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):
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.