A recent London-based publication carried a range of opinions about the shape and destiny of large law firms in 2018. For partners in these firms articles such as these can’t make comfortable reading. But I think they miss the real point by not looking over the horizon.
What is being called the BigLaw business model is in trouble—and the dangers are less than 10 years away in Asia. It’s not unreasonable to ask if we are witnessing the last decade of the BigLaw business model, as I have posited elsewhere.
The reality of 2018 and beyond may turn out to be worse and more unpredictable than most law firm leaders in Asia 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, including all major firms in Asia. 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.
History provides a useful perspective. In 1819 the firm we know today as Cravath Swaine & Moore LLP was founded in New York. Late in the 19th 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 understatement. The model rapidly became the basis of the Magic Circle and White Shoe firms of London and the USA—and every other law 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 essence of the BigLaw business model. The model enabled the massive growth of firms throughout the world and has generated the incomes of the owners of BigLaw firms for more than 60 years.
BigLaw business model
The Big Law business model has six hallmarks. These work together and no one is more important than another:
1. Attraction and training of top legal talent
2. ‘Leveraging’ of these full-time lawyers to do the bulk of the work serving clients
3. 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)
4. Tight restriction on the number of equity owners
5. Structuring as a partnership and
6. Charging high hourly rates (which is or at least until very recently has been possible because of the mystique associated with legal advice).
The consequences of the BigLaw business model are these:
A. 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
B. Firms pay their lawyers high salaries to win in the war to attract the very best talent
C. Firms drive high utilisation from their lawyers (although it should be noted Australian and British utilisation is much lower in comparable American firms)
D. Profit – measured as profit 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 they if they were employed as in-house lawyers
E. 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 and
F. The clients bear the risk of time-based fee arrangements.
Are we in the last days of the BigLaw business model?
In a word many believe the answer is Yes. Researchers are accumulating the evidence. In 2010 the late Professor Larry Ribstein of the United States 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-making machine for its owners, we can expect these firms to flex and strive to adapt the BigLaw business model. They will not capitulate in the face of the adverse trends in the industry. But, as Clayton Christensen points out recently and with specific reference to law firms in Harvard Business Review, this is a huge and very difficult task.
Dr George Beaton is a partner in Beaton Capital and Executive Chairman of Beaton Research + Consulting.