Three news items caught my eye last week and help explain the challenges large law firms face.
Citi Private Banking, which offers regular and reliable financial analysis of large law firms, reported on 2012 large law firm financial results in Citi: Firms Posted 4.3 Percent Rise in 2012 Profits (AmLaw Daily, by Dan DiPietro and Gretta Rusanow). The article content sends a much grimmer message than the headline. An extra push for Q4 collections explains some of the growth. That just steals from 2013 performance. Moreover, the report cautions about “survivorship bias": results look rosier when excluding failed firms (Dewey in particular). Net net, for 2012 “the Am Law 1-50 still finished 2012 flat to the prior year, and smaller firms still saw a decline vs. 2011″. The best Citi expects for 2013 is modest partner profit growth.
Two trends contribute to the struggles many large law firms face: (1) price pressure and (2) high quality alternatives to BigLaw that offer substantially lower prices. I’ll take these in reverse order.
“Axiom’s attorneys perform corporate legal work for clients but charge lower prices than typical large law firms which are encumbered by high rents and other fixed costs. The company bills itself as an efficient alternative to traditional law firms whose lawyers–many of them BigLaw refugees–can provide sophisticated legal expertise.”The company also offers “managed services” for document review and contract management. On a related note, late in the week, a much-Tweeted-about Bloomberg Law video interview of consultant Kent Zimmerman, LPOs Stealing Deal Work from Law Firms, reported that Axiom did all the work on one recent deal.
If clients care that Axiom Law is not a law firm, they can choose from many “new model law firms” that offer lower rates and higher efficiency than most AmLaw 200 firms. A particularly innovative one is Clearspire Law (see my several posts about Clearspire). Clearspire Law, issued a press release noting that
“Beginning with the 2013 opening of offices in the New York City, Los Angeles, and San Francisco areas - in addition to its existing Washington, DC headquarters - Clearspire plans to open offices across the US and increase its attorney roster by 50 to 100 new attorneys annually to keep apace with market demand. Future Clearspire offices are planned for Atlanta, GA and Chicago, IL.”
BigLaw partners still in the clutches of the “millionaire syndrome” can easily dismiss the alternatives. When I talk to managing partners and to large firm pricing professionals, however, I hear about the constant price pressure. On price pressure, I offer only an editorial note. The New York Times last week reported that Debevoise & Plimpton Drops Trusts and Estates Practice. I found one paragraph striking:
“Another issue in sustaining these departments is that individual clients bristle at billable rates that now reach more than $1,000 an hour. While big corporations grudgingly pay those rates, wealthy families often resist them.”I immediately thought about the likely large overlap between wealthy individuals and corporate buyers of legal services. If wealthy corporate executives refuse to pay high lawyer rates out of their own pockets, how do they justify to shareholders that the corporation pays these rates? I leave that question to the ethics experts but it is worth pondering.
And speaking of pondering, what do all these developments mean for large law firm technology? We know that Axiom Law and Clearspire have invested heavily in technology. True, so has BigLaw. But in my observation, BigLaw spends IT dollars on maintaining and upgrading core infrastructure. In contrast, law firm alternatives spend their IT dollars on creating better value for clients. Over time, that can only widen the value gap.