Client Perspective: On The Evolving Legal Market (Part I)

By Casey Flaherty posted 08-01-2016 13:38

  

Demand is flat and has been for six years. Except demand for legal services isn’t flat at all. Demand for law firm services is flat.[1] The uptick in demand has been captured almost entirely by law departments and their alternative services providers.[2] The flattening of demand for law firm services has been accompanied by a slowing of growth in worked rates—i.e., not published rates, but the rates actually charged for worked performed. All of this is happening in the shadow of a drop in collected realizations that has lasted more than a decade—starting well before the Great Recession.

Law firms have somehow continued to increase profits per partner (PPP) in this challenging environment. They have innovated their way to profitability. But the innovations have generally not included improved efficiencies or leveraging technology related to how firms deliver value to clients. Nearing nine years out from the onset of the Great Recession, the number of partners—the denominator in the PPP equation—just fell again for the AmLaw 100.[3] Even the biggest, most profitable firms de-equitized partners. They’re admitting new partners at below the replacement rate. They’re reducing staff. They’re pushing all the levers—investment, health plans—that companies look to when they want to maintain profitability in tough times. The thing about “squeezing the lemon” is that it works, for a while.[4]

This stagnation in growth keeps being referred to as Big Law’s “Kodak Moment.”[5] Because it played off Eastman Kodak Co.’s slogan, many headline writers could not help themselves but make reference to a Kodak Moment when covering the once behemoth company filing for bankruptcy.[6] Eastman Kodak invented much of digital photography, the innovation that would eat the company’s business model. But they were making too much money on film to pivot their core business. The collapse took decades and did not destroy an industry—photography, especially if you include smart phones, is healthier than ever—but, rather, the incumbent that used to dominate that industry.

Law has already seen a fair amount of once prominent players disappear due to bankruptcy or merger.[7] Meanwhile, there is real innovation in legal service delivery, even in Big Law. The problem is not that Big Law does not innovate but that they do not scale innovations because, well, they are already making a lot of money. And they will continue to make a lot of money for the foreseeable future. But “they” seem to be shrinking in number.

Viewed from the industry perspective, there is stagnation but no sign of imminent collapse—no ‘moment’ of existential crisis. There is, however, far more volatility at the firm level. Hypermobility, lateral fever, and merger mania combine with a financial model that starts every year deep in the red. And the strains of increased competition are felt most acutely at the individual lawyer level. Higher PPP is of little solace to the de-equitized.[8] Higher PPP is a mirage for the lawyers who have little chance of being admitted to the equity partnership. Higher PPP doesn’t even mean more money for all equity partners since averages are misleading. The gap between the highest-earning equity partners and the lowest keeps growing.[9] Those high earners are both essential to firm viability and the largest obstacles to change.

“Partners resist most change efforts” is the top response from managing partners when they are surveyed about why their firms are not doing more to change how they deliver legal services to clients.[10] In resisting change, the threat of going elsewhere in red-hot lateral market only needs to come from a few key rainmakers. While revenues and margins are high, the underlying “hotels for lawyers” business model is inherently fragile. Even if they recognize more change is needed, law firm executive teams are in a bind.

The rainmakers themselves are behaving rationally. They figure that clients hire them for their deep expertise and well-earned reputation. They figure clients will continue to do so. And they are right. We will hire them for the price-insensitive work that is mission critical to our organizations. Bet-the-company work exists, and we pay a premium for it. But, as alluded to in the opening, we are starting to go elsewhere for the run-the-company work that constitutes the bulk of our legal spend.

“Clients aren’t asking for it” is the second most common lament from managing partners when they are surveyed about why their firms are not doing more to change how they deliver legal services to clients. In a sense, they are right. We will respond to this charge in the next installment.

Connie Brenton is the Chief of Staff and Director of Legal Operations at NetApp and a founder of the Corporate Legal Operations Consortium (CLOC). Casey Flaherty is a former in-house counsel and CLOC member who started his own legal consultancy, Procertas.



[1] https://peermonitor.thomsonreuters.com/wp-content/uploads/2016/01/2016_PM_GT_Final-Report.pdf

[2] http://legalexecutiveinstitute.com/the-size-of-the-us-legal-market-shrinking-piece-of-a-bigger-pie-an-lei-graphic/

[3] http://adamsmithesq.com/2016/05/a-take-on-the-2016-amlaw-100/

[4] George Beaton and Imme Kaschner. Remaking Law Firms. American Bar Association (2016).

[5] https://bol.bna.com/is-big-law-having-its-kodak-moment/

[6] See e.g., http://www.economist.com/node/21542796, http://mentalfloss.com/article/62539/after-kodak-moment

http://www.csmonitor.com/Business/Latest-News-Wires/2013/0820/Kodak-bankruptcy-Can-failed-company-find-new-Kodak-moment

http://mashable.com/2012/01/19/kodak-goes-bankrupt/#flwhWc4hBuqd

[7] https://www.washingtonpost.com/business/capitalbusiness/the-fracturing-of-big-law/2012/05/11/gIQAgkNvMU_story.html

[8] http://www.law360.com/articles/807915/i-was-de-equitized-a-look-at-biglaw-s-second-class-citizens

[9] http://abovethelaw.com/2014/01/on-hybrid-partners-and-the-games-law-firms-play/

[10] http://www.altmanweil.com/dir_docs/resource/95e9df8e-9551-49da-9e25-2cd868319447_document.pdf

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