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.
The ability to spontaneously “crowd-source” expertise online
1. The idea that highly skilled professionals (men, women, experts, whomevers) are on a “spot market exchange” is very sensible. Particularly for project work under, say, $100,000. … The logic of a liquid online market exchange is irrepressible, undeniable, magical. It will 100% happen. And it won’t be academics or philosophers that will do it – it will be practical, sensible, humble business leaders who listen carefully to their audience and offer a micro-niche professional services solutions that dominate their market. 99Designs in design is an excellent example and an early winner.
2.I call this emerging mobility the concept of the “ATEAM” – the day when the best professional services teams in the world can be created instantly, anywhere, on-demand. […] – no intermediaries, no middlemen, no admin, no rubbish. We just need a global credible project management marketplace and this will readily become a real possibility…and quickly. The value-add will be in selection, configuration, alignment of goals, setting incentives, insurance and performance appraisal. (From John Persico.)
BigLaw’s powerful motivation to fight back
George Beaton expresses this quite pithily:
I don’t under-estimate the resilience of BigLaw owners, i.e. partners. The stakes for them are very high. They are clever and hard-working, as we know. My back-of-envelope figuring indicates the ~2,000 equity partners in the 20 largest firms in Australia earn an average of ~$1m per year (round numbers). Of these I calculate ~1950 would not get a job practising law in-house for even half this amount. So, in a survival sense, BigLaw is not going to lie down.
The undeniable reality that NewLaw is not burdened by legacy ownership structures, systems, or compensation models, and virtually unanimous agreement that the changes of the past five years are structural, not cyclical This from Mitch Kowalski:
Unlike Joel, I see structural change in the marketplace.
The growth in the number of inhouse counsel is structural, not cyclical. This growth is a symptom of law firms pricing themselves out of certain types of work. This never changes back unless firms can demonstrate that they are more cost-effective and provide better value than inhouse counsel.
After demanding more for less, GCs don’t suddenly say “Hey, charge whatever you want as the crisis is over.”
Afterall the easiest way for GCs to show a return on investment is to provide evidence of year-over-year legal cost reduction.
AS GCs become more comfortable with the Axioms and the Clearspires, the Conduit Laws and the Cognitions and the gunnercookes, and the Adventbalances, more work will flow to them. Again, this is structural change, not cyclical. After using these firms, GCs will not, absent a bad experience, suddenly give all that work back to traditional law firms.
Will NewLaw get $10B+ deals? Maybe not, but how many $10B+ deals are there out there annually? I am sure NewLaw is quite happy to do 50 $500M deals rather than hoping all year long for that one $10B+ deal.
Then factor in that better processes and better technology are designed to allow fewer lawyers to do more work. Global law firms rely on their massive scale to attract work – but what happens when clients realize that the scale is no longer necessary?
As we know, better processes and better technology never go away – they are structural in nature, not cyclical. Kodak thought that the market would always want print photography – Instagram showed that the smartest guys in the room at Kodak missed the mark.
The march of technology, which is both relentless and ubiquitous. Each of these characteristics of technology reinforces the other, and generates tremendous cumulative impact. So, this from Joshua Kubicki:
While this thread covers much of the real-time debate and trends in the legal sector it is ignoring an underlying enabler that is fundamental to any change in any industry. Technology.[…] A simple inescapable fact is that technology will and is quickening the pace of iteration in legal services. Notice I use “iteration” not disruption or revolution. The legal market is not, has not, and will not be the sole domain of lawyers. Lawyers do not operate in a vacuum with only their lawyer brains – they use tools. The tools of a trade are often a direct reflection of the maturity and capability of that trade. Tools are indeed part of the legal market – make no mistake. Westlaw and Lexis are players – not that I think they are long for this world. We tend to define legal services far too narrowly and look only inside business models to for innovation and disruption.
As the tools available become more powerful, efficient, and let’s use current jargon, ‘smart,’ so to will the services that the users of the tools provide. So also will the business models for tech and tools are not just for front-end use but are actually more fundamental to change when employed in the back-end of a business – see data warehousing, logistics platforms, and integrative financial tools. These back-end solutions are what drive pricing, resource management, and delivery flexibility – all key to law firms BTW. …
Axiom is often trotted out as a key indicator of NewLaw’s emergence and potential disruption. Where did Axiom spend a large portion of its $28m funding? Technology and tools. It is not so much that Axiom is doing anything new. It hires and provides lawyers to clients. What is new is the “how.” And how has Clearspire attempted to differentiate and grow? By investing in technology and tools? Look at the BigLaw players Seyfarth and Littler mentioned earlier. While it is challenging to learn what exactly these groups are creating and using (for good reason as it is their competitive advantage) we can look to the external market for signs of meaningful technological disruption.
