The business model pioneered by large law firms but now adopted by many smaller ones too is not sustainable, Professor Stephen Mayson has argued.
He said the weaknesses of the BigLaw model included lack of focus on value for the client and too great an emphasis on profit per equity partner (PEP), which was “rife with perverse incentives”.
The strategic consultant went on: “On certain, self-selected metrics (such as turnover, numbers employed or PEP), many law firms will appear to be successful – sometimes phenomenally so. This does not mean that their business model is successful or sustainable.”
Writing on his blog, the author of last year’s independent review of legal services regulation went on: “Over the years, we have seen many instances of previously ‘successful’ large law firms failing and collapsing quickly.
“In essence, this can usually be attributed to one or more of hubris, a culture of individualism (with weak commitment to ‘the firm’), and too much debt. Or, put another way, their fall can be attributed to a flawed or non-existent business model.”
Professor Mayson – who is a non-executive director of two alternative business structures, Tees Law and LGSS Law – also referred to “the well-reported instances of burn-out, mental health concerns, and substance abuse” at some law firms.
“We have to pause and ask what is going on – from a commercial, human, social, psychological, regulatory and ethical point of view. Can a business model that generates such reactions and consequences be sustainable? Should it be?”
He recognised that there was a group of ‘elite’ law firms “for which the conditions for success might well be different” – those with a “very high level of specialisation” or ability to manage complex legal needs, or go-to practice for high-stakes issues.
“In this context, ‘elite’ is not inevitably the same as ‘BigLaw’; equally, it is also not necessarily true that their business model is as robust as it could and should be.”
Professor Mayson said the ‘BigLaw business model’ “has its origins in the larger law firms (hence ‘BigLaw’), but it is no longer confined to them”.
He said creating value for clients was “the most important aspect of any business model” and in his experience “the least well understood in law firms”.
He went on: “The BigLaw business model at its core still tends to equate value with the cost of time plus a mark-up. But value for the client cannot be found in time-based billing.
“Client value can only be assessed by reference to the outcomes for the client; time is simply a reflection of the input of a lawyer. Only very rarely will the two ever equate – and even then never as a matter of correlation.”
He said law firms were being challenged by the “increasing fragmentation of client demand” as buyers of legal services were “faced with ever more options”, including alternative legal services providers.
“The inconvenient truth is that, if law firms had been as close to their clients as they claimed to be, and if they had been consistently creating value for them, there would simply have been no room in the market for the emergence of these alternative competitors. A $14bn sub-sector did not arise from nowhere.”
Too often in law firms, he found “fragile and fleeting coalitions of interests, driven by short-term individualised incentives” and internal competition – behaviours exemplified by the impact of PEP.
“There is no, or insufficient, focus on value for the client; too much dependence on lawyer input; returns disproportionately assessed and appropriated by ‘net profit per equity partner’; and over-reliance on external debt.”
Professor Mayson added: “The elements of a business model can exist without a firm realising it: many unspoken assumptions, habits and practices will define – if only by default – a firm’s approach to value creation, resourcing, returns and financing.
“Far better to identify and articulate what these are so that the underlying business model can be tested for its validity, robustness and sustainability. Too many firms are currently operating with a blindfold on.”