Big Law – Reports Of Death May Be Somewhat Exaggerated
Over the last couple of weeks the legal blogosphere has been inundated with reports covering the demise of Big Law. The hourly rate is also apparently in its death throws, and soon to be confined to the history books. So, is this pure sensationalism, or is the very survival of Big Law and its conventional, billing modus operandi, in doubt?
The departure, (or I could quote LegalBlog Watch, and refer to this as a “jumping ship”) of two high profile Skadden litigators, to form their own law firm BuckleySandler, has become the cause célèbre of the doom and gloom merchants.
In the same article I reference above, Professsor Larry E. Ribstein, is quoted as saying:
“I don’t know about Skadden in particular, but this move has significant implications for Big Law. As I've been saying, here, the model of law firm as worker coop highly leveraged by the inverted pyramid of associate leverage is doomed. The associates no longer can pay the stars enough to make them stay. When it starts happening even at a firm like Skadden, you know, notwithstanding comforting noises by law firm managers, and deep in your heart, that I'm right.”
The Las Vegas Sun once again revisits the question I raised three years ago in my “Time to Stop Time Recording” and asks whether The Billable Hour has Run its Course? The piece highlights the formation of a new law firm in Chicago, established by three former large-firm lawyers, announcing in January that their business model would depend almost entirely on alternative billing methods for all commercial and civil litigation matters. They also plan to cut costs by outsourcing legal work to offshore firms.
Law school students on both sides of the Atlantic appear to be stuck between a rock and a hard place. I reported recently, with incredulity, that leading London Colleges of Law were increasing the Legal Practice Course tuition fees by an inflation-busting 8 percent in the same week that legal giants Allen and Overy, and Latham and Watkins announced just shy of 700 layoffs. Reports abound discussing the continuing deterioration of job prospects as major firms routinely push back the start dates for new trainees and associates.
Harvard Law School Office of Career Services recently convened a panel to address the concerns of HLS students. According to Professor John C. Coates, a former partner at Wachtell Lipton Rosen & Katz, 70 of the AmLaw top 100 have undertaken some form of labor cost reduction strategy. Coates indicated that the average firm has decided to eliminate about 5% of attorneys, although some have eliminated up to 15%. Click here for the full Harvard Law Journal piece.
Now before we sign off on the AmLaw 100 obituary, lets take a moment for a reality check. I recently went for lunch with the Global Operations Manager of one of the world’s top firms. Although by no means in a state of denial as to the seriousness of the current financial meltdown, I got the distinct impression that he was firmly focused on the opportunities available as a result of the crisis. When I quizzed him about his own firm’s future, the leverage model, partner to associate ratio, outside finance, law firm capitalization, and alternative billing arrangements and of course the firm’s KPO and LPO future plans, his response was clear and concise - nothing was off the agenda.
In many ways this echoes the view of Harvard Professor David Wilkins. He opined that the current crisis comes as a part of a larger historic shift in the structure of legal employment, and that the down economy will provide impetus to more rapidly implement changes to the structure of big law firms which would likely have occurred anyway over the course of time. He also indicated that firms which are currently deleveraging their business model will likely experiment with new, unorthodox strategies like outsourcing and offshoring to keep costs down even after the volume of legal work picks up again.
The financial crisis, although catastrophic, is creating opportunities within Big Law. I truly believe that many major firms have finally woken up and smelled the coffee. Historically these firms were guilty of the charge of being reactive as opposed to proactive. However, what I believe is crucial now is the pace and extent of the reaction. When I hear key decision makers advocating change across an entire spectrum of operational and strategic issues its clear that Big Law are taking the steps necessary not only to survive, but more crucially, thrive, in this brave new world.
Mark Ross, in his blog post, makes an interesting point, although I disagree, generally, with his conclusion and take a more cynical view of the problems facing big law. Why? Because law faces unique challenges caused by its culture, general rules, and ownership structure.
Culturally, law firms have continued to operate under a relatively quaint model of partnership that was based upon trust and commitment to each other. New hires were brought up through the ranks to become the next generation of partners. The practice was steeped in collegiality and tradition (and, certainly, bigotry and exclusion as well). Reputation among other lawyers was just as important as reputation within the client community. In the 80's and 90's, this model began a tectonic shift, one which has led us to today's utter lack of loyalty or collegiality.