For all the diversity of voices, I think its’s fair to evaluate the conversation by saying agreement was asynchronously reached on a few key points, which – if they fall short of Google Maps turn by turn directions – are indelible indicators all of us would be wise to attend to.
- No one seriously believes or even suggests that global demand for high quality, high stakes legal counsel will collapse. Indeed, if history is any guide, it will continue to grow.
- And/but that does not necessarily imply that the only source of supply to meet that demand will always be lawyers in big, global law firms. They will continue to be part of the mix for a long time, but clients are less and less enamored of “what they sell, at the price they sell it, in the way they create and deliver it,” as Jordan Furlong put it.
- Clients are exercising their buying power.
- Clients are substantially growing their inhouse capacity.
- BigLaw firms that think it’s a comprehensive response to emulate the efficiencies of alternative delivery models, be it through labor market or occupancy market arbitrage, and through redesigning career paths to create ideally-infinite leverage, may just be postponing the day of reckoning or “fouling their own nests,” as George Beaton put it.Understand: Many firms may view this imitative flattery as a necessary response to the newcomers, but don’t delude yourself that it’s sufficient.
Count on clients to drive the vector (both pace and direction) of change, by voting with their wallets. and just as I prefer the coinage SophisticatedLaw to BigLaw, recognize for present purposes we’re talking about SophisticatedClients. (The Beaton dialogue touches glancingly, but no more, on the utterly distinct market for “High Street”/retail/consumer law.)
Nowadays, when I observe client behavior, I see two thoroughly opposed, but quite consistent, trends: A flight to quality and a flight to value. No single law firm can durably respond to both sets of client demand, which means many who aren’t already at one pole or the other will need to choose, and to change.
So indeed we come to change.
Organizations’ ability to change is a function of their constitutional DNA and doesn’t often have much to do with the external market stresses imposed on them. Some organizations are supple and have few ingrained internal “interest groups,” vastly facilitating their agility and flexibility, but others are afflicted with institutional sclerosis through the power of vested internal constituencies self-interest. This is not news.
But it is what makes me worry so much about law firms.
May I digress momentarily?
As a management consultant to firms, I often hear that a firm’s first priority is to increase revenue, or it’s stronger business development, or it’s higher profits. Often.
The problem is that those goals are not actually goals, they’re outcomes. To analogize to your own life, if your goal is to “be happy,” you’re in for a long, tough, fruitless, and depressing slog. The route to happiness lies through the hard work of figuring out what work you’re passionate about – and working yourself into a position where you’re actually able to do it – plus finding the love of your life, plus staying fit and healthy and curious and energized and optimistic. Achieve all those things and “happiness” will be within your grasp: No guarantees, understand.
So with higher revenue, more powerful business development efforts. Not goals, outcomes.
Thus did I find myself delighted and almost amazed when a managing partner I recently met with answered the question, “What’s the greatest challenge facing your firm?” with “Getting our partners to present ideas to our clients.” This fellow gets it.
The legal profession is a profession of ideas. They are what count, and they’re all that counts.
But, and here ends the digression, this was extraordinarily unusual. I dare to say unique.
So what is law firms’ DNA?
- The individual lawyer, in cultural terms, is the over-riding unit of organization: not the firm. This is often shamelessly or boastfully cloaked in the rhetoric of “entrepreneurialism,” when what it really is is anarchy.
- Our compensation systems revolve around the Sun of billable hours and origination credits of each and every individual lawyer, with hardly any regard to standards of good citizenship, the contribution of everyone in the firm who happens not to be a lawyer (a/k/a nonlawyers, a term I’d like to banish from the earth).
- Near-total ignorance about what normal companies call business intelligence, meaning insight into where profitable revenue comes from by practice area, client, attorney, activity, and much much more.
- And finally our profoundly antique business model of laboring in the trenches as the source of revenue. A friend of mine likes to say that when it comes down to it, lawyers are glorified hourly workers, and that has the distasteful ring of truth.
So if we as firms are really going to change we’re going to have to change some of these fundamental characteristics.
But we can’t.
They’re not surface or recently grafted-on characteristics; they’re intrinsic to how we envision ourselves as firms and as partners within those firms. The first one in particular.
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.
Your reaction to this heresy should tell you all you need to know about our ability to change.