In 2017, In-House Counsel Network (shout out to the ICN) invited me to give a talk on adaptive models for delivering legal services.
They asked me, because the law firm arm of the CITO Energy Group is a "New Law" venture. They also asked me, because I have been around quite a few law firms in twenty-three years of practice. As a partner, associate and client. Big firms and small firms. Old firms and new firms. Firms in Canada, and firms in England, Russia, Kuwait and China.
In researching for the ICN talk, I realized something. I had never seen an economic model for a "Traditional" or "Big Law" firm. The first thing a client does is model a new investment – and yet I had never seen (from the inside or outside) a Big Law firm take that step. A noteworthy fact all by itself.
So, I conducted an experiment. A good friend from my Husky Energy days is a wizard with economic modelling. We will call him Dave, because that is actually his name. I asked Dave to create an economic model for Big Law.
Dave was game, so we created some reasonable assumptions for a typical Big Law firm in Canada. Our theoretical firm had 50 partners, 15 support staff, a partner-associate ratio of 1.17:1, 1600 hrs of billed work per lawyer with a typical scale of rates, 30,000 sf of lease space at $65/sf gross and $10M in amortized costs for things like office build-out, furniture, equipment, Westlaw fees, etc.
As a New Law guy, I always figured that Big Law had, in this order of priority, a cost-control problem and an entitled (in my opinion) expectation of a minimum profit-per-equity-partner (PPEP). After observing years of waste, I had assumed that the cost-control problem arose from excess lease costs, opulent office build-outs and high support staff numbers. But the results of Dave's model shocked me:
Wow. I realized that the financial drivers were inverted. Big Law charges its clients high rates to ensure its high PPEP returns, and not really to cover a bloated operating cost structure.
That is a great job, if you can get it - but can you even get that job after Covid? In an oil price crisis, when companies are changing their models just to survive, will Big Law do the same? Is Big Law incentivized to change its model, and risk a historically robust PPEP?
After years in and around Big Law, I doubt it. Very much. By its very model, Big Law is motivated to maintain its PPEP, rather than examine adaptations that might threaten it.
And so, that becomes the opportunity for New Law. In the New Law model, if the firm's operating cost burden is reduced from 20% to, say 8% by reducing lease and personnel costs, for example, a lawyer can make the same PPEP with billable rates that are 12% lower. That is hard enough for Big Law to do, but what if a firm went one step further? If a firm also gives up a vaunted PPEP entitlement while keeping costs to 8%, that firm can still make great profits doing interesting work.
By giving up entitlements to a guaranteed PPEP, a law firm can really invest in its client relationships; by lower rates or alternative fee arrangements based on rational, reasonable numbers. I like the look of that future – it seems pretty constructive and client-friendly.
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