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Bigger. Better. Both?

What Voltaire might have said about NewLaw

18 October, 2013

. Law. Other professional services. Strategy

Our wretched species is so made that those who walk on the well-trodden path always throw stones at those who are showing a new road

-Voltaire, Dictionnaire Philosophique published in 1764.

There are times when we at Beaton Capital wonder whether Voltaire might have said this about us based on our contributions to the debate on the rise of NewLaw and the accompanying implications for BigLaw.

The American Lawyer has just released the 2013 Global 100, celebrating the BigLaw establishment that has so long shaped the industry. These achievements notwithstanding, Beaton Capital partner Warren Riddell recently noted that BigLaw firms – which have not been affected by disruption for more than six decades – are now swimming in the Red Ocean.

It’s time to ask quo vadis BigLaw – and NewLaw?

BigLaw: the well-trodden path…

Almost all of today’s BigLaw establishment have in one way or another evolved from Cravath Swaine & Moore and Baker & McKenzie.

The Cravath System, enunciated by Paul Cravath was a means to combat the shortcomings of prevailing early 19th century practice. At that time associates being trained through an apprenticeship system did not necessarily have strong educational credentials, leading to inconsistent quality. The ingenuity of the Cravath system is several folds as Bill Henderson, Professor of Law at Indiana University, points out.

  • Hiring elite law school graduates

Recruitment of those with disciplined minds as a result of college education and a first class college record creates an ‘intellectual snobbery’ that ensures the firm is ‘genetically enhanced’ on a continuous basis. And in this way has the intellectual horsepower to differentiate itself from competitors.

  • Developing human assets

Paul Cravath insisted that associates are recruited straight out of top law schools, ensuring they not ‘tainted’ with the ‘less than desirable habits’ of other firms. This means poaching talent from competitors is a rare exception at Cravath.

  • Ensuring sustainability

Cravath’s up-or-out policy ensures a Darwinian approach to the development of its lawyers. The long road to partnership means it is often difficult to keep the best long enough to determine whether they are Cravath partner-worthy. Therefore the firm invests heavily in its alumni to maintain flows of work and recommendations as a career opportunity.

  • Incentives for partners

Cravath’s modified lockstep structure fosters a co-operative ethos amongst its partners.

The similarities between the Cravath approach and that of members of the MBB of strategy consulting group are striking, but not unsurprising. Super-elite, highly trained and strongly motivated talent are a key to sustaining a position as a premium professional services firm.

Globetrotting Baker & McKenzie became the first BigLaw firm to expand aggressively outside of its home country, the USA. Starting in the 1950s Baker & McKenzie now has 74 offices in 46 countries. Its Swiss verein structure has enabled local adaptation of the global brand’s standards, a formula that proved very successful and been emulated by most, but all expanding firms.

My reference to these two great American firms does not imply the Magic Circle of London and other substantial American firms have not contributed in their own way to the profession’s modus operandi. But I believe it’s true to say Cravath Swaine & Moore and Baker & McKenzie have endowed a BigLaw imprint in ways that surpass all others.

NewLaw: the new road…

The NewLaw business model is the antithesis of the BigLaw model.

NewLaw firms are trailblazing in the legal services industry, providing the same or closely similar solution to meet clients’ legal needs often at and below BigLaw’s breakeven point.

This is Beaton Capital’s synopsis of the NewLaw business model:

  • Attraction of top legal talent – from BigLaw

NewLaw provides many very attractive life-career alternatives to the traditional mode, providing more flexible work, more varied careers, opportunities for wealth creation for those who would make partner in BigLaw – and more.

  • Variable cost structure – for almost everything

Instead of regarding precious talent as a fixed cost, NewLaw’s lawyers are usually a variable cost and with much lower associated occupancy expense. Legal process outsourcing minimises cost without compromising quality, etc.

  • Cylinders – not pyramids

Leverage is not an essential part of the NewLaw model. One-to-one or technology substitution are replacing the BigLaw leverage paradigm.

  • Many owners – no tournament

Introduction of widespread staff wealth creation is a feature of NewLaw.

  • External investment – creating capital assets

Private equity is a driving force in NewLaw’s evolution, changing the rules by which ‘firms’ are managed.

  • Risk-sharing pricing – improved client outcomes

Time-based fees are an anathema in all forms of NewLaw. Amongst many other benefits, this drives behaviours that are extraordinarily hard to change in BigLaw and its clients.

Who’s who in NewLaw

As part of Beaton Capital’s research program we are collating and analysing the many forms of NewLaw enterprise. Here we share our analysis of four NewLaw firms, one each from Australia, Canada, UK and US (click the image below to enlarge). This sample is illustrative and does not attempt to cover the many variations of the NewLaw model. Note: the quote by each NewLaw’s leader is excerpts from their interviews with the media.

