A Quick Dispatch From The Front: Thoughts On The AmLaw 100 From A Lean Thinker’s Chair

Or, how the rich misspend their money

The American Lawyer has released its data on the top 100 (by revenue) law firms based in the United States and the analysis frenzy has begun. The data is being re-sliced and diced by many and the rest of us are offering our opinions on what it means.

As a lean thinker, I view the AmLaw 100 as a place where general counsel send their precious dollars to die. As a general rule, for each dollar a GC spends at an AmLaw 100 firm, he or she gets .25 cents of value in return. If you look at the performance of the AmLaw 100 for 2017, you can see that some firms use the .75 cents wisely and others do not. That is, some convert that .75 cents into very lucrative compensation for equity partners while other firms barely squeak by.

Now, imagine you lived in a fantasy world. One day, you woke up and convinced your partners to become efficient, generate high quality, and use the firm’s resources wisely. You were able to greatly reduce the firm’s cost structure by using 70-year old techniques that have driven much larger organizations to much greater financial success than any firm has ever seen. In that fantasy world, you could reduce the amount you charged clients, capture the market for various services, and propel your firm to great financial heights.

Okay, I lived in that fantasy world. The manufacturing corporation where I worked captured its main market in about three years. By the third year, it had signed on all the leading buyers in the U.S. for its main product. The competitors were raising prices as our company lowered ours. And yet, even with lower prices, our company made more money per unit than it had made before. The power of lean thinking.

How The Data Spoke To Me

Here are some general thoughts I had as I pawed through the data.

1. There are the rich, the wannabe rich, and everyone else. No, I’m not talking about the law firms, I’m talking about their clients. A couple years ago, I was talking to the general counsel of one of the largest companies (a Fortune 50). I asked about the law firms he used, and he told me they defaulted to using “top” New York law firms whenever possible. “Why,” I asked, “aren’t they very expensive for most matters?” His answer still haunts me: “Of course, they charge a lot. But, that is how we know they are the best.” Price was a proxy for quality. Many wealthy clients will pay top dollar even though they have no objective measure of the quality they receive. Wannabes will go to those firms, because they want to be perceived as having the same “standards” as the wealthy. From an objective viewpoint, the clients overspend for most of the services provided by the firm (the routine parts of any matter), to get, perhaps, quality advice on key questions. This is like paying thousands of dollars to get the oil changed on your car in the hopes that the mechanic will correctly diagnose the rattle in the engine. If you have the disposable income, this can work (at least until you go broke). But, for everyone else, a $10 oil change will have to do. Moral: Spend money as if it was your personal money, not as if the shareholders will give you an unlimited supply to waste.
2. You can get a too-heavy plane to fly by throwing everything not nailed down off the plane. But, remember to keep the parachutes. There is a classic scene repeated in many movies where the protagonists are being chased. They hop onto a plane, start the engines, and start taxiing. But, the plane is too heavy. The pilot yells to throw everything not nailed down off the plane, and the passengers comply. In their haste, they also throw the parachutes off the plane. A bit later, when everyone needs to get off the flying plane (usually because it is running out of gas), the gaffe becomes evident. Many AmLaw 100 firms have been throwing everything off their planes for years. They have been stripping down to the essentials of an old school firm to keep their heads above water. Yes, many have dabbled with tech, project management, or other “new law” initiatives, but the key word here is “dabbled.” At some point, each of these firms will need the “parachutes” they discarded. That is usually the point where firms implode or merge. Moral: Cutting unnecessary costs is prudent management. But, eliminating investment in the future is a sure path to nonexistence.
3. Don’t confuse transitory with permanent. The legal industry is in a state of transition. There are many moving pieces and, like chess, it can be tough to keep all the permutations of future moves in your head. In the short term, it is easy to get impressed by a move that seems to put a player in a good position. But, the grand master knows to play the game to win which may mean having a disadvantaged position in the short term. Cravath, Swaine & Moore was the leading law firm for decades, as many of their clients were leaders in their industries. Today, Cravath seems a bit under attack and some question whether its compensation model will work in modern times. Similarly, stalwart Cravath clients such as IBM are under attack. The chessboard changes each year. It is harder today to play the long game than it was 30 or 40 years ago. What the industry will look like in another 30 or 40 years is hard for anyone to see. But, don’t count some players out just because they are taking what seems to be a disadvantaged position today (just as you shouldn’t be too laudatory of those who seem to have an advantaged position today). Moral: One good year or even a few good years is not a winning strategy. Building a flexible organization that can adapt to the times is better for the long run than becoming a rigid organization good at one or two things.
4. When drawing conclusions, look at what isn’t on the chessboard. To continue the chess analogy a bit further, look beyond the AmLaw 100 or 200 to what isn’t on the chessboard. The most obvious missing pieces are the Big 4 accounting firms and the law companies. Yes, they are not law firms. But, the distinction between “law firm” and “law company” is blurring especially for corporate clients. When PwC takes over GE’s tax law group and UnitedLex takes over another chunk of GE’s legal work, it is hard to argue that PwC and UnitedLex are not part of the chess set. This lack of distinction will continue to grow. Elevate Services’ new association with ElevateNext to provide legal services to Univar and other companies is another step blurring the lines. While Axiom Law, UnitedLex, and Elevate Services may not (yet) equal the large law firms in size, the Big 4 accounting firms and many consulting firms dwarf the largest law firms. Any attempt to view the legal industry as a whole without including these competitors gives a distorted picture. Competitors other than law firms have expertise in project management, process improvement, tech, and other methodologies that are becoming more attractive to corporations. Moral: Disruptors seldom come from where you are looking they come from where you aren’t looking. Don’t become so obsessed with the narrow view that you fail to see the big picture.
5. One thousand ones does not equal one thousand. Alright, that lead in is a bit cryptic, but this is what it means. Large law firms are confederations of lawyers practicing under one banner, they are not cohesive organizations the same as Neiman Marcus (or Costco, or …). Go to a Neiman Marcus in one city and then another city and you know what to expect. Go to two lawyers in one firm and you have no idea what to expect. Most large law firms today are simply the sum of many small practices. The firms are in constant states of flux as partners and even practice groups come and go. These confederations have very little to hold them together when put under pressure. Their growing competition comes in the form of organizations that do have that internal glue — the law companies. Moral: If stability, consistency, and focus matter to you, then look to law companies. If inconsistency, ephemeralness, and uncertainty are what you prefer, then look to the law firms.

I have been looking at the American Lawyer rankings since they were first published. They are fun to read, in a voyeuristic way. But today, as the legal industry evolves, they tell a sad story. Once proud firms with leading practices are sliding towards oblivion. New princes are crowned, but I doubt they will have long reigns. The legal industry is without FAANGs (Facebook, Apple, Amazon, Netflix, Google) and, if it doesn’t change its ways, will become a toothless relic.

If you want a deeper dive into the numbers and a nice analysis of what they do and don’t mean, I suggest you read Jae S Um’s The Empire Strikes Back and 2017 is (Mostly) a Win for Am Law 100.

Ken is an author on innovation, leadership, and on the future of people, processes, and technology in the legal industry. He also is an adjunct professor and Research Fellow at Michigan State University’s College of Law. You can follow him on Twitter, connect with him on LinkedIn, and follow him on Facebook.