutes it will be an interesting day; and you and I will be smiling. It’s a bit like people once laughing at mobile phone technology; it is already 15% of global internet use and will reach 30-40% in the coming years. There will be a tipping point in professional services; no one can sit on the fence. I think 7-15 years is realistically the timeframe for when the best online professional services marketplaces will/can/do eclipse the time, quality, performance equation on a repeatable scale of even McKinsey. I hope to be one of the leaders by building the World Professional Services Events and World Professional Services Marketplaces in making this happen in the next 30 years.
5. Finally, I think we need to look to the signs from small businesses, not the large corporations. SMEs can switch more swiftly and eagerly to basic everyday business benefits provided by the substitutes. Let’s spend more time on R&D activities to find, improve and celebrate the disruptors.
It took a while to catch up on this debate – it certainly took off.
The comments that resonate with me relate to the ability of very BigLaw firms to survive and thrive.
I don’t think there is any doubt about that. It may take a while to get to a Big 10 and even longer to get to an Accounting style Big 4 but it seems inevitable.
I completely agree with Jordan though that it is 11-200 that will not be able to sustain their current structures and are most at risk from the innovators. NewLaw won’t be satisfied with low margin/commodity work when there are better ways to undertake complex high margin work as well.
What will be fascinating to watch is which of the current players end up in that elite Very BigLaw category and how long it takes. Will there be a tipping point where the innovators bust the dam wall open or will it continue to be incremental as it has been to date?
PS Joel – AdventBalance currently has around 110 lawyers in the region with 75 in Australia. The website is “representative”. In any event we will redouble our growth efforts!
Wow. So much to think about in this thread – unlike any I’ve seen before.
Unlike Joel, I see structural change in the marketplace.
The growth in the number of inhouse counsel is structural, not cyclical. This growth is a symptom of law firms pricing themselves out of certain types of work. This never changes back unless firms can demonstrate that they are more cost-effective and provide better value than inhouse counsel.
After demanding more for less, GCs don’t suddenly say “Hey, charge whatever you want as the crisis is over.”
Afterall the easiest way for GCs to show a return on investment is to provide evidence of year-over-year legal cost reduction.
AS GCs become more comfortable with the Axioms and the Clearspires, the Conduit Laws and the Cognitions and the gunnercookes, and the Adventbalances, more work will flow to them. Again, this is structural change, not cyclical. After using these firms, GCs will not, absent a bad experience, suddenly give all that work back to traditional law firms.
Will NewLaw get $10B+ deals? Maybe not, but how many $10B+ deals are there out there annually? I am sure NewLaw is quite happy to do 50 $500M deals rather than hoping all year long for that one $10B+ deal.
Then factor in that better processes and better technology are designed to allow fewer lawyers to do more work. Global law firms rely on their massive scale to attract work – but what happens when clients realize that the scale is no longer necessary?
As we know, better processes and better technology never go away – they are structural in nature, not cyclical. Kodak thought that the market would always want print photography – Instagram showed that the smartest guys in the room at Kodak missed the mark.
When DiligenceEngine’s software replaces hoards of associates that traditionally do due diligence that is structural change.
When MSU perfects qualitative legal prediction and litigators rely on algorithmic prediction based on research that no human can accomplish – that is structural change. It also structurally changes what litigators will actually do – cause they’ll be going to court even less than they do now.
There will always be room for a very thin band of global firms that have a niche in a high level, narrow band of work – but remember that even the most complex niches become routine after a few years. My experience with P3 was that it was very exotic 10 years ago, but after you do 5 deals, they become cookie-cutter deals – print the same documents with only a few changes.
The disruption will be most dramatic with the thick middle section (and it is a very thick middle section) of Biglaw that really has no way to differentiate itself. These firms don’t do complex work and they are not niche boutiques – they are stuck in the middle without a plan.
But Global firms should not be patting themselves on the back too quickly. As we know, Global law firms need to do “every day work” to keep their troops busy between the “bet the firm” work. As a former Baker partner, I can tell you that most work done at my office and in most Baker officers is not complex “bet the firm” work. It was generic corporate deals, generic securities work, generic litigation, generic real estate.
Global firms are not at all well positioned to compete for that “every day” work. If they lose it, they are in trouble.
As NewLaw eats away at “every day” work, Global firms will have greater difficulty keeping their troops busy between the “bet the firm work.”
That is the real danger for Global Law.
Mitchell E. Kowalski M.A. LL.M. ICD.D.
Barrister and Solicitor
Author of: Avoiding Extinction: Reimagining Legal Services for the 21st Century
2012 Top 50 Fastcase Legal Innovator
Thank you Mitch. Yes, these are intensely interesting times.
Your message that these changes are structural, not cyclical, is a key reason most of BigLaw is still not waking up and acting. The good old days are behind us; hence terms like ‘new normal’ being apt. Ken Jagger suggests in Comment 4 that BigLaw managing partners are alert to the dangers. I don’t see this to any great degree in their actions or public statements.
Australian readers will be interested to know that Mitch is speaking at Beaton Capital’s November conferences in Sydney and Melbourne on Law Firms of the Future: https://beatonglobal.com/registration/files/docs/Law_Firms_of_the_Future.pdf. Ken Jagger, CEO of AdventBalance, and I are also in the line-up.
The business management literature is replete with insights into the phenomenon of ‘strategic drift’. Among others, the UK’s Gerry Johnson has shown there is a tendency for organisations’ strategies to evolve incrementally on the basis of historical and cultural influences (the so-called ‘custom and practice’ prevalent in the industry), but eventually this evolution fails to keep pace with the changing environment.
Beaton Capital’s research indicates BigLaw business model firms are drifting strategically. The six golden decades that began in the 1950s have lulled BigLaw. As a result almost all firms are ill-prepared for the disruption that is occurring. BigLaw is theoretically capable of re-invention, but as several other Commentators attest the impediments are substantial.
In particular, the workaday partners are trapped by the Icarus Paradox. They are captives of their past success and the powerful histories and legacies of their proud firms and profession.
So the biggest challenge BigLaw faces is to escape the shackles of the present. It would be very helpful to this debate to hear from some BigLaw leaders.
Thank you, as ever, for a thoughtful blog. I am currently at the 18th Law Firm Leaders’ Forum in New York. I gave the opening talk, setting out the thinking in my latest book, Tomorrow’s Lawyers. (There is much that dovetails with your own thinking.) Three panelists were asked to respond. They are leaders of first rate firms. They did not speak with one voice but there was a sense from two of the three that the disruptions that you and I discuss will not extend into the best firms who undertake the most complex work – work, that they argued, is price insensitive. As I said in reply, and echoing, in fairness, one of the panelists, that category of price insensitive work is diminishing. More than this, I suggested that if one leading law firm breaks rank and delivers world class service at significantly lower cost, using alternative methods of sourcing, then the market will change irreversibly.
Professor Richard Susskind is the author of several books on the future of law, lawyers and legal services. The latest is Tomorrow’s Lawyers from OUP.
Richard your real-time observation of BigLaw’s mixed response is a valuable contribution to understanding the situation. Thank you.
I thought you might find solace in Voltaire. Here’s another worthy contribution to the debate, drawing on Voltaire, from my colleague Eric Chin: http://www.beatoncapital.com/2013/10/voltaire-might-said-newlaw/
Just watched you in action here Richard.
Readers will also value your insights, so here’s the link: Digital Age: ewey & LeBoeuf: Flawed Firm or Flawed Business Model? Richard Susskind YouTube http://m.youtube.com/watch?v=6NaUSc8_s3E&desktop_uri=%2Fwatch%3Fv%3D6NaUSc8_s3E.
Mitch, George, and others,
It would be pure folly to pretend that the legal market is not in a state of flux. There are certainly a number of new entrants, changed business models, new pricing structures and growth of global firms. In-house legal continues to develop, flex its muscles and adopt professional procurement practices. All this while the total available ‘outsourced’ hours in recent times has been flat or diminishing (being both a cause and an effect).
What I don’t buy is the view that that the legal market is like the computer disk drive industry described in Clay Christensen’s famous book on disruptive innovation. In it, he describes six waves of technology from the 1960’s to the early 2000′s (14” ==> 8” ==> 5.25” ==> 3.5” ==>2.5”==> 1.8” drives). Each new drive technology disrupted incumbents and in almost all cases the leaders of the preceding generation failed. For the period 1976 to 1995, there were 129 entrants and 109 failures. Only IBM with its mega resources was able to sustain these shocks and prevail.
I’m sorry I just don’t see this kind of disruption in the legal market!
Sure there are changes and threats and mediocre firms will fail. But what I cant see is well-run incumbent law firms blindly watching their profits halve (as per Beaton’s modelling) without adjusting their cost base and adapting their ways.
