Skip to content

What Clients Want and Why BigLaw Can’t Deliver

October 8, 2013

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.

HolyGrail

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.

12 Comments leave one →
  1. October 8, 2013 3:50 pm

    An interesting read as always. The question I keep coming back to is how to persuade a firm to not only not bill by the hour but also not budget and performance manage by the hour too. It makes no sense to offer a fixed fee to a client and then still be beaten up by the finance team or the partners because something has taken longer (in an hourly sense) so the realisation is lower. I recognise the need to cover the costs and make a profit but if I am managed against a target of X,000 per annum, there is a breakdown between what the client reasonably wants to pay and what I am expected to record. Any suggestions?

  2. October 9, 2013 5:50 am

    I think BigLaw can provide #LPM, and thus deliver high quality work efficiently. We are figuring it out. It’s like shopping. If I want something cheap (and do not care about quality), I shop at Walmart. If I want an every day item, but not the cheapest, I shop at Target. If I want a high-quality item, I am willing to pay more, so I shop at Nordstroms (but I DO like the sale racks because I know I’m getting a deal). Legal services are the same way. We need providers similar to Walmart, Target and Nordstroms.

    • October 10, 2013 12:38 pm

      Thanks for the comment, Sheri. While I realize that some firm leaders now understand the need for LPM, recent posts by Pam Woldow (http://bit.ly/GIjvaF) and Jordan Furlong (http://bit.ly/1ebB7aD), highlight the almost herculean efforts required to move from an idea to implementation in a law firm setting. Meanwhile, their more nimble competitors are not only offering LPM, but are taking on the risk of erroneous LPM, by offering fixed fees.

      Moving on to your department store hypo. How does Nordstrom’s compete when Target offers the same or better quality at a much lower price, i.e., what Novus is doing compared to contract or BigLaw associates. What rational client is going to want lesser quality “document review” or “due diligence” from Nordstrom’s AND pay more, when they can get a better, lower-priced package at Target?

  3. October 9, 2013 7:43 am

    Couldn’t agree more Mike! I think the new marketplace will be a huge opportunity for smaller boutique firms that, as you point out, can deliver high quality legal services affordably and efficiently. BigLaw firms that will survive will be those that are more of a loose collection of boutique firms and that have also determined a way to keep their overhead down.

    In the not too distant future, many, many law firms will have associates working from home. This has happened in the real estate industry where realtors only go to the office on an “as needed” basis, thus allowing the company to cut back leasing expenses.

    Good post!

    [Originally posted on LinkedIn group e-LEGAL]

    • October 10, 2013 12:45 pm

      Thanks, Victoria. No need to wait for the near future, as many New Law providers are already working virtual (or using their client’s offices), such as Axiom, Clearspire, Conduit Law and Bliss Law, to name a few. I agree with you that BigLaw will have no choice but to start following down these new ways of practicing law in the very near future.

  4. October 9, 2013 7:57 am

    I like Victoria’s suggestion – cross-selling in firms is both a benefit and a risk. It’s sensible to be offering a broader range of services to the same client. Equally, however, if on a real estate deal I can get tax advice for my client for a lower price (but same quality) from elsewhere, it really makes more sense to source the work from the elsewhere. Sometimes the in-house, cross-sold service is the way forward – top quality advisory advice on complex matters – but on others it is a tied shop which drives up costs and prevents the lead lawyer giving the client a better service by project managing other firms as well as his/her own.

  5. October 9, 2013 8:56 am

    This tweet from Conduit Law timely demonstrates who’s winning the battle between Old Law and New Law. Give BLP credit for branching out, much like DLA Piper’s 21% investment in Riverview Law. If you can’t beat them, join them.

  6. October 9, 2013 10:51 am

    “the win-win-win holy grail for clients:
    Reduced spending • Better Outcomes • Higher Predictability”
    Indeed!
    And now all levers to achieve that are available: smarter providers, well designed processes, affordable and flexible systems and intelligent in-house lawyers!

    [Originally posted on LinkedIn group Law Department Management]

  7. October 9, 2013 4:09 pm

    Mike, it is hard to take issue with anything that you are saying . . . except perhaps, that we have been reading about the demise of BigLaw, from numerous commentators and consultants, for the past five years now!

    I believe the nature of the human condition is that once we own something we get used to it and are very reluctant to see it go away. When you are just starting out, you have very little so you look at potential gains and losses and are more inclined to gamble and go for broke. But once you experience some success you start thinking more carefully about what you have and you don’t want to give it up – so you tend to be much more conservative.

    When those who populate BigLaw finally feel their market position erode, they will react as all of us would when faced with losing something important and institute real change (which many of them are doing as you read this). Meanwhile, the market upstarts, who seem to be effecively disrupting the status quo today and deserve the accolades that they are receiving, will eventually mature and think that what led to their success will never change.

    Thus is how all marketplaces evolve.

    [Originally posted on LinkedIn group Law Firm Profitability]

    • October 10, 2013 12:55 pm

      Appreciate the “reality check” Patrick. While realizing the power of the status quo, at some point, informed clients will not tolerate paying significantly more for less, at least for a majority of legal work. To your point that BigLaw, when really threatened, will somehow quickly and easily pivot, I must respectfully disagree, especially given the partnership ownership model, who no one claims is the ideal structure for radical change. As I discussed above, both Pam Woldow and Jordan Furlong have discussed the major difficulties firms have in implementing real change.

      • October 10, 2013 3:14 pm

        Mike . . . so you welcome dissenting comments . . . so that you can disagree?

        Respectfully, what is interesting to observe is that the InnovAction program (which I was personally instrumental in helping launch with the College of Law Practice Management back in 2004) has recognized significant innovative initatives throughout the profession and internationally. While obvious candidates like Novus Law (2008), Practical Law Company (2009), Axiom (2010) and Riverview Law (2013) have received awards for their innovations, as have some smaller law firms like the Law Chambers of Nicholas Critelli; so too have BigLaw firms the size of DLA Piper, Mallesons, Pillsbury, Berwin Leighton, Blank Rome, Littler Mendelson and others.

        I believe the message here is clear. Embracing change and innovation is more a mindset than an issue of size!

        [Originally posted on LinkedIn group Law Firm Profitability]

  8. October 10, 2013 3:10 pm

    “The leveraged pyramid model used by most firms can’t compete in the newly hyper-competitive free legal market.”…..Excellent article Mike. You effectively conveyed a picture of the “now and not yet” for BigLaw. Change won’t be easy (and innovation and risk-taking are not typically inherent in the lawyer skill set). However, for those who decide to take risks associated with change, creating new ways of doing things today will put a firm on course for competitive advantage in the future. As the saying goes, “change or die”.

    [Originally posted on LinkedIn group Law Firm Profitability]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: