Feeling the Squeeze – The Future of BigLaw (Part II)
As I discussed in Part I, there is a mighty debate raging over the future of BigLaw. The Staunch Defenders point to the latest increased revenue and profit numbers as a sign that the Good Ship BigLaw Lollipop has rode out the worst of the monstrous 2008 Perfect Storm. Others argue that a closer look at those same numbers reveal that the iceberg has already been hit, and it is only a matter of time before the posthumous making of the “Poseidon Adventure II.”
Perhaps the numbers, whatever they may be, are somewhat of a red herring. After all, the entire AmLaw100 only realized a combined revenue of $73.4 billion in 2012. Contrast that to what just one company made in 2012 – Exxon Mobil – who reaped $453 billion of revenue, and a staggering $41 billion of profit! In fact, according to Fortune, at least 31 companies had individual revenues greater than the AmLaw 100’s combined total of $73.4 billion. Are the global conglomerates’ coffers so stuffed with gold and greenbacks, that they can’t really be bothered with their little minions’ obvious overbilling?
A few more numbers to consider. In 2012, DLA Piper, the new No. 1 in firm revenue, grossed a cool $2.44 billion. In fact, 20 of the AmLaw100 cracked the billion dollar mark. Big money, right? Meh. That’s chump change to a multinational corporation. British Petroleum settled the Gulf oil spill fiasco for around $37.2 billion and counting. Ally Bank (formerly GMAC) just settled its little mortgage problem for $2.1 billion. Morrison & Foerster, lead counsel for Ally, has collected $31 million in fees to date on that case. Are million dollar legal fees even a blip on the radar to Ally, when they are dealing with billion dollar problems? Heck, even if MoFo is overcharging by over 100% (allegedly), is Ally really concerned with an overall cost of $2.115 billion vs. $2.131 billion? Probably not. They’d probably happily pay double just to keep the skeletons in their closet safe and secure.
Given the mind-numblingly large numbers that BigCompanies deal in, can’t BigLaw just continue to gravy train the deep pockets of the multinationals happily-ever-after? But then, why are so many firms feeling the squeeze, e.g., the collapse of Dewey, the Weil layoffs, the troubles at Patton, Boggs, etc, etc.? The problems are no better on the other side of the pond, as disclosed in “Thirty of the UK’s Top Law Firms in Trouble.”
Clearly, something else is going on here. The tipping point was the Great Recession of 2008/9 (duh.) Not so much the actual financial impact – given that most giant companies have rebounded quite well – but rather, the psychological impact it had on those same companies and BigLaw. Prior to this time, BigLaw had almost zero outside competition. Clients had no options other than using a traditional law firm. Combined with a growing global economy and increased regulations and complexity, you had the perfect conditions for a 30+ year BigLaw Profit Party. But the real fear induced by the Great Recession, and the increasingly cutthroat environment it created at BigLaw, allowed a plethora of new ideas and new entrants to crash the BigLaw party. Worse, these new partygoers are having more fun and better looking than their BigLaw fuddy-duddies. And not surprisingly, these hip new partygoers do things quite differently, and much less expensively, than staid, old BigLaw.
Dr. George Beaton & Warren Riddell, admittedly with less colorful language, recently discuss similar issues here. Channeling American futurologist Alvin Toffler who defined “future shock” as “too much change in too short a period of time,” the authors see the current turmoil in the legal industry as “Future Shock 2”:
The pace of change in law confuses the unprepared managing partner. Are they witnessing a mere cyclical event or is it structural? Most hope for the former and believe they can ride it out. But they are actually facing the latter – a structural shift in the market. Law is being delivered differently because clients say it should. In strategy language, ‘structural’ means permanent and progressive. And, here’s the rub. For incumbents, ‘structural almost always means adverse, whereas for new entrants and substitutes it means opportunity, usually temporarily for the former and long-term for the latter.
Many firms that surfed the good and easy times are now starting to hit the rocks.
New entrants with attractive value propositions are appearing all-too-frequently. And innovative substitute services like Riverview Law and Axiom Law are skimming away high margin work at price points with which incumbents cannot compete.
To Riverview and Axiom, one could add so many more viable options – Clearspire, Conduit Law, Source Legal, Novus Law, Elevate, Valorem Law – the list goes on, and continues to grow every day.
Whatever the reasons, the aftermath of the Great Recession has resulted in new ways for clients to obtain solutions to their legal problems. Add in the explosion of social media and new technology, and you have a brave new legal world out there – a fast-paced and rapidly changing world that BigLaw is not well-suited to adapt to. More from Dr. Beaton in another post:
Substitutes offer clients the choice of how to solve a problem. It becomes a choice between conventional service providers and new ways of sourcing a solution. Examples abound. Just think what Amazon did to the local book store. Or digital cameras to Kodak. The roll-call of the venerable departed goes on. The main challenge of substitutes is the ceiling on the price a market and law firms in the market can sustain. As clients switch to the substitutes the viability of incumbents declines.
It was only a couple of years ago that there was a Borders bookstore in every mall – 511 superstores at the beginning of 2010. Circuit City? Not that long ago that was one of Jim Collin’s “Good to Great” companies. Worse yet for the BigLaw – both those failed companies were run as modern corporations and still failed in the face of major change. Can we expect better results from a majority of BigLaw, all run as archaic and historically unwieldy partnerships? Not likely. Of course, a few firms are continuing to kill it. Like remora, they have well-attached themselves to the top-of-the-foodchain predators of global giants that view multi-million dollar legal fees, even if inflated, as de minimis. Truth be told, the CEOs of these multinationals probably snicker to themselves at the relatively paltry PPP numbers of their lawyers compared to their yearly income as the titans of industry. They can’t be bothered with anything followed by only six zeros; they’ve got bigger fish to fry, like keeping those damn women out of their country clubs.
But the majority of BigLaw aren’t so lucky. Their sugar daddies have started to eyeball the new partygoers with the hip and exciting new ways of doing business. What? No billable hours? You’ll give me a fixed price? Upfront? Value-based fee agreements that are designed to put all of us on the same page? Wait…transparent billing data that gives me the big picture on all of my company’s legal spend? Lawyers who are willing to put some of their skin in the game.
Of course, all of this prediction stuff is notoriously unreliable, albeit rather entertaining. As a client, the more important takeaway is that it really doesn’t matter to you whether BigLaw survives, evolves, or dies an ignoble death. Whatever BigLaw’s ultimate fate – you, the client – have won. The once impenetrable walls of BigLaw have been brought down, and more and more new legal providers are streaming through the breach. The BigLaw monopoly has been broken, and a far more client-friendly free market is emerging in its place. Boo-ya.