Out with the old, in with the new – changing law firm models

By Nicole Bradick, Director of Business Development, Potomac Law Group

A recent survey by AdvanceLaw indicates that General Counsels are starting to move away from the most pedigreed firms, even for high-stakes work.  57% of GCs surveyed indicated that attorneys at leading firms were “less responsive” than lawyers at other firms.

Altman Weil reported that Chief Legal Officers are “trying to find a new, more cost-effective balance of resources” and are shifting work from law firms to in-house lawyers and lower-priced firms.

For like-minded corporate legal departments, the options are increasing as new competitors enter the market with innovative, efficient, and cost-effective models.  

Background 

The infamous pyramid model that took hold among large firms two centuries ago has remained essentially untouched until the last several years.

While this business structure has historically delivered steep profits to those who made partner, many firms operating under this business model have been plagued with shortsighted business planning.  The traditional partnership model provided little incentive for investing in technology, innovation, or any wholesale restructuring of the model that would reduce the partners’ profit.  In addition, these firms have struggled with how to reduce costs and adapt to the changing times as they have become hooked into legacy expenses like high associate salaries, long-term leases, and antiquated IT systems.

What’s happening now?  

Necessity breeds innovation.

When the 2008 recession hit, need for legal services grew due to greater government regulation and general litigiousness. Clients insisted on rate reductions (after years of steady rate hikes) and better efficiency in the provision of legal services.  Corporate legal departments increased internal hiring, which left outside law firms with less on their plates.

The legal market contracted significantly for large firms.  Since 2007, revenue has remained essentially flat despite the fact large firms increased their hourly rates steadily during the economic downturn.

Large-scale layoffs, bankruptcies, and mergers abound as these firms come to grips with their new reality.  In addition to the cracks appearing in the traditional pyramid model, talented attorneys (for whom Big Law partnership was historically the proverbial brass ring) are seeking alternatives to the large law firm grind.

These forces have created a prime opportunity for new entrants that are unburdened by outdated and unnecessary overheads.

What does this mean for in-house legal departments?  

Options. Lots of them.  A review of anecdotes and surveys indicates that in-house legal departments are concerned about two major qualities in outside counsel:  value and responsiveness. There is no reason why in-house legal departments should compromise on these values. The increase in alternatives to the traditional law firm provides new avenues for organizations to find these virtues in top legal talent.

Many of the new competitors are comprised of Big Law refugees operating in a low-overhead environment.  These firms achieve a reduction in rates by, first and foremost, eliminating the traditional partnership model.

The departure from the legacy ownership structure is the most significant change in terms of reducing attorney rates.  The partnership structure makes little sense from a client perspective.  Partners in a traditional firm structure make significant profits by working the associate pool hard and keeping their billing rates high.  The focus on client service and value gets lost in a fog created by the significant internal pressures to maximize individual numbers.

New model firms are also often able to accommodate a range of alternative fee arrangements, and some even default to all flat fee work.  With rates that are so reasonable in comparison, legal departments often find alternative fee arrangements are not necessary to ensure value and predictability.

New model firms also often have a reduction in physical overhead expenses, such as Class A office space and an expensive IT infrastructure. They benefit from cloud-based services that limit fixed overhead costs and enable attorneys to work from anywhere they wish.  Many firms will have a flex office space for client meetings if need be, although attorneys typically work at home offices or on-site with clients as needed.

The talent pool in many of the newer law firms is exemplary.  They are typically comprised of lawyers that have several years of training, if not a full career, in a large law firm. These lawyers leave for a variety of reasons, including the desire for a more flexible career.

Changes in the large law firm partnership structure, including lower odds of making partner, lengthened partner track, and greater lateral movement (resulting in less collaborative behavior), have made Big Law life less attractive and satisfying. New firms are benefiting from this growing dissention and, in turn, corporate legal departments are benefiting by being able to engage talented lawyers at more affordable rates.

While revenue has remained stagnant for large law firms over the past several years, new model law firms are reporting revenue increase year over year, which is perhaps the best indicator that clients are finding value in new alternatives.

Large law firms will likely always have their place in providing high-end legal services, but competitors are proving that there are countless ways to organise a firm to reduce the cost of legal services while also increasing client satisfaction.

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