“It was a growth story in the 1990s, but since 2008, it’s a more competitive world where there is less growth,” Jeffrey Hammes, Kirkland & Ellis
“Law firms today must make a persuasive case for their retention. [The] new reality is marked by hypercompetition and bears little resemblance to the world even five to 10 years ago, and virtually no resemblance to the legal industry 20 years ago.” Brad Karp, Paul Weiss
“For every mandate, you have to prove your talents. Our clients have the right to kick the tires.” William Voge, Latham & Watkins
Last week, the New York Times published a revealing piece about the business model pressures faced today by even the most elite corporate law firms.
While it may be common knowledge that there is general softness in the market, Elizabeth Olson’s story demonstrates how the pressures affect even the small corner of the practice occupied by the elite of elite law firms — that where elite clients call on elite relationship firms for work that was once thought to be absolutely price-insensitive.
Two fundamental economic trends are clashing.
Trend 1: There is more pressure on firms and their leadership to BOOST profits per partner every year. This is due to:
- Increased competition for rainmakers between the top law firms.
- Greater stratification of pay and status among partners within individual firms eroding firm loyalty.
- Consequently, rainmakers receive and will leave for better offers at higher rates than ever before.
Trend 2: There is a secular trend DEPRESSING profits per partner. This is due to:
- Increased willingness of the top clients to make relationships firms compete for work rather than reflexively going back to relationship firms.
- Less consistency within firms of lawyering as partners jump around further eroding loyalty to firms by clients.
In other words, at the same time that clients are demanding to pay less for their legal services, firms need to find ways to pay rainmakers more to keep or poach them through a combination of boosting overall profits per partner of the firm and increasing partner inequality.
We discuss these trends every day with our clients. Understanding the change in business pressures among law firms is essential to being a smart consumer of legal services as they affect how work is performed including through how staffing is managed.
Indeed, the most telling part of the New York Times article is the striking commentary, quoted above, by the chairs of three of the top global law firms confirming the realities of this new world — one where the most sophisticated clients expect their legal providers to compete as never before.
To put it simply, GCs and legal departments that just assume costs and prices of legal services “work out” because of relationships in the absence of competitive pressure and analytics are quickly becoming the exception and are not getting value (in price and quality) out of their legal dollars.