My prior two posts suggest that BigLaw may be going the direction of Detroit: slow motion train wreck explained as perpetual re-structuring. Consider that a few large firms have already had 2 or 3 rounds of lay-offs. If BigLaw re-thinks its business, what might it look like? Try a cylinder replacing a pyramid.
Large law firms in the UK, US, Canada, and Australia are “pyramids.” A few equity partners sit at the top, supported by non-equity partners, counsel, associates, and a huge staff. Over the last decade, many large firms have increased their leverage – the number of fee-earners and staff who support the top. The economics of firms has depended on maintaining this pyramid with its high leverage.
What if the legal market transforms and the pyramid no longer works? What if the new shape of law firms is a cylinder instead? In a cylinder, equity partners remain at the top but the number of fee-earners and staff supporting them is much less.
Two recent UK articles suggest a possible move to cylinders. Focus, Law firm management: A year of living dangerously by Matt Byrne in The Lawyer (30 March 2009) is an excellent, in-depth analysis of the future of large law firms. “The current financial crisis has been widely characterised as the most severe downturn since the Great Depression… Is it a cyclical downturn or does it represent a paradigm shift?… ” The article presents the varying views of managing partners of large US and UK firms on this question.
The Lawyer article reaches no definite conclusion. In contrast, Redundancy in the City: painful lessons for the big beasts in Times Online (2 April 2009) interviews Linklaters managing partner Simon Davies and suggests we may see a paradigm shift:
“Simon Davies, the managing partner of Linklaters, spoke exclusively to The Times… Davies sees a very different model emerging for the future… ‘Partners are spending much more time executing transactions or giving advice and, in each case, working with smaller number of lawyers to ensure that quality is maintained.’ … In this context it is inevitable that the firm should prioritise the very high-value work that needs the most experienced and creative skills while starting to slew off the lower value work that could be undertaken by more junior staff… ‘We are now moving to the right size for the new realities in the legal marketplace.’ “
It’s not clear what the “right size” is. Suppose, however, large law firms must adopt more cylindrical structures to succeed. This would require major changes in how they operate. The huge and costly infrastructure supporting partners and other lawyers would need to shrink. For individual lawyers and staff, that surely would mean more pain than we have already seen. For institutions, it would require a careful reconsideration of how they support high-end fee earners.
In such a transition, the question would be how much support partners need and how best to provide it. We’re not unbiased of course, but we think that outsourcing is a natural answer for this potential new regime. Large firms can do away with much of the expensive and hard-to-manage middle office services required to support armies of lawyers. Instead, they can outsource support on a more flexible basis. Even some of the support junior lawyers currently provide can likely be outsourced to legal support staff onshore or off.
One way to think about the potential de-leveraging is a big squeeze: the traditional BigLaw pyramid must squish down to a cylinder. No longer will there be armies to support a few generals. In a cylinder, the size of support layers differ little from top to bottom. If slabs of the pyramid must become smaller disks of a cylinder, firms need to consider whether the economics of operating all those layers on their own will still make sense. As functions shrink in scale, the economics change – usually for the worse. So moving services such as document product, finance and accounting, and business research to an outsourced, shared services model may become much more attractive in this new world.
[I originally posted this as How Law Firms Can Survive Transforming from a Pyramid to a Cylinder at the Integreon blog.]
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