Jerry Kowalski recently lamented in a LinkedIn thread the widening gulf between top- and bottom-earning partners, and its effect on their firms. He longed for
”…a return to the days of yore when all partners truly felt like they were proud owners of the enterprise, and a return to feelings of genuine esprit de corps, mutual respect, pride, loyalty and genuine collaboration.”
That's a beautiful thought, Jerry, but that genie is long out of the bottle, never to be recaptured. Doing so would require those at the top to reduce their cut by a third, perhaps half. Since the implicit threat of partners taking their client portfolio elsewhere is the Sword of Damocles hanging precariously over these firms, it can’t be enforced by partnership vote, so it would have to be voluntary. If, as Jerry wrote, those already enjoying the lion’s share of their pyramid are looking covetously at larger pyramids, what would cause them to agree to any reduction?
In 2008-2009, when evidence emerged suggesting that the degree of change in the law sector would be wrenching and transformational rather than a mere adjustment to a business cycle, I made a prediction that many derided as deranged. I said that in five years, as many as 50 of the AmLaw 200 would be out of business as currently constituted.
My reasoning was that those firms would be eroded from both the top and bottom.
From the bottom they’d lose business to brutal price competition for mature work that arguably should never have been placed with such firms. Under acute financial pressure from their C-Suites (that they could no longer ignore or rationalize away) corporate law departments had to set aside the ego gratification that drives such irrational work placement to “branded” firms, and respond as never before to price inducements. The bottom is further eroded by clients’ refusal to finance green lawyers’ on-the-job training, and the new non-firm competitors about which much has been reported, e.g., LPO and technological solutions.
Erosion from the top is what Jerry wrote about today. Rainmakers and luminary practitioners are beginning to recognize the logical effects of the foregoing on firm economics that, projected far enough, almost guarantee reductions in their take. Some are beginning to vote with their feet, eschewing the massive overhead that they realize they will have to finance in the future. Instead, many are setting up elite boutiques to skim off the high-impact work for which companies will always be willing to pay whatever it takes.
Other partners, successful but not powerhouses, are squeezed between their clients’ demands for rate reductions and their firms’ pressure to preserve profits. Their choice is pretty easy: stay where they are and have a monthly fight with the firm over the write-downs necessary to satisfy client demands, or move down a tier to a firm where your client’s preferred price is the firm’s top price, making you a hero.
For the top firms, the combination of these top- and bottom erosion factors projects to shrinking revenue while being stuck with the highest cost structure in the industry. Isn’t that what Citi’s recent report showed, i.e., expenses outpacing revenue despite three years of draconian cost-cutting?
Each rainmaker departure shrinks the revenue base and encourages further defections. At some point, it will resemble a run on the bank.
Hence, my prediction. I failed to take into account the release in 2010 of pent-up demand from 2008-2009 that delayed much of this until 2011. In the 9/6/12 online edition of the ABA Journal, consultant Kent Zimmerman is pretty straightforward on the topic. He predicts “absolutely more layoffs and as many as five dissolutions.” It looks like I’ll be wrong about the five-year period, but the trend seems clear.
Unless BigLaw dumps its outdated business model in favor of one that aligns with the permanent new Buyer’s Market reality, how else can it turn out?
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By the way:
In a report released by LexisNexis and Am Law Daily affiliate ALM Legal Intelligence, 'Thinking Like Your Client: Strategic Planning in Law Firms,' nine out of 10 leaders of AmLaw 200–size firms said their firms have partners at risk of being de-equitized or 'put on performance plans.' As one firm leader responding to that survey said ominously: 'Our attorneys need to be become client development experts rather than expense-cutting experts.'"