Let’s open this third and final installment with the #1 question we’re most frequently asked about this model:
Can one firm excel at being both a Maroon and a Gray?
No.
Or in the very best of circumstances, it’s extremely hard to do and it’s usually done not well.
In our experience, all Maroons know they’re Maroons. Many Grays deny they’re Grays.
While Maroons by and large accept the premises of the model without much objection, many Grays fight back strenuously and argue that that is not their lived experience—“we’re a ‘rainbow’ firm.” They usually advance a combination of the following observations:
- Some of our practice areas compete head-to-head with Maroons.
- A slight variant on that: Some of our partners compete head-to-head with Maroons.
- Some of our best clients come to us with Maroon-type work.
- And, in general, “Why should we limit ourselves? If we can serve our clients more comprehensively, why wouldn’t we?”
Let’s stipulate that, indeed, each set of firms does some work the other set does; this is a model, remember, not a rigorous geometric Schumpeterian dichotomy. Human nature kicks in, personal relationships matter, and sometimes clients just find it more convenient to trust a firm with one more matter rather than meting out everything from scratch.
But when it comes to business models, that’s not the question: The question is not whether to seize or reject opportunities that fall in your lap; the question is where does your firm invest?
It’s quite a complex challenge to recruit a stable of beyond-superb legal practitioners—who also have business savvy—and keep them feeling challenged, core to the firm, and properly recognized and compensated, while at the same time investing in sophisticated process optimization, project management expertise, and pricing professionals, plus the “good enough” lawyers to service the cost-of-doing-business legal work. And imagine setting the lawyers’ compensation: How do you explain the 10:1 or 20:1 ratio between the Maroon partners and the Gray partners, if you’re housing both under your one roof?
Fundamentally, Maroons need to invest in raw legal talent and Grays need to invest in efficiency, reliability, and predictability. But of course these are not pure and absolute distinctions. As we said earlier, unquestionable legal competence is a non-negotiable requirement for a Gray and superb “fit and finish” (process management) is equally demanded by clients of a Maroon. The question is what the firm is built to do.
Of course you can drive a $200,000 supercar to the suburban train station and back for your daily commute, and Ferrari or Maserati would presumably take your money for the purchase even if you told the dealer that’s all you ever planned to use the lavish machine for. But neither company would think, “Aha! A new market for us to exploit!”
By analogy, observers who see clients going to Maroons for Gray services and vice versa are mistaken to think they’ve spotted a strategic rationale for the firms to make big investments in the “other” business; all they’ve identified are clients being human beings rather than perfect exemplars of rational homo economicus.
Summing this all up
As was true of our original seven-category Taxonomy of 2014, a few salient overall observations:
- Both Maroons and Grays can succeed or fail; neither category is a panacea nor a sentence of doom.
- Firms can migrate from one category to another:
- A few former Maroons (we are not about to name names here!) probably are more aptly categorized as Grays today
- Query whether this was entirely intentional
- And, with herculean effort over a period not appreciably shorter than a couple of decades, Grays probably can transform themselves into Maroons
- We would venture the view that this move has to be resolutely intentional, and will involve a large percentage change in the composition of the partnership. This means that it is simply not tenable in a period of time much shorter than that of someone’s full career. For the vast majority of firms, partners would view it as an effort to blow the place up.
- Even then, the most time-consuming aspect will most likely be the market’s perception lagging reality.
- And for all firms, of either category, the critical priority is to recognize and respond effectively to their particular challenges.
- A few former Maroons (we are not about to name names here!) probably are more aptly categorized as Grays today
Having come this far, you may have assumed we secretly, or not so secretly, think the Maroons are in some ineffable way “superior” to the Grays.
Absolutely wrong.
For starters, both can provide invaluable client service—it’s just “different” client service.
And we did allude earlier to the complexity of managing each type of firm. Maroons are actually pretty simple to run; for one thing, lawyers have been doing it (it’s the Cravath Model, essentially) for over a century. Hire great legal talent, love and compensate it generously, and turn away any work that doesn’t have boardroom visibility.
Grays, by contrast, are very challenging to manage effectively, and thus in our book far more intrinsically interesting from the perspective of strategy, finances, and leadership judgment. Lawyers are one of management’s constituencies, but only one; the business professionals who are experts in process optimization, project management, big data analytics, pricing, and more provide an equally indispensable core competence. Getting cognitively and intellectually diverse teams to work together and form a more powerful whole—including, critically, in client-facing roles—is far more challenging than identifying the finest lawyer/practitioners in XYZ field and letting them lawyer things.
Here’s a simplistic way of thinking about the two types of firms and the consequences for each of strong or of weak management.
| Maroons | Grays | |
| Superbly run | Steady as she goes; don’t screw it up. | We call this quadrant that of the “Splendid Grays.” A fascinating and powerful business model and quite sparsely populated territory at the moment. This could provide tremendous value to clients and staff alike. Maybe our favorite quadrant in this table. |
| Poorly run | How long do you plan on being a Maroon, again? | You better have very forgiving, or very loyal, clients. Absent those (wasting) assets, a slow slide to irrelevance. |
“All models are wrong; some models are useful.”
