In 2017, In-House Counsel Network (shout out to the ICN) invited me to give a talk on adaptive models for deliver-ing 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 mod-els 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 mod-el, Big Law is motivated to maintain its PPEP, rather than examine adapta-tions 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.
This is part of a series on the future of the practice of law. The twin stressors of Covid and low oil prices will pressure the traditional Big Law model and accelerate industry change. As a New Law proponent, CITO has front-row event seating and thought it would be interesting (and timely) to share some fresh protections.