This problem has been exacerbated by better information available to the workers and owners of law firms. In the "old days," associates suspected, but did not know what other firms paid, partners were not readily able to enter a "free agent" marketplace, and a necessary bond of trust held these firms together. However, with the advent of "greedy associates" internet boards and the AmLaw 100, this information is in the marketplace for all to see. There is little question that this better information has provided individual attorneys with greater bargaining power, but for anyone who lived through these times, it is clear that law firms have yet to figure out how to respond to these challenges effectively.
Why is this news? Because this crisis has severed the last remaining bonds of loyalty within a firm. Partners are recruited away by the promise of a better "global platform" or are asked to leave if their annual "take" takes away from the AmLaw 100 performance. Now, no matter how large your share is in a law firm, no matter how many years you have generated business for the firm, a downturn in your sector - and an accompanying reduction in your individual billings, can spell the end of your career.
Furthermore, being asked to leave a law firm, for both associates and partners, is to a certain extent a "scarlet letter" that adversely affects future employment prospects. This is particularly true for those firms that participated in "stealth layoffs," e.g., layoffs masquerading as performance reviews. In this day and age, any individual joining a large law firm must approach this process with far more suspicion than optimism.
Mobility like this has not proved troubling in other industries, so why is it a big problem in law? Because of the importance of conflicts within the law. This is often under-discussed, but increased mobility, particularly among partner classes, can create major problems in clearing conflicts. Sure, these are often swept under the rug or addressed with broad-form waivers, but it is only a matter of time before successful proceedings based upon client claims of conflict of interest begin to populate the legal press. Thus, absorbing these professionals back into "big law" will ultimately prove difficult.
Adding to this problem are significant reductions in the incoming classes. Until this year, law school grads, particularly top grads from top schools, could count on at least a few years of big firm experience after law school. That is simply no longer the case. This group of law students (and the ones immediately following) will be suspicious of large firms. Winning their loyalty will prove challenging at best, impossible at worst.
The ownership structure of law firms - a partnership or its equivalent, has also contributed to this problem. When one is a co-owner of a company and is asked to leave, the likely feeling in the no-longer-employed partner is that of betrayal. Again, the bonds that permitted the relatively unique stucture of law practice have been severed, but their successors - the shibboleths of the AmLaw 100 and the comparison of "profits per partner" have not served as an adequate replacement.
Instead, this approach has guaranteed a future of "Frankenstein" firms - where parts from other firms are bolted on when needed and cut off when no longer necessary. Unlike Frankenstein, however, it is important that the pieces of the law firm fit perfectly together and that their blood types (e.g., clients and their conflicts) don't conflict. And in this case, there are few universal donors and even fewer universal recipients.
In essence, by becoming "lean and mean," law firms have deprived themselves of people who can actually do the work when it comes back; practice areas that, while no doubt down, are cyclical and will come back; and their reputation among their future classes. Unlike Mark, I believe that this is a dire situation for all but the best-managed large firms - and there are precious few of those.
However, I agree with Mark that these factors may benefit legal process outsourcing, at least in the short term. When large firms get hit with a deluge of new work, a demand to cut costs and no lawyers to do it, a certain subset will call on outsourcing firms to fill such gaps. While it may not be a perfect fit, LPO's can provide "limbs for Frankenstein." However, law firms must still be careful about conflicts - and no broad consensus has been built around legal process outsourcing and potential conflicts of interest.
In the long term, it is not clear to me that the law firms, themselves, can or will be the gatekeepers for LPO relationships. Instead, I believe that this task must fall to the client companies. With law firms, there is still too much of an opportunity for conflict and too little management experience. Unless law firms are able to independently profit from LPO relationships, their adoption will be haphazard at best.
In conclusion, I believe that this recession will create a significant shift in the model of the firm. While such a shift may prove to be a great opportunity for some, taking the opportunity will require managers with foresight, authority and skill. Foresight, authority and skill, however, are characteristics not often associated with management committees of major firms.
About The Author
Mark Ross is a UK solicitor and Director at LawScribe, one of the world's leading legal process outsourcing companies. Mark is Chapter Chair of the International Association of Outsourcing Professionals (IAOP) Legal Outsourcing Chapter, and a regular speaker at legal conferences on the subject of legal outsourcing. Mark has had numerous articles published by leading legal journals including American Bar Association, Association of Legal Administrators, ILW.COM and IAOP. Mark's blog http://blog.law-scribe.com/ has become one of the leading resources for information relating to offshore legal process outsourcing.
The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.