It’s the business model that matters

It’s the business model that matters is another Mark Cohen masterpiece dissecting the failings of the BigLaw business model by reference to three pioneering NewLaw model firms, particularly the little-known FisherBroyles of the US. 

Law firm sustainability—and more specifically, the future of the partnership model—is a hotly debated topic. Some pundits suggest partnership firms are dinosaurs on the brink of extinction. They point to a Darwinian marketplace with peripatetic rainmakers; migration of work in-house and to other provider sources; competition from the Big Four and other formidable competitors;  talent migration to other professions, and fewer quality associates game for the partnership gauntlet. Others pundits have a more bullish view. They cite eye-popping profit-per-partner numbers and conclude many firms are doing better than ever. The recent flurry of law firm ancillary service launches is evidence in support of their case that firms are responding to changing client demands.

This article leaves that debate to the self-styled “legal futurists.”

The more important question is: which law firm—or legal service provider—models will thrive in the digital age? Spoiler alert: client-centric, collaborative, data-driven, tech-enabled, multidisciplinary, diverse, agile, constantly improving, scaled, capitalized, and digitally transformed ones.

 The Law Firm Model Is Not A Sexy Topic

Law firm models have not drawn much attention. That’s because the partnership model has long been—and remains—dominant. It is predicated on the asymmetrical relationship between law firms and clients. Firms sold one thing: legal expertise. They controlled the supply  of legal talent and used self-regulation to prevent other professionals from engaging in what lawyers determined was the “practice of law.” Their insular regulations also prohibited “non-lawyers” from investing in, managing, or creating alternative business models to deliver legal services.

Law was whatever lawyers said it was. Legal practice was synonymous with the delivery of legal services. The economic terms of engagement between law firms and clients were dictated by firms. Firms maintained stability and a de facto succession plan by weaning out a talent pool from associates willing to work long hours in the hope of becoming partner. Partners rarely left the firm and generally served out their careers at the firm apart from government stints, judicial appointments or senior in-house positions. The partnership model worked well for firms—especially partners.

Then things began to change– about 40 years ago.

The profession remained more collegial than competitive until the early 1980’s when Finley Kumble violated firms’ unwritten ‘no-poach’ code and raided high-profile rainmakers from white shoe firms. The “lateral” phenomenon became mainstream later that decade when Steve Brill published the first American Lawyer survey of partner earnings (PPP). Law’s entry into the free agent era caused stress cracks in the partnership model’s foundation. Not only did Brill’s survey expose law firms as the business they had become, but it also enshrined PPP as the firm Holy Grail.

The fragility of the partnership model was more fully exposed decades later by the global financial crisis and its aftermath. Businesses engaged in fiscal belt synching that extended to the legal function. Rapid technological advances and globalization created what Tom Friedman dubbed a “flat world.” Disaggregation came to law. Legal practice—tasks requiring differentiated expertise, experience, and skills possessed by some lawyers—began to narrow. The delivery of legal services—everything else—expanded. Law firms no longer presumptively handled all facets of matters. They confronted a steady migration of high-volume, low value “legal” work in-house and to tech and process-savvy legal providers. This work was the grist for the high-billable hour mill, the driver of the partnership’s pyramidal, leveraged economic model.

The partnership model is not vanishing, but its stranglehold on legal delivery has loosened considerably. The days of undifferentiated, “full-service” law firms flourishing are gone. Data confirms the growing separation between a cadre of elite firms and the pack. What’s “elite” in this context? It’s the premium, “bespoke” work only a handful of firms are regularly engaged to perform and the premium fees clients willingly pay for it. Still, even some elite firms are taking steps to diversify.  Kirkland, a financial king among firms, is taking on more plaintiff cases. Other firms are entering the managed service space,  opening tech incubators, and tapping into litigation finance to achieve more flexible practice capability and new revenue sources.

Other Law Firm Models Generate Little Fanfare

 The partnership model has long dominated media coverage of the corporate legal marketplace. That’s not to say other successful models do not exist. Sussman Godfrey and Bartlit Beck, for example, pioneered large commercial contingency cases and non-billable fee arrangements. They often collaborated with other entrepreneurial boutiques (the author’s former firm included ) on high-stakes plaintiff commercial matters. These collaborative efforts confirm what for many lawyers remain surprising truths: (1) most big case outcomes can be reliably predicted (even in the pre-data era); (2)  firms can willingly collaborate for the benefit of clients and firms alike; (3) firms can operate highly efficiently when their model rewards it; (4) the billable hour is not the most profitable fee structure where differentiated talent, process, and technology is deployed; (5) lawyers can operate with the efficiency and financial accountability of private equity when they are trained and incentivized to do so.

