What Clients Want and Why BigLaw Can’t Deliver
What modern legal clients want, or should want, is obvious. We need look no further than the ACC Value Challenge which prefaced it’s 2013 ACC Value Champions with the following motto, essentially the win-win-win holy grail for clients:
Reduced spending • Better Outcomes • Higher Predictability
Worthy goals. I think if push came to shove, most corporate clients would actually be willing to pay more for better outcomes with higher predictability. When clients perceive that they are receiving real value, they have little problem paying the providers of those solutions.
The good news for clients is that there has never been a better time in history to obtain the right legal services at the right price. The bad news for BigLaw is that their current, long-entrenched business model can’t deliver the right level of service at a competitive price. Worse, they can’t even come close. Think Blockbuster during the rise of Netflix. Borders right before Amazon. Tower Records when iTunes took off. Poof. Gone. Powerhouses that simply disappeared overnight. Their traditional business models didn’t have a chance against their better positioned new competitors. People watch just as many movies, read just as many books, and listen to just as much music, but now they just get it from different providers. BigLaw is facing an equally grave threat from a slew of alternate service providers, whom Dr. George Beaton, has recently labeled as “New Law.” While BigLaw growth has remained mostly stagnant, some New Law providers like Axiom Law and Novus Law are growing at the speed of light. They aren’t doing this through smoke and mirror mergers or accounting tricks (Swiss Vereins), but rather through organic growth.
Big Law, with its reliance on the inefficient billable hour and the leveraged pyramid, are in real danger of ending up on the scrapheap of obsolete business models. The BigLaw Union has been broken by New Law. BigLaw got very rich selling the snake oil that the vast majority of the work it did could only be accomplished by its high-priced lawyers. For years, clients enabled this false assumption by vastly overpaying teams of associates to toil away at mundane and commoditized work. No one, other than truly-in-denial blue-haired equity partners, believes this self-serving fantasy anymore. In fact, Stephen Mayson, during his recent COLPM conference keynote, estimates that perhaps only 20% of all legal work performed in the UK is work that must be performed by traditional lawyers. I doubt you can find many investors willing to bet on a business model staring down an 80% loss in market share. BigLaw’s problem is no better on this side of the pond as evidenced by the ABA’s recent article “Who’s eating law firms’ lunch?.” A few highlights:
- Using Novus Law instead of BigLaw associates to do document review saved Fireman’s Fund Insurance “an estimated 15 to 30 percent per case on outside counsel fees.”
- Fireman’s considers Novus Law “better than any contract review attorney and most junior associates even at well-known firms.”
- Novus Law claims that nearly 80% of the work it does is work large law firms would otherwise do.
- While traditional lawyers focus “on inputs, number of people, hours and so forth, which is important if your revenue is driven by the billable hour,” the Novus model is based “on outputs – how much [they] can produce in a given period of time while minimizing the cost of inputs and achieving world-class levels of quality.”
- For every dollar Novus receives, outside counsel loses four dollars.
What rational client faced with a complex litigation is going to choose a traditional BigLaw firm who responds “It Depends” to pricing requests, when Novus will do a better job at 15 to 30 percent less. Short answer – none. Long answer – uh, none. Novus Law, like many New Law providers is delivering win-win-win value to clients. Game, set, match to New Law.
So how does the traditional law firm model survive against this type of lower priced, better value competition? Adapt very fast, or be lead to the slaughterhouse. Unfortunately for BigLaw, adapting quickly is almost impossible for mini-fiefdom partnerships. It’s simply not enough to fire some legal secretaries and cutback on summer associate programs. They are going to have to cut to the bone, and then some. BigLaw’s real problem, and it may be unsolvable, is that the leveraged pyramid model used by most firms can’t compete in the newly hyper-competitive free legal market.
To their credit, at least a few firms have realized that the old ways aren’t going to get it done, and “if you can’t beat them, you better join them.” Seyfarth & Shaw, which began Seyfarth Lean way back in 2005, now have at least 18 dedicated Legal Project Managers and 5 Legal Solution Architects (tech specialists who are also JDs). Akin Gump, who were required by Fireman’s to take on Novus for a complex litigation project, now proactively offer to team up with Novus to provide better value to clients. Both of these firms should be on any large client’s short list, especially so if the client is contemplating switching over to New Law providers, but wishes to hedge that move with a “CYA” brand name.
While I applaud the evolution being shown by Seyfarth and Akin, even these steps may not be enough to weather the storm without significant further changes. The fundamental problem, even for the most forward thinking firms, is their massive overhead when compared to the new competitors. The going rate for a BigLaw first year associate is $160,000 per year. If that associate bills out 2,000 hours, his or her hard cost is $160,000/2,000 = $80 per hour. Unfortunately for BigLaw, that number alone is above the current market rate for most types of commodity work, which is $60-or-less per hour. When overhead is added to the mix, which has been estimated at BigLaw to be between $200K – $300K per associate, the hard cost of the lowest-priced associates is around $200 per hour. Hmmm, New Law at $60 per hour vs. Old Law at $200 per hour -those are the price differentials explaining why New Law could soon be adding BigLaw’s “breakfast and dinner” to their menu as well.
Seyfarth and Akin, at a minimum, have bought themselves more time by embracing newer pricing models, LPM and LPO. Those steps should win them, at least in the short term, new corporate clients who will pay a premium for a name brand. The remaining question for even the fastest evolving BigLaw firms, however, will be whether those moves will be enough in the long run. I’m not so sure that the even the fastest evolving traditional firms can compete against the Axioms and Clearspires, who both have far less overhead and can thus offer far better pricing while maintaining healthy profit levels. I can also foresee a future where the Novus Laws are so in demand that they recommend which lawyers to use for the remaining 20% or so of high-level lawyer work. Wait, isn’t that already happening on the other side of the pond with Riverview Law & DMH Stallard teaming up on M&A deals at 30% savings? Did I mention they reduce the fixed fee by half if the deal doesn’t go through? I’d be willing to bet that if Riverview brings Novus into the mix, they can squeeze at least another 10-20% savings on their deals.
Welcome to 21st Century law, an ecosphere that rewards agility and new thinking, but is a rather hostile and dangerous place to be for old, lumbering, 20th Century legal dinosaurs.
Update: While indirectly linked to above, I highly recommend Dr. George Beaton’s recent article, “The rise and rise of the New Law business model,” which discusses similar issues and has inspired lively debate in the comments.