NewLaw

Our analysis reveals:

  • Three of the four NewLaw leaders came from BigLaw background save for Karl Chapman from Riverview Law.
  • All four NewLaw actively recruit from BigLaw, providing flexible working arrangements that suit the talent.
  • Risk sharing pricing via alternative billing arrangements is part of all four NewLaws’ value proposition.
  • NewLaw clients range from MNCs, SMEs to HNWIs.

BigLaw vs NewLaw: Two roads diverging or converging

George Beaton’s last post ‘The rise and rise of the NewLaw business model’ has already received more than 2,000 views and generated dozens of comments from industry observers from many sides of the NewLaw–BigLaw debate (save at the time of posting, no BigLaw managing partners).

Some of the views of BigLaw supporters liken the NewLaw phenomenon as (my own words) nothing more than a drop in the seemingly limitless ocean of BigLaw, creating little more than a small, perhaps temporary, ripple.

There are some firms like Littler Mendelson and Seyfarth Shaw in the BigLaw sector, as Jordan Furlong has pointed out, that are actively addressing the tidal wave of change in scientifically creative ways. These firms are adopting new ways of doing things by finessing their business model, as George Beaton observed when he analysed the responses from BigLaw. Others, the large majority it seems, are either consolidating (believing that bigger is better), withdrawing by surrendering by merging into another firm, or collapsing (30 of the 100  largest law firms in the UK reportedly in financial difficulties).

The dominion of BigLaw is by no means coming to an end. Clients will always need ‘brain surgeon’ advice and seek it from the Charmed Circle and Magic Circle firms and their ilk.

Researching and writing this article reminds me of Clayton Christensen’s words “Upstarts will first capture new and low-end customers and then gradually move upmarket to pick off higher-end customers from incumbents”. For ‘upstarts’ read NewLaw, for ‘low-end customers’ read SMEs, for ‘higher-end customers’ read MNCs and for ‘incumbents’ read BigLaw.

If you find this post of interest, you can find more on related topics here:

This post was written by Eric Chin, Senior Analyst at Beaton Capital and Beaton Research + ConsultingGeorge Beaton‘s assistance in the finalisation of this post is warmly acknowledged. Eric is also at Google+ as +Eric Chin. You can connect with Eric on LinkedIn or Twitter.

4 Responses to What Voltaire might have said about NewLaw

Ken Chasse says: 24 October, 2013 at 6:03 am

Bigger isn’t better if a law firm is nothing more than a collection of small law firms called practice groups. Systems management is needed to displace the belief that a law firm is no better than the lawyers in it. That requires, (1)displacing the traditional “handcraftsman’s” method of delivering legal services with a support-services method; (2)centralized legal research units; (3)databases that are a catch-all of all in-house production; and, (4)sophisticated database management procedures. Such involve systems development and management, for which lawyers lack training and experience. Therefore the “cost of legal services problem” gets worse, causing law firms to disappear and merge, etc. Getting bigger is just the same old thing without proper management of “bigger.” Law firms cut costs by cutting competence, e.g., giving legal research work to students. Large-scale manufacturing and the medical profession don’t cope with their “costs” problems that way. Specialization has to be an on-going process, in response to new technology, knowledge, and competition. The legal professional doesn’t do that. As a result, legal services cost too much. The legal profession has priced itself beyond the majority of the population. Law societies are inviting socialized law by their failure to innovate to solve this “cost of legal services problem.”