Three Variations on The Partnership Model

 FisherBroyles, Axiom, and Clearspire are three pioneering legal providers that launched around the new millennium. Each reimagined the partnership model in a different way. FisherBroyles is a pure-play law firm; Axiom a flexible legal talent management company; and Clearspire a two-company model law firm and dedicated legal service provider.

Each of these new model providers shared a common mission: drive client/customer value by realigning provider and consumer interests. They constructed models that rewarded output-efficiency and results—not input-hours billed. Their attorneys worked flexibly and often remotely, not at lavish offices. They liberated lawyers to practice law and freed them from office politics, billing quotas, and other stressors endemic to the traditional partnership structure. They created cultures that celebrated diversity, client-centricity, work-life balance and well-being, collaboration, agile workforces, ongoing professional advancement and restoring joy to legal practice.

Axiom and FisherBroyles has grown significantly since their launch; each has revenues that would land them in the AmLaw200. Clearspire is gone (it sold its service arm in 2014), but its model remains highly relevant and lives on in Atrium and other new-model legal providers around the world.

FisherBroyles provides the starkest contrast to the traditional law firm partnership model because it is a law firm. How can a full-service firm about to crack the Am Law 200, with approximately 250 highly-experienced lawyers from leading firms, nine-figure annual revenue, and a recently launched London presence in response to growing client demand for its cross-border capabilities fly under the radar? Short answer: its model is very different from the traditional firm partnership.

The legal establishment has, predictably, been dismissive of firms (and service providers) that do not share its model. FisherBroyles and other new-model firms are often lumped together as “virtual law firms.” This is a vacuous term that could equally apply to the way many traditional firm lawyers work. Rimon, Potomac Law, and a slew of other so-called virtual firms have carved out profitable marketplace niches. FisherBroyles stands alone among them in size, practice depth, geographic presence, longevity, as well as portfolio breadth and depth. It is the only “virtual” firm that has achieved scale.

FisherBroyles operates as a curated legal marketplace where attorneys—not the firm—set their rates. This includes collaboration with other partners in setting the rate charged when they are called in to assist. The model enables partners to operate as entrepreneurs while drawing from the resources of the firm, notably its curated, deep talent pool.

The firm has a unique economic model where lawyers keep 80% of matters they originate and bill (that figure is reduced when other firm partners collaborate). Partners receive 32% origination credit for work performed exclusively by a colleague(s). The fee is recurring for as long as the client and originating partner remain with the firm. The colleague(s) performing work realize a generous 48% from collected revenue.

The FisherBroyles model is generous for originating and collaborating attorneys alike, far more so than the traditional partnership model. It also blunts origination squabbles that are endemic and corrosive to traditional partnership firms. The FisherBroyles model provides clarity to “origination” and converts it to equity for the originating partner. The firm’s unique model also benefits clients by freeing up lawyers from firm rack rates and allowing them billing flexibility, reducing turnover, promoting firm stability, and creating a collaborative firm culture.  The firm’s non-discretionary compensation model addresses and solves the equal pay issue that is so important to historically under-represented groups.

The FisherBroyles economic model and culture explains its astonishingly low turnover rate, palpable collegiality, and high job satisfaction ratings. The absence of billable hour and origination quotas produces a more diverse, highly qualified legal talent pool, boosts morale, and facilitates recruitment of top talent seeking alternatives to the traditional partnership model environment. It’s common for FisherBroyles attorneys to recruit, and it doesn’t hurt that they earn a 2%  recurring credit on the recruited partner’s revenue as long as both lawyers remain at the firm. FisherBroyles attorneys, almost all of whom are partners, have no buy-in. The firm has no forced retirement or demotion based upon an arbitrary age limit. This allows clients, the firm, and partners the opportunity to tap into talent that is often prematurely sidelined due to retirement, burnout, or work-life balance considerations.

If happy cows make better milk—as the California dairy industry commercial suggests—then perhaps the FisherBroyles model makes better lawyers.

Conclusion

 There is nothing inherently wrong with law firms; the problem is the traditional partnership model. It no longer serves most clients. Nor does it align well with most firm lawyers and legal professionals—except a handful of generally older partners. No amount of firm marketing or self-styled “innovation” dollars will fix this. Firms that live by PPP might just die by it.

Author

Mark Cohen is a lawyer, law professor, legal innovator and strategist, and founder of Legal Mosaic.

Mark says of himself “I write about changes in the global legal marketplace”.

Mark is a member of the Program Board and Teaching Adviser for Australia’s College of Law new Master in Legal Business. With Alison Laird, Mark teaches two subjects, Innovation and Entrepreneurship.

It’s the business model that matters was first published by Mrk Cohen in Forbes on August 19, 2019, titled Are Law Firms Sustainable? It’s The Model That Matters

More on this subject may be found in my posts Who coined NewLaw? and Last days of the BigLaw business model.