Is Big Law Running Out of Work? What Excess Capacity Really Tells Us about the Future of Legal Services

Topics: Automated Contracts, ediscovery, Law Firms, Leadership, Legal Innovation, Legal Managed Services, Thomson Reuters

underperforming partners

Citing the recent annual Altman Weil survey of law firm leaders, some commentators have interpreted the respondents’ complaints about too many lawyers in the marketplace as a testament that Big Law was running out of work. While that makes a catchy headline, is it true?

There is plenty of work to go around; it just isn’t getting done the way firms used to offer it. In other words: When horse carriages fell out of fashion, it didn’t signal the end of transportation—quite the opposite was true, as history teaches us.

Demands on stakeholders in our societies are higher than ever resulting from various onslaughts such as globalization, regulation, digitization and other trends dominating our times. Legal services are required by more entities in higher volumes and with greater complexity than ever. And that will continue. Unless by some utopian coincidence societies suddenly desire to be simpler, people mutate into entirely altruistic beings and governments consider themselves irrelevant, demand for legal services will continue to grow. Does anyone want to bet against that?

So what is really going on with the excess capacity? Law firm leaders say that a growing numbers of in-house lawyers are sucking away their traditional work. That highlights three important trends: First, it is basic labor arbitrage, of course. Second, it shows us that firms’ offerings are specialized until the client needs it in such quantities and frequencies that it can blow away the magic dust of “made in a law firm”. (Of course, with that, the 200% mark-up premium dissipates, too.)

So what is really going on with the excess capacity? Law firm leaders say that a growing numbers of in-house lawyers are sucking away their traditional work.

And third, it shows that law firms—despite decades of relentless marketing claims and lackluster training—have not yet managed to understand their clients. Clients want their lawyers to understand their business, and really, really understand it. And few lawyers in private practice actually do. In-house lawyers have a much greater chance to master an understanding of their own company’s business, mainly because they are not distracted by the 10 other clients they are serving and the 50 others they are chasing.

But there is more to this excess capacity question than in-house competition—way more! Law firm leaders underestimate the amount of work that is being done by providers other than law firms and legal departments. One prominent example is in the regulatory compliance space where the large accounting firms—under the thinly veiled ruse of offering consulting services—provide nothing short of legal advice. Other examples are e-discovery and contract life-cycle management, which are now being handled by legal managed services (LMS) providers with a far superior mix of people, processes and technology. These are massive projects that were once handled exclusively by lawyers (and still are), but most law firms aren’t even invited to bid for that work because they have no way to staff the work at a reasonable price point.

When confronted with this, most law firm leaders suggest that their firms don’t want that work because it is too low in value. That is a convenient answer but one that will end with most law firms on the wrong side of history. Really few firms can be so snobbish as to say they only do complex work. If you think your firm is one of them, it probably is not.

Let me try to explain. M&A deals are not low in value, correct? I have never met a firm that doesn’t want to do more of them. And yet, change is coming to this area too… Some clients—especially those experienced in M&A deals (and thus not blinded by the magic dust)—will use LMS providers for the due diligence as well as the closing stage. The senior corporate lawyers from the law firms are brought in just to negotiate the deal documents. Now that kind of buying behavior leaves firms with excess capacity. And we are going to see a lot more of that kind of cherry-picking happening in the future. The rate of change would be much greater if the buyers of legal services were not largely former associates raised in law firms. But, hey, that is changing too. So get ready for a real excess capacity issue coming down the pike.

What is a law firm to do? The Altman Weil survey suggests that 40% of firms have adjusted staffing levels. What that means in reality is that most firms have fired some underproductive lawyers and, where needed, hired cheaper resources in the form of contract lawyers for really rate-pressured work. All that is not very creative; it reminds me of carriage makers lightening their models so horses can pull them faster and as such compete with the emerging automobiles.

What is a law firm to do? The Altman Weil survey suggests that 40% of firms have adjusted staffing levels.

Some firms like Orrick, Allen & Overy, Herbert Smith Freehills, Wilmer Hale and others built centers where parts of their work can be done more cheaply. That is a convincing step in the right direction, although their size today begs the question whether that strategy is much more than a fig leaf. It’s helpful for tedious discussions with clients who dole out tens of millions of dollars a year to a firm even as that firm tries to convince clients that it’s doing enough to deserve more of the gravy train.

For this approach to really make a difference for their clients, far more work would have to shift to lower-cost methods and staff. While the low-cost headcount balloons, the headcount at the “front-office” (what used to be known as the “law firm”) shrinks: less excess capacity at the “front office” and yet an overall larger firm which handles more legal work thanks to a growing low-cost operation. Firms that don’t go down this road will keep battling excess capacity. While it may lessen at times, overall the trend will be relentless, leaving firms to fight a brutal and dispiriting battle which could very well end with the law firm indeed running out of work.

But many other law firms will thrive—just in a very different way than before. What this means for the individual lawyers and future generations of law school graduates is where all discussions on the future of our industry need to begin.