Reply
Ken Chasse says: 24 October, 2013 at 7:46 am

To solve the legal profession’s “cost of legal services problem”: an example of the necessary national support-service (in Canada) would be to enable CanLII, (the Canadian Legal Information Institute, which now provides free access to case law and statutes, nationally) to provide, in addition, the broad range of sophisticated support services nationally, at cost, that the LAO LAW division of Legal Aid Ontario provides, free, to Ontario lawyers in private practice who do legal aid cases. LAO LAW provides fact-pattern specific legal opinions, as well as a wide range of other services and materials that can be downloaded. Such support services involve specialization as an on-going process of, (1) lawyers’ skills; (2) re-usable in-house work-product; and, (3) database management. As a result, such databases quickly become more important than any lawyer who has ever worked in the firm. Lawyers come and go, but the database into which they have deposited their skills, insights, and writings, remain, and are always available 24/7, to continuously shorten the time needed to service every client, and shorten the training period for every new lawyer. A law firm is then much more than just the lawyers in it. The database allows each lawyer to stand on the shoulders of all other contributors to its contents. “All power to the database.” Then, the firm’s cost-efficiency will continuously improve. And then, “bigger will always be better.” This is what is meant by replacing the “handcraftsman’s” method of delivering legal services, with a “support-services” method. Handcraftsmen perform all stages of the work necessary to deliver the finished product or service. That’s too slow and has a poor cost-efficiency. Support services specialize in those jobs that other producers find to be poor profit-makers; e.g., the “special parts companies” used by the big automobile manufacturers. And, the medical profession provides the family doctor with a massive infrastructure of specialized doctors, technicians, technologies, and other life sciences. There is no counterpart in the delivery of legal services. But the law continues to be more: (1) voluminous; (2) complex; and, (3) technology-based. And so each legal service takes longer and costs more, and that process will never stop as long as technology becomes more the foundation of everything we do, and of every law made. Every new technology needs a legal infrastructure to regulate its use, otherwise it will injure people and damage property. And so the legal profession’s “costs” problem gets worse. The Federation of Law Societies of Canada (FLSC), as the sponsor of CanLII, could solve the problem for every lawyer in Canada by making CanLII into the national support service necessary to do it. Thus the solution could be the law societies’ solution, which would end the claims that they caused the problem by refusing to innovate. Irony: this solution would mean using a technology developed in an institution of socialized law (a judicare-model legal aid organization) to stave off the government’s bringing into operation a program of socialized law. Our free-enterprise devoted/impassioned legal profession has not been able to do so well. For feasibility, check the websites for: LAO LAW; Legal Aid Ontario (LAO); CanLII; and the FLSC.

Reply
Jeff Carr says: 16 May, 2014 at 5:18 am

Let me take a minute of your time to describe the market from my perspective (that of the true customer). In my view, the most firms, VC’s in this space and the start-ups are still looking at the periphery – the “what can be outsourced that lawyers now do” model — not the new platform that destroys the traditional model of what lawyers today do. The true gist is:
• “Big Law” or “Old Law” (aka a traditional law firm) is not in the business of solving legal problems – it is in the business of billing hours to solve legal problems.

• “New Law” (e.g., LPO’s, Axiom, Huron, etc.) is in the business of billing lower cost hours to solve legal problems.

• “Enlightened Law” (e.g., Riverview, Valorem, etc) is in the business of solving legal problems effectively and efficiently.

• “Next Law” is the business of preventing legal problems from ever arising.

In-house counsel teams are uniquely situated to understand and deliver on the prevention focus – precisely because that’s what a high performance legal team does. The problem is that most in-house teams are just as risk-averse as outside counsel and generally overwhelmed with reactive work. As such, I think very few are actually focused on my vision of Next Law. The most interesting thing about Next Law is that it co-exists with Big, Old and New Law – as providers for reactive services when legal problems do arise – but the focus of Next Law is on prevention and proactive law and therefore cost reduction by limiting the incidents giving rise to the need for the high cost remedial and reactive legal services. We’ll never eliminate fires and as such will always need firefighters – but we can drastically reduce fire incidents and therefore leverage the costs over fewer incidents. The truly interesting thing is that I believe that large segments of the legal market are going unserved today precisely because the cost of delivery of legal services is prohibitively high. Many small and mid-size companies “go naked” and then when they are embroiled in a legal issue, they have no recourse but to react – and that means even higher costs.

If you wonder whether I have any basis for these views, let me draw your attention to our track record from the time of our spin-off from FMC Corp in 2001 until now — the Company has tripled in size, our total legal spend has declined by a third absolutely and dramatically as a % of revenue, and — get this — we pay our legal alliance firms on balance 7% more than they bill us.

Unless you change how you provide legal services, you can’t get metrics like those below in a world where law firm rates go up 10% a year, my internal costs go up 5%-8% annually, the company has tripled in size, the regulatory burden has grown significantly – while at the same time paying your law firms more than they bill you!

Via la (R)evolution! I use that phrase because the legal industry fights change and innovation at every turn – That said, whether Revolution, Evolution or Foreverlution, I believe the tipping point has been reached – it’s just that many of the players don’t see, or don’t want to see the comet coming.

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Eric Chin says: 13 June, 2014 at 9:17 am

You have hit the nail in the head on the challenges of the current business model. At the recent conference held by Harvard Law School in March this year, David Wilkins (Professor at Harvard Law School) eloquently enunciated the realities of this challenge in his closing statement “We are just in the beginning of developing a 21st century answer to what it means to be a lawyer. Right now we have a 19th century answer and in many ways we do not want to throw the baby out with the bath water.”

What are lawyers in the business of? Or in Clayton Christensen’s memorable words, what is the “job-to-be-done”. General Counsels (as you have succinctly pointed out) need their legal service providers to provide ‘prevention and proactive’ legal solutions, not ‘reactive’ legal solutions. It seems to me that the sustainable business model for the future should of course hang off the job-to-be-done logic.

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