I also don’t see NewLaw’s value proposition being so profoundly superior to BigLaw that conservative, sceptical buyers will jump ship without question. You’re not talking about Moore’s Law scale innovation (http://en.wikipedia.org/wiki/Moore's_law).
I think George and others argue that BigLaw’s partnership model is a structural and cultural impediment that prevents them from changing. While there is some truth in this, I’d also point to recent Australian history where a number of blue-blood partnerships agreed relatively quickly to profound strategic changes to their firms. I’d include Blakes, Mallesons, Phillips Fox, Deacons, Freehills, Allens and Middletons in this category.
I’m not claiming that things will just go back to the good old days and firms just need to sit it out. Far from it. I do, however, object to the black and white notion that BigLaw is dead and NewLaw will take over. This is the premise in the opening line of this blog post (scroll to the top up and see).
Joel, at all times in this discussion I am referring to the underlying business models of incumbents (BigLaw) and the substitutes (NewLaw). The monikers in parentheses are neologisms invented by me and Eric Chin, respectively.
A large, medium or small premium firm – like those to which you have referred and those sitting on Richard Susskind’s panel in New York (Comment 26) – conceivably has the capacity to re-invent itself. If such a firm permanently and sustainably changed elements of the BigLaw business model, then by definition this firm is no longer part of BigLaw. In other words, it will have left the BigLaw strategic group.
So, is say Marque Lawyers of Sydney still a member of the BigLaw strategic group? Marque, as followers of the charismatic Michael Bradley well know, is a first generation fixed fee corporate and commercial boutique. My answer is ‘yes’ – Marque is still BigLaw, but has brought advantage to itself over many other BigLaw firms and bought time by its adoption of fixed fees from its start as a breakaway. Marque may progress further towards NewLaw by changing more elements of its business model in the future.
As you well know, the literature shows how difficult (impossible?) it is for a going concern to move out of one strategic group into another. It may be that re-invented BigLaw firms create a new strategic group. Some are certainly trying to escape the trap of BigLaw culture and structure and where they will land is as yet unclear.
This is a fascinating struggle.
“But what I can’t see is well-run incumbent law firms blindly watching their profits halve … without adjusting their cost base and adapting their ways.”
The disc drive/mainframe/workstation/minicomputer makers etc. didn’t fail because of poor management. “Christensen argues that disruptive innovations can hurt successful, well managed companies that are responsive to their customers and have excellent research and development.” (Assuming many law firms fit this.) It is very hard for incumbents to adjust their cost base.
That said, we can’t tell yet whether Christensen-style disruption will happen with Biglaw, though it could.
While this thread covers much of the real-time debate and trends in the legal sector it is ignoring an underlying enabler that is fundamental to any change in any industry. Technology.
To Joel’s challenge earlier – what are these big technological disruptions? No one in this thread has taken up his justly thrown gauntlet so I shall do so now.
We can discuss, debate, and dialogue around business model changes, incumbent tendencies and capabilities for response to change, and new entrants to our hearts are content. In fact, there are far too many conferences and events where this artificial and “feel-good” chatter occurs. A simple inescapable fact is that technology will and is quickening the pace of iteration in legal services. Notice I use “iteration” not disruption or revolution. The legal market is not, has not, and will not be the sole domain of lawyers. Lawyers do not operate in a vacuum with only their lawyer brains – they use tools. The tools of a trade are often a direct reflection of the maturity and capability of that trade. Tools are indeed part of the legal market – make no mistake. Westlaw and Lexis are players – not that I think they are long for this world. We tend to define legal services far too narrowly and look only inside business models to for innovation and disruption.
As the tools available become more powerful, efficient, and let’s use current jargon, ‘smart,’ so to will the services that the users of the tools provide. So also will the business models for tech and tools are not just for front-end use but are actually more fundamental to change when employed in the back-end of a business – see data warehousing, logistics platforms, and integrative financial tools. These back-end solutions are what drive pricing, resource management, and delivery flexibility – all key to law firms BTW. What to change a business model – look here first. And where knowledge and communication are essential to a specific business (see the legal sector) technology is already demonstrating its power to make communication more efficient, accessible and meaningful. Legal is simply catching up.
Axiom is often trotted out as a key indicator of NewLaw’s emergence and potential disruption. Where did Axiom spend a large portion of its $28m funding? Technology and tools. It is not so much that Axiom is doing anything new. It hires and provides lawyers to clients. What is new is the “how.” And how has Clearspire attempted to differentiate and grow? By investing in technology and tools? Look at the BigLaw players Seyfarth and Littler mentioned earlier. While it is challenging to learn what exactly these groups are creating and using (for good reason as it is their competitive advantage) we can look to the external market for signs of meaningful technological disruption (again I am using Joel’s word here and prefer iteration).
Legal project management software while not sexy or “cool” is becoming a norm in the legal sector. Yes there are still many challenges with getting it into the incumbents’ hands but it is happening and at a greater pace. Mind you this is much different and a heck of a lot more meaningful that taking an LPM CLE or seminar from a consultant. These LPM systems are integrated platforms that cut across task codes, billing, workflow, and resource management. Talk to Axiom et al. mentioned above to learn the power these tools hold.
Legal research is also being iterated. We all know that it is harder to bill for research at a firm these days. It is seen as a cost of doing business for firms. While the promise of robust knowledge management systems has not yet prevailed, this has a created a commitment to status quo due to lack of tools, not desire. While research is good for “churn baby churn” billing – with the pullback in client pay-fors – providers are keen to have more powerful tools. Enter the number of startups from Neota Logic, Ravel Law, Fastcase, Jurify, Mootus and many others. Do any of these have critical mass yet? Fastcase certainly does and is perhaps the least disruptive/iterative of the bunch. But that is a common trend in technology adoption. Seldom is the most disruptive play the leader in the market initially. I get the sense that Ed Walters at Fastcase knows this and it careful with the scale and frequency of his innovations.
What is perhaps most important about this is that while the incumbents may not have the culture or systems to adopt the new tools rapidly, new entrants are not so constrained. See Alex Hamilton at RaidiantLaw as he chimed in above. NewLaw has the advantage of being able to test and adopt tools while also building a business model that incorporates them from the get go.
Legal services are not immune to iteration or disruption they are merely just resistant. The quandary for traditional players is that they are being enveloped by news tools and tech by new entrants but more so by their clients. When clients begin testing and using new tools, the service provider will be made to use them as well in order to better integrate into their clients’ environments. This is happening and will only accelerate. Talk to Westfield Insurance about their approach here. This, I argue, is where the meaningful change is occurring. Perhaps not at the pace some would like but rest assured, technology adoption often looks like a hockey stick – flat at the beginning then rapid increase in usage.
Joshua, thank you for making the first substantive ‘tech’ contribution to this thread. ‘Tech’ is not my space, so I defer to your expertise and experience.
Seems to me that the pure(r?) tech plays will occupy specialist roles in competing with or complementing large BigLaw firms.
Then, as you indicate, there are many ways in which tech will make the BigLaw and NewLaw lawyer-delivery models work faster, better, cheaper.
Has anyone published a definitive work on the current and future strategic roles of tech in legal services delivery? I, for one, would really appreciate getting ahead on my own knowledge in this space.
George, sorry to come in to this debate late. I think you have polarised the issue with great success and the debate seems to be running and running.
In my experience this polarisation doesn’t really exist though. At the opposite ends of the spectrum you might find firms which fit the monikers BigLaw and NewLaw but what lies in between constitutes a significant part of the legal sector and it comes in every shade of grey. DLAPiper is presumably BigLaw but was a founder of Riverview Law. NewLaw? Plenty of traditional law firms are moving away from the billable hour and towards the fixed fee without setting up so called NewLaw vehicles.
Yes, we are seeing evolution in the legal sector at a surprising speed but, having just watched David Attenborough’s Galapagos, I now understand that evolution at surprising speed still takes years (in the case of the Galapagos, millions).
What I am interested in seeing in the near future within the legal sector is what ownership/management structures providers of legal services adopt. Look at the two different models adopted by the accountants on the one hand and the chartered surveyors on the other, the former still largely using the partnership and the latter incorporated. Both were what you might call BigLaw type partnerships a couple of decades ago. In some ways an equity structure based on shares rather than partnership makes equity more difficult to attain rather than easier.
Whilst, as someone points out above, there has hardly been a rush by traditional law firms to adopt new structures in Australia (and the same seems to be true to date in the UK) traditional law firms have been seen to show herd mentality. Who predicted the rush of the global players into Australia? So may be the floodgates have yet to open.
I think we live in interesting times.
Editor’s note. For readers unfamiliar with a Nick, he has served as Managing Partner in Asia for both DLA Piper and Eversheds in the last 10 years and is no longer associated with either firm.
Thank you for your comment Nick. In this dialogue, you have the distinction of being the first with a BigLaw managing partner background to comment! Make of that what you will.
