Ten years ago this week, the bailout and eventual collapse of Bear Stearns kicked the global financial crisis into high gear. A couple of retrospectives (a roll-up from Bloomberg here and a good postmortem on WSJ here) came up in my Twitter feed — skimming these, I thought it would be interesting to take a data-oriented look at the lasting aftermath for legal markets.
Big Law in danger: of being bored to death + lulled into complacency
For the past 5 years or so, the post-recovery headlines have basically stayed the same: (1) demand for legal services is essentially flat; (2) performance dispersion is growing across segments; (3) the legal market is subject to much greater volatility; (4) firms face constant margin compression from clients who expect more in pricing sophistication, delivery capabilities, and service improvements.
These headlines are essentially correct, and they describe important structural trends in the industry that directly affect every law firm competing in the market today. Every law firm leader should be thinking about how these market conditions shape their firm’s competitive positioning and available strategic options.
The problem is that this is not how people think or talk in the real world, and these headlines don’t do a great job of explaining the actual everyday experience of people working in Big Law or properly communicating the scope and texture of challenges they face. So in this and future posts, I’ll try to pull together some interesting data and practical analysis on these topics.
#FlashbackFriday: Revisiting the 2008 AmLaw100
The 2017 financial results are starting to trickle out. So far, the news is pretty good — but the AmLaw reported numbers can lack useful context, especially for busy (and therefore casual) observers of the market.
One great way to contextualize this data would be to zoom out in time, so let’s take my brand new subscription to Legal Compass (highly recommended BTW) for a spin and check in with the 2008 class of the 100 largest firms in America.
No real surprises but a good overview. Frankly, an 82% survival rate over a 9-year period would probably be considered pretty comfy out in the corporate world. For further context, consider that the 20-year survival rate for the Fortune 500 is an unforgiving 37.6%. Since 1955, only 12% of F500 firms have managed to cling on to see 2016).
However, Big Law in 2008 wasn’t prepared for a shitstorm of epic proportions after so many years in the sun. Even now, after a full ten years of Great Recession gloom and doom, a “down year” at any firm is considered just cause for much hand-wringing, shirt-rending, and in some cases, partner flight.
And the next chart will go far in explaining why.
I intentionally omitted the actual figures from the above highlight table so that we can all appreciate the picture it’s painting: the subprime collapse of 2008 might have been a black swan event (although it probably wasn’t), but its aftermath couldn’t be further from a one-time event. I direct your attention particularly to the last 2 columns over on the right, because these two columns are not at all alike.
Prior to the subprime meltdown, AmLaw firms did not have down years, particularly in the upper echelon. It just did not happen because the demand growth was that good. A handful of the firms with heavy reliance on sizable litigation matters or M&A deals saw big swings from year to year, but that was to be expected and the good years for these firms was fantastically good. Even these few managed to keep their pipelines full enough that a down year for topline revenue was a rare occurrence. Of course every firm would from time to time run into difficulties with getting invoices out and cash in the door, and a few firms had bumpy stretches here and there. But for the most part, the work was always there.
Lower down into the second 50, there are a few more cyclical blips, particularly around the dot-com crash, but the post-recession view for these firms is also worse relative to the AmLaw50.
We hear (over and over and over again) that the business of law has changed fundamentally and structurally. I am as guilty as anyone of repeating this clinical phrase too often, usually to underwhelmed audiences who nod politely and then get on with their day.
In some ways, I get it. Big Law partners are still millionaires many times over and on most days, “business as usual” can seem basically fine. But most things in life work great until they don’t — and the business of law just ain’t what it used to be.
Like the golden age of manufacturing and coal mining for America, BigLaw’s good old days are gone — and they’re not coming back. That’s because the world around BigLaw has changed, and at least in the universe we occupy, there is no way to turn back time.
The counterpoint to the “business as usual” attitude is a school of thought that I’ll call “lawpocalypse now.” This narrative implies that law firms — not only the business but even the profession — is under certain threat of explosive disruption. If that sounds like a straw man argument, it’s not. In fact, the discussion has been couched in fairly direct existential terms: it’s pretty common for change agents to imply (or just say directly) that lawyers must change or die. (On this, I call BS. But more on that later.)
Many partners, by all accounts, have been less than receptive.
