BigLaw 2014: A Look Ahead

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In the introduction to our 2013 Client Advisory, we asked whether the current state of affairs was the “new normal,” and concluded that it was indeed so. As we look ahead to 2014, we thought it would be helpful to take a look back at our predictions for 2013 to see how prescient they were, and to share our outlook for 2014:

1. The global demand for legal services, at least those services traditionally provided by BigLaw, has contracted. Although leading commentators continue to state that the demand for legal services is relatively flat, it appears the analysis underlying these assumptions may be outmoded. Traditionally, these commentators looked at the total output of BigLaw to determine whether demand has increased or decreased. However, such an analysis arguably fails to properly take into account the inroads made by new entrants to the legal market described below. We believe it would be more accurate to say that the global demand for legal services remains strong, and is arguably even growing, but that BigLaw is giving up market share to these new entrants, as described below.

2. New entrants to the legal services market are taking market share away from BigLaw and expect to make significant inroads over the coming decade. New entrants to the legal services market, such as Axiom, Pangea3 and Major, Lindsey & Africa's own highly-specialized, temporary legal staffing solutions provider, Solutions Practice Group, continue to capture market share and will continue to have a major influence on how legal work will be performed and “disaggregated.” They have proven themselves to be nimble and responsive to client demands. Moreover, a number of the major consulting firms, having closely watched the inroads made by these legal process outsourcing firms, are re-entering the legal market and looking to capture some of this revenue. Not only will these new entrants continue to increasingly dominate the bottom portion of the pyramid of work (document review, etc.) and move upward, they will cause BigLaw, in-house counsel and clients to completely rethink how legal services should be delivered.

3. The expansion era of BigLaw is not over, but is more focused on filling in the gaps (i.e., key geographies and emerging markets). Firms will continue to be circumspect about adding new offices. Even the recent push to Latin America and Asia has slowed somewhat as firms reassess why they are going there and what they ultimately hope to achieve. Nonetheless, we believe firms will continue to fill in the gaps even in key U.S. geographies such as New York, Washington, D.C., Silicon Valley and Texas.

4. More and more clients are exploring alternative fee agreements (AFAs) and expect their law firms to be more proactive in developing them. AFAs, such as flat fees, success-based fees, auction-based fees, etc., continue to proliferate. However, as we noted last year, many clients continue to be uncomfortable using AFAs and are amenable to the continued use of the billable hour, provided they get a discount. The bottom line is that firms must continue to show flexibility regarding fee arrangements and the death of the billable hour continues to remain greatly exaggerated.

5. Practices are increasingly becoming commoditized to some degree. Commoditization can take many forms: an entire specialty may become commoditized, such as with certain insurance work, and portions of otherwise profitable work can be disaggregated as discussed above, thus reducing the overall profitability of a project. As we noted last year, over time, this results in firms being able to retain a smaller portion of the former practice at high billing rates. This trend toward commoditization and disaggregation will undoubtedly continue and likely accelerate.

6. The non-partner track will continue to grow and become an acceptable career track at many firms. The non-partner track at law firms is poised for an explosion in growth as firms re-think their hiring models. Both firms and clients have come to understand that project attorneys, staff attorneys, career associates, etc., can provide high quality work at significantly lower cost. Faced with the external pressure from new market entrants, law firms will have no choice but to embrace these staffing alternatives. Many that have already done so have seen that it can be a win-win for all.

7. More firms will experiment with off-shoring and on-shoring back office services, as well as project attorneys and staff attorneys, to lower wage geographies such as West Virginia and Tennessee. As we noted last year, firms such as Orrick, WilmerHale and Reed Smith have already embraced this concept and others are following their lead. What was once seen a decade ago as a questionable initiative will undoubtedly become de rigueur over the ensuing decade. Moreover, as with new staffing models, law firms are finding that back office services can be provided at significantly lower cost with no loss in quality, and that these operations can even significantly contribute to the bottom line once the initial start-up costs are absorbed.

8. While firms have become better at controlling expenses and have shed many of their most unproductive partners, they are still carrying many unprofitable partners and will need to deal with this issue. This issue is probably the most significant issue facing law firms today. On the one hand, nobody wants to tell a loyal friend and colleague that the firm simply can't afford to keep him or her on any longer. On the other hand, the economic realities of today's market dictate that tough business decisions need to be made. As we noted last year, to their credit, most firms seem to be genuinely distressed by this reality, and have been slow to deal with it because of their true affection for their partners. Ultimately, most firms will have no choice. In order to remain competitive, they will need to address this issue. Similarly, many firms are now re-thinking their capital structure, and are either asking their partners (including non-equity partners) to contribute more capital in order to reduce borrowing costs, or even doing away with the two-tier structure altogether.

