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Transparency is BigLaw’s Kryptonite

September 16, 2013

KryptoniteThis is the fourth installment of “The Future of BigLaw” series.

Oh ye battered clients, the time has finally come to rejoice!  The Reign of Terror is over. Cue up some classic Frank Sinatra, because the end is near, and BigLaw is facing the final curtain.  And before any delusional BigLaw partners break out that hackneyed Mark Twain refrain about the rumors of their demise being greatly exaggerated, let me remind them that Mr. Twain, like Elvis, has left the building.  Might be a good time to look into a new line of work – I know Axiom and Riverview Law are hiring.

How can I be so certain of the pending crash and burn of the once mighty, all-consuming, BigLaw juggernaut?  Even Superman had a weakness, and BigLaw’s Kryptonite is the ever-increasing transparency surrounding the practice of 21st Century law.  BigLaw has made a killing by keeping it’s dirty little secrets inner workings out of the light.  For decades, BigLaw, like other professional service firms, relied on opacity to ward off disruptive competitors.  According to a recent article in the Harvard Business Review, “Consulting on the Cusp of Disruption,” co-authored by Clayton Christensen (author of “The Innovator’s Dilemma” and “The Innovator’s Solution“), disruption is inevitable in all industries.  You can run, but you can’t hide.  All things considered, BigLaw had a pretty good run.

The HBR article states that opacity and agility are the chief defenses of incumbents from the threat of outside industry disruption.  We can immediately dispose of the agility defense for BigLaw, since no one can reasonably argue that the large general partnership model is nimble or quick to change.  Quite the opposite really, with the traditional law firm model being the poster child for an industry allergic to change.  That leaves the last line of defense – opacity.  BigLaw, hiding behind tradition, obscure Latin phrases, and the impenetrable Canons of Law, has greatly benefitted from this lack of transparency, which made it difficult for clients to objectively measure their work.  The HBR article notes that:

It’s incredibly difficult for clients to judge a [lawyer’s] performance in advance, because they are usually hiring the firm for specialized knowledge and capability that they themselves lack. It’s even hard to judge after a project has been completed, because so many external factors, including quality of execution, management transition, and the passage of time, influence the outcome of the [lawyers’] recommendations. As a result, a critical mechanism of disruption is disabled.

In this environment, clients had little choice but to choose firms based on:

Brand, reputation, and “social proof”—that is, the professionals’ educational pedigrees, eloquence, and demeanor—as substitutes for measurable results, giving incumbents an advantage.  Price is often seen as a proxy for quality, buoying the premiums charged by name-brand firms.

Another related concept, “informational asymmetry” (hat tip to Tim Corcoran) can help explain the same type of client behavior.  “Information asymmetry” exists where one party has superior information than the other party, which allows that party to have the upper hand in the relationship or negotiation.  Without a clear understanding of the work being done in the secret world of BigLaw, clients had to grin and bear the ever-higher hourly fees they were being charge.  Worse, clients actually began to believe that the higher the fees, the better the firm.  Stuffy & Hotshot must be great because they have $1250 per hour partners and $800 per hour first-year associates.  Even when chronically dissatisfied clients pushed back and reasonably requested more predictability, i.e., estimates and budgets for any given legal matter, their complaints were brushed aside with the usual suspects:

  1. Legal matters are far too unpredictable and complex to allow us to give any useful estimates;
  2. Legal problems require a level of expertise and skill that can only be accomplished by highly-paid and specially-trained attorneys.

Even today, ask any BigLawyer what they do, and they’ll likely tell you that the vast majority of their work is high level and intellectually challenging.  This stock response worked for decades.  However, whether it was the real financial pressures clients faced as a result of the Great Recession, the increased flow of information brought about by the rise of social media, the explosion of technology and Big Data, or a combination of all three or other factors, the information gap has now been closed. The cat is out of the bag.  In “The $60 Per Hour Lawyer – Why Dewey Isn’t Abnormal,” Paul Lippe paints a far more accurate view of what the practice of law really entails:

When lawyers describe what they do, they may say “we do very sophisticated, unique, bet-the-company work.” In fact, most of the work that actually gets billed is process work.  Just look at an enormous bill like the Lehman bankruptcy. How many of those hours represent unique insight, and how many represent moving information from one place to another?

According to Lippe and Jeff Carr, the innovative GC at FMC Technologies, lawyers traditionally do four things:  advocacy, counseling, content & process.  BigLaw still does the first two well, and may even deserve the high fees they charge for advocacy and counseling (when done well.)  No one is begrudging Ted Olson or David Boies their fees when they are arguing before the Supreme Court.  But do you want to pay them $1250 per hour to review boxes of documents.  Not likely.  I doubt you want to pay anybody much more than $60 per hour for process work.  Last I checked, I haven’t seen any $60 per hour BigLaw associates.  Oh, they pay their indentured servants contract attorneys about $30 per hour, but  then bill them out at their associate’s rates.  They can’t do that, right?  Wrong.

The fundamental problem for BigLaw, and it’s a whopper, is that clients now understand that the majority of work that BigLaw has traditionally charged very high rates for, can now be done more efficiently and at a much lower cost by others.  BigLaw’s main source of profit – teams of associates doing huge amounts of content and process work – has been exposed for what it really is – old fashion price-gouging.  But the days of milk and honey are fading fast in the rear view mirror.  BigLaw, too bloated with past success, continues to churn away rather than take any real steps to adapt to the new normal.   What began as a slow trickle of disruption just a few years ago, is now becoming a raging waterfall.  Once disruption gets a foothold, a similar pattern emerges in all industries:

New competitors with new business models arrive; incumbents choose to ignore the new players or to flee to higher-margin activities; a disrupter whose product was once barely good enough achieves a level of quality acceptable to the broad middle of the market, undermining the position of longtime leaders and often causing the “flip” to a new basis of competition.  (Quote from HBR article.)

Sound familiar?  That pesky mosquito, Axiom Law, is now an 800 lb. gorilla (well, actually a 900-person-and-growing alternate legal service provider.)  At their current rate of growth, they could pass DLA Piper as the No. 1 revenue firm in the world within 5 years.  The little fixed fee operation on the other side of the pond, Riverview Law, just grabbed headlines by combining forces with DMH Stallard to complete a couple of mergers and acquisitions at a 30% cost reduction.  I could go on and on – and on some more, but I’ll save space and reveal the latest survey information from AdvanceLaw that “72% of general counsel said that they will be migrating a larger percentage of work away from white-shoe firms.”  Doesn’t sound like thriving incumbents to me.

Ah, but I can hear the cries of the Staunch Defenders that BigLaw is simply too large and successful to fail.  So was U.S. Steel.  In 1901 it produced 67% of all U.S. Steel.  One hundred years later that number was down to 8%.  It was experiencing record profits right before being unseated by the disruptive competition of mini-mills.   In fact, the HBR article ends with the observation that “there may be nothing as vulnerable as entrenched success.”

The party is over.  The fat lady is singing as we speak.  You just can’t hear her over the deafening roar caused by the stampede of alternate legal service providers galloping onto the wide-open playing field, all of whom BigLaw is almost completely powerless to stop.  Hey, it was a hell of a run while it lasted.

Consulting on the Cusp of Disruption was authored by Clayton M. Christensen, Dina Wang & Derek van Bever.

The other posts in the “Future of BigLaw” series:

How Fixed Fees Are Going to Change BigLaw Forever (Part III)

Feeling the Squeeze – The Future of BigLaw (Part II)

The Future of BigLaw, Part 1 – The Numbers Don’t Lie, or Do They?

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