The standoff: Why the business model of big law firms is in big trouble

Times are changing for large law firms and their business model is starting to get into big trouble in most parts of the world. The forces that structure an industry and the ability of its enterprises to extract profits have all turned from neutral or favourable to adverse over the past decade.

It’s becoming clearer what’s happening in the legal services industry, particularly among law firms at the top end of the market. To understand the severity and intractability of the challenges facing them, one must understand the fundamentals of their business model
(the BigLaw model).

The BigLaw model

The BigLaw business model is based on the professional principles of technical excellence, client centricity and high standards of ethical behaviour. The model progressively evolved from the practice of law to the business of law.

In 1819, the firm known today as Cravath Swaine & Moore was founded in New York. Early in the 20th century, Paul Cravath enunciated the principles of a system that “places a premium on efficiency and quality of work that no other firm matches”.

It was through this value system, which the firm still uses today, that Paul Cravath invented the foundation for the contemporary BigLaw business model.
It rapidly became the basis for the rise of the magic circle and white shoe firms – and every other law firm that sought to learn from and copy them.

In the great industrial boom of the post World War II era, firms seized on the Cravath model and turned it into the BigLaw model. The BigLaw business model enabled the massive growth of firms throughout the Anglo-American world and generated high incomes
for their equity partners for more than
60 years.

The hallmarks of BigLaw fall into five categories: human capital, technology, practice economics, ownership structure and fees. These and their economic and cultural consequences are summarised
in Figure 1.

 

Challenges to BigLaw

This traditional business model has served law firms and their client very well for a very long time, but is now being increasingly challenged. What have long been the strengths of the BigLaw business model now pose as many problems.

Of Michael Porter’s famous five forces, perhaps the most interesting and topical are substitutes. Substitutes are newcomer firms that meet the same clients’ needs as the incumbents, but do so at a cost that is usually below the breakeven point of the incumbents. This has occurred in many industries – think what digital cameras and smartphones did to Kodak.

Now it’s the turn of legal services.
Of course, there are some big-ticket litigation and corporate work that won’t
be challenged anytime soon. But much
of the volume-based work – perhaps as much as 70 per cent of the great majority of corporate and commercial law firms –
is coming under threat from substitutes. This is the NewLaw firm phenomenon.

 

NewLaw vs BigLaw

The NewLaw and BigLaw models share the use of qualified and licensed legal talent. This leads one to conclude that they also share a common commitment to client centric and ethical behaviour.

But, in almost every other respect,
the BigLaw and NewLaw business models are diametrically different. NewLaw firms are completely reengineering their underlying business models for delivering legal services.
The differences between NewLaw and
BigLaw firms are evident when comparing Figures 1 and 2.

A spectrum of NewLaw firms exists (see Figure 3). At the purest end of the spectrum are firms like Axiom Law and Riverview Law, moving through Clearspire and Virtual Law to legal process outsourcing providers like Pangea3 and Exigent LPO, and e-marketplaces like LawyerSelect and LegalMatch.

In-house law departments are
also included in this new form, such
as BT Law Ltd and Carillion Legal
in the UK – they are integrating
backwards and competing with their legal services suppliers. Then there are the document providers like Epoq, LegalZoom and LawDepot.

Finally, while some may say that they are BigLaw, firms like Valorem Law in the USA, Inksters in Scotland and Marque Lawyers in Australia – while much closer to BigLaw –seem to be on a path to NewLaw status.

As Mark Harris, formerly of BigLaw and co-founder of Axiom Law, noted, “it’s a challenge to describe us when we’re creating a new category”. That’s why the NewLaw descriptor is so apt – and one of the reasons why BigLaw is in trouble.

Dr George Beaton is an associate professor at the University of Melbourne and author of NewLaw New Rules (www.beatonglobal.com). Eric Chin is a senior analyst at Beaton Capital (www.beatoncapital.com).