A decade after the subprime meltdown, there is a distinct contradiction to the tired urgency to this conversation about legal innovation, being weary of waiting for massive change that is so long overdue yet incontrovertibly and obviously imminent.
What’s missing? Relevance, mostly, but also basic empathy
Most partners are practitioners first and foremost. They spend most of their waking hours thinking and working as lawyers, thinking about legal problems. Plenty of partners are thoughtful about their areas of expertise and spend time diligently doing all the things legal marketers ask for: writing and speaking and sitting through many events all in the pursuit of new business, because those things make sense to them within the context of their own goals and day-to-day lives.
Once in a while, they tune in and hear that they should already know all about whatever is abuzz at the moment, whether it’s bleeding edge technology like machine learning or some broad imperative to change their mindset and behaviors (how and what they are supposed to change exactly isn’t always clear). What seems crystal clear to legal marketers, technologists or would-be disruptors of every other flavor all seems very time-consuming and fuzzy to the working partner, because it doesn’t fit easily into their worldview.
Consider a fairly successful equity partner with a $5m book of business who has maintained the same marquee clients for years: she has no particular reason to think she won’t keep them for many more years. Regardless of what some survey says about what some in-house counsel are doing with legal buy these days, the partner’s firsthand observations and experiences will always take precedence. The disconnect happens when trying to extrapolate what is generally true about the market to what will actually happen between a specific partner and a given client.
The same problems of abstraction apply to talk about the growing performance dispersion and volatility among Big Law segments, or the rise of legal operations and growing in-house capabilities, or the continuing adoption of alternative legal service providers.
It’s not that the “business as usual” crowd isn’t listening or that they don’t understand. It’s that their personal observations and experience aren’t consistent with what they’re being told about “lawpocalypse now.”
Empathy requires that we think and talk concretely about how real things work for real people in their everyday lives
To say demand is flat is essentially abstract. Most Big Law partners, being of well above average intelligence, understand the academic concept of supply and demand just fine, and it is also galactically obvious to everyone involved to say flat demand is worse than growing demand. What is less obvious is how this actually affects the business of law.
One implication of flat demand is that it becomes incredibly and unbelievably difficult to acquire new revenue. At some level, Big Law partners feel this struggle because they spend time pursuing and pitching for business.
But the next implication appears to be less obvious: when the books are closed on New Year’s Eve every year, it is far more likely that managing partners and CFOs will be staring down bad news. Despite the somewhat morbid interest in news of other firms’ struggles, equity partners generally respond to bad news about their own firms with both incredulity and consternation.
There are a lot of reasons for this, but one big reason is that they remember a time not too long ago when they were getting really, really good news all the time. To make matters worse, most market commentary doesn’t really communicate how drastically the market changes are affecting firms: “flat demand” (wrongly) implies conditions that are just kind of stagnant while average growth figures of 1.1% or 1.4% sound (misleadingly) benign.
As the histogram above indicates, 40 out of the 2008 AmLaw100 was coming off a decade where the revenue grew annually by 14% or more. After the recession, only 22 firms out of the same group posted annual revenue growth exceeding 6%, with only 4 firms achieving sustained double-digit growth from 2008 to 2016. In other words, only a handful of firms are now able to achieve, through herculean effort, what used to be very middling results to be had for minimal effort.
Put this way, it’s easier to see how equity partners might have a difficult time understanding how they went from being up 8 to 12% most years to being flat or down 2% without many people doing a series of really stupid things.
Another reason is that the continuing consolidation has made many firms significantly larger, and therefore unwieldy and complicated: it is now unlikely that individual equity partners have the time or mental energy to maintain visibility over all of the component parts of their firms — or to build and maintain meaningful awareness of the firm’s overall competitive position.
Simply put, a great way to describe the New Normal is that the business of law is much, much more difficult and grueling than it used to be.
It’s not necessarily profound, but I think this is a description that bears repeating, because I’m pretty sure most partners and business staff in Big Law don’t really believe it. I’ll come back to this.
Change sucks and nobody likes being criticized
When forward-thinking law firm leaders talk about the need to adapt to market pressures, the topic of change management often comes up. And when law firm leaders talk about change, they use analogies and phrases that evoke acute and prolonged suffering: warfare, marathons, and the like. Business staff in law firms often complain in unofficial channels that many law firm partners are essentially dismissive of business challenges facing their firms (and by extension the business professionals hired to grapple with them) and fail to appreciate the behavioral changes required to adapt to client and market demands.
