Ideoblog

The shrinking and deleveraging of Big Law

aSpeaking of the Death of Big Law, the National Law Journal reports (HT ABA Journal) from its NLJ 250 survey (based on an attorney census covering 10/1/2008-9/30/2009) that Big Law significantly shrank and decreased partner-associate ratios in 2009. Here are the grim details:

• Lawyers working at the top 250 law firms down 5,259 lawyers or 4%. According to the article, "it's as if all of the lawyers working at two firms the size of Jones Day vanished in 2009." It was the worst of only three declines since the start of the survey 1978 (the others were .9% in 1993 and 1% in 1992).
• 15 of the top 75 law firms dropped more than 100 lawyers.
• Associates shrank by 8.7%. 113 firms deferred 2,784 associates, or 42% of the law graduate pool.
• Partners increased 0.9%, with increases at 30 of the top 50 firms. According to NLJ:
  • "The results confirm that law firms' strategy in managing the downturn was to save the partners -- and partnerships. "The cuts made were done primarily to preserve workloads for partners," said Ward Bower, a consultant with Altman Weil. And perhaps troubling to clients, "it suggests that work done by partners is work that associates could do," he added.
• Nonpartner, nonassociate lawyers shrank 8.9%.

The declines basically reversed growth since 2005. So does this mean just that Big Law overgrew over the last few years, or is this the first phase of a long-term decline? My article linked above provides theoretical and factual support for the latter hypothesis. We will get a better picture as the broader economy picks up.

Update: Bill Henderson has a more detailed analysis:

So what is the bottomline analysis?  I think the slowdown in the economy has made the largest firms the most vulnerable to price pressure from large corporate clients.  The largest firms have the highest cost structure (rents and associate pay), and there is some doubt whether there is a corresponding value-add for their higher fees.  At the high end, the market is pretty crowded.  An international footprint is not necessarily a competitive advantage when 20+ of firms have the same high fixed costs and similar lawyer credentials.  Not surprisingly, a lot of desirable legal work that does not require a multi-office international platform is migrating to firms further down the AmLaw/NLJ 250 food chain.  Indeed, anecdotal evidence from my informal network suggests that boutiques are booming.

Folks, we are in uncharted waters.  The structure of the corporate bar is changing rapidly.  The giants are vulnerable.

This analysis is consistent with my theory: it's not just a general downturn, but a shifting of work from firms that are more dependent on the standard highly-leveraged/one-stop-shop big firm model to firms that are less dependent.

Will envy help kill Big Law?

ATL shows us how Goldman Sachs GC Greg Palm made $60 million between 2003 and 2009 – i.e., over $8 million/year. This would sound mighty good even to top partners in Big Law firms. So ATL says

Sullivan & Cromwell partners, eat your hearts out. Not only does Goldman GC Gregory Palm get to boss you around, he also makes more money than you do.

Two years ago I wrote an article for Forbes ("Lawyers Don't Make Enough") in which I favorably compared Goldman Sachs partner earnings to those at, say Wachtell. I speculated that ethical rules are preventing lawyers from getting bigger pieces of the transaction fee pie. The ATL comparison is more to the point, comparing compensation of lawyers to lawyers, not to investment bankers.

Perhaps Sullivan & Cromwell partners, after they're through eating their hearts out, will join with other lawyers in getting to work on the ethical rules that produce these disparities. This is just one of the forces contributing to what I've called The Death of Big Law.

Update:  The ATL post notes some questions about Palm's precise compensation, though none that would cast doubt on the general point made above.  

Big Law tries to get bigger

If, as I've argued, Big Law is dying, then what explains Hogan & Hartson and Lovells's plan to create a US/UK megafirm?

Got me.

The WSJ explains that the merger would create "one of the world's largest law firms, with about 2,500 attorneys and $2 billion in annual revenue." I've argued that Big Law lacks a business model that binds property to the firm. If that's true of large law firms generally, then it would seem that it's likely to be even truer of a transatlantic firm with clashing cultures, notably including eat-what-you-kill vs. seniority-based compensation.

My guess is that the consultants think clients will pay premium prices to a firm that can provide integrated advice on global regulatory and antitrust issues. But in order for that to work, the firm has to keep all those lawyers working for the firm. The WSJ quotes Peter Kalis, chairman of K&L Gates LLP, as saying that the obstacles to the merger "boil down to . . . [n]ame, power and money."

Oh, is that all?

