Perspective: More Turbulence Ahead for Big Law?

Editor’s Note: The author of this post is the founder and CEO of Legal Mosaic, a strategic consulting firm and a regular contributor to Big Law Business.

By Mark Cohen, Chief Executive Officer, Legalmosaic

I was having breakfast the other day with a friend who is the managing partner of an AmLaw 100 firm (remember when “AmLaw 200” was the standard?). Before becoming a lawyer, he was a Navy bomber pilot. Translation: he doesn’t panic easily and knows when a crisis is acrisis.

“How do you see the weather ahead?” I asked, referring to his firm’s prospects. “It’s going to be a rocky ride,” he replied, “I’m thinking about how to get around the heavy weather.”

The weather aheaddoesseem menacing for most firms, and few seem to have the ability to fly above or around it. But why with all the chatter are so few seeking course corrections?

Ominous Indicators

True, PPP remains eye-popping at many large firms. But that masks fundamental structural problems and market shifts that threaten to make it a bumpy ride for most firms. The events of the past several weeks are eye-openers.

• Georgetown Survey

The 2016 Report on the State of the Legal Market by the Center for the Future of the Legal Profession at Georgetown Law is a wake up call for law firms. Its begins with the suggestion that their traditional partnership model may soon have a “Kodak moment.” And don’t confuse that with the magic of a Polaroid snapshot -- they’re talking about a fabled brand going under because it failed to respond to a changing marketplace.

The evidence supporting The Georgetown Report’s grim prognosis for traditional model firms is compelling: demand for law firm services is flat; service providers are experiencing 30 percent jumps in market share; in-house departments are also growing and now have a 35 percent market share; and new entrants – most notably the Big Four accountant giants — are poised to increase theirlegalmarket presence and share.

• Dickstein Shapiro Dissolution

O.K., so Dickstein was not an elite law firm. But it was around for 60 years, had a host of talented lawyers, and for many years enjoyed a high PPP. Its demise is equally an old story and cautionary tale for other firms.

What’s old is that prized lawyers stopped lateraling into Dickstein, lateraling out instead. And what’s cautionary is that Big Law, as never before, is in a Darwinian struggle to retain and attract rainmakers. This goes beyond laterals and includes the record-setting number of mergers and the rapacious growth of several firms pursuing a “too big to fail” strategy.

BigLaw is about keeping business generators and bringing in new ones. Just as there have been several firm casualties before Dickstein, so too will there be many more. Free agency does not promote institutional loyalty.

High profit-per-partner is the glue that binds rainmakers and their firms. But if you live by PPP, you will die by it.

• The Gowlings-Wragge Lawrence Graham & Co. Merger

Gowlings, a Canadian-based firm, and UK based Wragge Lawrence Graham & Co. recently merged and to form Gowlings WLG. What’s noteworthy is not the new entity’s 1,400 lawyers or $600 million revenue but its election to forego a U.S. presence. The firm will instead tap into U.S.-based network firms to service inbound work there (and presumably to refer outbound matters).

And while foregoing a U.S. presence is an outlier among the top 75 Global 100 firms, the reasoning here is telling. Peter Lukasiewicz, the new firm’s CEO, was quoted inThe Lawyerexplaining: “It didn’t make sense for us as a business proposition to go into a competitive legal market that is very well serviced.”

Translation: the U.S. market is already saturated.

This also explains why so many U.S. firms are going global, focusing on foreign markets that are less competitive and have higher growth potential than here in the world’s largest legal market. This is another warning sign for large firms, especially those whose revenue is principallydomestic.

• Associate Shortage

The ABA Journalpublished an article recently entitled “Some BigLaw firms face associate shortages; boutiques are partly to blame.”And while the piece suggests that things may be getting slightly better for law grads and associates who want to enter BigLaw (no doubt in part to pay off student loans), the news for firms is not so good.

Lateral mid and senior level associates are hot commodities now because they are in short supply and can be productive from the get go. Many recognize the statistical long shot of making equity partner at large firms and are considering other options. Where? Major, Lindsey & Africa partner Jacquelyn Knight pointed to the pattern of boutiques luring associate talent from BigLaw. This would have been unusual just a few years ago because partnership at large firms was the brass ring. But as that carrot has been removed, young talent is going elsewhere.

Add to that work- life balance considerations, the proliferation of “agile” or “New Law” firms, and the opportunity for tech and business savvy lawyers to ply their skills at legal service providers and you have what could result in a BigLaw talent drain.

Bottom line: just as consumers have alternatives to large firms, so too do talented young lawyers.

• The Lawyers on Demand/AdventBalance Deal

The announcement that two leading “New Firm” providers, Lawyers on Demand (LOD) and AdventBalance, struck a deal speaks to the success and globalization of non-traditional model providers. The 600+ attorney combined entity will service clients in the UK and in Asia. And it has announced plans to expand to other markets (U.S.?) in response to client demand. This will create still more competition for BigLaw and place greater stress upon its model.

LOD is no stranger to headlines -- just a few months ago it announced a partnering agreement with global goliath DLA. This bold pairing of traditional and new model legal providers might be a blueprint for the future.

And Axiom recently announced its acquisition of Cognition, a Canadian based service provider. This is another sign that it’s not just law firms that are going global. Translation: it’s a global legal marketplace and new providers have the resources, brand, and client bases to challenge large firms for business across the world.

• Formation of AILFN

The Association of International Law Firm Networks (AILFN) recently announced its formation. Its mission is to advance the visibility, capability, quality standards, and resources of legal networks and their independent business law firm members. Collectively, legal networks have a 25 percent share of global corporate legal business.

Though they lack the recognition of unified branded network firms like Dentons, DLA, and Hogan Lovells, the independent business law firms have two key advantages over their larger competitors: far fewer conflicts and markedly lower rates (data confirms the correlation between size and rates). And with effective co-branding, access to technology that provides easy collaboration across firms and geographies, and tie-ins to key service providers to integrate the legal supply chain, the smaller, more agile and cost-effective firms are poised to expand market share at the expense of the big boys.

• The Big Four

I have been writing for some time – as have others -- about the looming threat of the Big Four. Their global brand, immense war chests, deep C-Suite ties, advanced technology, and management expertise present a formidable challenge to law firms. The Big Four have quietly been engaged in legal consulting for decades and have each built up massive legal service departments. And three of the Big Four have secured Alternative Business Structures (ABS) licenses in the UK.

And if you think I’m shouting “Fire!” in a crowded theater, take a look at a recent article inThe Lawyertitled “ A very legal coup: the accountancy giants.” It chronicles the significant imprint and aggressive growth plans for PwC in the UK and also points to the build up of other accounting giants.

Conclusion

Reasonable minds might disagree whether legal delivery has reached its tipping point. But it’s clear that BigLaw is being challenged as never before.

Now we will see how well they navigate turbulence.