Growth Is Dead, The Video

Thursday, February 28, 2013

OK, so the film rights to the book have not yet been auctioned, but in the meantime here’s my interview with the intrepid Lee Pacchia of Bloomberg Law.

From Lee’s introduction:

The era of ever-expanding revenues and profits for the nation’s largest law firms — a period that lasted from 1980 to 2008 — is over, and it’s never going to happen again, law firm consultant Bruce MacEwen tells Bloomberg Law’s Lee Pacchia.

Big law firms are now “in a battle for marketshare,” he says. Corporate clients have recognized they have pricing power over firms and “we’re never going back.” For firms to succeed today, “we’re going to require people all up and down the food chain in biglaw to . . . work more hours,” MacEwen says.

That new economic reality is putting the squeeze on “this relatively undifferentiated mass of mid-market full-service firms,” which even their own managing partners are hard pressed to tell the difference between. “That’s a sector [of the legal marketplace] I would short,” he says.

In an October interview with Bloomberg Law, MacEwen spoke about firms using “suicide pricing” — handling matters for less than their cost to service the client, on the hope they would later get higher-margin work from the client. Since then, the situation has gotten even more dire, with some firms providing work for free, he says.

The only way out of the suicide pricing trap is “discipline in the law firm to say we don’t do that, and let the work walk,” he says.

As always, I welcome your feedback.

 

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5 Comments


  1. David O'Brien, 1 year ago Reply

    The fundamental problem underlying the dilemma that law firms face is that the law is a *profession* not a trade, and law firms cannot be managed or analyzed like traditional businesses for a number of reasons:

    - Lawyers are not in the business of selling widgets; they are in the business of selling their advice, counsel, and judgment. These things are not commodities that can be produced in ever greater numbers with ever greater efficiency and economies of scale. There is a limit on the number of hours of work that a lawyer can provide, based not only on the number of hours in the day, but also on the amount of work a human being can provide before burn out ensues and the judgment and advice offered begins to suffer.

    - Commoditizing legal services is totally at odds with the rules of professional responsibility and the fundamental role of attorneys as fiduciaries to their clients. Unless we are willing to entirely throw away this model, the idea of maximizing profits by treating legal services as a traditional business is based on a fundamental fiction that lawyers can sell ever increasing volumes of time and advice through a highly leveraged “assembly line” of associates consistent with the obligations of professional responsibility Advice and judgment cannot be produced on an assembly line. We need to stop thinking about lawyers as assembly line workers and we need to stop demanding that big firms grow like businesses sold on the stock market.

    - Asking law firms to produce continuously increasing profits is like asking brain surgeons to create a brain surgery business and maximize profits of that business by maximizing the number of brain surgeries the business performs by delegating the brain surgery to armies of associate brain surgeons and asking them to perform brain surgeries constantly for 60-80 hours per week, 50 weeks a year. Would anyone want to go to Brain Surgery, Inc. as a “client” to have their own brain surgery performed?

    - What lawyers are trained to do, and what they do best is to offer sound advice and judgment. The current trend towards disaggregation of business services is likely based in part on the recognition by business clients that lawyers are not good or efficient at providing goods and services outside their area of comparative advantage (i.e. providing legal advice). Lawyers and law firms should focus on their highest and best use, delivering legal advice and letting other providers (e.g. Legal process outsourcers, clients, etc) do the rest of it.

    - The flat management structure of law firms is inconsistent with the idea of maximizing efficiency and profit. First, for the reasons stated above, legal advice is not a commodity that can be generated through a system of heirarchical, matrixed departments. Second, in law firms the work is not effectively or efficiently divided efficiently among specialized teams. Law firms tend to adhere to the myth that lawyers that are “partner material” can do all things well. To the extent they do have specialized teams (e.g. a discovery center staffed by contract attorneys, or an IT group focused on document or matter management software), those specialized teams are not well compensated or respected by the partners that receive all the money, prestige and incentives to work hard. By contrast, businesses people tend to be better than law firms at recognizing that different employees have different skills and strengths and they organize employees accordingly into specialized teams and reward them for their special contributions.


  2. David O'Brien, 1 year ago Reply

    Additional thoughts:

    Rules of professional responsibility, including those that prohibit ownership of law firms by non lawyers and generally prevent lawyers from sharing in the profits of their clients, are designed to ensure that lawyers act as independent, trusted professionals, with a responsibility first and foremost to care for their clients as fiduciaries, not to extract maximum profit from them. These rules also prevent law firms from operating like a corporation, with business managers and investors deriving high levels of compensation and profits from “products” being manufacturd by the company’s factory workers (ie, the lawyers).

    Simply put, the nature of the “product” sold by lawyers (legal advice) and the regulatory structure of the profession (embodied in the rules of professional responsibility), make it impossible for law firms to operate as a true business, and therefore attempts to analyze law firms and the legal services market like a traditional business market — and apply normal economic principles of growth, profitability etc. market — are fundamentally flawed.

