The first eight columns in this series, to state the obvious, have been all about the challenges facing BigLaw, which I believe may be mortal to some firms who don’t or can’t respond effectively. The new landscape reflects trends bubbling up under the surface for some time, including globalization and the relentless march of IT, spreading transparency into talent, ideas, and value for money, and all of which have been accelerated and brought into the clear light of day by the Great Reset of 2008 and beyond.
A rational reader might ask: “Is it all gloom and doom? Do you really think BigLaw will cease to exist as we know it?” Fair question, the answer to which is no.
In this column I want to describe what I believe the future of BigLaw, more or less “as we know it,” may hold. I predict it will be:
- Smaller overall as an industry, in terms of revenue and headcount;
- Cylindrical rather than pyramidal at its organizational core;
- More cloud-like than either cylindrical or pyramidal in its reach;
- With an obsessive and intense firm by firm focus on delivering stringently defined services for carefully identified, and narrow, categories of clients.
You may have noticed I’ve said nothing there about profitability. That’s because I believe the jury is out on that scorecard, but I see no intrinsic reason whatsoever that profitability need take a systemic plunge. Profitability will be far more dependent on smart and focused management than ever before; the days of “do no harm” and “steady as she goes” are gone forever, and room for error will be tightly circumscribed.
First let me lay out the reasons I believe BigLaw will continue to exist in some form we could agree is recognizable today, and then let me describe what adaptations creatures will have to make to survive and thrive in the new ecosystem. Think of the first part as demand and the second as supply.
Demand:
- Globalization is here to stay (see #3)
- Regulatory, precedential, and financial complexity is here to stay.
- The ability of talent, ideas, and capital to cross borders is here to stay (see #1)
Let’s explore this a bit.
1. By “globalization” I’m really talking about the spread of multinational corporations. For example, the revenue GE derives from non-US operations crossed the 50% threshold a few years ago; it will never go back. For many industries, including some of the largest in the world, it would never cross anyone’s mind to imagine they’re not global by definition. Such as? How about oil and gas exploration, production, and refining; automobiles; aircraft and airlines; electronics; software; entertainment in all forms and media; sports; and the list goes on and on. It’s almost simpler to talk about industries that are constrained by laws of nature to remain local, which are increasingly limited to those where human beings have to interact in person to create and deliver the service: Restaurants, healthcare, residential construction, retailing.
The point is simply that the dynamics pushing whatever industries can go global to go global are unyielding, and there are no forces operating in the other direction.
2. By complexity I’m simply positing the commonplace observation that regulation, precedent, and financial tools are always being added to but never subtracted from. Dodd-Frank will never be repealed, nor will Sarbanes-Oxley before it, and if Glass Steagall was actually repealed it now stands a good chance of being replaced by the Volcker Rule, 1,000 pages and growing. The cumulative bulk of judicial decisions never shrinks, as more and more finely sliced distinctions can always be added (the US Supreme Court has discovered a difference under the Fourth Amendment’s prohibition on unreasonable searches and seizures between homes and cars), and as scenarios never remotely contemplated by the drafters of constitutions, statutes, and regulations become reality: Does automatically captured GPS tracking data from your smartphone raise issues of “privacy?”
Similarly, financial derivatives (say) will never be “un-invented.”
All of these complex systems exhibit ratchet-like behavior: Their interstices proliferate in only one direction, towards greater and greater complexity, since there are no intrinsically opposing forces, and there is no morbidity in their ranks.
3. Cross-border flows have never been at fuller tide, and speaking of tides the tide of history is running in favor of systematically eroding whatever legacy barriers (language, visa and immigration requirements) remain. Even China’s economic boom cannot stop its most skilled professionals from seeking greater freedom abroad.
Nor is it an accident that the one practice area showing evidence of an increased pulse is intellectual property. Ideas are increasingly important to differentiate and distinguish goods and services when all generic characteristics can be replicated almost anywhere.
Similarly with capital flows: Not only have First World economies become continuously more open, but new capital “trade routes” are opening up between countries and regions where before there were none: Consider the emergence of the Brazil/China/Australia/Africa triangle, for example.
Need I point out that all these trends should bode well for BigLaw? Every single one alone, and all in combination, should create work for us.
