Toby Brown and Ron Friedmann (both friends) have a thoughtful and well-reasoned point/counter-point going over at “3 Geeks and a Law Blog,” which they invited me to comment upon.

It’s called “Bet the Farm” versus “Law Factory:  Which One Works?, and while I think Toby and Ron fundamentally agree (more on that in a second), I have a slightly different perspective.

Here’s the background to the piece:

Law firms face an uncertain future, with competitive markets, intense price pressures and a drive to change. So they are beginning to ask fundamental questions about the nature of their business. These include what shape should a firm be and how will a firm approach this new market? Will firms be “Law Factories” that provide services to numerous segments of the market? Or will they be niche players that protect their brands in high-end markets and maybe even spin off sub-brands for servicing mid-level and low-end markets?

Ron and I started discussing this question in follow-up to an ILTA session last August where Ron was a co-panelist. The panel suggested that in the future, law firms would need to choose one of two strategies: bet the farm or law factory. This oversimplifies but helps air important issues. The panel struggled to answer whether the two models can co-exist in one firm. If you think the question is academic, consider the recent news about Howrey’s demise. Managing partner Bob Ruyak attributed the fall of the firm, in part, to more efficient e-discovery vendors and document review. Even if apocryphal, this illustrates the impact law factories can have on law firms.

So we decided to take up this question and compare the two approaches in a back-to-back blog post. Both views are shared on both of our blogs. We hope this “debate” spurs dialog in the market over many aspects of how firms are structured and sell themselves to their clients. We welcome comments, input and even offer up guest posting opportunities for those who want to take on this subject with us.

With this premise, summarized in the first sentence of that excerpt, I could scarcely agree more.

The question seems to be:  Does the future lie with firms that focus on “bet the farm” (probably more commonly expressed as “bet the company”) work, or does the future lie with firms that become highly efficient, high-quality, “law factories.”

Actually, I think the answer to that question–as far as it goes–is pretty straightforward:  Both are viable strategies.

The far more interesting questions are: (a) How much room is there in the market for each type of firm; and (b) Can a single firm attempt to serve both markets, that is to say, to be both elite counselors to the boardroom and law factory?

How much demand is there for each?  Let’s start with the elite “bet the farm” segment.

By way of introduction, for about $2–5-million, McKinsey will provide you with the following matrix.  Fortunately, readers and clients of Adam Smith, Esq., are smart enough not to throw around that kind of money lightly, so here it is at a drastically reduced price:

  Low Value High Value
High Price Pretty much the null set ***You should be here!***
Low Price The Factory: dull, drab, dismal–but you can make nice money here if you’re smart about it.  (Can you say:  “Process Management”?) The Category Killer, and truly innovative if you can pull it off without sacrificing quality

McKinsey will tell you that your firm should migrate towards the top right quadrant.  How do I know that?  Because that’s what they tell every firm, as far as I can tell.

See?  I just saved you $2–5-million.

The problems with every firm aspiring to the top right quadrant are several:

  • First and foremost, not every firm can do it, meaning the market doesn’t require it of all firms.  We’re not all Cravath, Slaughter & May, Wachtell, or Skadden, and there’s a reason for that.  Just as not every carmaker is Ferrari, Lamborghini, or Porsche, there’s a limited demand for truly superb, world-beating services, and frankly for most folks most of the time a whole lot less will do nicely, thank you.  Demand is constrained.
  • Second, not every firm can do it, meaning we can’t all recruit the bluest of the blue-chip lawyers it takes to deliver that level of service.  Supply is constrained.
  • Third, reputations are sticky and it can take decades for them to materially change.  This generally benefits incumbents who have been highly regarded in the past, even if their service has been slipping recently, and prejudices aspirants who were not considered at the top of the food chain even if their service has been soaring.  I don’t know what the solution to this is, other than persistence on behalf of the aspirants and prayer on behalf of the highly-regarded incumbents.

But let’s see what other lessons might be in my simplistic little 2 x 2 matrix for Ron and Toby’s conversation.

The top left quadrant is the least interesting, because nobody lives there, or certainly nobody lives there for long.  It’s the Bermuda Triangle for service providers, and as soon as the market cottons to what your game is, the jig is up.  Enough said.

Conversely, the bottom right quadrant is, to my mind, the most fascinating of all, because it is so incredibly difficult to pull off.  Ron alludes to The Innovator’s Dilemma, and rightly so:  This is the quadrant where innovators enter, or at least where they seriously penetrate, the market.  Caterpillar, wedded to big bad belching steamshovels, dismissed hydraulically powered baby backhoes as toys, for years, no matter how useful customers actually found them.  Sometimes you just don’t need to lift a dump truck’s worth of dirt all in one bite.  Similarly, Digital Equipment Corp. ignored and disdained desktop PCs until it was, literally, too late for DEC.  Sometimes you really don’t need a mini-mainframe to recalculate your Lotus 1-2-3 spreadsheet. 