    Aspiring lawyers should not go to law school with the idea that they will become rich like investment bankers if they want to pursue a traditional law practice upon graduation. They should do it because they find the work itself inherently rewarding and only if they are satisfied with a comfortable but not excessively high standard of living. If on the other hand they want to apply the skills of critical thinking, sound judgment, oral and written advocacy, etc. (ie skills that that one learns in law school) outside of a law practice (eg as business managers, investment bankers, entrepreneurs, etc.) then their skills may be well utilized in any number of areas that may lead to high levels of wealth and other rewards.


  3. Bruce, 1 year ago Reply

    I’m not sure where to begin in response to Mr. O’Brien’s remarks, but I suppose I can now vouchsafe to readers beyond reasonable doubt that we have a liberal welcoming policy on comments here at Adam Smith, Esq.-lest anyone had any doubts on that score.

    More substantively:

    Mr. O’Brien makes a number of quite disparate and, with respect, internally inconsistent points while both denying reality as we know it and omitting to offer a sensible way forward.

    For example, he starts out by positing that “Lawyers are not in the business of selling widgets; they are in the business of selling their advice, counsel, and judgment. These things are not commodities…”, yet not much later it appears that much of what clients have traditionally come to law firms for was in fact “commodity” type work.

    He calls it “a fundamental fiction that lawyer can sell ever increasing volumes of time and advice through a highly leveraged ‘assembly line’ of associates consistent with the obligations of professional responsibility,” but as anyone with the remotest acquaintance with BigLaw over the past few decades could attest, this was precisely the dominant business model until very recently. And if was inconsistent with professional responsibility, that would come as news to clients, law firms, and disciplinary committees, none of whom made that assertion or acted on it. And boy did this dominant model work, in terms of spinning profits for BigLaw. Some “fiction.”

    Now of course clients have awakened to the realization (here I warmly agree with Mr. O’Brien) “in law firms work is not effectively or efficiently divided among specialized teams” and that “By contrast, businesspeople tend to be better than law firms at recognizing that different employees have different skills and strengths and they organize employees accordingly into specialized teams and reward them for their special contributions.”

    He has put his finger on why clients are insisting on disaggregation, unbundling, and on- or off-shore outsourcing. Here’s something else about outsourcing: Once an activity is outsourced, it never comes back.

    That has one simple, but fairly massive, implication for BigLaw: The party’s over for the pyramidal assembly line gravy train. If profits are to be sustained, other models and tools need to be put in play.

    A few final notes:

    (a) Have no fear that the “brain surgeons” of the world-in my interview I specifically cited Cravath, Wachtell, and Slaughters, and there are more-have anything to fear. They’ll be fine, thank you very much.

    (b) If rules of professional responsibility prevent law firms from paying managers and investors (a/k/a equity owners) high levels of compensation and profits, then a full-scale inquiry is called for into the character and fitness of all 115,000 or so lawyers in AmLaw 200 firms.

    (c) Finally, I feel obligated to quash, yet again, the ancient canard that seems destined to rise again and again from the dead, that for-profit businesses cannot pursue “a responsibility first and foremost to care for their clients [and] not to extract maximum profit from them.” This clearly explains why airlines prefer plane crashes, car makers prefer rollover-prone models, oil companies prefer well blowouts, and every high tech company on the planet prefers to make increasingly expensive, dysfunctional, and useless products.


  4. Bruce, 1 year ago Reply

    Through the magic of online alerts, it came to my attention that an article has been published called “Why law firm growth is not dead.” You might want to take a look before reading on. [http://www.intlbusinessdevelopment.com/2013/03/05/why-law-firm-growth-is-not-dead/]

    Now, It may surprise readers to hear that I both agree with this commenter and hold fast to the bedrock thesis of “Growth Is Dead.” How might that be possible?

    Here we have the classic (and widespread) conflation of two separate markets and indeed two separate business models. Our commenter-and “Growth Is Dead” itself-address the existing BigLaw model serving familiar clients in historic and conventional ways. Here we have a battle for market share, as confirmed by the FT’s study.

    All the opportunities for growth which our commenter cites arise in separate markets using separate business models. As our commenter enumerates, these markets and models may involve such things as (1) international expansion into relatively virgin territory (to the extent local regulation permits); (2) domestic expansion into the “middle market,” currently served not at all by BigLaw; and perhaps (3) diversification into other adjacent markets. I couldn’t agree more.

    I must take radical issue, however, with the remark that “Simply put, Mr MacEwen’s analysis presumes law firm services offers and management systems will remain static into the future. I don’t believe that’s a given at all.”

    Nor do I.

    See Chapters 8 through 12 of “Growth Is Dead” if you doubt me.

    The challenge for BigLaw, or HistoricLaw, is conceptually analogous to that which faced the Big Three (US) automakers, today arguably faces Print Media, and which at least one political wag has said faces the Republican Party: We all can’t wait around for it to be 1965 again.

    That is the challenge laid down by the world I try to describe in “Growth Is Dead.”


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