I certainly don’t want to be polarising, although the debate seems to have some heat in it. With the stake owners of BigLaw firms have in their businesses and decades of culture and a proud history, their capacity to adapt should not be under-estimated. What can be certain, I believe is this. There will be many more losers than winners among the larger firms in the BigLaw sector (at all times I refer to BigLaw as a business model, not a size of firm: http://www.beatoncapital.com/2013/09/last-days-biglaw-business-model/).
This imbalance stems from the limitations of the partnership structure. It is a major impediment to change, especially transformational change.
A great post has triggered a fantastic discussion, which I have thoroughly enjoyed reading.
One of the things that struck me is the black versus white, law firm-centric nature of the discussion, and I think those attributes steer the discussion wide of my view. Not to say I’m right, mind you. As someone said, let’s circle back together in five years and see how right or wrong all of us were.
First, this discussion, and any discussion of “BigLaw” is, by its nature, focused on firms and businesses that provide service to the corporate world. Little of what we say is applicable in other areas, like family law, consumer law and so forth. That said, some New Law entrants that begin in those areas may find themselves expanding into the more traditional corporate domain.
Second, until relatively recently, legal services in the corporate domain were monolithic–big firms doing work on an hourly basis. There was no belief or expectation that the same forces at work on our clients from a business standpoint would ever apply to law firms. We were, after all, different.
What we have learned in the past five or so years is that firms and law departments are not immune from these business pressures. We also have learned how fragile firms are. The departure of a few key partners in search of “more” can be enough to cause “a run on the bank.” So as firms continue their efforts to grow by hiring market share via aggressive lateral hiring, there will be both winners and losers in the big firm market. The pressures on firms are exacerbated by the competition in the process and content areas that made firms so fat and bloated–document review and research. The pressures from firms like Axiom cause even more stress on large firms–helping clients bring more work in house where the make versus buy decision rarely cuts in favor of outside lawyers. Again, the added stress load on law firms will cause more to flail and ultimately fail.
We know there will be some number of large firm successes. If nothing else serves to prove the point, we only need look to the accounting world. The numbers in the legal world won’t be as limited, but the look will be similar– a relatively low number of hugely successful behemoths and then some relatively successful others, followed by countless small players.
So the pressures from the market are causing changes, as is the growing impact of New Law entrants. The other driver seems to be the clients themselves. More and more clients are realizing they do not need the “IBMs” of the world to handle the vast bulk of their legal work. Most companies never have a “bet-the-company” lawsuit, for example. If they do, there are several worthy behemoths to select from, but the immediate concern of these clients is this year’s performance to budget, and they are learning that small firms can provide better service and better outcomes and virtually all of the year in and year out legal work with which businesses grapple.
To me, all of this means that we are moving from a monolithic world to a kaleidoscope environment in which smart and creative people can find new and better models that are much more client-focused in delivering outputs for predictable costs, and clients will be much more sophisticated and savvy buyers, finding suppliers that suit their specific needs. The one-size fits all will be a thing of the past.
Another thing that will be a thing of the past is the guaranteed year-in and year-out profits firms have enjoyed. Businesses don’t enjoy guaranteed profits every year, so why should we expect law firms to be different? Let’s avoid looking at PPP–if businesses could gerrymander their stock price the way law firms play with PPP, there would never be a business whose stock price declined. At some point, the games that allow law firms to show high PPP will have to end, just as the games ultimately ended for Dewey.
The inescapable conclusion is that the market is going through an epic alteration and cleansing. There will be plenty of casualties–in my view, many more than most expect–but one way or another, casualties aplenty. At the same time, huge opportunities exist for the bold.
Patrick you make a really good point. So far, all almost all the focus has been on the ‘big end of town’ so to speak.
I agree that the many forms of NewLaw application serving consumers and small business are as interesting. Australia’s own Slater and Gordon (SGH was the first law firm to list on a stock exchange) is a NewLaw business model. SGH is a ‘consumer’ law firm with very strong personal injury plaintiff origins.
This is a topic for another major post! Thanks for the nudge.
The traditional model’s biggest problem is that the competition is directly attacking its largest profit center – hordes of associates billing at rates that are no longer competitive. The obvious solution is to cut those costs. But as I’ve discussed here http://wp.me/p2oxY6-jE, the hard cost of a $160,000 first year associate billing 2,000 hours is $80 per hour. That figure does not include the estimated $200K-$300K of overhead for the same associate. Now that the market price for such work is at or below $60 per hour, BigLaw can’t get that low. Without this work to fuel the leveraged pyramid money tree, PPP numbers are going to take a huge hit at most firms, as Dr. Beaton has predicted.
Merging won’t solve this fundamental problem, nor will accounting tricks. The two viable short term options for firms seems to be: 1) focus more on the booming emerging markets in other parts of the world (which are likely behind on the disruption going on here), or 2) adapting like Seyfarth Shaw, Berwin Leighton, and Addelshaw’s. The risk, as described above, is that their offerings cannibalize their own profit centers. Given that these will disappear anyway as clients refuse to overpay for this work, the reward to the firms that get out front is grabbing large amounts of work from BigClients who demand change, but want it from large firms with brand.
The third option, doing nothing and hoping for the best, is going to lead to many more Deweyesque headlines in the near future.
Mike, I agree the choices facing BigLaw business model firms of all sizes are stark. At Beaton Capital we use sustainable PEPP (aka PPP) as the measure of success for BigLaw.
One (temporary) way for some firms to preserve PEPP is hyper-specialisation and conversion of the pyramid to a cylinder. If my memory is correct, the cylinder metaphor was first used by Bill Henderson of the Maurer School of Law at Indiana University.
This post may be of interest: http://www.beatoncapital.com/2013/02/for-most-law-firms-the-pyramid-has-to-change/.
In this thread and on Twitter some commentators are expressing views that the NewLaw threat to BigLaw may be being hyped and over-stated by others. I thought it would be valuable to provide some facts by way of background and respond with my view of the extent and proximity of the threat.
Just a reminder for those who are new to this thread. At all times BigLaw and NewLaw refer to business models, not size of firm or recency of arrival, respectively. At the start of the post above these words are defined and there are links that provide more details. The threat to which I refer is to the sustainability of PPEP or PPP, as some prefer, in BigLaw business model firms.
There are many types and sizes of BigLaw firm:
• There are giants (at least for law). The Beaton450 2012 league table (http://www.beatoncapital.com/beaton450/) catalogues 208 law firms in the world’s 450 largest professional services firms. The USA has 154 of these, the UK 24, Australia 9, and the rest are in Belgium, Canada, China, France, Germany, Italy, the Netherlands, South Korea, Spain and Sweden. The largest are DLA Piper and Baker & McKenzie (~US$2.3b) with the smallest ones weighing in around US$165m.
• At the other end of the spectrum there are more than 100,000 small firms (we think) operating a BigLaw business model with a much smaller number of lawyers. Their revenues range from say US$5m up to the lower end of the Beaton450 firms, i.e. $150m.
To varying degrees all parts of the BigLaw spectrum are threatened already for at least six reasons:
1. Clients, especially since 2008/09, are flexing new-found buying power.
◦ In some measure clients are learning new tricks from NewLaw. And using these tricks on BigLaw and NewLaw alike. While the largest, most prestigious BigLaw firms undertaking the most mission-critical work may hold their line under fire, once either NewLaw finds a way of doing at least some of this work and/or a BigLaw firm breaks ranks (as Richard Susskind points out in Comment 26 above), then it’s game on.
◦ Beaton Research + Consulting convincingly demonstrated in the depths of the 2008/09 recession that firms themselves were leading price down, at least as much if not more than clients were pressing it down.
◦ The old adage is true: Feed a lion raw meat and its appetite for more red meat grows. This trend continues, at least in Australia.
2. Clients, at least in those jurisdictions we have examined, are increasingly keeping work in-house and growing their legal departments.
◦ For the last 20 years or so the Australian Corporate Lawyers Association membership has been growing around 30% per year. Yet the Association estimates its share of the in-house market is fairly stable around 30-40%, i.e. membership is a proxy for in-house share of corporate legal spend.
◦ It is conceivable that banks and insurance companies, for example, will establish ‘industry solutions’ by creating shared captive law firms (a form of NewLaw), most likely part-owned and managed by renegade BigLaw practitioners.
3. NewLaw is taking market share from BigLaw now, the question is how much.
◦ If Axiom Law is growing 30% compound while BigLaw is growing at 1/10th of this rate, the case is made, as this memorable post by my colleague Eric Chin amply shows ’2018: The year Axiom becomes the world’s largest legal services firm’.