—George E.P. Box, British statistician (1919—2013)
To tie this theme to your earlier theme about the important of the firm, if the Maroons are easier to manage than the Grays, is it possibly because the Maroon lawyers understand that the firm has value separate from their individual merit, and they’re more willing than the Gray lawyers to let their egos take second place to the firm’s collective image?
Without doubt the Maroon firms have an intrinsic (and strong) identity separate and apart from the sum total of the individual lawyers’ practices. And in our experience Maroon firms also have bonding rituals, shared heritage stories, regular communal celebrations, and so forth: All the elements of forming a thick community. Grays can default to being “hotels for lawyers.”
…. and Maroons can default to being cosy “mini me” clubs.
Do you really think that your prescriptions for Grays are feasible for 90% of those firms? Your Gray managing partner has all the normal problems plus recruiting and integrating a business optimization and marketing staff, running a continuous cost reduction strategy (often demoralizing in the extreme), finding and applying large amounts of capital to business process and improvement programs (remembering that partners have to make their tax payments and borrowing can easily over-leverage the firm and drive away rainmakers), and motivating two very different sets of professionals. Were I a Gray MP, I’d conclude that Bruce’s prescription is too complex, costly, divisive and risky (10%-15% chance of success) and that the best plan is “satisficing,” doing a bit of everything and casting around for whatever opportunities may come by (primarily trying to nab laterals) to live another day. That may result in a gentle decline, but it’s better than blowing up the firm trying to do what almost all lawyers (even with excellent professional staff) are incapable of achieving.
Joseph:
Thanks as always for your contribution and thoughts. I’m torn between whether yours is a counsel of despair or of realism! In either case I think you have added to the richness of why being a “Superb Gray” is a sparsely populated quadrant of our simplistic little matrix at the moment–and why it may remain sparsely populated.
Mr. Heyison, I take it that your concern is how the Greys would transition from their current ways of doing business to the sorts of controls you itemize. There are hundreds of engineering firms, from huge Engineering Construction and Project Management companies such as Bechtel (2017 Revenue: $25.9B) to modest regional and even local engineering practices who operate on the model of the Greys with great success and longevity. Of course, they grew up as “businesses”, but include within their senior staff scientists and engineers with all the intellect and accomplishment – and ego – that one would see in the strongest of Greys. Although many of the “names” in engineering are public corporations, some remain privately held (including Bechtel).
My point isn’t based on the inability of lawyers to appreciate systems management or on their pigheaded insistence on autonomy — although both factor in. The Gray MP is faced with a two or three front war — managing the practice; integrating a systems staff with a very different culture that is going to upend firm culture and practices; and communicating a vision that will unite the two — with inadequate capital and cash flow, a management structure built for passive resistance, a cost reduction imperative that demoralizes, and key assets (rainmakers) who will walk if their immediate returns are impaired or their egos triggered. And at the end of the day, the war is not existential. Most lawyers and staff will find new positions and the firm qua firm is a sentimental value, not an essential. This war under these handicaps may not be worth fighting on Bruce’s strategy. Alt-law, starting with a clean slate, may be able to.
I tend to agree. At least in the short term, I see the majority of firms electing to just “muddle through”, make incremental changes to keep up with the Joneses and leave the existential problems for another generation (who may also choose to do the same!). That doesn’t mean these firms won’t have a strategy and try to execute it. But it will be largely within the same model it has always been for the foreseeable future.
The major thing that I just can’t get past is seeing rank and file partners giving up the kind of control and autonomy that would be required for a Gray even if doing so has some upside as Bruce suggests. And the reasons are more mixed than might appear at first glance. Some of its just pure ego and arrogance. Some of it is blanket resistance to change (fear). But the fact is, in the organizational structure of almost all US law firms, lawyers, and lawyers alone, bear virtually all of the business/economic risk of the enterprise. That makes giving up any control (even a little) a tough sell for all the but the best leaders. Now, can a modified business/capital structure reallocate some of that risk away from lawyers and to the various business functions so that everyone (at least at the executive level) has the appropriate amount of skin in the game?
If the firm DNA allows it to be done, it will be over the course of many years. Just by the law of averages, very, very few managing partners are that visionary AND charismatic AND hard-driving. One in ten? One in twenty?
Is it perhaps worthwhile to think of the Maroon – Gray model(s) in terms of the scenarios for the direction of Big Law that ASE proposed in 2017? Would I misread as the consensus of the comments to date that the ASE scenario most expected by the readers today would be “Lawyer Psychology and the Partnership Structure Win?”
Mark, Joseph, Skeptic, and all:
I concur that the challenges of being a “Superb Gray” are more than all but the most exceptional MP would want to undertake: Building a Swiss-watch business organization, continuously pushing costs out, scratching up capital somewhere somehow when the traditional law firm capital funding model is to pass the hat among the partners, keeping the rainmakers feeling loved, convincing clients your offering is quality- and cost-competitive, and more–all within the context of an organizational structure optimized for massive passive resistance. So yes, Mark, you have rightly pointed to the “Partnership Structure Wins” scenario of Tomorrowland.
