For some time, I’ve been struggling with how to characterize in pithy short-hand what our industry has been experiencing since almost four years ago to the day when Lehman Bros. collapsed.

How about Economy I and Economy II?

I steal the phrase from the iconoclastically wide-ranging David Brooks of The New York Times who earlier this week wrote a column ostensibly about the Chicago school system’s teachers’ strike, but it was actually immensely broader than that.

Here’s how he began:

Modern nations have two economies, which exist side by side. Economy I is the tradable sector. This includes companies that make goods like planes, steel and pharmaceuticals. These companies face intense global competition and are compelled to constantly innovate and streamline. They’ve spent the last few decades figuring out ways to make more products with fewer workers.

Economy II is made up of organizations that do not face such intense global competition. They often fall into government-dominated sectors like health care, education, prisons and homeland security. People in this economy believe in innovation, but they don’t have the sword of Damocles hanging over them so they don’t pursue unpleasant streamlining as rigorously. As a result, Economy II institutions tend to get bloated and inefficient as time goes by.

As I was reflecting on what Brooks had to say, I wondered if BigLaw has existed in Economy II essentially for…well, forever. But now it’s being dragged into Economy I.

Understand what I am, and am not, proposing.

Does BigLaw face “intense global competition?” Absolutely, but until now it’s been within and among other BigLaw members.

Is it government-dominated? Not remotely.

Does it have the sword of Damocles hanging over it? I have argued it does, but persuading a room full of people earning $1.4-million/year (average AmLaw 100 PPP last year) to that view can be awkward.

Is what BigLaw provides really tradable, in the same sense as planes, steel, and pharmaceuticals? Not yet, and some of will never be.

Do we face a compulsion to constantly innovate and streamline? You be the judge.  If we do, there is scarcely a scintilla of evidence that anyone is making the smallest move in that direction.

So what am I talking about?

My thesis is that until now, the BigLaw stool has rested one leg in Economy I and two legs in Economy II, but that irresistible forces—the same forces that have proven their mettle by forcing revolutions in agriculture a century ago, followed by manufacturing (apparel, automobiles, machinery, furniture and appliances, consumer goods, electronics, etc.), followed by non-face-to-face services (call centers, finance and accounting, tax preparation, software coding, etc.)—are finally assaulting BigLaw.

If you must label these forces, they come into play where globalization meets technology, and there’s an odd thing about both globalization and technology: Whether or not to embrace them is not a choice.

In other words, the combined impact of these forces is pushing all three legs of the BigLaw stool into Economy I—like it or not.

 


 

Interlude and point of order:

This series talks about BigLaw, or SophisticatedLaw, as an industry.  I’m not talking about individual firms or even segments of the market or groups of firms.

Will some firms continue to experience growth (as several private commenters have protested)? Of course. If my thesis is right, does that imply other firms will experience the euphemistically named phenomenon “negative growth”?  To an arithmetic certitude, yes.

And here, as I talk about BigLaw moving into Economy I, I speak in the context of this series.  I’m talking about the industry, not Marty Lipton, Ted Wells, or David Boies—or the fortunate firms they belong to.  To ask whether they are threatened by the ascendancy of Economy I is akin to asking whether Ferrari noticed the Japanese auto invasion of the US.

 


 

Back to the Economy I/Economy II discussion. You may think we’ve been under serious client pressure on fees since, say, September 2008, and I readily concur. And you might think that means we’re dealing with Economy I pressures. As I see it, not even close.

The history of responding to pricing pressure in BigLaw through “innovation” has been almost exclusively the story of labor market arbitrage.  We have never gotten serious about changing the way we work.

By “labor market arbitrage,” I mean finding (a) cheaper people; (b) cheaper locales; (c) cheaper career paths; (d) cheaper offices, or some combination of all of these, to be able to deliver a service of indistinguishable quality for less.  This works, and for awhile it gives clients what they want.  But it has a few intrinsic limitations:

  • These savings are one-off’s.  You can only move certain people out of midtown Manhattan once, and you can only introduce the non-partner associate track once.
  • There are virtually no barriers to entry in the labor market arbitrage business.  If AmLaw firm A can do it, so can AmLaw firm B, C, D,…—not to mention the Pangea3’s and Integreon’s of the world.
  • Finally, “arbitrage” only succeeds as a profitable strategy, in equity and fixed income markets and in lawyer labor markets, so long as there are inexplicable price differentials. Once those “inexplicable” price differentials have been ironed out of the system and all that remain are fair, supply/demand driven, price differentials (based on quality, responsiveness, consistency, reputation, or other variables clients will pay for), there is no further profit to be made.

I challenge you to name one so-called innovation in our industry, introduced in the name of cost-cutting and efficiency, that has not at root been an exercise in labor market arbitrage.

We have not fundamentally changed how we do things.  We have changed who does them and where.  Economy II permits  us to stop there; Economy I will require us to go much farther.

But like Bartleby, we prefer not to.

While every other sophisticated professional services industry uses behavioral interviewing and personality profiling to evaluate candidates, we prefer not to.

While business process re-engineering has come to virtually every company of scale in every industry, and all its divisions, we prefer not to.

While other industries are driven to do their utmost to excel at client service, we (let’s be honest) pay it lip service on the surface and disdain it where it matters most, in terms transparent value for transparent money.

And did I mention?

While other industries have relentlessly upended, reinvented, re-engineered, six-sigma’ed, and kaizen’d themselves, while being under the constant unforgiving glare of creative destruction, we are using fundamentally the same business model Paul Cravath invented over a century ago. Change? We prefer not to.

Why?

Because we’re lawyers. We know better. We know better than all of them.

 

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