◦ In my Reply to Comment 7 above I stated “Our calculations suggest between 2/3 to 3/4 of the revenue of large BigLaw firms is under threat from NewLaw. I completely agree that there is ‘brain surgery’ that the great minds in these firms are uniquely well positioned to apply to clients. Perhaps these represent up the rest. Of this perhaps 1/2 could be done in boutiques, i.e. breakaways. Doesn’t leave much to cover the leases and other overheads of large BigLaw firms…”
◦ As Jordan Furlong inimitably explains “Growth is not dead — it’s just changed addresses” in Comment 13 above.
4. Some BigLaw firms like Seyfarth Shaw, Berwin Leighton Paisner and Pinsent Masons are responding, but may be fouling their nests.
◦ As Mike Ayotte points out in Comment 31 above, the alternative delivery models offer clients a choice. The challenge is how these firms fence the (apparent?) discounts or prevent migration? (Remember we debating whether BigLaw can preserve its PPEP levels.)
◦ Consider what online retailing is doing to bricks and mortar retailers in many categories.
5. The smaller 100,000+ firms at the other end of the BigLaw spectrum are also threatened by NewLaw.
◦ Big time. And I am referring only to their commercial and corporate work for businesses and governments.
◦ The UK’s ABS regime has unleashed a torrent of private equity backed innovation. Riverview Law and Keystone Law just two of many.
◦ Australia has NewLaw firms like Bespoke Law (see Comment 40 below by Jeremy Szwider, founder of Bespoke) and AdventBalance (see Comment 4 above by Ken Jagger, CEO of AdventBalance) operating across the client size spectrum. Canada has Conduit (Comment 11 above).
◦ And we should not forget Australia’s Slater and Gordon is a quintessential NewLaw firm with more runs on the board than most, including entry into the UK in 2012.
◦ And I am sure there are dozens more.
6. Then there are the emerging e-marketplaces like LawyerSelect (Comment 8 above) for solicitors and AustBar Chambers for barristers (Comment 2 above) in Australia.
The roll call goes on. These are not future threats. There is a real and imminent danger. I have many BigLaw clients and friends. I am urging them to act decisively now. Alas.
Last, but not least, I do want to acknowledge Patrick Lamb’s point that we have not addressed what’s transpiring in the many – and important – facets of consumer law (Comment 30 above). Beaton Capital, being from the land of Slater and Gordon, undertakes to contribute to this side as well. Please watch our blog space. Thank you Patrick (Comment 30).
Finally, finally today October 22, 2013 @AlexHamiltonRad tweeted “@ronfriedmann @jordan_law21 @grbeaton_law I do worry that a few 10s or 100s of us live in a NewLaw echo chamber”. An excellent point.
It would be really helpful to a deeper understanding of what’s trending if some BigLaw partners joined in. So far, we have one contribution – from Nick Seddon, former managing partner of DLA Piper and Eversheds in Asia (Comment 29 above).
As Richard Susskind wrote to me in email (I trust you don’t mind me citing you Richard): “It was ever thus. Law firm leaders are very slow to respond online.” Clearly true, but we are all deprived of a balanced debate.
Thanks for this great post and thread – I’ve enjoyed reading it very much.
The one issue in this debate that often gets lost for me is the issue of new lawyer training. I have yet to hear a satisfactory answer to this issue. So much of NewLaw (including companies I have started and/or am involved with) announce that they offer top-tier legal talent at lower cost due to a lean and agile infrastructure. NewLaw clients love that they are getting a former BigLaw partner for a great rate due to the reduction in overhead and the lack of partner leverage. A lawyer with BigLaw experience is still very much a draw for clients of NewLaw firms. Perhaps over time this focus on pedigree will erode as new models take hold, but for now it seems that NewLaw needs BigLaw to train lawyers, and needs BigLaw to be an undesirable place so that great talent leaves BigLaw to go to a new model firm! I have not yet heard of a new model firm that takes new grads and provides them with any real substantive training. That’s because these new firms, with a focus on reducing overhead, cannot justify billing a client for attorney training time. I think for the foreseeable future we’ll need firms with big overhead and clients willing to pay for it in order to train the next generation of NewLaw lawyers… although I do think there is a considerable opportunity out there for a new model that offers to supervise and train new lawyers in a way that is profitable and beneficial to clients.
The more we talk, the more we evolve, so I’m delighted that this conversation forges on!
There is a huge difference in the quality and quantity of training large law firms offered in decades past and what they offer now. It seems likely that the “pedigree” of those paroled from BigLaw will be as important going forward. Firms like ours that do a great deal (or all) of our work on fixed fees place a premium on training since being better faster helps improve our margins. There is nothing like a direct financial interest–seeing dollars drop to the distributable bottom line–to motivate training.
How big is your firm Patrick? In other words, I am wondering if there is a minimum scale required to invest in training. That asked, our combined Beaton companies have a head count of some 25. We invest massively in on-the-job training and in postgraduate study for approved courses. It pays handsomely. And we lose people we have trained, but very seldom to competitors.
Our firm is 12 lawyers, 3 of whom are associates.
Nicole, thank you for adding to this engaging and important debate. And also, if I may, for being the first woman to comment!
You are right. So far, and for the foreseeable future I believe, NewLaw enjoys a somewhat parasitic relationship with BigLaw. The latter firms – and their clients as you point out – are doing the heavy-lifting training lawyers who later join NewLaw.
It’s hard to see how this will play out. There was, and to a large degree still is I suspect, a professional ethos in BigLaw that says “It’s part of our contribution to the profession and society to train young lawyers”. If this willing and capacity to invest dwindles, all stakeholders will be the poorer unless and until NewLaw or others find ways and willingness to do the same.
We should be careful not to conflate “experience in a large law firm” with “new lawyer training” — they are not necessarily the same thing at all. Three years in a large law firm will teach you how to be a profitable generator of revenue for that firm. But it will not teach you anything about client relations (as you won’t meet many clients), business generation (since you’ll be fed work created by other people’s business generation), or running a successful business (since you’re an employee, not an entrepreneur). You may well be enrolled in internal professional development training courses, and some of these are quite good; but there’s no guarantee of either outcome. For the most part, employment in a large law firm prepares you for employment in another large law firm.
“New lawyer training” is what the legal profession as a whole needs, and a pretty dire need it is, too. Most law schools don’t and won’t teach it, and it will be several years before market pressures overcome their structural and cultural impediments to allow them to do so. Most bars admit new lawyers to practice on the basis of a law degree, a test, and an absence of felony convictions, but do not otherwise assess new lawyers for the ability to offer legal services to the public in a competent manner. As I’ve written elsewhere (http://www.slaw.ca/2011/12/30/cpd-and-the-presumption-of-competence/ and http://www.law21.ca/2013/04/the-mcle-question-no-one-wants-to-ask/, for example), we don’t really have a professional process or infrastructure in place that can defensibly ensure the competence of new private law practitioners.
We, as a profession, have for many years been relying on large law firms to employ great numbers of new lawyers, and we’ve been closing our eyes and wishing very hard that this employment amounts to “new lawyer training.” It doesn’t. Large firms have now made clear they’re no longer going to employ many new lawyers, and whether that’s good or bad is secondary to the fact that it’s happening and it’s unlikely to change anytime soon. So now we have to face our longstanding failure to create and enforce a discipline of new lawyer training, and move to address it as soon as possible. I suggest that we get on that.
Jordan I will quote you in my October 31 address to the Faculty meeting of Melbourne Law School (University of Melbourne) on the Future Face of Legal Services. I look forward to sharing their reactions. Thank you.
I wholeheartedly agree, Jordan, that a few years in BigLaw does not make one a competent lawyer/rainmaker. I cut my teeth in a mid-sized firm and had significantly more development pressure and experience by the time I “retired” than my BigLaw peers. Regardless, clients are moved by BigLaw experience, and countless NewLaw firms use their former BigLaw attorneys as a major selling point. In my view, that’s the result of clients still getting comfortable with new models and hearing that a major law firm had previously employed the attorneys gives them a sense of security that they are dealing with a known entity.
My best hypothesis is that over time, being an attorney at certain NewLaw firms will carry enough clout by itself that those firms will start moving away from the marketing message that they have former BigLaw attorneys. When that happens, those firms will feel more comfortable training their own entrepreneurial young lawyers who will only carry NewLaw names on their resumes. My hope is that time will create a sufficiently long history of competent, cost-effective alternatives to BigLaw that those changes will start to really solidify in the minds of clients, who will turn to NewLaw firms because of their reputations and not the reputation of their lawyers’ former firms. This should help liberate NewLaw firms to focus on effectively training their own.
By the way, I think I need a calculator to answer the math question required to submit this post!!
Very true, Nicole. We’re still in the period when many market participants believe in “BigLaw pedigree,” even though it’s a term that has less meaning the more you scrutinize it. I spent my articling (apprenticeship) year at one of Canada’s most highly respected large firms, and some people would still consider that to reflect well on me. They don’t necessarily think through the implications: If I was such a hotshot, why didn’t the firm keep me on?
