Wednesday, May 27, 2020

How the ‘new normal’ is a genuine threat to Big Law

For decades the ‘Big Law’ model has allowed partners of commercial law firms to generate significant profits and a generous standard of living.  However, the combination of a shrinking market for legal service, increased competition and demands that law firms do more for less has created a ‘perfect storm’ that may just spell the end of the Big Law model as we currently know it.

Big Law

The term ‘Big Law’ is now routinely understood to refer to the commercial law firm model that enjoys a number of common characteristics:

  • partnership structure where the owners are also the producers and the managers;
  • pricing predominantly through billable hours and time-based billing;
  • an emphasis on technical perfection irrespective of clients’ wishes and without any real consideration of whether the cost of delivering perfection is worth the result;
  • attraction and training of top legal talent at a relatively high cost;
  • apprenticeship model where junior lawyers are trained by more senior lawyers on the basis of “this is the way we always do things”;
  • a highly-leveraged ‘pyramid’ structure with the base made up of large numbers of employed lower cost lawyers completing more routine types of work; the middle made up of more expensive senior lawyers responsible for more complex work; and a tightly restricted number of owners at the top charging the highest rates for the high end and complex work;
  • creation of a competitive environment to motivate junior lawyers to strive to become equity partners and unquestioned presumption that this environment will be attractive to staff.

…partners are now considering whether those forces represent a fundamental shift to the market – effectively, a ‘new normal’.

This business model has dominated the legal services sector allowing commercial law firms to dictate to clients on costs; how services will be delivered and what services clients require.  However, a confluence of forces since the GFC is changing that to such a degree that partners are now considering whether those forces represent a fundamental shift to the market – effectively, a ‘new normal’.

The New Normal

Falling revenue – Over the past 5 years, there has been a steady fall in demand for commercial legal services and this shows no signs of abating.  Melbourne Law School and Thomson Reuters Peer Monitor recently reported that demand for legal services shrunk another 2 per cent last year.  Firms have responded to falling revenue with a number of arguably short term strategies, including:

  • reducing headcount and cutting the number of equity partners;
  • requiring lawyers to work longer and harder; and
  • cutting expenses and under-investing in new methods or technology.

New entrants and competition – For the first time in their history, commercial law firms are facing genuine competition by new, more nimble entrants to the legal services sector – often described as ‘New Law’.  Such businesses arguably have a number of distinct advantages to established commercial law firms in that they have non-partnership based ownership structures (thereby separating production, management and ownership); are aggressively adopting more flexible work practices for staff; are heavy users (and often developers) of new technology; and are champions of alternative fee arrangements.

There is no compelling reason why much of the work that has traditionally been the purview of Big Law will be immune from this trend.

Old foes re-emerge – The ‘Big 4’ accounting firms have returned to the legal services sector (having previously tried and failed in the 1990’s) this time with a focus on mid-level work closely aligned to their core services – think tax and corporate structuring.  This has happened with little fanfare, but has been enormously successful – by headcount, PwC’s legal division is 10th largest “law firm” globally and the rest of the ‘Big 4’ are not that far behind – all placing in the global top 40 on headcount.  These businesses have been incredibly successful at diversifying into providing different consulting and advisory services and they have the reach and resources to continue to do so.  There is no compelling reason why much of the work that has traditionally been the purview of Big Law will be immune from this trend.

 The rise of General Counsel – For years, the role of General Counsel was dismissively regarded by ‘Big Law’ as a place for lawyers that couldn’t cut it in a large commercial law firm environment.  Largely seen as outsourcers of work to Big Law, they were expected to manage outflows and take what they were given.  This is no longer the case: in-house legal teams are growing and are filled with technically excellent and commercially savvy lawyers.  Often trained in a Big Law environment, they know how those firms operate and where the fat lies.  Increasingly, they are keeping the most interesting work for their teams, outsourcing routine work to low cost providers and demanding better pricing for the ‘bet the farm’ work that they are willing to brief out.

Conclusion

Large commercial law firms must adjust to these fundamental structural changes to the legal services sector.  While many firms have persevered hoping that these changes are short lived and that things would return to the ‘good old days’, increasingly that looks less and less likely.  The danger for those firms that refuse to change is that the pie will continue to shrink, while their ability to compete also dwindles.

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