The term "BigLaw," used to describe the top global law firms, has become part of our profession's language. And until very recently, these behemoths appeared to be unstoppable both in terms of their growth and the wealth that they generated for their partners.
But the Great Recession put a major dent in BigLaw's aura of invincibility, and cost-conscious corporate clients are turning that dent into a crater.
The result has been the demise of firms like Howrey & Simon, Heller Ehrman and Thelen Reid (which seemed to have only size as their defining trait) and the current travails of Dewey & LeBoeuf, a 1,000-lawyer firm created by merger just a few years ago and, as of this writing, in the process of unraveling.
Why is bigger no longer better? "Declining Prospects," a forthcoming book on law firm economics by corporate attorney Michael Trotter, suggests a telling answer. As described in a recent issue of Bloomberg Businessweek, the book starts with the premise that since the 1960s, the explosion in government regulation and the growth of global multinationals created BigLaw, which became synonymous with big numbers of lawyers.
But that is not necessarily the same as big profits. Trotter notes, for example, that Baker & McKenzie, the largest U.S.-based firm with almost 4,000 lawyers, has a leverage ratio of 4.48 associates to each partner but ranks 79th in average per-partner profitability. Other big firms show a similar disparity between size and profits.
The conclusion is stated clearly by Bloomberg Businessweek: "By bulking up so aggressively, law firms made themselves more vulnerable to economic downturns. Partners at many firms failed to appreciate that all those salaried employees needed to be paid every month, whether or not new business is coming in the door."
Now technology has emerged as a downsizing agent, even with the Great Recession officially over. In the past, many BigLaw associates were used for the task of document review in discovery. In large cases, that required hundreds of lawyers to go through the documents.
But now e-discovery software can analyze documents required for litigation discovery in a fraction of the time, for a fraction of the cost. Inescapably, many attorneys who used to conduct document review will no longer be billable - and will no longer have a job.
Not only has this technology impacted the number of lawyers required, it impacts the cost of legal services. BigLaw had become synonymous with big hourly rates, even over the $1,000-an-hour threshold.
Now, however, technology has become the stimulus for alternative fees. When lawyers charge by the hour and see their time and revenue reduced, an impetus to charge a fixed fee naturally emerges. This is anathema to the economic model BigLaw had built.
Technology transforms every industry where technological innovation occurs. The legal profession is now experiencing such upheaval, and BigLaw will bear the brunt of it.
Ed Poll, J.D., M.B.A., CMC, is a recognized expert in law practice management. He partners with attorneys and law firms to increase profitability, coaching them on issues of internal operations, practice development, & financial matters. Ed enables lawyers to be more effective with their clients with less stress for both the lawyer and the client. He practiced law for 25 years, has coached lawyers for 20 years, and is the author of 13 leading books. His latest books are: Secrets of The Business of Law, 2nd edition, and the 16th anniversary edition of The Profitable Law Office Handbook.
Ed is the recipient of the Lifetime Achievement Award, State Bar of California (LPMT Section). Ed is a Fellow of the College of Law Practice Management, a board-certified Coach to the Legal Profession and a charter member of the Million Dollar Consulting® Hall of Fame. He can be reached at (800) 837-5880, www.lawbiz.com, www.lawbizblog.com and www.lawbizforum.com.