We’re still just entering a transitional period between a longstanding “law firm pedigree” convention and a new set of reputational dynamics, and it will be a very long time before experience at the most highly esteemed firms ceases to have value. But I think you’re right: we’re not that far away from a time when “NewLaw pedigree” starts to emerge and lend its possessors real advantages as well.
All – I’m fascinated by the tone, pace, participants, and substance of this discussion. I think it should be required reading for ANY lawyer. I’m working on a mindmap to make the material more easily digestible – and also because I think that would be interesting to see a graphical representation of the discussion. I’ll share once it’s done.
Nicole – So glad you brought up the training piece. I am a lawyer with five years experience who has spent the majority of my career at “NewLaw” firms. I posted about my experiences at such firms, calling particular attention to the training issue, on my blog: http://bit.ly/GzAQD2
In short, you are correct that there’s a gap and, in my opinion, the growing stratification between BigLaw and NewLaw does not bode well for training new lawyers. Training is very expensive and there seems to be little interest in investing in it.
On the training issue, Jordan Furlong has insights and useful suggestions in his replies to Nicole Bradick in Comment 34. In my view it’s central that the distinctions between the educational and vocational aspects of law and legal services be drawn more clearly in the minds of all stakeholders. Fora and leadership are badly needed where the many dimensions of this are researched and shared.
I am trying to engage Australian legal educators in this discussion and at least I am getting a hearing. I welcome others’ views; it’s the whole ecosystem that’s affected.
I’ve been enjoying and digesting all these smart, diverse posts, and can’t resist adding a comment that keeps clanging in my head as I read these great exchanges.
My experience is almost totally on the client side – as the GC of the Association of Corporate Counsel for more than 20 years, and as a long-time advocate (and grenade-thrower) in the “New Law” brand of conversation for most of that time, here’s what I would add to the stew: just because an in-house lawyer continues to send work to a law firm or relationship partner, even one with whom she’s worked for many years, doesn’t mean she’s satisfied with the service. And just because she scores a law firm as an 8 or 9 or 10 when asked to complete the evaluation about a firm that (beloved or not) she feels she must continue to use (and therefore must validate), doesn’t mean she wouldn’t drop them in a New York Minute if something better came along that provides her similar “quality” AND superior efficiency: in cost control, knowledge practices, process re-engineering, and better trained staffing.
Every year, there’s a study in the US that defines this disconnect: When asked how they believe they rate with their clients, 85% of BigLaw partners grade themselves an “A+” – they are indispensable! When clients of those same BigLaw lawyers are asked if they would recommend/refer their outside counsel to another in-house colleague, only 35% say yes.
So if that’s the year-over-year spread on client dissatisfaction and a clear demonstration of the lack of alignment between clients and BigLaw (whom they view as – at best – fungible), why hasn’t 65% of BigLaw been fired or replaced? Answer: Because everyone keeps forgetting who in-house counsel – even the best and brightest – are: the vast majority are former lawyers in big law firms, where they were trained and rewarded in the same dysfunctional service model that their outside counsel continue to practice in. Just because they’re aware that the Emperor isn’t really wearing any clothes now that they’re in-house, doesn’t mean that they’re equipped to know what to do about it. And they’re inherently suspicious of New Law environments, just like their BigLaw colleagues: they never left law firms to join RiverView Law or Valorum or Axiom … they left law firms to land in corporations that often house teams of lawyers who behave more like in-house law firms than innovative service providers. It takes time and the proper in-house incubator for a recovering outside counsel to be reborn as a savvy in-house client.
It takes time for them to learn that their clients don’t have legal problems, they have business problems.
But here’s the good news. I think the time is now. I’m seeing a critical mass of clients who are ready to do something more than talk about these issues. They’re ready to ask for more than a discount.
I think we’re finally at the point where enough solid providers, and enough solid clients are trying out New Law services with demonstrated success, and engaging with each other about them in commonplace conversation (see, e.g., this very blog comment chain!); the tipping point has arrived. (Can I pronounce that here?
The in-house leaders I work with are ready – they are still working on the “how” and developing confidence in their decisions and the balance they’re striking in connecting risk (of change) and reward, but they are clearly ready to engage in a new round of convergence conversations with their firms (and an increasing array of non-law-firm providers) that will redefine the legal marketplace to reward so many of my good friends posting here who’ve been patient and diligent leaders in moving us toward better practices. Distinguishing value (and the resulting sustainable business with top clients it will earn) requires far more that quality lawyers performing quality services.
Bottom line: Scoring an 8 – or heck, even a 10 – for having great lawyers is about to become the floor for future in-house retention. I know many of the global departments working on massive change, and what many are driving toward in both their insourcing and outsourcing decisions.
(Note for the future: there’s another post in me for this group about decisions in-house departments are making to insource and internally re-source more work in a fashion that should message to every firm out there that this entire conversation may be misplaced: the real competition for all kinds of law firms isn’t New Law firms: it’s clients themselves.)
Game on. Looking forward to the next posts …
Delighted to hear your voice Susan. Here’s an initial and quick response from me.
I refer to part of your penultimate sentence in parentheses: “the real competition for all kinds of law firms isn’t New Law firms: it’s clients themselves”. I think backward integration by clients in some industries (insurance, banking for example) is a no-brainer. In this scenario the clients would band together, form a captive (possibly with some equity held by ex BigLaw partners who would run the operation) and be provided with high volume routinized services at lowest cost. In other sectors this is well-established business model known as an industry solution.
To Beaton Capital’s way of thinking this is simply one of several forms of NewLaw business model. More later as to why such a business model is NewLaw.
George, congratulations on sparking a very active conversation. I come at this issue with over 30 years in a mix of boutique and mid-size firms and an AmLaw 50 firm, 20 years in-house, and now several weeks as a consultant embedded in an AmLaw 100 environment.
What interests me most about this topic, is the inwardness of the discussion. We talk as if we are in the first major industry to face change and reformation. We are, of course, not the first – not even close. Perhaps more accurately, we are one of the last.
Invoking George Santayana: “those who do not remember the past are condemned to repeat it.” The legal industry is going through a phase with a mid-term outcome not hard to predict at a macro level given the history of change in other industries. I see a consensus around the following predictions.
First, technology will replace many labor-intensive activities. This isn’t the first and won’t be the last time the legal industry faces technology changes.
Second, firms will continue consolidating. Weaker players, big and small, will lose to stronger players. I watched distributors for one of my clients consolidate from 12,000 to 4,000 in less than five years.
Third, concentration will change industry stratification. There will be fewer large law firms and fewer mid-size firms. Conflicts rules will ensure more of each size survive than the market would otherwise support. There will be many small firms, at least in part because there will be many smaller corporate clients who prefer these firms (which, as they do today, will use technology to be competitive).
Fourth, all firms will change operations. Technology will drive some change. What the work force values will force some change (e.g. millennials favor technology over office space, life choices over work choices). What clients want will drive some change (e.g., a work force that flexes in size depending on the organization’s needs – where Axiom plays, in part).
Fifth, wealth generation opportunities will change. Microsoft was the wealth generation opportunity for Bill Gates, today it is BigSoftware and the multitude of startups are the opportunities for wealth generation.
Sixth, clients will vertically integrate legal services (labor and technology) as they continue recognizing the benefits of controlling and inventing their futures (lawyers helping mold the future of businesses through embedding strategic legal solutions into new business development).
The list goes on, but I’m belaboring the point and to all of you it probably seems obvious. Because it is obvious. By looking to what happened when other industries went through such changes, we see the general patterns of what will emerge. Strong, smart, nimble players will survive; slow, inward-focused and tradition-bound players will struggle and disappear. How many of the companies on the original S&P 500 list still exist (when the S&P hit 50 years, only 86 of the original 500 still existed)?
Let’s stop obsessing about change in the legal industry. Rather, let’s focus on channeling this change to reform the role of lawyers. At one time, we served as trusted advisors to clients, lending our strategic insights, analytical skills and technical abilities to help clients see around corners and shape the future of businesses and society. No, we weren’t saints and this isn’t viewing the past through rose-colored glasses. But today, many view lawyers as tools to accomplish necessary (and not very pleasant) tasks – technocrats bringing little additional value. Harsh, perhaps, but in 2011, lawyers had an approval rating of just 29%.
Why not use this opportunity to focus discussions on how to mold the industry back into a highly respected profession, profitable for participants sure, but also respected for the value added. Those who want to take entrepreneurial risks will have plenty of opportunities for wealth generation. But wealth generation should not be our overriding purpose or the focus of our discussions. Focusing on service brought us wealth. Focusing on wealth brought us to this point. Perhaps focusing again on service will bring us back.
