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Disruption visits law firms

Be a doctor or a lawyer – that was once the route to a guaranteed good life.  Both professions are seeing an erosion of that premise, with legal work being the most dramatic victim.

 

Exhibit A:  Dewey & LeBoeuf LLP filing for bankruptcy (in what is being considered the biggest law firm failure in the U.S.).  It’s a wake-up call that suggests that law firms, like any other business, are subject to the rules and operations of business and economics. However, many law firms haven’t yet come to grips with the fact that they are in a business that is being fundamentally disrupted, in the “disruptive technologies” sense of the word. 

 

The full-service law firm often offers “too much” to their customers—often the customers need simple, uncomplicated, solutions to their problems, not arcane and abstract thinking.  The digital age has had an impact on the operations of law firms and lawyers, as more and more work that used to be done by lawyers can be done with other—and often cheaper—resources.  Consider the advent of e-discovery. It makes a trained lawyer who prepares court documents unnecessary, and it cuts to a fraction the costs of legal billing and other fees incurred in the process of sifting through documents. 

 

This idea fundamentally upsets the basic business model of law firms, which as a friend of mine waggishly put it, “hasn’t changed since the age of Charles Dickens!” In other words, most law firms depend on a few highly paid and successful ‘rainmakers’ who bring in business to keep lots and lots of hourly billing worker bees busy.  The trick is leverage.  As soon as you need fewer worker bees, or Heaven forbid, the client refuses to pay sky-high salaries for younger talent, the business model starts to break down, and with it, the career strategies and up-or-out model for advancement. 

 

In the case of Dewey and LeBoeuf, the firm collapsed not only as a result of poor economic conditions, but also because of its excessive compensation of the firm’s partners. It promised millions of dollars in packages to nearly 100 partners, which proved to be a financial catastrophe as revenues fell during the recession. The troubles led to the resignation of 160 of the firm’s 300 partners as well as the termination of 81% of its New York employees in early May.

 

Students, moreover, are getting wise to the fact that just having a law degree doesn’t mean you’ll make a salary that will pay off those onerous student loans.  In a recent Op-Ed article in the New York Times, Washington University law professor Brian Z. Tamanaha reported on the failings of law schools in relation to monumental student loan debt. Law school graduates owe an average of $100,000, and more than one-third of graduates have not been able obtain legal positions in the last few years. As a result of this debt and lack of job options, we have a glut of lawyers who may never find themselves with the careers they envisioned.  You can see some of the effects as law schools compete more vigorously for applicants.

 

The other big issue, to me, is that few law firms have a solid strategy and many of them don’t think very strategically.  For some time, I ran a course on strategy for law firms at Columbia Business School. The main idea of the course was that without a strategy, it is hard to create a robust firm.  Strategy is all about making choices – choosing clients, problems, services – and many law firms never say ‘no’ to anything!

 

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