But do, or how do, we need to configure ourselves to respond?
Supply:
Heretofore BigLaw has followed a remarkably homogeneous business model, with the result that even as knowledgeable and informed a follower of our industry as Aric Press has observed more than once that it’s almost impossible to tell the difference among (say) AmLaw 25—75 firms.
This, I predict, will end.
It will end because clients will demand it, and they will vote with their dollars.
As they become increasingly sophisticated and discerning in how they select and purchase legal services, and as the CFO and yes, the purchasing department, increasingly look over the General Counsel’s shoulder, I believe they will push our industry to evolve, at first barely perceptibly but in a rapidly accelerating fashion, towards a different fundamental composition, or ecosystem if you will.
These are species I predict will thrive, or falter, on this new landscape:
- The full-service, national or regional or super-regional, one-size-fits-all, not terribly specialized, generic law firm:
- Endangered and at risk of becoming marginalized.
- Truly global players spanning three or more continents—and as many as six—who deploy a vast, but truly unified, network across virtually all economically meaningful jurisdictions.
- Top of the food chain predators eliminating less fit competitors
- Boutiques exquisitely focused on doing one thing exceptionally well
- Survivors who know their niche in the ecosystem and stay close to it
- “Category killer” specialists who target one broadly needed but perhaps not intrinsically high-value practice area
- Hungry and effective acquirers who will absorb anything on their turf and improve it
Let’s take these in reverse order.
Category killers have vanquished competition in many industries, most famously retail, where firms like Barnes & Noble, Home Depot, Toys ‘R Us, Staples, and Best Buy have come to dominate their “categories.” In some cases there’s room for more than one firm per vertical niche (Home Depot has Lowe’s, and Staples has Office Depot, but Best Buy finished off Circuit City), but regardless of the microstructure of the industry, the point is that one or more firms decided to focus on supplying one highly specific type of good/service and learned how to do it extremely well.
They don’t do everything, but who cares? To the contrary, clients have exhibited a strong and lasting preference for firms that promise to do one thing very well and don’t pretend to do anything else. There’s a rationale behind their success:
- They don’t get distracted;
- They can develop extraordinarily deep expertise;
- Customers can rely on the best selection of “X” being available;
- They can invest in systems, people, and processes specifically tailored to their vertical niche;
- And perhaps most importantly, these firms have staked out an extremely clear identity, so the “brand promise” to their customers is universally understood and strongly articulated.
Now, in Law Land, I would argue that we’re beginning to see the emergence of some category killer firms as well: Think Jackson Lewis, Littler Mendelson, and Ogletree Deakins for employment, for example.
Also note: Once one or more firms begins to establish a powerful beachhead in category X, it becomes increasingly difficult, uneconomic, and unattractive, for other firms to offer X. They can’t do it with as much expertise, or with as broad geographic coverage, or for the price of the category dominant firms. Note the last point: This may be the “secret sauce” to their success. I couldn’t even hazard a guess how many times I’ve heard a law firm say, “we used to do employment law, but we just couldn’t continue to do it for the rates the market demands.”
Tough for other law firms, great for clients. QED.
One final parenthetical, just for thoroughness, before leaving this topic: There is, as yet, no equivalent in Law Land to the threat that online retailing poses to these brick and mortar firms. But all of them, Best Buy and Barnes & Noble perhaps most urgently, have to figure out a credible and durable response.
Boutiques have always been with us, and with almost any other industry I can think of. You might be tempted to think of them as close cousins of category killers, in that they do one thing and do it well, but they aren’t really, since their model isn’t necessarily premised on wringing cost out of service delivery through regularized and (to the extent possible) technology-enabled business processes and methods. Indeed, many boutiques have sky-high billing rates, just as Cartier, Ferrari, and Gulfstream (boutiques all, I would argue) position their offerings exclusively in the sky-high price tranche.
Moreover, the boutique model is far more flexible and extensible than the category killer model: There are only so many available categories, after all, that call for scale on the order of (say) Home Depot or Littler Mendelsohn, but boutiques are found everywhere.
Some species of boutiques are so familiar we may not even think of them as boutiques any more, but they are: The IP boutique or litigation boutique, for instance. In a totally separate market from BigLaw, we obviously have players concentrating on things like divorce family law, or plaintiff-side class action litigation.