Maybe the new hashtag could be #RespectedLaw?
Ken Grady is the Chief Executive Officer of SeyfarthLean Consulting.
And he is psychic! 15 minutes before I received his very welcome comment, my colleague Eric Chin and I were drawing on material from SeyfarthLean Consulting’s website for a seminar we are presenting next week.
Thank you Ken and colleagues!
Ken, welcome to this conversation.
As a student and teacher of management in service industries it’s heartening to learn how Seyfarth is pioneering supply chain management and co-production with clients in legal services.
This tweet by @RWS_01 (Richard W Smith of Sydney) alerted me a few hours ago: “Great piece by @AdamSmithEsq on @grbeaton_law’s #Biglaw #Newlaw thread ‘How much how fast?’ http://ow.ly/263WMa“.
Bruce MacEwen – who blogs as Adam Smith Esq – had just published a meta-analysis of my post ‘The rise and rise of the NewLaw business mode’ and the ensuing thread. So far the thread has been built by 28 authors who have contributed 77 responses totaling more than 20,000 words.
For those seeking a great precis of the narrative so far, go to Bruce’s ‘How much how fast’ post. As always Bruce adds insights and opinion. Here’s how he ends, writing from the perspective of BigLaw firms:
“So what is law firms’ DNA? Editor’s note: Bruce is referring here to firms with a BigLaw business model.
The individual lawyer, in cultural terms, is the over-riding unit of organization, not the firm. This is often shamelessly or boastfully cloaked in the rhetoric of “entrepreneurialism,” when what it really is is anarchy.
Our compensation systems revolve around the Sun of billable hours and origination credits of each and every individual lawyer, with hardly any regard to standards of good citizenship, the contribution of everyone in the firm who happens not to be a lawyer (a/k/a nonlawyers, a term I’d like to banish from the earth).
Near-total ignorance about what normal companies call business intelligence, meaning insight into where profitable revenue comes from by practice area, client, attorney, activity, and much much more.
And finally our profoundly antique business model of laboring in the trenches as the source of revenue. A friend of mine likes to say that when it comes down to it, lawyers are glorified hourly workers, and that has the distasteful ring of truth.
So if we as firms are really going to change we’re going to have to change some of these fundamental characteristics.
But we can’t.
They’re not surface or recently grafted-on characteristics; they’re intrinsic to how we envision ourselves as firms and as partners within those firms. The first one in particular.
If law firm leadership needs to alter the ship’s course, not everyone can get a vote. In fact, it shouldn’t be up for a vote.
Your reaction to this heresy should tell you all you need to know about our ability to change.”
Re-reading this excellent discussion, I am struck by how little hard data we have about our industry. We do not reliably know:
- Growth and share of market for NewLaw
– Percent of work done in-house versus by law firms
- The change in unit cost of legal work
The data we do have leave me skeptical. Two examples:
1. When I worked in the legal process outsourcing market, I thought most published reports significantly overestimated LPO growth and market size.
2. Many published legal market surveys provide a weak foundation for firm conclusions. For example, the recently released Altman Weil CLO Survey reports the percent of GC who answer multiple questions. Unless that percent correlates highly with law department spending, drawing conclusions is statistically risky. Many published legal market surveys share this potential flaw; another frequent flaw is a sample not representative of the market.
If we had reliable data, some simple graphs likely would illuminate and perhaps even resolve the debates here. Am I nitpicking or do others agree that more and better data would help clarify the topics here?
Ron, you are spot on. The sector is desperately short of independent hard data. We are far too reliant on trade publication league tables such as The American Lawyer, The Lawyer and others. While these tables have played a surrogate role in the past, they do not represent the dynamics of the industry, as this somewhat belligerent post of mine argues: http://www.beatoncapital.com/2013/07/danger-in-being-part-of-the-biglaw-establishment/.
A great deal has been already said in this debate. Ron Friedman rightly points out that we know very little about how these new business models (NewLaw) work and draws attention to the lack of reliable data on the sector. Meanwhile, Alex Hamilton of Radiant.law does provide some of that know-how, explaining their business model is based on LPO, fixed-fees and ‘experimenting’ with new technologies in search of creative solutions to common problems in legal services delivery. I think Alex has pinpointed where NewLaw is gaining its true competitive advantage.
Certainly BigLaw is also investing in new technologies; some of the biggest Spanish firms are certainly doing so. But it is also true that many lawyers in these firms see these innovations as more work for them, more control and time-consuming, rather than as the opportunity to create a better practice a stronger business.
At this point, I agree with Ken Jagger, among others, when he suggests some aspects of ownership structure are a big impediment to innovation. Remuneration models like ‘eat what you kill’ have a short-term focus in that they penalize investment in technology, research and management. This type of system may help reduce fixed costs, but they also a firm’s ability to adapt to the market.
In my opinion the BigLaw model is not going to disappear altogether. There is – and will always be – a (small?) part of the community that values their expertise and the intangible benefits of their brands as Richard Susskind has noted elsewhere.
But I also think traditional firms as we know them today will be halved in number in just a few years. Innovation in processes, technology, commoditization and LPM will make the business of legal services more industrialised. And document automation, online platforms and virtualization will do the rest.
Well, today more of BigLaw kinda started operating according to NewLaw business model principles. LeClairRyan is using UnitedLex’s capital and know-how to launch its 400 person Legal Solutions Center. And SeyfarthShaw announced they are using NeotaLogic’s expert systems, document automation and process control technology to improve the efficiency of their lawyers.
BigLaw is experimenting.
Liam there are different ways of viewing these developments. If you can’t beat them, join them is a cynical throwaway line I heard earlier in the week from a BigLaw managing partner commenting on what he regards as another, weakened firm capitulating. The firms you cite appear to be on a path to creating a new strategic group; one comprising network organisations (well explained here: http://en.wikipedia.org/wiki/Network-centric_organization).
A great debate guys and well done to George for pushing this along.
NewLaw is more than just a passing trend. There has most certainly been a shift in the pillars of the legal profession and BigLaw is being challenged. With the economic downturn and the progress of technology, we are witnessing a revolution in the legal marketplace. Alternative business models (such as LPOs, online legal marketplaces, virtual law firms, dispersed law firms, commoditisation etc) are evidence of this evolution and the creation of NewLaw business models – which are changing the way clients use lawyers and pay for legal services. Our NewLaw business model is all about the client, focussing on efficiency, technology, innovation and price certainty – that is the HOW. And for us, importantly, the distinction between private practice and in-house is increasingly blurred – incorporating the best aspects of both worlds.
I draw close analogies to the trends of music consumerism. In the music revolution, technology has helped bring the listener closer to the music. The music revolution has progressed from records, to cassettes, to CDs and then the MP3. The rise of the MP3 has made music much easier to obtain. We now devour as much music as we possibly can and musicians need to stay on top of their game to maintain their status on an iPod’s growing playlist. These trends were clearly not part of our predecessor’s wildest dreams as they spun their LP vinyls back in the 50’s. But the evolution rolled along, slowly but surely, and the consumer is now much better off for it.
Steve Jobs once said that “Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It’s not about money. It’s about the people you have, how you’re led, and how much you get it.” The legal profession does not have the privilege of having a leader like Steve Jobs at its fingertips. However, there appears to be enough innovators and disruptors looking from the outside in and helping us push the boundaries to evolve the legal profession. Some may simply call it an iteration or an evolution in the legal marketplace … or maybe even a revolution.
Founder and Managing Director
Thank you for your insights Jeremy. You observe Biglaw doesn’t have a “leader like Steve Jobs”.
Perhaps Peter J. Kalis, Chairman and Global Managing Partner of K&L Gates is that leader? Pete has contributed a spirited rejoinder in Comment 43 below.
George (and all contributors),
I’ve thoroughly enjoyed following this debate. Stimulating!
For what it’s worth I would add the following random thoughts:
(a) It is clearly important to talk about business models. No single business model will win in the new legal market emerging. However, some models will struggle and prove unfit for purpose – like the that of traditional law firms. Others, such as professional outsourcing and resourcing models, are fit for purpose and timely for much of the corporate legal market. This is not to say that some law firms won’t be winners, big winners, because they will be. But, taking a ten year view I wouldn’t invest in a traditional law firm; the competition (which is well capitalised and run like businesses) has only just started to flex its muscles. As Reagan said ‘you ain’t seen nothing yet’.
(b) The legal market is a multi-billion £ global one. It has been (and still is!) protected by myth and regulation. It has generated excess profits for BigLaw participants and has led to incumbent complacency and a lack of innovation. It is hardly surprising therefore that, as the market opens up, it has, it is and it will attract the attention of well capitalised new entrants. These new entrants have all the advantages that come from starting with a blank piece of paper. These entrants will disrupt at many levels – customer service, higher quality, innovative pricing, application of MI and data to avoid ‘failure demand, targeting specific sectors/niches … etc. This has huge implications for customers and BigLaw.
