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The last days of the BigLaw model

The end is nigh for BigLaw, according to Dr George Beaton and Eric Chin.

The end of the world as lawyers know it Atlphaspirit

“The barbarians are coming to #BigLaw @grbeaton_law  #JDKMConf  read a tweet during a major law and technology conference in Sydney on 20 September. The audience were visibly shocked to hear my opening statement at the event -  “We are witnessing the last days of the BigLaw business model."

I explained that ‘BigLaw’ is not about big law firms. It’s a description of the business model used by firms generating more than 99 per cent of law firm revenues today (that is, it excludes micro and sole practitioner ‘firms’ and the handful of alternative business model firms). The difference between the BigLaw business model and big (or small) law firms is critical.

BigLaw business model

As Beaton Capital analyses it, the BigLaw business model is built on six key elements. These work together and no one is more important than another:

  • Attraction and training of top legal talent,
  • ‘Leveraging’ of these full-time lawyers to do the bulk of the work serving clients,
  • Creation of a tournament to motivate the lawyers to strive to become equity partners (the idea of a tournament is akin to Roman gladiator contests and the subject of a seminal book),
  • Tight restriction on the number of equity owners,
  • Structuring as a partnership, and
  • Charging high hourly rates (which is or at least until very recently has been possible because of the mystique associated with legal advice).  

The consequences of the BigLaw business model as set out above are these:

  • Firms treat their lawyers as fixed costs (because of viewing them as a form of sunk cost and the time it takes to bring them to full productivity) plus most other costs are regarded as fixed too,
  • Firms pay their lawyers high salaries to win in the war to attract the very best talent,
  • Firms drive high utilisation from their lawyers (although it should be noted Australian and British utilisation is much lower in comparable American firms),
  • Profit – measured as profit per point of equity on issue – is maximised and as a result the average equity partner in a BigLaw business model firm earns far more than they if they were employed as in-house lawyers,
  • Profit is taken today and none is retained and as result partnerships have no balance sheets on which to rely for investment or rainy days, and
  • The clients bear the risk of time-based fee arrangements.

Are we witnessing the last days of the BigLaw business model?

In a word, yes. However, because today’s BigLaw business model is a consummate money-making machine for its owners, we can expect them to flex and adapt the BigLaw business model. They will simply not roll over and die.

This post was written by George Beaton, a director of Beaton Capital and Beaton Research + Consulting with research assistance from Eric Chin, Senior Analyst.

 

 

Posted by:

Dr George
Beaton

20 September 2013

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