Cliff Notes and Takeaways From Adam Smith, Esq.’s “Growth is Dead” Series
I recently had a chance to read (and an easy read at that) all of Bruce MacEwen’s excellent series on the forever-changed economic landscape BigLaw is now confronting, which he has labeled the “Great Reset.” Realizing many of you (especially if you are a beleaguered associate at one of these firms) have little time to read them yourselves, I offer the following brief summaries, as well as some key takeaways for smart clients.
Clients are finally flexing their “pricing pressure” power on BigLaw by:
- requiring AFA’s, caps, blended rates, rate freezes, and hourly discounts, etc.
- strongly resisting or refusing to pay for the training of junior associates
- requiring major segments of matters be handled by LPO’s and other lower cost non-associate providers
- requiring RFP’s
Facing this inexorable pressure, some BigLaw firms (against Bruce’s strenuous pleas) are responding with “suicide pricing” on their RFP’s, i.e., offering too-low bids to keep work flowing through the doors, at the real cost of permanently devaluing their “high value, price-insensitive work.”
- Client Takeaway: Keep your feet on their jugulars. You’ve finally got the beachhead so don’t get pushed back. Better yet, now is a prime time to deep-six your BigLaw firm and (1) find a great boutique with a client-friendly pricing model, (2) bring a recently laid off attorney in-house, or (3) avail yourself to the slew of other great options cropping up in the new legal world order.
No secret here, BigLaw is facing “excess capacity.” Because of 30 years of historic growth, BigLaw has now become too fat for its own good. Kinda like the general U.S. population. It now finds itself with:
- too many associates given what clients are willing to pay for
- too many of-counsel and non-equity partners, thus clogging the pipeline for the best attorneys below them
- too many equity partners not justifying their high salaries
Excess capacity, combined with low demand, leads firms to an “almost irresistible compulsion to cut prices, even to unprofitable level” in the hopes of surviving the slump. The other “hyper-rational” option is to cut “partners and the most expensive non-partners,” something that is brutally hard and has yet to be systematically done:
So we are faced with excess capacity. Which leads to intense pricing pressure. Which leads to lower profits. Which leads to…
- Client Takeaway: The ship is sinking. Find a life boat immediately (see above) and make sure to stay far enough away from the wreck to not get sucked under…
This installment deals with “partner expectations.” In the last 25 years:
- Average AmLaw 100 average PPP has more than quadrupled, from $324,500 to $1.4 million
- Total gross revenue for the AmLaw 100 firms has gone up more than tenfold, from $7 billion to $71 billion
In other words, the last 25 years have been just too good and most partners “have never experienced a seriously down year.” The other fallout from this historic ride is that:
There are far too many people earning way more than they’re worth; their success owes to being in the right place at the right time.
Shockingly, rather than being content with their windfall, they want more:
Partners of all classes and genders were united on one front: They all think they should be making more money. Fifty-eight percent of all partners said they should be better paid, and among that group, an overwhelming majority wants something more than a token raise. Ninety percent of the survey’s respondents thought that their compensation should be increased by more than 10 percent, while 1 percent thought their pay should be doubled. (Quoting the AmLaw Daily’s “Report Shows Pay Gaps Widening Among Partners“)
- Client Takeaway: Besides valid worries about getting swamped by the sinking ship, now you need to be very careful about not getting eaten by the always hungry sharks.
This installment deals with the legal industry now entering the competitive market, where companies face “intense global competition and are compelled to constantly innovate and streamline.” (labeled Economy I.) Economy II is made up of organizations that do not face such intense global competition, typically government-dominated sectors like health care, education, prisons and homeland security. Without constant competition, Economy II institutions “tend to get bloated and inefficient as time goes on.” (sound familiar?)
While BigLaw has faced global competition, it has been “within and among other BigLaw members.” It has essentially been a stool with “one leg in Economy I and two legs in Economy II,” but is now being assaulted by two “irresistible forces” – globalization meeting technology – and the combined impact of these forces is “pushing all three legs of the BigLaw stool into Economy I – like it or not.”
While other industries have relentlessly upended, reinvented, re-engineered, six-sigma’ed, and kaizen’d themselves, while being under the constant unforgiving glare of creative destruction, we are using fundamentally the same business model Paul Cravath invented over a century ago. Change? We prefer not to.
- Client Takeaway: Why would you want to help people who don’t want to help themselves?
With the magnitude of the problem identified, what is the solution? This installment looks at Proctor & Gamble, who faced similar problems and successfully adapted by betting on “innovation.” Like the legal market today, P & G faced a “market landscape with intrinsically limited growth,” and responded to these “Darwinian pressures” in “an enormously creative, not to mention successful, fashion.”
But MacEwen is not optimistic that BigLaw can pull off the same feat:
I wish I could tell you I have confidence in us all to do that. I don’t, and in the final installment in this series I’ll try to explain why.
- Client Takeaway: Never bet against Darwin, because losing that bet is very costly. As argued above, there are a myriad of smaller, more agile boutique firms, LPO’s, in-house solutions, Axiom Law’s, and other better, less risky options available. Smart client’s don’t bet on Dinosaurs…
Update: Bruce has added two, uh, make that three more installments, with at least one more to follow.
Growth is Dead: Part 8 – Now What?: Hot off the press.