Will AFA Drive Law Firm Overhead Down?
In my recent post, BigLaw Growth is Dead – Lower Cost Support Tipping Point?, I wrote about Bingham opening a support center in Lexington, KY and asked whether other large firms would take steps to reduce overhead. Conversations I had 10 days at the Ark Law Firm Pricing and Profitability Conference ago reinforced the importance of this question.
BigLaw pricing experts explained how they factor overhead into their profitability analysis: most allocate it to fee earners on a sliding scale, more to partners than other lawyers and more to lawyers than to staff. They also confirmed that the average overhead per lawyer ranges between $200k and $300k per year.
In competitive markets, players wring costs out of operations. Post the economic crash, large firm face growing competition. That means more alternative fee arrangements (AFA) and more profitability analysis. And that in turn educates partners on the real cost of the fee earners. Will partners have a collective “a-ha” moment when they realize the impact of the enormous overhead? Perhaps that realization is a big factor in the growing number of boutique and “new model” law firms that compete both for high-stakes and every-day corporate legal work.
With such high overhead – it exceeds the comp cost of junior lawyers – BigLaw keeps open a “price umbrella.” That is, it creates the opportunity for competitors to gain share by selling equivalent or near-equivalent service at a lower price point. Price umbrellas tend to close absent a monopoly position, highly differentiated offerings, or supply-demand imbalances. Large firms have none of these to prop open the umbrella. Other commentators have noted that alternative to law firms are growing but BigLaw is not. And while data are sparse, I suspect boutiques and new model firms are also gaining share.
If this analysis is correct, then the question is whether the umbrella closes with a crash or slowly and gracefully. Either way, it seems likely we will see more cuts in law firm overhead.
Update (moments later). Minutes after posting this I came across the WSJ article, Law Firms Wring Costs From Back-Office Tasks, posted late Sunday. A meme at work?
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