That’s the theme of thousands of articles and blog posts that show up on our desktops every week. Mainly the writers are wringing their hands about the disruption that is occurring to the traditional business models of large law firms. But if we can divert our attention from the pity party that seems to be overcoming the business of the private practice of law, we will notice that it’s not just us. All of our clients are seeing their business models disputed too.
The first goal of every business model is survival, and that’s getting a lot tougher to do. In 1935, the average life expectancy of a large company in the S&P 500 was 90 years. In 2011 it was 18 years. By the same token, there are lots of large law firms that can directly trace their roots to the mid-19th century but, realistically, how many of the AmLaw 200 do we expect to see still around 20 years from now? In fact, law firms have become so fragile that managing partners fear that a single bad year or the departure of a few partners with large billing bases will start a downward spiral that could threaten their firm’s survival.
As a result, the greatest threat to law firms may not be the economy, the surplus of lawyers or even the operose pricing demands by clients. Instead, it may be law firms reacting to threats by cannibalizing their own business models to supplement short-term profitability. For example, the way most large law firms make money is by performing complex and sophisticated work that permits aggressive billing rates and the ability to leverage work to lower paid lawyers. But to maintain short-term profitability, firms have reduced their number of fixed-compensation associates and routinely taken on less sophisticated work to keep timekeepers’ plates full.
Actions that are contrary to a firm’s business model are not necessarily a bad thing. Indeed, they may be necessary to maintain the delicate balance that holds a law firm together. But when a firm continues to change the type of work it accepts and the manner in which it prices and performs the work, it is effectively creating a new business model – one that may or not make sense in the long run. That is, what works to generate necessary revenue in the current year may not be sustainable over a number of years.
So what is a firm to do? It can start by understanding the firm’s traditional business model and how far the firm has strayed from it over the past few years. Then, project the impact of the revised business model and likely further changes over the next few years. For many firms it is likely that this analysis will not paint a pretty picture. Business models are like automobile engines. One cannot remove or change around pieces and expect them to perform effectively.
The answer for the many firms that have inadvertently abandoned their business model is to take a hard look at their client base, understand the necessary changes that are occurring in the client’s business models, identify the impact of those changes on the legal services they will require under their new business models, and figure out how best the law firm can provide those services on a profitable basis. This may require some significant and painful changes in the structure and makeup of many law firms. But, by definition, these changes will be less severe than the results of continuing to meander away from their own operating model.