The Big Law Arms Race — Can Big Law Firms Survive?
Bloomberg BusinessWeek posed this question on its current cover: “What do you call 176,000 lawyers lying at the bottom of the ocean?”
The answer? (for approximately 176,000 law school graduates who probably won’t find a job this year at law firms): “The future.”
Citing professors at Indiana University (From Big Law to Lean Law) and other recent research, BusinessWeek grimly noted: “For practically everyone…in Big Law, the future looks chaotic.” The BusinessWeek article based its comments on a broad analysis of the collapse of the former litigation powerhouse Howrey, which after a dramatic expansion into Big Law in the late 2000s, went belly up in 2011. Big Law – created by consolidation and mergers of law firms — is still profitable, but the concept faces challenges.
The coverage cited Dr. William Henderson, a professor at Indiana University, whose treatise “From Big Law to Lean Law,” bears closer examination. In this white paper he argues that Big Law as an expansion strategy “has plateaued” and is losing market share, which creates questions about the future: “Something new is going to gradually supplant, or at least rival, BigLaw; and as a practical matter, none of us really know what it is going to look like.In times of massive structural shift, strategy is little more than an informed guess.”
Why is Big Law consolidation fading? Dr. Henderson cites five reasons:
“Big Law as a business model is dead, according to Ribstein’s critique, because the firms’ reputational capital is being steadily eroded away by a confluence of pervasive business practices. These include five factors:
(1)Bad Incentives. Compensation structures that reward individual rainmaking and provide inadequate incentive to build the firm for the longer term.
(2) Diluted Selection Criteria. Lenient partner and senior selection processes that end strict up or out in favor of keeping lawyers who add to short to medium term profits.
(3) Inadequate Monitoring and Training. Excessive partner to associates leverage, which makes high quality training, mentoring and monitoring infeasible.
(4) Lack of Shared Downside Risk. The migration away from general partnerships, where vicarious liability for partner behavior is potentially unlimited, to limited liability entities, such as LLPs and LLCs, which typically caps liability to one’s capital account.
(5) Proliferation of Exit. Increased emphasis on lateral partner hiring to grow the firm, which “complicates a firms’ ability to maintain a strong culture of trust and cooperation.”
According to BusinessWeek, what’s on deck? “Keeping any big firm together becomes a real high-wire act,” as “law is going through wrenching structural changes.”
All is not lost, as innovation in law firm management and the increasing focus of clients and legal consumers to abandon law firm brands in favor of individual lawyer reputations will lead to new ways for firms – large or small – to keep client “rain-making” activities and business development productive.