The other week the redoubtable George Beaton launched what turned into as wide-ranging an online discussion as I can remember, under the title The rise and rise of the NewLaw business model, Since its publication, it has generated 65 comments over nearly three weeks from a Who’s Who of the best informed, most thoughtful, and most active commentators and practitioners on the globe.
George’s thesis is that (to oversimplify) we live in an environment where BigLaw co-exists with New Law. Here’s the difference:
[T]he BigLaw business model is built on six elements:
- Attraction and training of top legal talent,
- ‘Leveraging’ of these full-time lawyers to do the bulk of the work serving clients,
- Creation of a tournament to motivate the lawyers to strive to become equity partners (the idea of a tournament is akin to Roman gladiator contests and the subject of a seminal book),
- Tight restriction on the number of equity owners,
- Structuring as a partnership, and
- Charging high hourly rates (which is or at least until very recently has been possible because of the mystique associated with legal advice).
These elements work together to create the economics and culture of the BigLaw business model. No one is more important than another. (For a summary of the consequences of the BigLaw business model please read my previous post). The only element Axiom and other NewLaw players have in common is part of #1, the attraction of top talent.
Within a matter of hours, the first comment appeared, from Joel Barolsky, whose remarks I have condensed and re-combined (but without changing a word):
Hi George,
Thanks for your post. Personally I think you underestimate the strength and resilience of BigLaw and overstate the competitiveness of New Law.
My view is based on 6 factors:
1. Semi-variable cost structure: Law firms are not like manufacturing, retail, airline or mining businesses which have huge fixed costs. Labour costs typically are around 60% of costs and occupancy 20%. The evidence points to firms being able to scale its workforce up and down with more flexibility than one would traditionally think.
2. Deal-driven profit – cyclical not structural: I think it would be better to wait and see the impact an increased M&A deal flow on the legal market before calling the end of BigLaw. Frankly I can’t see many clients trusting Axiom and lookalikes with their $10B+ cross-border deals. I think you’re drawing structural conclusion from a cyclical change.
3. Globalisation – net impact is low for most
4. Labour arbitrage: Much has been made of the cost differential between Australian and Indian law firms, and the growth of the off-shore LPO market. Mumbai rents are now twice as high than CBD Sydney or Perth. Top talent in India is becoming scarcer and more expensive. All evidence points to cost differential gap narrowing rapidly.
5. Fixed pricing and efficiency dividend open to all: Fixed fee pricing has been part of BigLaw for many many years. It’s just one of many pricing structures they offer their clients. Many BigLaw firms are investing in legal project management and process reengineering. There is very little evidence to assume AFAs will bring down BigLaw.
6. Reap and sow: It seems to me that notwithstanding their ownership structures, the evidence points to some BigLaw firms willing to invest, to innovate, to reap as well as sow [sic–he means “sow as well as reap”–Bruce]
Thus we were off to the races.
The rest of the back and forth addressed the following inter-related topics.
Excellent post as ever. The value vs quality trajectories point is interesting. I wonder about it. Gulatti and Scott’s Three and a half Minute Transaction book came to mind. Blue chip partners in blue chip firms not providing quality (post here http://lawyerwatch.wordpress.com/2013/09/29/securities-lawyers-and-sticky-contracts-innovation-and-elite-law/). A deepening of the gloom was provided by their observation that the sages on these firms, who actually understood the law they wrote, or rather had a better chance of understanding, were about too fall off he retirement cliff and were not being replaced.
Bruce, take it from a guy who is happy: You have hit the nail right on the head with your statement “To analogize to your own life, if your goal is to “be happy,” …..”
If more lawyers realized the wisdom of your point, things would go better for all of us, and our friends, families and clients. You would be doing us a service to expand on this thinking as a separate post, which I and many of your readers would enjoy reading.
The last point of your post is pretty pessimistic about BigLaw, but I guess “If they do not listen to Moses and the Prophets, they will not be convinced….”
Congratulations on a continuously interesting and fruitful website.
Paul Bannon, B.A., LL.B., LL.M.
Barrister & Solicitor
#360-33 City Centre Drive
Mississauga, Ontario L5B 2N5
(905) 272-3412
(905) 272-0142 fax
Paul@BannonLaw.ca
Bruce –
An unresolved question in the comments on the Beacon post was, “What do you do with the $XX million you raise via the BigLaw IPO?” In a way that is immaterial.
Your closing point – “If law firm leadership needs to alter the ship’s course, not everyone can get a vote. In fact, it shouldn’t be up for a vote.” – answers the question of why ownership structures need to change. As long as a strong, productive, but ultimately selfish and shortsighted, group of partners can block change, change will be blocked.
And, that is unsustainable over the long run for large, sophisticated businesses – legal or otherwise.
Are quality and value are necessarily separate? While I can see how they might be, there is really a lot of room for improvement in low-end tasks done in high-end law. And some of these quality improvements also make lawyers faster at their work, which, depending on pricing model, enhances value. A few quick examples:
– Ken Adams points to how nearly all firm lawyers draft by cut-&-paste as opposed to using document assembly software, which could help them provide more consistently high quality contracts in less time. Contract errors matter and are more likely with today’s slower cut-&-paste drafting.
– Ediscovery technology enhanced review software enables better quality litigation document review in less time. Better quality document review means the parties to the dispute have better evidence to work with.
– Our contract review software has been shown to help a lawyer do due diligence contract review with greater accuracy in 20–60% less time. Due diligence contract review takes up a lot of time in M&A deals; junior lawyers are slow and sometimes make mistakes in this work. These mistakes hurt clients.
There are a number of other examples where big firms currently underperform on quality, and could provide better work product in less time if they chose to.
l’m new to this site, so if this comment has been discussed in the past, I apologize. I wonder how much of the innovations and changes in BigLaw are really just “rearranging the deck chairs on the Titanic”. The reality is that there are just too many of these larger law firms. While there is no doubt in my mind that “BigLaw” will survive, there will not be nearly as many and their primary business will be large litigation matters or large financial deals. However, the latter will be in danger if the prohibition on non-lawyers owning law firms ever truly comes down (not in an investment structure manner, but in a true ownership – as in subsidiary – structure). At that point, I think the large accounting firms will acquire several of the larger firms and absorb them into their structure to handle large financial deals.
I think that a good exercise that I have yet to see anyone undertake is a comparison of what the legal industry is going through now compared to the accounting industry in the 70s, 80s and 90s. At that time, technology was making a huge impact on the accounting industry, firms of all sizes were consolidating, fee were dropping and fee structures were changing (introduction of the flat fee and project based model) and the industry was changing dramatically. There were winners and losers and today’s environment (big four, smaller number of midsized) was shaped by that tumultuous time. How can we learn from what happened to our accounting cousins and do better than they at managing the change?