Blog - Management speak

Law of supply and demand is biting at BigLaw

Law firms need to wake up and smell the coffee on their declining marketplace before it's too late

Profitability under scrutiny

In three developed legal services markets, the USA, UK and Australia, three independent observers–using data available to the public - have come to the same conclusion. It is now and forever will be a buyers’ market. Curiously there are few signs that #BigLaw firms is consciously recognising and are responding to this fact and its economic consequences. It’s time.

 

Growth is dead

 

In September this year blogger Bruce MacEwen in his Growth is Dead series wrote “We are faced with excess capacity. Which leads to intense pricing pressure. Which leads to lower profits. Which leads to…I leave it to your imagination.” Bruce was analysing the supply side.
Short thereafter Stephen Mayson’s post on the Grand Delusion of law firm partnership further fuelled the supply-side stirrings with “It’s not so much the size of any individual reward that’s the issue…it’s the sheer number of people who are able to extract this level of averaged reward in a reactive service market that is dependent on client activity”. Stephen analysed the number of equity partners in the UK’s top 100 law firms and their annual earnings, continuing “I would doubt that the number of buyers of legal services who control that £17.5 billion spend in aggregate earn a total of £5.4 billion, or an average of £650,000 (per year each).”

 

Profitability set to half

 

When these US and UK analyses are combined with our studies on the demand side in Australia the picture is complete. The secular decline in the contestable volume of work and the impact of this and other external forces on profitability leads inexorably to the conclusion that “hope… of maintaining profitability… is dashed.” In a #BigLaw firm that continues business-as-usual real profit per equity partner will be halved in less than 10 years.
 

And finally earlier this year I wrote “Let’s examine the facts, starting with the profits made by equity partners in the well-managed larger firms. In an Australian setting for these firms, the average profit per equity partner range is about $700,000 to $1,200,000. Of course, there are firms making less and some a good deal more, but let’s just stay with the main stream. There is only a small amount of a partner’s personal capital at risk, so this income represents an extraordinary level for what is really just a sophisticated technical job in terms of the corporate world. Remember these figures represent the average profit of some 2,000 partners in the 20 largest firms. Certainly a chief general counsel of a major public corporation earns this and sometimes more in salary and incentives, but there are not 2,000 chief general counsel positions out there. There are fewer than 50 at this level. So how is it that these profits are garnered? The answers lie in the long-running sellers’ market conditions, the firms’ economic model and the lack of real client power, all of which have prevailed–until now.”

 

The silence of law firms

 

The voices are persistent–and hopefully persuasive. Why aren’t firms responding? Or at least responding more urgently, intensely and visibly?
To my knowledge there has been no systematic study of this question. So I can only posit why. The reason lies in the mindset of what many call ‘partner land’, the great mass of partners serving their clients with dedication and skill and still being handsomely rewarded. Many have quoted David Maister in this context before, but his explanation bears repeating: “Try telling a bunch of smart people who make a million dollars a year they are wrong”. These words say it all.
The size, profits, and conventional wisdom of #BigLaw firms today have trapped partners in what one might term a spider’s web. Each strand that holds the firm together is fragile. But if you are a fly, the web is so strong it restrains you until the spider arrives. A variation on the frog in boiling water. And no more palatable.
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Posted by:

Dr George
Beaton

22 November 2012

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