Broken Business Models and Black Swans
Posted By Rob Millard - 0 Comments -
Earlier today, I enjoyed listening to Aric Press's webinar on the Amlaw rankings in 2009 (being a preview of what is published in the upcoming edition of American Lawyer.)
His comments on the trends in the Amlaw 50 (the fifty largest grossing law firms in the USA) over the past twenty five years were particularly interesting. Despite the slight dip for most U.S. law firms in 2008/9, the long trends from 1985 up to today for the Amlaw 50 are:
Gross earnings: Up 13x
Headcount: Up 4x
Revenues per Lawyer: Up 3x
Profits per Partner: Up 5x (and still 2.5x when 1985 dollars are adjusted to 2009)
Those twenty five years encompass almost the entire careers of many of the senior decision makers in U.S. law firms today. For such leaders, having experienced such immense tailwinds for almost all of a quarter century makes the possibility of this trend reversing almost inconceivable. I am also not suggesting that the trend itself is likely to reverse anytime soon ... but should these leaders have the same level of confidence in their business models remaining the same? That is, barring tweaking like better cost-efficiency, moving associates to performance-based compensation packages and negotiating a few alternative fee arrangements with clients? Will the most profitable business model/s for delivery of legal services in the future be radically different to those that succeeded so dramatically in the past?
Aric did touch on the "is the model broken?" debate in his webinar but he hedged his bets and avoided making any predictions himself. To be fair, the scope of this issue extends far beyond the topic of the Amlaw 200's performance in 2009, so this was probably wise. If the events of the past two to three years did cause hairline cracks in the business model of America's top law firms, though, those may yet be nothing compared to what might come from the hammer poised across the Atlantic.
A debate on this topic was held in London a week ago by Legal Week's Future of Legal Services Forum. Much naturally revolved around the impact of the Legal Services Acts which, as I am sure most readers know, involves non-lawyer ownership of businesses dispensing legal services in England and Wales, amongst other things. Here are some of the comments quoted from that event:
" ..... new entrants [are] not interested in the law firm model." and "..... the biggest competition will come from the outside."
Neil Kinsella (Chief Executive, Russell Jones & Walker)
"Venture capitalists see more opportunities in setting up new businesses to compete with law firms, as opposed to direct investment into existing firms."
Simon Beswick (Managing Partner, Osborne Clarke)
In my humble opinion it is almost certain that radically different business models will indeed emerge from the crucible that will characterize the legal services market in England and Wales over the next few years. Some of the experiments planned are very well funded. The brains behind them are amongst the best around and I don't just mean legal brains, either. I mean legal brains working together with finance brains and with strategy/business brains and with marketing brains on equal terms with each other .... a powerful cocktail indeed. Will there be failures? Of course, and these will no doubt be held up as evidence that the Legal Services Act is a terrible idea, by those who feel that way. There will be successes too, though, and there will be those that thrive in the new environment and those that fail.
How will those emerging business models impact the markets of U.S. law firms? In truth, it's difficult to say at this early stage. The convergence of the new models together with the macro-trends of globalization, exponential advances in IT and the entry of new legal services markets (India being at the forefront) into the global legal services market could spawn a Black Swan of monumental proportions for the U.S. legal services market, though. Time will tell.
Law firm leaders have a tough task balancing short and long term priorities and there is not much for them to do about this right now except (1) watch carefully as things unfold and (2) keep asking the difficult "what if?" questions.
But they shouldn't lose sight of this ......
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