9. Changes in technology will continue to drive changes in the legal market. Firms will need to make significant investments in technology to keep up with these changes. Technological changes over the last fifteen years, such as the introduction of the blackberry and the rise of the internet, have probably had a greater impact on the profession than at any other time in modern history. Moreover, the rate of change seems to be accelerating as well. These changes will continue to impact how and where people work, as well as the type of work that is handled by BigLaw.

10. Firms will require less "Class A" office space to accommodate their personnel, and will continue to explore ways of re-configuring office space (e.g., hoteling, elimination of partner offices, etc.) in an effort to control costs. There is no question that law firms have undergone a fundamental change in their need for, and use of, real estate. The bustling corridors of prior decades have given way to sleek, new offices that are vastly underutilized. Though law firms, with the assistance of commercial real estate developers and brokers, are gamely seeking to reinvent the modern day legal workplace, they might very well be fighting a losing battle. Consulting firms long ago shed expensive offices, opting for a model where partners spent their time visiting clients. The need for physical proximity, once an essential element of a thriving law firm, seems to be on the wane (which we don't believe is a good thing). Coupled with a younger generation that is equally (if not more) comfortable operating in a virtual environment, law firms need to carefully consider whether it makes sense to keep spending millions of dollars each year on prime real estate that is often unused or under-used.

11. The competition for lateral partners will continue to remain fierce, but will continue to be skewed toward those with significant portable practices. The lateral market continues to be extremely hot, both nationally and internationally. Partners with significant portable books of business remain in the driver's seat, but firms are also continuing to make key "investment" hires, especially where no logical internal replacement can be identified or where obvious client synergies exist. For many firms, strategic lateral hiring remains the single best way to grow, or at least maintain the status quo, in an increasingly competitive marketplace. While many firms have become more strategic about their hiring, a surprising number still fail to grasp the significant competitive advantage that can be had by having the right people overseeing the lateral program. Moreover, firms that fail to properly integrate their lateral partners run the very serious risk of losing them as quickly as they came.

12. Now more than ever, firms that lack competent leaders, sound strategies or both will be extremely vulnerable. Although some firms have already begun to gravitate toward more professional managers/ leaders, forcing partners to cede some measure of control to professional business men and women, a number of firms continue to cling to the traditional "player/coach" model. Similarly, many firms are facing serious generational, succession planning issues and are struggling to identify who their new leaders will be. Given that the median revenue of an AmLaw 100 firm now exceeds over $575 million, query whether the traditional leadership models and strategies have run their course, or, at the very least, whether firm chairs and managing partners should continue to practice while attempting to oversee such a vast business enterprise.

13. The number of dissolutions and mergers will increase, and rainmakers at weaker firms will continue to move upstream, putting significant stress on these firms. Merger mania is clearly sweeping the profession on a global scale. While a number of these mergers will surely prove successful in the long run, we believe an equal number (or more) will not. In our view, the combination of two firms, both of which are struggling to survive, will yield little synergy. Furthermore, while some of these combinations are being classified as mergers, the reality is that in many cases the firms being acquired stand little chance of surviving absent being acquired, so one has to wonder what the benefit will be to the acquiring firm. Nonetheless, we believe this merger mania will continue unabated into the New Year.

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Our message in our last advisory was clear: BigLaw, it is time to adapt or die. We think this same message is equally true as we head into 2014. Only more so.

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Jeffrey Lowe, Law Firm Recruiting Practice LeaderJeffrey A. Lowe is the Global Practice Leader of Major, Lindsey & Africa’s Law Firm Practice and the Managing Partner of the firm’s Washington, D.C. office. He is the author of the 2010 and 2012 Major, Lindsey & Africa Partner Compensation Surveys, the most comprehensive efforts ever undertaken to identify ranges of partner compensation, and the co-author of the 2014 Major, Lindsey & Africa Lateral Partner Satisfaction Survey. He is regularly quoted by leading legal newspapers and periodicals, such as The American Lawyer, Law 360 and The Wall Street Journal.

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