'From Big Law to Lean Law' by William D. Henderson in (2014) 38(Supp)
International Review of Law and Economics 5 comments
In a provocative 2009 essay entitled The Death of Big Law, the late Larry Ribstein predicted the shrinkage, devolution, and ultimate demise of the traditional large law firm. At the time virtually no practicing lawyer took Larry seriously. The nation's large firms were only one year removed from record revenues and profits. Several decades of relentless growth had conditioned all of us to expect the inevitable rebound. Similarly, few law professors (including me) grasped the full reach of Larry's analysis. His essay was not just another academic analysis. Rather, he was describing a seismic paradigm shift that would profoundly disrupt the economics of legal education and cast into doubt nearly a century of academic conventions. Suffice to say, the events of the last three years have made us humbler and wiser.
This essay revisits Larry's seminal essay. Its primary goal is to make Larry's original thesis much more tractable and concrete. It consists of three main pillars: (1) the organizational mindset and incentive structures that blinds large law partners to the gravity of their long-term business problems; (2) a specific rather than abstract description of the technologies and entrepreneurs that are gradually eating away at the work that has traditionally belonged to Big Law; and (3) the economics of the coming “Lean Law” era. With these data in hand, we can begin the difficult process of letting go of old ideas and architecting new institutions that better fit the needs of a 21st century economy.
Henderson notes that Ribstein, in writing on the legal profession and lawyer regulation, considered
how the legal ethics rules, through bans on noncompete agreements and nonlawyer investment, were limiting the ability of lawyers to create new forms of organization that would facilitate optimal levels of risk sharing and innovation. Larry advanced these arguments long before the first signs of trouble. When the large corporate law firms were finally showing signs of stress, Larry reviewed the evidence. He concluded that most large law firms were evolving into highly inefficient, sprawling structures that worked to the benefit of individual lawyers and, as a result, were hollowing out the very mechanisms needed to strengthen and grow the organization. He also took stock of broader trends affecting the market for corporate legal services. The clients were wising up. Moreover, they had other options. Playing out the logical next steps, Larry confidently pronounced The Death of Big Law.
As someone who closely follows the legal market and talks regularly with a wide range of lawyers, I can say with confidence that three years after the publication of The Death of Big Law, Larry's thesis is not widely accepted, let alone understood, by most large law firm lawyers. Yet, for reasons entirely rooted in self-interest and survival, it ought to be. By extension, legal education, which over the last several decades became heavily dependent on the fortunes of Big Law, also needs to grapple with the Larry's core message of value creation.
The purpose of this essay is to move from the plane of high theory, where Larry Ribstein was a virtuoso, to the ground floor of practical application, where law firm leaders and educators have to assess myriad messy facts and make decisions about what to do next. Big Law is not dead—Larry was trafficking in metaphor—but it has plateaued. It is also losing market share. This creates an environment of uncertainty that is rarely acknowledged by law firm leaders and legal educators. Something new is going to gradually supplant, or at least rival, Big Law; and as a practical matter, none of us really know what it is going to look like. In times of massive structural shift, strategy is little more than an informed guess. Yet, such an approach is more likely to be successful than one that relies on false, outdated assumptions.
Drawing upon Larry Ribstein's insights and some more recent market data, I will attempt to draw a more concrete picture of the state of Big Law, the evolving market for corporate legal services, and how the future might unfold. This Essay is organized in three sections. Section 1 is a summary of Larry's primary critique of Big Law. Section 2 adds color and concrete detail to Larry's prediction by examining recent trend data for both large law firms and non-law firm competitors that Larry's predicted would grow at Big Law's expense. Although Big Law remains big, it appears to be losing market power. Further, Larry may have underestimated the dynamism of nonlawyer entrepreneurs operating in the legal industry and overestimated the need for regulatory changes to spur innovation. The breadth and depth of change is very large and gaining momentum. Section 3 outlines the prevailing economic conditions of the post-Big Law period—what I refer to as Lean Law.
1. Ribstein's critique of Big Law
What do large law firms produce that is distinct and apart from the legal work performed by partners, who own the firm, and their lawyer employees? According the Larry Ribstein, the most persuasive explanation was reputational bonding. Lawyers are in a better position than clients to evaluate the skills, integrity, and work ethic of other lawyers. Therefore, highly capable lawyers have a strong incentive to organize themselves into firms, not only to provide more specialized services to clients—which clients surely need—but also to erect a screen to filter out less able or trustworthy lawyers. Over time, the firm earns a reputation for skillful lawyering and excellent client service. That reputation has positive value that enables a firm to charge premium fees.