Think about what happened to other firms that have grown rapidly to become one-stop-shopping behemoths. Remember Brobeck?

So good luck to Sterling Cooper Hogan Hartson Lovells (or whatever the new firm will be called).

The lawyers who will be left behind

Two related posts on the WSJ's Law Blog deserve notice. First, cuing off of a Thomas Friedman NYT column about the skills needed in the current job market, and a UK Legal Week article, the LB says that "law associates fear rainmaking."

A separate post excerpts an ABA Journal article on the suicide of Big Law appellate litigator Mark Levy when he was asked to leave his firm. A former associate said:

"He was not interested in compromising to make law a business. His pleasures in practicing law were largely intellectual and professional[.]" * * * I suspect that change in the profession, given Mark's temperament and commitment to values, hit him real hard."

Another friend said: "If someone like him cannot prosper in law practice, you wonder what law practice has become."

So lawyers will have to become more like business people or find themselves unemployed or worse.

The problem is that lawyers are by temperament and training knowledge workers. To be sure, some are entrepreneurial. But we don't demand that all software engineers, musicians, authors, etc, be business people. Why are lawyers becoming an exception to the specialization of labor?

The quick answer is our wacky and perverse system for delivering legal services. Specialization demands firms. Because ethical rules operate to bind individual lawyers to clients rather than to their firms (e.g., by restricting non-competes and non-lawyer equity holders), law firms are inherently weak institutions. Once upon a time, the firms maintained a tenuous equilibrium. But as I discuss in Death of Big Law, a variety of market forces are combining to weaken the bonds between lawyers and firms.

In other words, the thinkers no longer can rely on the hunter-gatherers to bring food home for them. Lawyers must all go out into the cruel world to fend for themselves.

Ironically, the rules that are supposed to preserve law as a profession are increasing the pressures on all lawyers to act like business people.

America needs a new model for delivering legal services

My Death of Big Law argues that the standard model of the big law firm is dying. However, I point out that

[t]he malaise of Big Law does not necessarily mean a decline in demand for legal services. On the contrary, the rise of the regulatory state suggests otherwise. This article focuses on the problems of a particular model of delivering legal services – that is, through large professional firms focused on individualized legal advice.

Some support for this comes from Gillian Hadfield's Higher Demand, Lower Supply? A Comparative Assessment of the Legal Resource Landscape for Ordinary Americans. Here's part of the abstract:

In this paper I review the small amount of available data on the extent to which ordinary individuals in the U.S. have access to legal resources to navigate the law-thick world that Robert Kagan has famously called 'adversarial legalism - the American way of law.' I present this data in comparative context, relating what (little) we know about the availability of law in the U.S. to what (little) we know about the availability of law in other advanced societies and in countries transitioning to legally-mediated market democracy. * * * [T]hese 'tidbits' of data, which call for more careful empirical work, are suggestive of the conclusion that while the US system ostensibly relies heavily on law to mediate relationships among people and institutions, in practice there are few resources devoted to making law effective in practice, and apparently less so than in countries that are arguably less law-driven than our own.

This indicates that there is a significant unmet need for legal services in the U.S. My paper discusses some alternatives to Big Law that could address this unbalance, most of which depend on loosening regulation of the structure of law practice which currently strangles the availability of legal services.

I’m a (legal) rebel

Check out the ABA Journal.

Craig Johnson’s new model for law practice

My Death of Big Law (which, by the way, I'll be presenting this Saturday at MLEA) discusses not only the unwinding of the conventional law-only firm, but also some possible new models for delivering legal services.

Today's WSJ discusses one possibility in remembering Craig Johnson, who left Wilson Sonsini to found the Venture Law Group in Silicon Valley. As the WSJ says:

In addition to providing legal services, VLG gave business advice, helped arrange venture financing and took an equity position in clients. It routinely turned investments of $20,000 to $40,000 into multimillion-dollar gains following an IPO. "We view ourselves as a mirror image of a traditional law firm," Mr. Johnson told The Wall Street Journal in 2000.

Lawyers didn't just bill hours but invested in clients. It didn't try to be a jack of all trades, but focused on startups.

"The great value he brought was his sense of business development -- who was your customer, how would you sell it to them, far and above what an ordinary lawyer or business consultant might do," says Guy Kawasaki, a former Apple Inc. marketer who helped Mr. Johnson found Garage.com.

Legal expertise has strong synergies with business advice. With the billable hour and other wheels falling off Big Law's profit engine, these alternatives deserve new attention as possible replacements and not just aberrations.