I think the existential point is partially captured by Joseph’s observation that when a firm fails its assets are not, as my bankruptcy law professor said in response to an overly sentimental student, “dumped in the Pacific Ocean:” The lawyers and professionals and staff go on to other, presumably healthier, going concerns. This is Schumpeter’s creative destruction on the most micro of scales.
The macro question is whether the market share of the Mediocre Grays will remain substantially what it is today, or whether NewLaw and Superb Grays will capture the material portion of it. The answer to that, in turn, will probably be determined by client behavior more than anything else.
A final thought: Is it safe to surmise that a large proportion of partners in (failed/failing) Mediocre Grays will find themselves staring at substantial compensation cuts?
I can’t let this one go, unfortunately. As a matter of economic theory, the exiled Gray partners should not see substantial compensation cuts. By hypothesis the Gray firm is a collection of fee earners with a brand that does not earn substantial returns over the productivity of the fee earners. Thus when they move to another firm they should still earn approximately what they had; and if they can move to a brand name Maroon firm they may earn more, if only because they can mark up their rates closer to the Maroon level. This of course, ignores the fact that in moving they lose bargaining leverage vs. their new firm, which will initially undercompensate them because it can and because it fears a market for lemons situation. But sooner or later the exiled partners will receive substantially all their economic profit or will walk.
This would follow if, but really only if, there is a “seller’s market” that is organized around partnerships. But if it is (increasingly, post reset?) the case that “the client gets a vote” (to paraphrase an expression that ASE has used), then the sorts of pressures Bruce outlined in Part 2 would seem likely to erode the profit margins as currently structured: lawyers might still receive their “economic profit,”, but that base value may decline over time.
Survivorship bias affects the answer to the question “will the exiled/relocating Gray lawyers continue to get their economic profit?” If you look only at the Grays who move, I agree that the answer is mostly yes. Take into account, however, the ones who don’t move – the ones who are abandoned altogether as a effect of NewLaw and NonLaw. Imagine a strong department in a poorly-performing Gray firm. The department’s RPL and PPL is noticeably higher than the firm’s average, and the department’s leaders have correctly determined that they’re subsidizing their unproductive partners. They pack up and leave to a better Gray firm. The RPL and PPL of those they leave behind does down, and if that firm doesn’t dissolve altogether (been there, done that) it will likely cast some of its partners and many of its associates adrift as it belatedly tries to cut costs to respond to its fallen revenues. The people who lose out aren’t so much the ones who move as the underperformers they leave behind. From the point of view of the moving group, they’re leaving a firm that shorted them on their economic contribution to join one that’s going to short them less.
Mark has made precisely the point I would have: I think all three of us can stipulate that the lawyers at (or formerly at) Grays will in any remotely rational market collect their “economic profit.” The question I’m posing, and to which I have no answer, is whether that economic profit will remain at the same (extraordinarily high) level once the market, meaning clients, is widely exposed to lower-cost/higher-quality alternatives.
Again and again, I hear first-hand stories of NewLaw undercutting Grays by, typically, a factor of 2–5X (that is, a price of 20%–50%), for superior results. This week I heard the biggest multiple yet: $300 for a NewLaw firm to conform a contract to new regulations, vs. $15,000 for a Gray.
Now it may be that dissemination of this market awareness will be slow, spiky, and halting, and met with skepticism at every turn, but I suppose the economist in me can only believe that some sort of new equilibrium will eventually be reached, in which case the Gray lawyers’ economic profits will reset in a highly material way.
For some reason this reminds me of John Jacob Astor’s decision to completely abandon the fur trade, where he had made his first fortune, upon the opening of the Erie Canal, which by opening up cheap transport to the interior of the young country blew up Astor’s effective monopoly on bringing furs from the interior to the New York market. The story is told here among many other places.
One thing about NewLaw that isn’t mentioned much but is definitely salient to this debate is where exactly NewLaw chooses to compete with BigLaw. For instance, I believe at one time, Axiom said, right out front on its website, that it did not issue legal opinions and it would not act as counsel of record. Not sure if this is still the case. Those two roles are (or are directly adjacent to) a substantial part of sophisticated legal practice at large firms. Even routine, run of the mill transactions and non bet the company cases require these services from outside counsel. Now yes, unbundling is an option, but that comes with its own inefficiencies if you have to get someone else to put their name on a pleading or dispositive motion or an opinion.
So I guess the question is, even if NewLaw can eat BigLaw’s lunch when the two go head to head (and I would fully stipulate that it can), will it choose to do so in the areas where a large firm really does add some value and there are still well-defined client needs? It may be that the answer to who “wins” is not a winner-take-all proposition. It may be that the successful NewLaw enterprises end up stripping the low-hanging fruit out of law firms and then proceed to become the category killers in those engagements while firms get a lot leaner, but intensely focus on the areas where lawyers have been providing unique value for many years, inside a courtroom and high-end written legal analysis enabling sophisticated clients to comfortably take transaction risk with shareholder money.