The natural question that tends to arise at this point is “why?” Why don’t lawyers change? Why won’t lawyers listen? Don’t they WANT to survive the coming lawpocalypse?
As part of the change dialogue, much has been written about intrinsic qualities unique to lawyers, namely fear of failure, overabundance of risk-aversion, unwillingness to seek or accept help, and general lack of resilience. A lot of this research is statistically supported and deserving of thoughtful consideration — but it’s not always effectively used. When mishandled, the subtext that gets delivered to most lawyers is that they are stubborn jackasses at best and an object lesson in hubris at worst.
There is a subtle danger to the search for an answer to the change conundrum that is unique to something intrinsic about lawyers. This approach lends itself too easily to a set of fatalistic assumptions and inferences that are unkind as well as untrue, and most importantly, nonconstructive: All lawyers will essentially fail at life if they don’t change everything about how they do things, starting with admitting that they are overpaid and have been for a long time. BUT lawyers also present cultural changes that are basically hardwired into their personality so in all likelihood they are probably just properly screwed. So good luck with all that, and have yourself a great day!
Social psychologists call this the fundamental attribution error. Put simply, this theory says that we are more likely to consider situational factors when we evaluate our own behavior. In contrast, when evaluating other people’s actions, we are more likely to overemphasize dispositional factors. As an example, I might think of all the unusual last-minute things that conspired to make me late to an appointment— but when someone else is late, I am more likely to think it is because that person is inconsiderate or less capable of managing their time.
We need new facts that better describe the New Normal
As I said above, it’s pretty obvious that the old days felt awesome. The not-so-obvious part is that 3 decades of nearly uninterrupted and fantastic growth shaped the worldview of many Big Law partners. This worldview essentially makes perfect sense as it is constructed from sound logic though now based on an outdated set of facts:
- Business of law was easy and mostly rooted in common sense, and something an average lawyer at an elite firm should easily be able to grasp with a perfunctory level of interest. All that the “business of law” demanded of most law firms was to stay (more or less) on top of incredibly basic operational processes like time entry and invoicing — and for bonus points, lots (and lots) of associate hiring and the occasional tie-up with a reputable firm with likable partners.
- Developing business was largely enjoyable since it meant meeting interesting people and socializing with them, and also should not be too taxing for reasonably likable and well-mannered individuals. Keeping clients was also easy for highly accomplished and hardworking lawyers, and of course one did not often advance in a prestigious firm without these traits.
- Reputable law firms did not struggle financially and they certainly did not fail. Financial success was assumed and very nearly an afterthought. Barring spectacular fuck-ups on client work, unethical behavior by bad actors, or unseemly infighting among partners (all of which signal deep personal failings for those involved), well-established and prestigious firms would continue to enjoy the fruits of enormous success.
All of the above was essentially true for so many years — until they weren’t. And really, it all happened pretty fast.
If one accepts the above generalizations at face value, it makes perfect sense for lawyers to seek refuge in the wisdom of the crowd. For decades, a huge crowd of their peers enjoyed fantastic success. By the same token, it makes sense to be risk-averse: behavioral economics tells us that happiness and envy are local and relative, and so what could possibly feel worse than being an contrarian who fails amidst a crowd that is winning?
Ultimately, I think the most harmful legacy of Big Law’s golden age might be this deeply held but rarely discussed belief that success is common and easy to come by while failure is unusual and personally implicating. This is, of course, a point of view that is exceedingly unhealthy, incredibly nonconstructive, and demonstrably untrue.
Without a broad acknowledgement that the business of law already is (and getting more) difficult, I’m not sure that the very real cultural barriers that exist in law firms today will ever get better.
In future posts, I will attempt to present some data on very specific examples of exactly how the business of law has gotten more difficult. I’ll also (1) address my cryptic comments above about why I’m not buying that lawyers have to CHANGE OR DIE, (2) convince you that averages are mostly useless and completely insufficient in most situations, (3) posit theories about why inorganic growth is dead; and (4) share new charts about the one AmLaw metric that I think is the most important. If you enjoyed the above and would like to see more, please share, comment and clap below!