(c) We’ve witnessed a number of big themes since we launched Riverview Law in Feb 2012 but the most significant is the speed with which GCs in large corporations have adopted our Legal Advisory Outsourcing model. We are 3-4 years ahead of where we thought we’d be with large businesses and, as you’d expect from a customer-focused business, we’ve transferred a lot of our investment into this area. But here’s the key … the Legal Advisory Outsourcing model we’re deploying now is the same model, with a few tweaks, that we deployed in Recruitment Outsourcing throughout the 1990s. It is the same HR Advisory Model AdviserPlus, a shareholder in Riverview Law, has deployed since 2000. For customers it is proven, low risk and effective.
(d) One theme that never ceases to shock me – and it says a lot about the market in the UK – is the trend for GCs to grow the size of their in-house functions. When you ask them why they are doing this their answer is simple – it’s cheaper for them to employ lawyers than use law firms. What supply chain would create a situation where it is cheaper for the customer to do it itself? Interestingly, I think that this is just a short-term, unsustainable, labour arbitrage. With a few exceptions (e.g. Cisco) it will be very hard for a GC to sustain the cost savings and quality. To do so requires a fundamental change in the culture and the way in-house functions work plus significant investment in IT. So, while today GCs may be able to do it cheaper in-house, they will never be able do it cheaper and better in the short and medium term than a professional outsourcer with a business model that has talented people (a mix of lawyers and non-lawyers), supported by great IT and heavy R&D spend, who are underpinned by a one team culture and business insight driven by comprehensive MI and data analysis.
(e) And this brings me right back to where I started – business models. It’s taken me a while to be able to articulate it but when I’m asked ‘So, why do you think Riverview Law will succeed’ my answer is now quite simple – ‘we have the DNA of a professional outsourcer not a law firm.’ Over the last 25 years we’ve built big businesses in the recruitment and HR advisory markets by identifying and exploiting market trends (and we knew little about either market when we started). This is the biggest market opportunity we’ve seen so far – what a great time to be in the legal market!
Karl your elevator speech captures the essence of many NewLaw substitutes, not just Riverview Law: “We have the DNA of a professional outsourcer not a law firm”.
Most BigLaw firms are currently stuck in their paradigms built over generations of success. It’s very hard, but not impossible as Clayton Christensen has shown, to break out of a paradigm.
But the partnership structure makes it harder for BigLaw. On the other hand, as I have pointed out above, the stake 10,000s of BigLaw partners have in the profits of the industry make it likely that some will succeed. And surprise many in the process.
I have made other observations on the reasons for BigLaw resilience in Comment 6 and my Reply to Comment 7 above.
Thank you George. Apologies for getting the terminology wrong and thank you for clarifying my post.
I think your observations about small BigLaw and NewLaw being able to deliver to an under developed market is an interesting one.
I have come across many that suggest they are offering into that space but all they essentially have to offer is an alternative fee arrangement. Just ripping up the time sheets does not a NewLaw offering make IMHO. Service model innovation is what is needed; that automatically determines a new billing model.
That is what in part is so interesting about the RiverView offering.
It reminds me of the innovation that was Rouse (www.iprights.com) when it grew from 4 to 500 staff in 15 years. When it was formed 24 years ago the model was £100 per hour for each and every fee earner and fixed prices. I was a really radical thing to do 24 years ago in the traditional UK legal market. We have waited a long time for further innovation!
What a rich and intriguing conversation! As I read through the many insightful and well-reasoned posts in this thread, I couldn’t help but feel that the conversation would benefit from an examination of a few structural changes in particular and how—and when—these changes may affect BigLaw.
Let’s begin with the following two premises:
Premise No. 1: BigLaw firms must maintain a competitive PPP. A substantial drop in PPP would all but stop lateral equity partner recruiting, which would prevent a firm from offsetting normal partner attrition. This has the potential to push a firm into a Dewey & LeBoeuf-like death spiral.
Premise No. 2: If there is pressure on margins and revenue is flat, the only way to maintain PPP is to cut costs. Many BigLaw firms have maintained competitive PPP by, among other things:
– de-equitizing partners,
– increasing the ratio of non-equity partners to equity partners,
– lengthening the associate partnership track,
– reducing leverage,
– hiring non-partnership-track associates and contract lawyers,
– promoting fewer partners
– reducing associate training opportunities and
– restraining associate compensation growth (relative to PPP and inflation) and offering fewer perquisites.
There is an often-ignored but profound consequence to these cost reduction efforts: they have fundamentally undermined the BigLaw value proposition from the perspective of junior law firm attorneys.
Once upon a time, attending an elite law school and taking a position with BigLaw was a very attractive professional path. Compensation was high compared to alternatives, training was top-notch, the path to equity partnership was clear and the odds of promotion to equity partnership were good for those with the stamina to remain BigLaw firm associates for seven or eight years. That’s no longer the case and, in my opinion, has contributed to the collapse in applications to US law schools – see http://www.nytimes.com/2013/01/31/education/law-schools-applications-fall-as-costs-rise-and-jobs-are-cut.html?_r=1&.
The reduced appeal of the BigLaw career path will eventually undermine BigLaw’s ability to deliver elite level service as talent is reallocated elsewhere.
This qualitative shift won’t happen overnight—it may take decades—but it will eventually erode much of the (arguably, perceived) competitive advantage historically enjoyed by BigLaw relative to other market participants. And this trend will be reinforced and accelerated by new technologies and new business models that are commoditizing large components of the traditional basket of services offered by BigLaw firms. The collective result of all of this will be a much flatter competitive landscape.
Erik Lopez is the creator and CEO of jurify.com
Thank you for your contribution Erik.
You raise the first premise of the ‘Cravath system’ which I cited in ‘Last days of the BigLaw business model’ – see http://www.beatoncapital.com/2013/09/last-days-biglaw-business-model/. Cravath focused on the recruitment and training and of the finest talent from the top law schools.
I agree if BigLaw does not re-invent itself and preserve PPP levels, then the erosion of its talent strategy will undermine the very basis of its advantage.
Allow me to offer a number of points for consideration:
1. I observe a strict rule against twice declining the reasonable requests of people I truly admire, and thus I am constrained to contribute to the conversation this time around lest this Athenian sin twice against philosophy. Although my late father was from Samos, not Athens, you get the point. Thanks, George, for the second nudge.
2. I should have granted the request the first time it was made, as the conversation is now so long that I have had time only to skim it and not to study it. No excuse, except the demands of my day job.
3. Fortunately, because some of the contributors (but certainly not all) are glitterati among the membership of ABLAC, their positions are well known, oft-repeated and require only a quick skim. ABLAC, by the way, is the acronym for AttackBigLaw at Any Cost. ABLACs should not be confused with All Blacks, New Zealand’s national rugby union team, who perform a haka before each match. Instead of a Maori challenge delivered from the middle of the playing field, ABLACs tend to stay on the sidelines and say things like, “If I were a player, this is how I would play the game.” Their uniforms, unlike those of the All Blacks, seldom require laundering after a match. In fact, the only thing ABLACs have in common with All Blacks is that they both stomp the ground, albeit for different reasons.
4. I hate to hide behind my day job again, but if you want to see fuller statements of my views you might try my comment on Professor Hadfield’s provocative thesis “The Hadfield Tunnel: A Comment on ‘Legal Infrastructure and the New Economy’”, at http://moritzlaw.osu.edu/students/groups/is/files/2012/02/Kalis.pdf; or my Foreword to Bruce MacEwen’s Growth Is Dead: Now What? (2013); or, if you wish to delve into the relationship between law firm structure and client service, my 2011 piece in The American Lawyer entitled “The Grand Illusion.” [This point 4 sounds disturbingly close to a famous footnote in American jurisprudence wherein an illustrious professor stated: “See my cogent analysis in ….”]
5. I love conversations like this one because they remind me of my youth. Endless debates in Oxford common rooms the purport of which, in retrospect, was to keep juveniles off the streets and to paralyze them with toxic amounts of caffeine. Or at least I think that was caffeine.
