In this two-part series, we will take a look at how our proposed "GigLaw" model solves many of BigLaw’s inefficiencies and investigate the path leading our profession away from outdated Am Law 100 metrics, hence moving from BigLaw to GigLaw.
With our June 1, 2020, launch, we identified the fact that “[I]n the new world, businesses not only increasingly need attorneys with a tailored skill set, they need access to that skill set in the most efficient way possible.” Serving this need, we created Beeman & Muchmore, LLP as a platform from which to deliver our highly-specialized skill set – in our instance software auditing and licensing counseling – free from the inefficiencies of the traditional full-service law firm. In so doing, we are not simply embracing the efficiencies of technology, although that is a large part of it. We are also delivering the efficiencies of specialized services, free from a learning curve and uncoupled from ancillary services that are increasingly being handled in-house.
We dubbed our unique value proposition “GigLaw,” which inspired Scott Graham to anoint Beeman & Muchmore as the “Uber of Lawfirms” in The Recorder. While giving us that title may have been somewhat tongue-in-cheek, it is more than fair in its own way and did get us wondering – is Beeman & Muchmore “the Uber of Lawfirms”? More to the point, what does GigLaw mean, and to what market phenomenon is a shift from BigLaw to GigLaw responding?
As we reflected on this pair of existential questions, it became clear how far back one needs to reach in order to trace the events in the BigLaw legal world that led to the present moment where GigLaw is not only a logical conclusion but an inevitable one. As such, in order to fully tell the story of our move from BigLaw to GigLaw, we are presenting two blog posts. Part I (below) will address the evolution of the law firm model from where it began at the turn of the last century and up to the Covid-19 pandemic. Part II will address the changing legal needs and demands of businesses and how the legal industry must adapt to these emerging trends.
Forgoing the need for an analysis of minor (yet important) variations, the law firm model spent most of its first hundred years essentially unchanged. During the first decade of the 20th century, the “Cravath System” was hatched – “a pyramid-shaped organizational structure in which each partner was served by several associates to ensure profit maximization.” The Cravath System introduced the now-familiar two-tiered system of partners and associates, bridged by an up-or-out path of promotion or termination. In this model, lateral partner hiring was minimal.
This “partnership model” of law firms grew from and otherwise leveraged an “asymmetrical relationship between law firms and clients.” As Mark Cohen explained recently in Forbes:
Firms sold one thing: legal expertise. They controlled the supply of legal talent and used self-regulation to prevent other professionals from engaging in what lawyers determined was the “practice of law.” Their insular regulations also prohibited “non-lawyers” from investing in, managing, or creating alternative business models to deliver legal services.
Tyler J. Replogle also described the attorney-client relationship as an “information asymmetry”, attributing it in large part to a legislation boom stretching from the New Deal of the 1930s to the “rights revolution” of the 1960s. Because so few businesses had the internal knowledge to navigate these regulations, businesses invested in “close, long-term relationships with full-service firms to help them understand their legal responsibilities.” Almost unthinkable today, it was not unusual for “a single law firm to handle all of the legal matters of its major clients.”
Introduced in 1986 by The American Lawyer, the Am Law 100 has become the yardstick for measuring elite law firms. Though it purports to consider multiple metrics, the Per Equity Partner Profit (“PPP” or PEP”) is often considered the most important factor in a firm’s ranking, even dubbed the “gold standard” by some. The resulting competition from the Am Law rankings launched what more than one commentator has called an “arms race:”
“I think this is just an arms race,” said Nicholas Bruch, a director and analyst at ALM Intelligence. “In the old days where most firms had collegial partnerships where all you had to do was work long enough and you got into the partnership, what that meant was that some people were being subsidized.”
“As soon as one or two firms decided that they weren’t going to do that, then everyone basically had to go to that world,” Bruch added.
Unfortunately, as Mark Cohen has stressed, stimulating a firm’s PPP does not serve the interests of a firm’s clients:
With the exception of a few brand differentiated firms, PPP is achieved by increasing rates and billable hours, restricting partnership, retaining rainmakers and pulling in big book laterals, and by thinning the partnership herd. This stimulates PPP, not client value. It also explains the head-scratching rate increases and billing quotas that many firms are imposing at a time when clients routinely exact significant ‘rack rate’ discounts and increasingly favor fixed fee.
In or around 2007 – immediately on the cusp of the 2008-2010 global recession – one commentator harshly critiqued the “toxic message” that firms are sending by having an undue focus on PPP:
[P]EP has nothing remotely flattering to say to clients or to everyone in the firm who doesn’t happen to be at or above the publicly stated PEP figure in year-end earnings. To clients, it reinforces the already toxic message that we’re a navel-gazing people, ignorant of their true business challenges and hostile to educating ourselves about them. This is, as Guy [Beringer] drily puts it, "not a wise position to adopt."
With clients sensing the drifting priorities of law firms and simultaneously seeking out and finding other alternatives, a crisis loomed.
In retrospect, it is clear that the Great Recession accelerated trends that were already gnawing at the edges of the BigLaw model and, in so doing, enshrined lasting change. As described in The Atlantic Monthly a few years after the recession had subsided, clients began demanding and receiving lower fees which, in turn, forced law firms to institute cost-cutting measures to maintain record partner profits:
Business dried up. Clients balked at the annual rate hikes, and many started demanding discounts. Most firms maintained profits by laying off associates and staff […]. In other words, they resorted to temporary pain relief -- taking aspirin to treat a broken leg.