The Death of Big Law: Hot off the press

I've posted a draft of the work in process I've been referring to over the last few months, The Death of Big Law. Here's the abstract:

Large law firms face unprecedented stress. Many have dissolved, gone bankrupt or significantly downsized in recent years. These events reflect more than just a shrinking economy: the basic business model of the large U.S. law firm is failing and needs fundamental restructuring. There are at least three prerequisites to establishing the viable large legal services firm of the future. First, the firm must own a core of durable, firm-specific property. Second, the firm must be able to secure non-lawyer financing in a variety of forms. Third, coherent legal structures must evolve that are suitable for large law firms. Big Law's ability to meet these conditions is contingent on significant changes in the regulation of law practice. The article discusses the current stresses on Big Law, potential business models for legal services, and the forces that may usher in the introduction of these models.

I'll be presenting this paper at various venues and discussing here over the next few months. Comments welcome.

Update:  For a comment on the paper see Bruce MacEwen (Adam Smith, Esq.)'s newsletter.

The death of hourly billing

The WSJ has an interesting article on the state of the billable hour. It confirms what most people suspect – it's declining – but has some notable details.

The article notes that clients spent $13.1 billion this year on alternative billing, vs. $8.6 billion last year, with a reported average cost savings of 15%.

The article suggests it's the current economy. The chairman of the Association of Corporate Counsel says "[l]aw firms are more receptive to change because they are in the business of needing legal work." Saul Ewing's managing partner says "[j]ust like the tech and housing bubbles, there was a legal-profession bubble, and now we are experiencing a correction."

But the decline of the billable hour is not just about the recession. After all, if demand goes down you cut your prices, meaning in this case hourly rates. But clients are demanding a change in the pricing method, away from the billable hour.

The billable hour has worked well for law firms. They just count lawyer hours and slap a profit on them. Historically, clients haven't been in a position to question that profit, because they haven't had a better way to control costs. But now with beefed up in house counsel offices, increased sophistication about what lawyers do, and competition from outsourcers, among others, clients are in that position, and there's no reason to think they'll revert to old practices when the economy improves.

The article suggests some implications for the lawyer market:

• Orrick "is employing some college graduates who can perform routine tasks at a lower cost."
• Orrick is "focusing less exclusively on hiring graduates from elite law schools, who can command starting pay of $160,000."
• A Sidley Austin partner told the reporters that Pfizer's switch from hourly to fixed fees meant they could assign more efficient senior associates rather than having to use juniors because Pfizer restricted hourly rates to no higher than those of second-year associates.

Doesn't sound too good for the entry level lawyer market.

How far will this go? According to the article, "[a]ttorneys say it is doubtful flat fees could ever supplant hourly billing for the most complicated and high-stakes matters, such as an antitrust fight with the government or a particularly tricky corporate merger, where it's too hard to estimate how much effort it will consume." But we're in early days for alternative billing. Certainly aspects of even the most complex litigation can be charged on a fixed basis, perhaps with bonuses.

The implications for Big Law are substantial. Fixed fee and other alternative billing make legal work more like a commodity and less like a specialized one-on-one service.

Even more importantly, hourly billing has been Big Law's profit engine for decades. If it ends, Big Law will have to adapt or give way to new kinds of firms.

What kinds of firms? I'm working on a paper tentatively titled "The Death of Big Law." Watch this space.

Elois and Morlocks

The juxtaposition here is great.

Yesterday the WSJ Law Blog asked What Can Law Firms Do To Make Everyone Happy? A: Read This. What ensued was a discussion of Larry Cunningham's suggestion on Concurring Opinions that law firms offer partner sabbaticals. Cunningham says:

Firms adopting such policies would instantly win the affection of the many younger associates now concerned, by associate-targeted firm policies, about their own job prospects and security. * * * Instead of running a firm like a business, riveted only on bottom line and promoting cut-throat cultures, the practice of law could return to its erstwhile professionalism, characterized by thoughtful advice to clients, service to the public weal, collegial support among firm members, and cultivation and training of the next generation's legal professionals.

At around the same time, Above the Law had a post about contract attorneys, with quotes from Big Debts Small Law about a piece of the real world of modern law practice. I've been discussing the bigger picture in my Lawyers archive.

I wonder whether Cunningham's suggestion doesn't fit at all in the real future of Big Law, or whether the future will be H.G. Wells's bifurcated world.