What’s the analogy in law land?  The short answer is, “If I knew, I wouldn’t tell you,” because I’d be out trying to do it, but the real answer is that nobody knows, and the market will get the last vote, and the only vote that matters.  But we of course are seeing nascent attempts to penetrate that quadrant in the form of organizations such as Axiom and Practical Law Company, as well as with “sandboxes” established within existing AmLaw 50 firms.  (Orrick’s ever-expanding empire in Wheeling, West Virginia, and WilmerHale’s newly launched center in Dayton, Ohio.) 

The big question for BigLaw about this quadrant is whether it will take away their work or simply absorb work they didn’t really want to do, are ill-equipped to do, and couldn’t make any money on if they tried.

This brings us to the bottom left quadrant, which I have disdained as “dull, drab, and dismal”–not because I believe that (I don’t, in the least) but because that’s how most lawyers think of it.  As Toby says:

“Commodity” is a dirty word at most law firms. It implies a ‘less-than’ level of expertise and is not the sort of brand any thoughtful lawyer would want for their firm.

If making Toyota Camrys and Honda Accords is a commodity business, I’d love a piece of it for myself.  We can’t all be making just Lexus’s and Acura’s (Toyota and Honda’s top right quadrant brands).

Nevertheless, Toby has put his finger on the barrier to an AmLaw firm breaking into this quadrant. For a name-brand firm to do so in a concerted and convincing way, under their own brand name, would be in the eyes of clients to announce retreat from the upper reaches of BigLaw. Traditional clients would assume you had decided to no longer service their needs. They would assume you can’t serve both the Law Factory market and the BigLaw market.

Would they be right?

Before answering that, we need to get a bit more specific about what the “BigLaw market” is. It’s not monolithic.

Helpfully, Toby gives us a case example in an area he’s intimately familiar with: Patent litigation. In the past 18-24 months, he’s seen fees per matter in that practice area drop 50%. 50%. He now describes the practice as divided into Tiers 1, 2, and 3: Tier 1 is the still magical high-margin, high-stakes world where fees aren’t seriously questioned. That’s a decreasing proportion of the market. Toby pegs it at 15-20% of the market

Tier 2 is where the bulk of the work is, where real issues are at stake but nobody’s going to be killed whatever the outcome. This can be serious bread and butter work for AmLaw firms. Here’s how he describes it:

Tier 2 – Mid-level stakes. These matters will have valid legal claims involving enough money they require a reasonable legal response, but not at the level of Tier 1. This segment of the market has seen increasing price sensitivity. Two to three years ago the work may have commanded fees near Tier 1 level [but not any more]. Put this segment at 50-60% of the market and growing.

Tier 3 is nuisance work, with dubious legal claims and high price sensitivity, where clients want to get it done, get rid of it, and move on. Not worth paying much for or getting too worried about. Maybe 20-25% of the market.

This is the point where the existential question confronting BigLaw in the New Normal raises its head:

Can our firm:

  • Stay in, or move into, Tier 1?
  • Survive in Tier 2, with enough work to go around and make everyone happy, including most importantly with enough money to go around to make everyone happy and keep them onboard?; or
  • Decide to become a Law Factory?

If you’re in Tier 1, you know who you are. So does everyone else. God bless, and don’t mess it up.

If aspire to the Tier 1 circle, you have to be very serious about what that means. That means being very clear-eyed about whether this is even possible for you, and “possible” doesn’t mean what you think; it means what your clients and prospective clients think. Can you hire the talent? Will clients believe it? Will you get the market traction you need? How quickly can you change perceptions?

If you’re in Tier 2, you have the most challenging job. This deserves a separate column, which it shall get.

If you want to be in Tier 3, you need to become a Law Factory. No mincing words.

Can you do it?

If you’re an AmLaw 200, I don’t think so. Simply put, your partners won’t stand for it; this isn’t the deal they signed up for. And they’re right; they didn’t. They, rightly, wouldn’t stand for it and you would destroy the firm in the process.

Still, can you do it?

This is what Toby and Ron were really discussing.

I would cast the question slightly differently: Can a BigLaw firm create a sub-brand to exploit the Law Factory quadrant?

My thoughts on that also coming up in a future column. In the meantime, I invite your thoughts.

A regular reader writes:

This is great, I like the idea of adding a matrix to the debate.
My only thought is that the “top left” (low value/high price) may not be the null set.
It really may be where 80% of the Am Law 200 lives for a good proportion of their legal services.
And if my “Legal
has any value, the question is how many law firms can last in the top left? Higher-performing partners at these firms will leave for the “top right” firms, large or small, or start firms of their own.

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