6. What an egocentric conversation you’ve spawned! We are all so important. We apparently not only guide our own destinies but also dictate the ebbs and flows of markets. If only the tail that is the legal profession could be made to wag more efficiently, or perhaps were to be replaced by an uber-mechanized prosthetic tail of the 21st Century, our dog of a global economy would stop throwing up on the carpet. It would also help, of course, if the dog were to stop eating roaches, socks and plastic sandwich wraps, but let’s focus on the tail and not the dog. In the last week, I read a Bloomberg piece on the paltry bonuses to be handed out on Wall Street this year. Not enough deals apparently. Let’s ignore this as we consider the state of BigLaw. A day or two before, I read the New York Times article on the latest Thomson Reuters deal numbers, the basic purport of which was that we’re in a 2009-like trough. Let’s ignore this as we consider the state of BigLaw. There is a deadly contagion of fecklessness in the political class spreading across the world and casting a paralytic uncertainty over markets. Let’s ignore this as we consider the state of BigLaw. Washington is captured by warring camps of ideologues whose political adroitness is roughly comparable to the subtlety of a sledgehammer. Europe is contending with the act of genius that it can maintain 17 different fiscal policies and one currency. Not to worry. Knock, knock. Latvia here. Make that 18 different fiscal policies soon. China, in the age of the internet, apparently thinks it can have a little bit of freedom and a little bit of capitalism but not too much. Good luck with that. Australia has ridden the resources boom engendered by economic expansion elsewhere and now might have actually to tend to its own indigenous economic strengths. Russia, Brazil, India. The beat goes on. Yes, it’s all about the legal industry.
7. The egocentrism of the conversation causes a fundamental question not to be asked, or perhaps I skimmed over it. If the pall of uncertainty were to be lifted incrementally from the global economy, and we were to head, say, in the US toward 3.5% GDP growth, would we even be having this conversation? Is it impossible that we could see that level of economic growth? If you think that is impossible, you’re not paying attention to fundamental movements in the energy and manufacturing sectors in the US; to its unmatched level of innovation flowing not only from its great research universities but also from all sectors of the economy, especially but not exclusively the technology sector; and its continuing attraction as a destination for global investments in a troubled world. (In the land of the blind ….) Let me put this another way: Last week another managing partner and I depressingly concluded that we are a rolling six months away from — steady yourselves — competing for associates, raising associate salaries and all of the other hoop-jumping that we engaged in pre-2008 because markets will demand the same. Some sea change.
8. Egocentrism can be an endearing trait — consider those pre-War conversations at Downton Abbey — but when egocentrism is coupled with obliviousness to the darkening clouds over Europe (“In the nightmare of the dark, all the dogs of Europe barked ….” OK, OK. Auden wrote that in 1939, not 1914.) or, in this case, with a stunning lack of insight into the global marketplace, the egocentrics may be guilty of misleading the young. And I think they are here. Has anyone heard of Reinhart and Rogoff, the authors of This Time Is Different: Eight Centuries of Financial Folly (2009)? Their work has attracted criticism from some other economists — what Americans call “inside baseball” type criticism — but the fundamental point sounds intuitively right: Recessions following financial crises are deeper and longer than those of a more cyclical variety. Economic activity continues to be subdued. Can anyone doubt that this has been true since 2008? If so, may I ask you to look at levels of M&A activity during that period? In the UK, as but one example, 1600 M&A deals involving UK companies in 2007 became 500 in 2009 and that’s pretty much where it was in 2012 too. Does the legal industry somehow get a dispensation from such ebbs and flows in the more general economic environment? Is it somehow immune? Of course not. For those who read the legal industry’s correspondingly more subdued levels of activity as portending or even reflecting fundamental structural change, radical behavioral modifications and the end of the world as we know it, my only advice is to buy yourselves some terrific 3-D eyeglasses — perhaps ABLAC can secure a group discount — go to the movie house, and find a real reason to scare the hell out of yourselves.
9. I also enjoy the way the ABLACs treat BigLaw monolithically. This is a half a trillion dollar global industry with tens of thousands of organizational actors and millions of individual actors, and the ABLACs treat it like gooey dough that can be pressed into a single shape. Here’s a news flash: My law firm competes hammer and tong with other global firms; international firms; Magic Circle firms; Wall Street firms; national firms in dozens of countries; regional firms; super regional firms; boutiques; legal process outsourcers; consultants of all varieties; accounting firms; HR firms; and a variety of other economic actors. We also compete against our clients for the same work, as law departments become more varied, expert and expansive. And we even compete against our own partners who every day of the week take our elevator down and may take someone else’s up the next day after, of course, magically reinventing themselves. And we’re all in a conspiracy of the dumb! We apparently don’t compete by innovating and becoming more efficient. Primitives, each and every one of us! Recall that scene in Les Miserables. Strapped in place and tugging on cables to pull that boat into dry dock on a stormy day. “Look down, look down. Don’t look ‘em in the eye. Look down, look down. You’re here until you die.” Not a Valjean among us. It seems to me that even the most passionate ABLAC must allow for the possibility that we’re not really strapped into place and quite as dumb as they fear. Or should I say as dumb as they hope? Could it be — get a grip here — that market forces have shaped us and continue to shape us so that we’re meeting the demand curve as it presents itself in the real world. What else would explain the move from pyramidal to cylindrical business models or a variety of other organizational and technological adaptations within the practice of law, including a breathtaking array of alternative fee arrangements and other partnering initiatives with clients? It’s probably important that I mention here a crucial distinction between BigLaw and most of the ABLACs: Our mission is to serve clients, not sell books.
10. May we talk a moment about the global pandemic in Legal Complexity that engulfs our clients? I know that it clashes with the egoistic décor, but let’s just for a moment stand in the clients’ shoes. Legal Complexity in the 21st Century arises from three principal sources. That is to say, in addition to traditional legal requirements, clients must now contend with legal requirements flowing from globalization, regulation and innovation. With globalization, we see the movement of people, products, ideas, capital, commodities and services across national borders. As national borders become increasingly less important to commerce, the dictates of sovereign legal systems paradoxically become more important. Clients need advice on this side of the border, on the other side of the border and on how to cross the border efficiently and legally. Law firms can’t fake this. And, with respect to NewLaw, whatever that is, good luck if you think you can handle such matters with the sophistication required at all levels. From what I’ve seen of your qualitative scope, I think BigLaw will probably hold its own. With regulation, we see the ratchet-like and often inconsistent interventions of governments around the world into private markets. This results not so much from partisan impulse but from burgeoning amounts of knowledge upon which public officials can and must rely when discharging their public duties. We know more now than we did in 2007 about the interdependence of global financial markets. We know more now about the linkage between human behavior and climate change. We know more now about the genesis and progress of sub-clinical disease processes. Public actors must act. We can debate whether they act wisely, but highly sophisticated lawyers are required to address the governmental interface for clients. Is this something NewLaw can address? I guess it could get there some day, but by then it would begin to look a lot like BigLaw. And by innovation, I mean the creation and protection of intellectual property. It’s funny that the ABLACs are prepared to see the end of the world for BigLaw in the midst of an extended deal trough over which it has no control and that all agree will end someday but are unwilling to grant BigLaw’s value proposition in IP litigation during the same timeframe. Note to ABLACs: If you wish to throw darts at your computer screen, please click on the following link: Critical Crossroads (http://www.youtube.com/watch?v=7L_OLQFATKo)
11. Consider the structure of the legal industry presented on a bar graph where the y axis is 2012 revenue and the x axis is a ranking of the Global 50 law firms. What you see is basically a long, gently sloping tail running from about US$2 Billion to about US$600 Million. Compare that in your mind’s eye with the accounting industry where you would see four very high bars on the left side of the graph followed by a sharp decline to the right. The shape of the legal industry, in an era of intense consolidation and globalization, is still up for grabs, unlike the accounting industry. Economic actors compete through innovations in the marketplace and efficiencies gained in their business, not by listening to boo birds perched on the sidelines.
12. All of us might gain from reading Nicholas Nassim Taleb’s latest book, Antifragile: Things That Gain from Disorder (2012). ABLACs give me acute gas attacks because their incessant lecturing from afar violates the basic rule of innovation, as Taleb persuasively sets forth. Innovation doesn’t result from a top-down dictate but from tinkering at, in the case of the legal profession, the client interface. Our challenge, as law firm leaders, is to protect our stakeholders both from all of you ABLACs who, like Lincoln Steffens before you, “have seen the future, and it works,” and from our own egos when we also think we know all of the answers. Our job is to propagate a culture of innovation, and let the interplay of creativity and market forces take it from there.
13. Let me holler as loud as I can over to the sidelines in hopes that I can be heard by the ABLACs: As clouds of political uncertainty dissipate, I see an ascending demand curve for legal services that my firm and other BigLaw firms are positioned to address. We intend to compete, and compete hard, for client work based on a value proposition conforming to the needs of a 21st Century clientele and reflecting efficiencies in the delivery of our services. We intend to continue to adapt our value proposition to the real-world legal requirements of clients, to continue to partner with those clients in a variety of ways and to work hard to anticipate the shape of the future demand curve and the preferred modalities for our services in the future. We hope to see some of the ABLACs on the competitive battlefield because, however the battle turns out, clients will be the winners. We’re in the business of serving clients, not selling books. But I guess I’ve already said that.
George, I have to get to work!
Peter J. Kalis is Chairman and Global Managing Partner of K&L Gates
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