Boutiques—as a business model, abstracting from the boutique’s chosen subject matter—have several features to commend them:
- They know who they are, and their clients know who they are;
- They can avoid distracting and time-consuming debates about whether to launch new practices or cut back on existing ones;
- And the smallish size of the organization, and the commonalities among what everyone does within it, vastly simplify management.
The one systemic threat to boutiques arises from the roots of almost all of them in one or a handful of visionary founders or leaders. The risk is succession planning; there may not be any. But realize this isn’t a flaw in the boutique model; it’s a flaw in that particular endangered boutique’s management.
If I’m right that we see boutiques throughout the economy, why is that?
My best guess is that the fundamental reason boutiques are ubiquitous has to do with economies of scale, or rather the relative lack thereof in niches where boutiques thrive. A large part of the value of owning a Rolls Royce stems from its taking on the order of 400 man-hours to build, vs. 20 or less for a Toyota; a single person can spend an entire day selecting and matching sections of leather (all from the same animal’s hide, mind you!). Toyota can’t cope with that and isn’t interested in trying.
This in turn stems from another deep fact about most markets: A certain small subset of customers in almost any market has a set of preferences so specialized, demanding, and dare I say “picky,” that price almost ceases to matter. These are the multinational corporations or, more likely, individual moguls, who just have to have the latest G5—or luxuriously customized 767, for that matter.
Where, in this taxonomy, you might be wondering, do the super-prestigious law firms fit?
Cravath, S&C, Wachtell, Slaughter & May, Davis Polk, etc.—the New York and white shoe and London elite? Right here, folks: In the price is (almost) no object league.
Truly global powerhouses have a place in this ecosystem, first and foremost, because they have multinational corporate clients who need a matching footprint in their law firm. That’s the primary reason many of these firms will survive, and thrive. (See “Demand,” above.)
But there’s a separate category of client that can benefit from capabilities these firms can provide that no one else really can, and they need not be globe-spanning enterprises in their own right at all: Indeed, they could be quite small. I have in mind clients who, because of the intrinsically global nature of the industry/market they’re in, can benefit from a law firm ally with global reach. For example, imagine a small biotech or medical device manufacturer located in one of the US’s local hotbeds of IP—maybe Research Triangle Park in North Carolina or Austin, Texas—who needs to connect with a manufacturing facility in a place like Taiwan or Vietnam. Wouldn’t a globe-spanning law firm come in handy? And there aren’t many “substitutes” (economic sense) for that kind of ally.
Note I have not discussed whether these globe-spanning law firms have to be at the “elite” end of the market, because I don’t believe they do. There’s room for high-end and middle-market players, and perhaps even some room for another level below that.
How many? Well, pre-2008 everyone used to think there would be dozens and dozens. Not any more.
My own money would be on the order of 15—20 firms, with:
- Flags planted at least in North America, Europe, and Asia
- And maybe South America, Australia, and Africa
- Strong expertise in English and New York law
- And as much of a presence as regulatory authorities permit, in closed or quasi-closed but economically vital markets such as Brazil, Korea, and India.
Finally, national or regional full-service, but not particularly specialized, firms.
I fear that firms in this group are at risk of not being able to state a compelling value proposition to clients. If they can’t, their competitive position will slowly erode and they could find themselves marginalized, certainly if doing any meaningful amount of high-end work is their aspiration.
Whereas the first three types of firms have, I believe, a credible and distinctive positioning that clients “get,” and can deliver a tailored set of services difficult to duplicate through other structural forms of organization, firms in this group need to focus more rigorously than ever on precisely what it is that their particular firm offers to clients—and why clients should engage them to deliver it and not someone else. (Hint: It’s not “superb lawyering.”)
Firms in this category won’t be able to find a “one size fits all” solution to their challenges. (Trust me, if I had such a solution I’d be pounding the pavement with it.) Rather, each firm will need to engage in an intensive, and challenging, process of articulating what they can do for clients that other firms can’t, and communicate that to clients.
These firms may have to wrestle with what could be make-or-break decisions and initiatives about client management and client service.
What that means, and how to do so, will be the subject of our next piece.
