BigLaw Still Facing Problems?
Anecdotes first: A short while ago, I had lunch with a friend, a BigLaw partner. This partner's firm had gone through two rounds of associate and staff layoffs, a round of partner reduction and some de-equitizations. According to this partner, more of each are on the near horizon, as in 2009 sometime. I heard similar predictions from another friend, a partner at a different large law firm.
These anecdotes are fresh in my mind when I happen upon Law Review: Big Firms Still Facing Big Problems in the Philadelphia Inquirer. A critique of the business model of BigLaw, not terribly positive.
Larry Ribstein, a professor at the University of Illinois College of Law, says the response of many big firms - cutting costs and discounting rates - isn't a cure.
"My theory is that big law firms don't have a coherent business model," says Ribstein, who studies the economics of the legal profession. "From a client standpoint, why would you pay so much per hour for a lawyer who works for a big firm vs. [a lower rate] for a lawyer who works for a smaller firm? What value does the big firm add?"
That's my theory too, so I immediately think this guy is a genius. But then I happen upon a post over at Legal On Ramp by my friend, Ed Reeser. Ed used to be the managing partner of the Los Angeles office of an AmLaw 50-ish firm, and he knows the inside of BigLaw better than anyone I know. Ed wrote:
Reports of profit declines at some of these firms are in the range of 20 percent or more but, for a majority of firms, the reported year-end results actually range from neutral to 3-5 percent decreases. Hmmmmm! Does an enterprise of any kind take a chainsaw to its staff and attorneys for a drop of that magnitude? Of course not!
So the magnitude of financial stress is presumably much greater than reported. These management responses in the form of terminations and cost cutting are either proportional to the impact on current or projected income streams, or hysterically out of proportion. Now, the managing partners of major law firms are not the kind of people to get hysterical. It should therefore be fair to conclude that the responses are calculated and requisite, not irrational or emotionally over-reactive.
But why now? Once the year end profits for 2008 were finally in, the distributions of income made to the partners, and the work flow for the first six weeks of the year completed and tallied.... business looked beyond bleak for 2009 with no clear picture of when it might improve. But the slash and burn of the first quarter has not abated, and each month brings a new wave of adjustments that are quickly adopted across the industry once implemented at a major firm.
The law firm management response is not unlike a medieval physician responding to a patient that is not recovering. Throw on a few more leeches, open a vein, and draw some more blood.
Why is this happening if the reported declines in net revenue are reported to be so marginal? In a few instances, it’s because the reported declines are not accurate. More importantly, though, the real driver is a fundamentally flawed business model, which has wreaked havoc for more than a decade, and which cannot be effectively changed in a short period of time. The current actions of management are not directed to a solution, only a deferral of the day of real reckoning.
This frames the precise question: why is no one making the fundamental changes required to remedy an out-of-control situation? Why doesn't someone shoot the diseased animal and put it out of its misery? Ed provides a detailed answer, identifying 5 compelling reasons why BigLaw is in trouble, and then explains management's indifference:
Significantly, and sadly, many law firm leaders cannot afford a comprehensive and transparent analysis of what they’ve actually been doing for the past several years, which would be required for a “clean sheet of paper” transformation to a new business model. Alas, there is a gaping divide between what partners have agreed to live by in their written partnership agreements and how the inner circle actually administered the decision-making apparatus. The synapse would shock a number of their partners if they were fully aware.
I have stopped worrying about partners who cede their lives to management of the type described by Ed, who are too passive or afraid to make waves to protect their own stake. At some point, those partners have to accept their personal responsibility for the hand they are about to be dealt.