Much to the dismay of the legal community, client control over their legal services was only the beginning of a long-term shift:
But the problems that began in the recession were not a momentary blip. Rather, they seem to have been the beginning of a long term shift, where companies are simply not willing to spend as much on lawyers. Legal outsourcing firms, the use of inexpensive contract attorneys, the decision by companies to bring more work in-house, and demands for cheaper rates have all put permanent pressure on profits. The march of improved information technology will only slim margins further.
As predicted, the march continued. As of a few years ago, it was estimated that corporate legal departments accounted for 45% of legal spend.
However, it misses the point to identify the massive shift of legal work in-house as a simple cost reduction measure of putting lawyers on the payroll in order to decrease legal spend. Rather, the true measure of the efficiencies of in-house lawyers stem from the buy-in and commitment of in-house legal ‘team players’:
But the more fundamental reason for in-house growth is law firms’ inability to deliver legal expertise and value--as well as to integrate technology and process in delivery. Plus, successful corporate counsel can earn equity (residual equity) whereas law firm partners whack up annual profits. Corporate lawyers have a long-term financial stake in their organization's success. In-house lawyers also have several ‘home field advantages’ over outside counsel.
Further establishing that the shift was beneficial beyond reducing costs, these trends continued long after the Great Recession ended:
It has been a dozen years since the Great Recession resulted in clients taking decisive control of the legal market, reversing decades of deferral to their outside law firms. After some bumps and starts, clients are now effectively exercising their new-found power over the market in ways designed to push improved efficiency, predictability, and cost effectiveness in the delivery of legal services.
Nonetheless, as the partnership model decreased in value, the costs of running large, full-service law firms continued skyrocketing.
Despite the fact that an increasing percentage of fee dollars are spent in-house, law firm overhead continues to consume a large percentage of fee receipts. One recent study estimated that 45-50% of fee dollars go to the core cost of operating an office.
The typical law office spends 45 to 50 percent of the fee dollar on the expenses of operating the office. These funds go for non-lawyer salaries, rent, telephone, library, equipment, supplies and other facilities.
What does this look like in real dollars? Writing for abovethelaw.com, James Goodnow estimates that the “overhead at an Am Law 200 law firm can run anywhere from $150-250K per lawyer.” He wryly concluded that “the greater public are stunned that it can cost so much to create so little of tangible, concrete value.”
Increasingly, attorney attrition – a relatively new phenomenon -- is compounding the overhead cost of running a law firm. In an article published by the Law Firm Partnership & Benefits Report, it was estimated that “for every 25 new associates hired, 17 other associates left last year.” The estimated cost of each lost associate averaged between $200,000 and $500,000. Another study estimated that attrition could cost upwards of 4 times the base salary cost for that attorney:
Historically, law firms simply accepted attrition as a normal cost of doing business. Firms assumed attrition was somewhat costly, but generally placed no monetary value on the loss. However, attrition can actually cost up to 400 percent of a base salary for specialized hires. This means for an attorney making a base salary of $120,000, the possible cost of losing that attorney is $480,000.
Who bears the brunt of these costs? Feeling intense pressure to compete in the Am Law 100 arms race and keep their PPP high, it most certainly won’t be carried by a firm’s equity partners. Rather, as with every other expense of the modern law firm, it will be paid for by cutting costs and increasing rates for already exasperated clients.
The confluence of the increasing costs and decreasing efficiencies has led none other than the Wall Street Journal to announce that the law firm model is “all but dead.” How are firms responding? Confoundingly, they continue to preserve PPP:
So with demand for legal services robust and law firm demand flat three years and counting, law firms have a problem. Its crux is a misalignment of the traditional law firm model with the marketplace—except, perhaps, in certain high-value matters. Is it being fixed? Soaring partner profits (PPP) suggest it is. But the increasing percentage of legal services rendered outside law firms indicates the contrary. Which is it? Short answer: partners have addressed their challenge — how to increase PPP with a declining demand. Firms, on the other hand, have an unsustainable model that remains largely intact even as clients are seeking options.
Despite the fact that clients are “seeking options”, meaningful change has been elusive. Why? In sum, those benefitting at the top – those equity partners whose numbers drive the “gold standard of PPP” -- are hard-pressed to accept that there is a need for radical changes:
So why are firms not taking more aggressive action to give the customer what it wants? Simple answer: partners—especially senior ones—are prospering even as their model falters. As Richard Susskind says, it’s hard to convince a room full of millionaires that they’ve got their business model wrong.
And, at least up until the current Covid-19 pandemic, the profits continued increasing. The 2020 Am Law 100 showed that 2019 was a “good year”:
In terms of the big picture, 2019 was a very good year for the world of large law firms. Here are some metrics (noted by David Thomas in his insightful analysis of the rankings):
Adding a psychological bent to our profession’s stasis, some writers even speculate that the very things that make a great lawyer could also be holding up the legal profession:
As lawyers, we are trained to question facts and hunt for the negative in order to protect our clients. We need to be skeptical of facts, look for fault and question what could go wrong. This negative mindset helps us to be good lawyers, but it can prevent us as business owners from moving forward in times of change.
Per logical extension, “lawyers not only resist change, we run from it. We not only seek stare decisis, we revel in it.” And, change-resistant by nature, “we are as a group totally unprepared to meet the challenges created by change.”
* * *
And so, with change already waiting in the wings (and 'priming the pump' for shifts such as ours from BigLaw to GigLaw), the Covid-19 pandemic and the resulting economic fallout arrived, presenting the largest challenge to our profession since the Great Recession. And, as we will see, it is already forcing the greatest change.
Please stay tuned for Part II of “The Road from BigLaw to GigLaw” which we hope to post next week.
Published on 6/19/2020
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