RECENT London-based publications have carried a range of prognostications about the shape and destiny of large law firms in 2018.
For partners in large law firms, these articles probably don’t make comfortable reading. But I think they miss the real point.
What is being called the BigLaw business model appears to be in trouble. And it’s not unreasonable to ask if we are witnessing the last days of the BigLaw business model.
The reality of 2018 and beyond may turn out to be a great deal worse and much more varied than most law firm leaders in Australia and commentators around the world suggest. And the dangers apply to almost all law firms, not just big ones. Here’s why.
BigLaw is not about big law firms. BigLaw is a description of the business model used by firms generating the vast majority of law firm revenues today.
The description excludes micro and sole-practitioner firms and the handful of alternative business model firms such as AdventBalance and Plexus.
The distinction between the BigLaw business model and big (or small) law firms is critical to an understanding of why we argue the BigLaw business model is in trouble.
Let’s start with some history. In 1819, the firm we know today as Cravath Swaine & Moore was founded in New York.
Early in the 20th century, Paul Cravath enunciated the principles of a system to train associates rigorously and promote exclusively from within.
To quote the firm’s website: “The rotation path fosters collaboration and eliminates the need for associates to compete for work, clients, training or bonuses.
“The Cravath System places a premium on efficiency and quality of work that no other firm matches, and it was through this value system,which we still use today, that Cravath created a new model for American law firms.”
What Paul Cravath really invented was the foundation for the contemporary BigLaw business model.
The modest claim to be “a new model for American law firms”
is a big (pun intended) understatement. The model rapidly became the basis of the Magic Circle and White Shoe firms of London and the US, and every firm that strives to learn from and copy the model.
In the great industrial boom of the post World War II era, firms seized on the Cravath model and turned it into what is now the BigLaw business model.
The model enabled the massive growth of firms throughout the Anglo-American world and has generated the fabled incomes of the equity partners of BigLaw firms for more than 60 years.
The BigLaw business model is built on six key elements. These work together and no one is more important than another.
- 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 1991 book).
- Tight restriction on the number of equity owners.
- Structuring as a partnership.
- Charging high hourly rates (which, at least until very recently, has been possible because of the mystique around legal advice).
- The consequences of the BigLaw business model as set out above are these:
- Firms treat their lawyers as fixed costs (because of viewing them as a form of sunk cost and the time it takes to bring them to full productivity). Plus most other costs are regarded as fixed, too.
- Firms pay their lawyers high salaries to win in the war to attract the very best talent.
- Firms drive high utilisation from their lawyers (although it should be noted Australian and British utilisation is much lower than in comparable American firms).
- Profit – measured as per point of equity on issue – is maximised and as a result the average equity partner in a BigLaw business model firm earns far more than in-house lawyers.
- Profit is taken today and none is retained and as result partnerships have no balance sheets on which to rely for investment or rainy days.
- The final point is that clients bear the risk of time-based fee arrangements.
Are we witnessing the last days of the BigLaw business model?
Researchers are accumulating the evidence. In 2010, the late Larry Ribstein of the US published a major article on the subject. Few BigLaw firm partners seem to have paid serious attention to his analysis and warnings.
As new business models start, ever so slowly, to challenge BigLaw perhaps the need to re-invent these important firms will surface sufficiently to galvanise action.
Because today’s BigLaw business model has been – and remains – a consummate profit machine for its owners, we can expect these firms to flex and strive to adapt the BigLaw business model. They will not rollover while facing the onslaught of adverse trends in the industry.
But as Clayton Christensen points out in The Innovator’s Dilemma – and more recently and with specific reference to law firms, in Harvard Business Review – this is a huge and very difficult task.
George Beaton is a partner in Beaton Capital and executive chairman of Beaton Research + Consulting
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