Here’s another way of thinking about what’s happening (although, fair warning, it’s offers up no more optimistic prognosis).
If we want to trot out Harvard Professor Michael Porter’s “Five Forces” Analysis, the fundamental landscape facing BigLaw has become far more challenging in the last few years. Here, in a nutshell, are the five forces that Porter believes shape industry competition and how they’ve changed in our world recently—every one of the five for the worse, from the perspective of BigLaw:
| Force | Why it matters | How it’s changed for us |
| Threat of new competition | High entry barriers are good, as are client loyalty and switching costs | Barriers to entry and switching costs have always been low and if anything, technology is making the costs of starting a new law firm lower than they’ve ever been. Now client loyalty is eroding as well |
| Threat of substitutes | Clients trying substitutes may like what they find and never come back | More substitutes are available, some of them are becoming very good and they’ll only get better |
| Client bargaining power | Price pressures: any questions? | No explanation needed |
| Bargaining power of suppliers | If “inputs” you can’t do without (e.g., talent) have strong leverage over what you must pay them, you will tend to pay what they demand | If anything, the accelerating visibility of superstar laterals potentially puts firms behind the 8-ball |
| Intensity of competition | The more aggressive (desperate?) your competitors, the more tempted they’ll be to engage in irrational behavior | Again, no explanation needed |
So much for theory; here’s some data (all courtesy of the Altman Weil 2012 “Law Firms in Transition” Survey). From 2009 to 2012, the percentage of managing partners believing that these trends are permanent and not cyclical rose as follows:
| Yes, Permanent | 2009 | 2012 | Increase |
| More price competition | 42.4% | 91.6% | 2.2X |
| Fewer equity partners | 22.8% | 67.6% | 3.0X |
| More contract lawyers | 28.3% | 66.2% | 2.3X |
| Reduced leverage | 12.1% | 57.7% | 4.8X |
| Fewer first year associates | 11.4% | 55.4% | 4.9X |
| More outsourcing | 11.5% | 45.5% | 4.0X |
Note that while the first is explicitly about price (aren’t you getting sick of hearing about pricing pressure by now?), the other five are actually all in response to pricing pressure. This is what happens to firms when markets shift from the suppliers (that would be us) being price-makers to being price-takers.
Of course, we’re not truly “price takers” just yet; we have more than a modicum of control over what we charge. But the tilt of the landscape has indisputably shifted in favor of clients. Let’s assume heightened price competition is a given: More than 9 out of 10 managing partners evidently take it as such.
So if the remaining five trends are responses to pricing pressures, how exactly do they constitute a response and what do they have in common?
I suggest that all five are ways firms are trying to reconfigure their offerings (read: themselves) to more closely match up with clients’ willingness to pay. At the top of the food chain, clients are apparently as willing as ever (more willing?) to pay top dollar for partners who are truly superb, while at the other end of the food chain clients want to pay as little as they can to get their unavoidable commodity-ish work done competently and effectively.
And where does that leave the middle?
Actually, if you have an hypothesis about what happens to the middle, let me know. I’m serious.
Does the client demand function I’ve been describing remind anyone else of the airline or car industry?—because it does me. Think of partners as Cathay Pacific or Singapore and contract lawyers and outsourcing as Southwest or JetBlue. Or else partners as Audi and BMW and contract lawyers and outsourcing as Toyota and Chevy. The good news is those industries seem to have reached stable equilibria where clients’ preferences across a range of quality and service levels and price points are satisfied. The bad news, for traditionalists, is that they bear no resemblance to how we perceive of our profession.
But let’s take this thought experiment a step further.
I have enjoyed this series of articles immensely, Bruce. Thank you.
Your question in today’s Part 11 as to the model for the many firms that will compete for survival in the middle tier got me thinking. However, what started out as a few short sentences turned into something much longer; too long to post here. So, here is a link to my reply to your question.
http://gimbalcanada.com/blog/2012/11/8/whats-next-for-the-middle-kingdom-a-response-growth-is-dead.html
Thanks again. I look forward to the final instalment…
David Skinner
(Gimbal Canada)
great series of articles. they even had my non-lawyer, non-business spouse fully immersed.
I look forward to the final instalment.