Comment: The Trouble with the Big Law business model – by George Beaton
What is being called the Big Law business model is in trouble. And it’s not unreasonable to ask if we are witnessing the last days of the Big Law business model.
As recently as a few weeks ago, The Lawyer in London published a range of prognostications about the shape and fate of large law firms in 2018. For partners in large law firms the articles don’t make entirely comfortable reading. But, The Lawyer – and almost all law firm leaders and observers of large law firms – miss the real point.
The reality of 2018 and beyond may turn out to be a great deal worse and much more varied than The Lawyer suggests. And they apply to all law firms not just big ones. Here’s why.
Big Law is not about big law firms
Big Law is a description of the business model used by firms generating more than 99% of law firm revenues today (that is, it excludes micro and sole practitioner firms and the handful of alternative business model firms such Riverview Law). Big Law is not about big law firms.
The distinction between the Big Law 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 me explain by starting with some history. In 1819 the firm we know today as Cravath Swaine & Moore LLP 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 Big Law 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 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 Big Law business model. The Big Law 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.
BigLaw business model
The Big Law business model is built on six key elements. 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 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 as set out above 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 witnessing the last days of the Big Law business model?
In a word I believe the answer is Yes. Many researchers and commentators are accumulating the evidence.
Because today’s Big Law business model is a consummate money-making machine for its owners, we can expect these firms to flex and strive to adapt the BigLaw business model. They will not roll over while facing the onslaught of adverse secular trends in the industry.
But, as Clayton Christensen pointed out in The Innovator’s Dilemma and more recently in Harvard Business Review with specific reference to law firms, this is a huge and improbable task.
The basis of this article was first published in the Beaton Capital Blog and presented at the 6th Janders Dean Legal Knowledge & Innovation Conference in September 2013 by the first author.
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