BigLaw: On the Clock
Last time, I noted that BigLaw is not a monolith; it’s actually a model. Here’s one description from a speech this week given by Richard Susskind (the context is the historical revenues from labor-driven document discovery):
The reason these documents are being reviewed in that way is not in part to provide training. It’s the business model that sustained these law firms in the past. Classical management theory in professional services requires one equity partner at the top of the pyramid and a broad base at the bottom of junior lawyers who are paid a lot less than they’re charged to clients.
BigLaw (I am beginning to tire of that moniker) simply took this business model and extended it geographically and by adding practices (legal specialty and industry).
In the salad days of the mid 1980s to around 2008, the BigLaw model, as executed by the best firms, was one of the most profitable ones by margin in any industry. Ever. These law firms were paid willingly, well and often.
Ah, but success breeds competition.
A few years before the bottom dropped out of the U.S. economy, Mark Hurd was still at the helm of HP. The New York Times quoted Mr. Hurd on a conference call in September, 2006:
…the company would continue to trim costs as it fostered growth. ”Costs and growth are different sides of the same coin,” he said. “We will spend money to save money and save money to spend money. We will never be done looking at our cost structure.”
The emphasis is mine, but the insight is all Mark Hurd. Any legal provider to HP would be on notice then if they weren’t already. Any law firm today would do well to tape those words on refrigerators in branch office break rooms, worldwide.
Sometimes I feel that some of my colleagues in large law firms think that if people would just stop using the term “BigLaw,” and quit the focus on legal costs, things would just settle down again. Back to the future, as it were.
But general counsel know better. There is no going back. They review budgets regularly with their CEOs and CFOs. To defend a budget variance with “but we got value” or “we’re waiting for part of the AFA to kick in” is to limit one’s GC career. Quickly.
This is why I am not surprised that a press release this week mentioned the ongoing hold of hourly billings among corporate clients. A recent ALM/Lexis Nexis survey drew these conclusions:
While nearly all the law firms surveyed have adopted AFAs and most respondents expect increased adoption, growth is slow, with AFAs accounting for less than a quarter of most law firms work. Legal departments are not rushing to move to AFAs either, with only 12 percent using them for more than half their work in spite of 84 percent satisfaction ratings. Looking more closely, only 20 percent are very satisfied (and only 11 percent of law firms) as lawyers struggle with the culture change, collaboration and trust issues that must be addressed for alternative fee arrangements to work effectively
Now this doesn’t mean that AFAs aren’t a big part of the answer on legal cost control. Some companies feel uncomfortable right now jumping into that pool. They hold the billable hour ducky life preserver tightly and dip a toe in gingerly.
Yet at the same time, these very GCs may be removing legal from some processes entirely, using LPOs selectively, and swapping out $700/hr lawyers for $350/hr ones where they can. When you stop and think about it, lower billing rates and clear budgets are really AFAs, from the standpoint of the buyer.
The future of corporate legal services will not just be written by law firms.
The good news for the very large law firms is that most of them are still more profitable than their clients. So they have resources to fund change. Even if they have the will (a BIG if), do they have the time?
According to Professor Susskind’s remarks noted above, the sea-change in the legal industry will be driven largely by new market entrants, who are in the business of taking revenue away from less-competitive players. As far as the timing? Here’s his best guess:
It’s going to sweep through and drive all manner of efficiencies that we can’t anticipate. This is not the next six months; this is the next six to 10 years.
So large law firms that cling to the BigLaw model are clearly on the clock. And the work required to compete effectively is off the meter.
(Here is a handy timer. I set it to five years just to be safe.)