Yet, the Ribstein critique also points out that the success of the large firm also gives rise to opportunistic behavior by individual lawyers. Once the firm's vaulted reputation is in place, partners may be able to make more money by focusing on their own client relationships and giving short shrift to activities that would preserve and grow the firm's reputational capital (e.g., training and mentoring junior lawyers). Firms can mitigate this behavior through careful screening and monitoring of partners. Yet, firm size, geographic dispersion, and lateral turnover make this job more difficult. In addition, the rise of limited liability through LLP and LLC business forms seemingly reduce the downside individual risk of poor monitoring, which means that lawyers become less vigilant monitoring each other.
Big Law as a business model is dead, according to Ribstein's critique, because the firms’ reputational capital is being steadily eroded away by a confluence of pervasive business practices. These include five factors:
(1)
Bad Incentives. Compensation structures that reward individual rainmaking and provide inadequate incentive to build the firm for the longer term.
(2)
Diluted Selection Criteria. Lenient partner and senior selection processes that end strict up or out in favor of keeping lawyers who add to short to medium term profits.
(3)
Inadequate Monitoring and Training. Excessive partner to associates leverage, which makes high quality training, mentoring, and monitoring infeasible.
(4)
Lack of Shared Downside Risk. The migration away from general partnerships, where vicarious liability for partner behavior is potentially unlimited, to limited liability entities, such as LLPs and LLCs, which typically caps liability to one's capital account.
(5)
Proliferation of Exit. Increased emphasis on lateral partner hiring to grow the firm, which “complicates a firms’ ability to maintain a strong culture of trust and cooperation.”
Notwithstanding the appearance of massive size, Ribstein argued the above pervasive practices have made Big Law remarkably brittle and unstable. As stated at the beginning of this section, reputational capital is what enables individual lawyers to obtain firm-level profits distinct and apart from the sale of their own time and services. Yet, “the firm's reputation lasts only as long as lawyers gain more from investing in it than they do from building their own clienteles.” When lawyers infer that their partners lack such a commitment, they become inclined to “grab” clients and invest in behavior that creates portable clientele, which creates better options for exit. When partner profits fall short of their expectations, they head for the doors. Because so few firms in the Big Law sector have avoided these pitfalls, reputational capital, Ribstein argued, is being rapidly dissipated. As a result, large law firms have increasingly become “just a collection of individuals sharing expenses and revenues that has little or no value as a distinct entity.”
The core message of the Ribstein critique is that The Death of Big Law is caused by the decline of the traditional reputational capital model. As discussed above, this decline is substantially caused by the inability, or failure, of law firms to preserve an environment and ethos where individual lawyers invest in the long-term fortune of the firm.
But according to Ribstein, the value of reputational capital is also declining because of external factors, such as the rise of in-house legal departments. With improved ability to evaluate cost and value, legal departments can avoid the price premiums of Big Law by expanding their own in-house capacity. In-house lawyers also have a proliferating array of options to address their legal needs, including hiring of non-US global law firms, legal process outsourcers with operations in India and other lowcost countries, non-lawyer companies and consultants, and mechanized legal advice or products delivered through sophisticated software as predicted by the lawyer, technology consultant, and futurist, Richard Susskind in this book, The End of Lawyers?.
For many practicing lawyers, the Ribstein Death of Big Law thesis makes little sense. In the year 2010, when Larry made a presentation of this seminal paper to a large audience that included several managing partners, the general reaction was polite bafflement. Sure, there had been layoffs and deferrals, but Big Law was only two years removed from record revenues and profits. Even a year into the recession, the incomes enjoyed by partners were still extraordinarily high by historical standards. Two managing partners and a litigation chair of a major law firm, who were formal commentators on Larry's The Death of Big Law paper, conceded that the Big Law model was going to change, but all agreed that Ribstein's dire predictions were overstated.
2. Contemporary market data
Three years after the symposium that featured the Ribstein Death of Big Law critique, Big Law does not appear to be dead. In fact, Big Law is bigger. Yet, as discussed in this Section, there is evidence that the legal industry serving large organizational clients is undergoing significant restructuring. Section 2.1 presents an array of data that shows the continued dissipation of reputational capital: large law firms are losing market power; lateral activity is on the rise; and leverage (lawyers to number of equity partners) is up. Section 2.2 describes a series of non-lawyer legal vendors that are taking portions of the legal supply chain that was formerly the exclusive domain of large law firms. They are growing very rapidly. Indeed, they bear the hallmarks of a disruptive innovation.
