There has been a lot of recent commentary regarding the “impending doom” of the Biglaw business model. Many industry observers point to the recent comments and layoffs at Weil Gotshal. Others highlight a changing partner strategy at Patton Boggs as the early signs of change. Some industry observers render law firms as a seemly “doomed industry” that is either going to drastically consolidate or face a period of severe economic duress.

We disagree. Law firm strategy will create both winners and losers

Biglaw is here to stay. Law firm strategy will likely take a very different form over the next decade, however, the legal services industry is unlikely to undergo the drastic consolidation and/or demise as suggested by industry skeptics until law firms are allowed to employ ownership structures consistent with their large corporate clients.

Change is likely to be slow, but law firm strategy will define winners and losers

The changing dynamics of the legal services industry will affect both large and small law firms. Biglaw will likely have to wrestle with meager demand growth and some industry consolidation. They will continue to contend with pricing pressure brought about by:

• Their clients: seeking to reduce / consolidate fees
• Other Biglaw competitors who achieve superior economic and operational models
• Smaller law firms (particularly the recent wave of virtual law firms), some of whom are more efficient, continue to attract higher-caliber talent, and employ leaner cost structures

Biglaw and Declining Demand: Billing rates aren’t likely to fall anytime soon

Big brands rarely slash prices until they have no other choice. Companies that charge a premium price for their services take every strategic step possible before lowering prices. Likewise, Biglaw is unlikely to slash rates across-the-board anytime soon. There is too much internal business development left to improve. Law firm strategy is already showing the early signs of change:

• Focus on profits per partner is increasing
• Firms are re-thinking partnership structure & compensation
• Targeted layoffs are underway
• Focus is being placed on the imbalance of law school graduates and available jobs

All of these initiatives are positive for Biglaw. Sure, the reality of the competitive landscape is less-than-ideal, but big law firms are making big moves to improve their competitive position. A more optimized internal infrastructure, innovative compensation strategies, and a more robust use of business intelligence is enabling some Biglaw competitors to continue to achieve very high profits per partner (and grow) while their competitors languish.

Industry change will impact smaller law firms:

Biglaw is placing more focus on law firm economics. This affects their smaller competitors. Each of the law firm strategies listed above will close the gap that some small law firms hold over their larger competitors. If they employ the right law firm strategies, some Biglaw competitors will stem the tide of declining demand. If small & medium size law firms are not prepared for the competitive changes that lie ahead of Biglaw, their business models will fail to grow, drastically impacting profits per partner.

Keys to success for small & medium-size law firms

It starts with a strategic plan focused on maximizing the competitive advantage that is embodied by a law firm’s unique collection of talent, interpersonal relationships, culture, and law firm economics. Successful strategic plans provide each firm a unique road map to growth & improving profits per partner. Specifically, every law firm can improve profits per partner by focusing on:

1. Productivity
2. Compensation
3. Liquidity
4. Growth
5. Analytics

Our primary industry-level observations:

Change is underway, but the pace of change is likely to be slow. Targeted layoffs and altered partnership structures / compensation plans are likely to remain in the headlines. Beyond that:

Biglaw will change, albeit slowly, unless changes occur in ownership regulations and structure

Well-run small and medium-sized firms will achieve higher rates of growth if they focus on law firm strategies that foster profitable growth and improving PPP.

Consolidation in Biglaw will cause problems. It won’t be good. Is it plausible to think that law firm M&A strategy will be substantially more successful than their corporate clients? Less than a third of publically traded M&A’s create stakeholder value.

Most virtual law firms aren’t the answer – in our experience, some virtual firms are established with the strategy and infrastructure necessary to grow and improve PPP. However, many virtual law firms fail to create a strategic plan and internal infrastructure necessary to foster long-term growth and improved profits per partner.